-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RHGCsp61gH4KTLAIxa3Cbar/3pb4MZkehkQeaKvtU3P+11b2DrP4eI2CQzsnI9ML 4zeRNpknYsobvu2hICC0cQ== 0001144204-04-003753.txt : 20040330 0001144204-04-003753.hdr.sgml : 20040330 20040329183102 ACCESSION NUMBER: 0001144204-04-003753 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALYPTE BIOMEDICAL CORP CENTRAL INDEX KEY: 0000899426 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 061226727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20985 FILM NUMBER: 04697635 BUSINESS ADDRESS: STREET 1: 1265 HARBOR BAY PARKWAY CITY: ALAMEDA STATE: CA ZIP: 94502- BUSINESS PHONE: 5107495100 MAIL ADDRESS: STREET 1: 1265 HARBOR BAY PKWY CITY: ALAMEDA STATE: CA ZIP: 94502 10KSB 1 v02097_10ksb.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-KSB (MARK ONE) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________ COMMISSION FILE NUMBER: 000-20985 ---------------------- CALYPTE BIOMEDICAL CORPORATION (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 06-1226727 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 1265 HARBOR BAY PARKWAY, ALAMEDA CALIFORNIA 94502 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ISSUER'S TELEPHONE NUMBER: (510) 749-5100 SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $.03 PAR VALUE PER SHARE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ? Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. |X|? Issuer's revenues for its most recent fiscal year: $3,467,000 As of March 22, 2004, 137,039,316 shares of the registrant's common stock, $.03 par value, were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant (i.e., excluding shares held by executive officers, directors, and control persons as defined in Rule 405) on that date was approximately $51,002,000 based on the $0.52 per share closing price of the common stock on that date reported on the Over the Counter Bulletin Board. DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement on Schedule 14A to be filed with the Securities and Exchange Commission relative to the issuer's 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-KSB. Transitional Small Business Disclosure Format (Check one): Yes |_| No |X| ================================================================================ CALYPTE BIOMEDICAL CORPORATION FORM 10-KSB INDEX
PAGE NO. ---- PART I. Item 1. Business 1 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7. Financial Statements and Supplementary Data 68 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69 Item 8A. Controls and Procedures 70 PART III. Item 9. Executive Officers and Directors of the Registrant 72 Item 10. Executive Compensation 72 Item 11. Security Ownership of Certain Beneficial Owners and Management 72 Item 12. Certain Relationships and Related Transactions 72 PART IV. Item 13. Exhibits and Reports on Form 8-K 73 Item 14. Principal Accountant Fees and Services 82 Signatures S-1 Certifications II-1
Except for the historical information contained in this annual report on Form 10-KSB, the matters discussed herein contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, uncertain market acceptance of our proprietary method of determining the presence of HIV antibodies, our limited experience selling and marketing HIV diagnostic tests, limited operating history, and our ability to obtain additional financing, as well as the other risks and uncertainties described under "Risk Factors" and elsewhere in this Annual Report on Form 10-KSB. The Company assumes no obligation to update any forward-looking statements contained herein. PART I ITEM 1. BUSINESS Our business involves the development, manufacture and marketing of in vitro diagnostic tests primarily for the detection of antibodies to the Human Immunodeficiency Virus ("HIV") and other sexually transmitted and infectious diseases. We have historically focused our business on urine-based screening and supplemental tests for use in laboratories. By integrating several proprietary technologies, we developed novel urine HIV antibody tests, the Calypte urine-based enzyme immunoassay ("EIA") HIV Type 1 ("HIV-1") screening test and the Cambridge Biotech urine-based HIV-1 western blot ("Urine Western Blot") supplemental test. We also manufacture and market the Cambridge Biotech serum-based western blot ("Serum Western Blot") supplemental test for detecting HIV-1 antibodies in serum. Our revenues are currently generated from sales of these three products, which we refer to collectively as our "ELISA tests." The ELISA tests are manufactured in formats that make them most suitable for high-volume laboratory settings. We shall sometimes refer to ourselves herein as "Calypte" or the "Company." We are the only company with Food and Drug Administration ("FDA") approval for the marketing and sale of urine-based HIV-1 antibody tests. Our EIA HIV-1 screening test received FDA approval for use in laboratories in August 1996. Our Urine Western Blot supplemental test received FDA approval in May 1998. Our urine-based ELISA tests together, with their screening and confirmatory testing components, are the only complete FDA approved urine-based HIV testing method. Our business is also involved in developing new test products for the rapid detection of HIV-1 and HIV Type 2, a second type of HIV ("HIV-2"), and other infectious diseases. In November 2003, we filed an Investigational Device Exemption ("IDE") with the FDA announcing our intent to develop a rapid serum-based HIV screening test. Rapid tests provide test results in less than 20 minutes and are particularly suitable for point-of-care testing, especially in lesser developed countries which lack the medical infrastructure to support laboratory based testing. We are currently developing both serum- and urine-based HIV-1 and HIV-2 rapid tests and anticipate that our primary focus will be the development, manufacture and sale of our rapid test products, both internationally and domestically. BACKGROUND HIV HIV, the cause of AIDS, is a leading cause of death for persons ages 25 to 44 in the U.S. and for persons of all ages in many international locales. Those infected with HIV generally do not show symptoms of AIDS until several years after HIV infection, if at all. Because most persons infected with HIV are unaware of their HIV status and are asymptomatic for AIDS, they do not avail themselves of medical treatment and may unknowingly expose others to the risk of HIV infection. Prior exposure to HIV can be detected in laboratory and point-of-care tests even though the infected individual is asymptomatic. Although the human immune system typically requires a number of weeks or months to begin producing antibodies following exposure to HIV, there is no consensus in the scientific community as to whether antibodies can first be detected in blood, urine or oral fluid. According to the December 2003 AIDS Epidemic Update published jointly by the Joint United Nations Programme on HIV/AIDS and the World Health Organization (the "WHO"), at the end of 2003 an estimated 40 million people globally were living with HIV; over 30.9 million people had already died from the disease, and an estimated 5 million people were newly infected with HIV during 2003. The Update reported that about 3 million people died of AIDS during 2003. HIV is spread by a transfer of bodily fluids, primarily through sexual contact, blood transfusions, sharing intravenous needles, accidental needle sticks or transmission from infected mothers to newborns. In its February 2004 presentation, Global Health, The Bill & Melinda Gates Foundation (the "Gates Foundation") cites a mid-2002 UNAIDS report indicating that in the absence of dramatically expanded prevention and treatment efforts, 68 million people will die of AIDS in the 45 most affected countries between 1 2000 and 2020, a mortality outlook that is five times the number of AIDS-related deaths in the previous two decades in these countries. Further, the Gates Foundation report projects approximately 45 million new HIV/AIDS infections by the year 2010, with 28 million of these infections considered to be preventable. Whereas the epidemic is currently centered primarily in sub-Saharan Africa, where expectations of current and future infection range from 30 to 35 million adults by 2010, the Gates Foundation study identifies countries in northern Africa as well as Russia, India and China as the "next wave" countries which will experience the HIV/AIDS pandemic, as demonstrated in the following chart: High and Low Estimates of Current and Future HIV/AIDS-Infected Adults in Next-Wave Countries, 2002 and 2010 (in millions) High Low ---- --- Nigeria 2002 4 2 2010 10 5 Ethiopia 2002 3 2 2010 7 3 Russia 2002 1 1 2010 5 3 India 2002 5 3 2010 20 5 China 2002 1 1 2010 10.5 4.5 source: Bill & Melinda Gates Foundation Global Health report 2/2004 HIV Testing The discovery in 1984 of HIV antibodies circulating in the blood led to the development and widespread use of blood screening tests for the detection of HIV antibodies. Blood banks began testing their supplies of blood in an effort to maintain and protect the integrity of the blood. Most current HIV antibody screening tests are EIA tests which operate on the principle that antibodies react with antigens. Antibodies are produced by the human body in response to the presence of an infectious disease, such as HIV. Antigens are substances that stimulate production of antibodies. EIA tests provide an antigen base that will react with HIV antibodies, if such antibodies are present. Enzymes are used to detect the reaction between the antigens and antibodies. Since then, the blood screening test has been considered the gold standard of HIV testing. In the United States, in addition to blood banks, physicians, life insurance companies, the military, the criminal justice system, the Immigration and Naturalization Service and community-based organizations all use blood-based testing. Unfortunately, HIV blood testing can be expensive and poses risk of infection to health care personnel. Blood is typically drawn at physician offices, clinics, hospitals or blood draw stations, where trained personnel are available. The blood is then sent to a laboratory where a trained health care worker or phlebotomist must first centrifuge the blood sample and then test it for the presence of HIV antibodies. Blood samples and related blood-sampling equipment require careful handling to avoid accidental exposure to blood-borne pathogens, such as HIV. Additionally, blood-based testing has become increasingly more costly as the costs of disposing of potentially infected specimens, syringes, needles and transfer tubes has increased. The cost of blood-based testing is prohibitive to many large public health screening programs, particularly in lesser-developed countries, many of which have significantly higher rates of HIV infection. Even in the United States, certain populations are not routinely screened due to the high cost of blood-based testing. 2 We have always maintained that urine-based testing offers unique advantages to blood-based testing. The following table illustrates these advantages:
+---------------------+--------------------------------------------------------------------------+ | | ADVANTAGE OF URINE OVER BLOOD | +---------------------+--------------------------------------------------------------------------+ |SAFETY | o Urine is non-invasive | | | o Urine collection uses no needles or lancets | | | o Urine does not spread HIV | +---------------------+--------------------------------------------------------------------------+ |COST EFFECTIVE, | o No special handling. Urine is stable for 4 weeks without refrigeration | |SIMPLE TO | o A urine sample is easier to obtain | |COLLECT | o Urine is not a bio-hazard and does not require expensive disposal | +---------------------+--------------------------------------------------------------------------+ |CONVENIENCE | o Urine collection does not require sterile collection devices or | | | trained health care providers | +---------------------+--------------------------------------------------------------------------+ |PATIENT APPEAL | o Urine has been shown to increase voluntary testing by up to 73% | | | (Source: University of Pennsylvania study results) | +---------------------+--------------------------------------------------------------------------+ |PATIENT SUITABILITY | o Urine is easy to collect from patients and is the most commonly | | | collected bodily fluid | +---------------------+--------------------------------------------------------------------------+ |COMPLEMENTARY | o Similar commercialized urine tests exist for | |MENU OF TESTS | drugs of abuse, pregnancy, other sexually transmitted diseases | +---------------------+--------------------------------------------------------------------------+ |ACCURACY | o Clinical data of urine testing shows a high correlation to blood, | | | approaching 100% | +---------------------+--------------------------------------------------------------------------+
All methods of HIV testing follow the same testing protocol. The protocol is to first test a sample for the presence of HIV antibodies. Any sample found to be reactive is then retested in duplicate. If either of the retests is reactive, the same sample is tested again using a more precise and expensive supplemental test. The presence of HIV antibodies, based on the results of the supplemental test, is considered a positive diagnosis of HIV infection. This protocol minimizes the risk of incorrectly reporting a false positive result that an individual is infected with HIV. ORGANIZATION We were incorporated in California in 1989 and reincorporated in Delaware in 1996 at the time of our initial public offering. In December 1998, we acquired certain assets from Cambridge Biotech Corporation, an entity now owned by bioMerieux, Inc. The acquisition included the Urine Western Blot and Serum Western Blot supplemental tests and leasehold rights to the Rockville, Maryland facility. We are headquartered in Alameda, California and have manufacturing facilities there and in Rockville, Maryland. Historically, the Alameda facility has manufactured our EIA screening test and the Rockville facility has manufactured our Urine and Serum Western Blot tests. However, we are currently in the process of consolidating our manufacturing operations by moving all manufacturing to our Rockville facility. We expect the closure of the Alameda facility to be completed by June 30, 2004, when the current lease expires. Our corporate headquarters will remain in the San Francisco bay area. In November, 2003, we became the 51% owner of a joint venture, Beijing Calypte Biomedical Technology Ltd. (the "Beijing Calypte Joint Venture"), created to market existing and potential new products in the People's Republic of China ("China"). The remaining 49% of the joint venture is owned by Marr Technologies Limited, an affiliate of Marr Technologies BV ("Marr"), our largest stockholder, holding approximately 28% of our outstanding stock as of March 22, 2004. Currently, we and our distributors market our ELISA tests in approximately half a dozen countries worldwide, primarily, however, in China and Brazil. Our current marketing strategy is to use distributors, both third party and joint venture partners, to penetrate targeted domestic and international markets. In the future, we may 3 use the Beijing Calypte Joint Venture or other joint ventures to manufacture and market our products in international markets or as vehicles to manage our international manufacturing arrangements. FINANCIAL CONSIDERATIONS To successfully implement our business plans, we must obtain sustainable cash flow and profitability. Our future liquidity and capital requirements will depend on numerous factors, including successful completion of the development of our new rapid tests, acquisition and protection of intellectual property rights, costs of developing our new products, ability to transfer technology, set up manufacturing and obtain regulatory approvals of our new rapid tests, market acceptance of all our products, competing products in our current and anticipated markets, actions by the FDA and other international regulatory bodies, and the ability to raise additional capital in a timely manner. Since December 31, 2003, we have entered into new financing arrangements (see Item 5) that management believes will be adequate to sustain operations at expected levels through at least 2004. Under our new financing arrangements, we will have the ability to borrow up to $15,000,000 pursuant to 5% promissory notes we may issue between February 28, 2004 and May 31, 2004 to finance our operations. Each promissory note will be due and payable 12 months after its issuance, which will be no later than May 31, 2005. If sufficient funds are not available from our operations to repay the promissory notes when due, we may need to arrange additional financing, attempt to extend or otherwise modify the promissory notes or make other arrangements. There can be no assurance that additional financing, if and as necessary, would be available or, if it is available, that it would be on acceptable terms. The terms of an additional financing could involve a change of control and/or require stockholder approval or could require us to obtain waivers of certain covenants that are contained in existing agreements. We would or might be required to consider strategic opportunities, such as a merger, consolidation, sale or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such new strategic opportunity, and there can be no assurance that any such opportunities will be available to us on acceptable terms, or at all. If additional financing is not available when and if required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and may be unable to continue our operations at current levels, or at all. PRODUCTS The Calypte Urine-Based HIV-1 Screening and Supplemental Tests (the urine ELISA tests) Our proprietary urine-based HIV-1 EIA (the "EIA Screening Test") is non-invasive, easy to use, reliable and avoids many of the costs and risks associated with blood-based testing. Our EIA Screening Test, when used with our Urine Western Blot supplemental test provides the only complete urine-based HIV testing method. Laboratories using our urine-based testing method can complete the entire testing profile for HIV-1 antibody using a single urine specimen. Key benefits of our test include: Convenience and Safety. Urine is the most commonly collected bodily fluid for laboratory testing. Collection of urine can take place any time of day. Urine testing does not require a 24-hour voided specimen or a midstream, clean-catch sample. Because it requires no special preservatives or containers, urine is also easy to collect, handle and discard. Our EIA Screening Test is in standard EIA format and is designed to be used with standard laboratory equipment. Independent studies have concluded that the likelihood of contracting infectious HIV virus in urine is extremely low. There have been no reported cases of transmission of HIV virus through contact with urine of HIV-infected patients. Accordingly, the risk of HIV infection to health care and laboratory workers accidentally exposed to urine samples appears to be negligible. Since no needles are used in the urine sampling process, our test avoids this route of accidental infection. In lesser-developed countries, where the supply of sterile needles and syringes cannot be guaranteed and the medical infrastructure to support laboratory testing is scarce or nonexistent, the safety benefits of using urine sampling extend to patients as well as to health care workers. Patient Appeal The ability to screen non-invasively for HIV in all types of patients, including injection drug users and newborns, may both enhance patient comfort and significantly increase the voluntary testing rates in patients who might otherwise decline testing. A recent study conducted by Johns Hopkins University entitled 4 "Screening for HIV Infection in High-Risk Communities by Urine Antibody Testing," published in the December 2002 volume of Journal of Acquired Immune Deficiency Syndromes utilized Calypte's EIA Screening and Urine Western Blot Tests. The study concluded that "[u]rine-based screening for HIV infection in high-prevalence inner city communities can be an effective tool for identifying and treating infected persons who are unaware of their infection." Cost Effective. Our EIA Screening Test may significantly lower the overall cost of testing for HIV infection because the cost of collecting, transporting, testing and disposing of urine specimens is relatively inexpensive. Our urine ELISA tests do not require the use of trained healthcare professionals to obtain samples and we believe that a urine collection cup costs between $0.05 and $0.50. Moreover, since urine is often already being collected for other testing purposes, the incremental cost of collecting urine samples is likely to be insignificant. Domestically, our current testing products qualify for insurance reimbursement coverage. We sell our current ELISA tests primarily to reference laboratories which in turn receive compensation from the insurance companies who order the tests. Even with reimbursement approvals, there can be no assurance that our ELISA tests will gain any significant degree of market acceptance among physicians, patients, or healthcare payers. As we seek to develop new products and obtain FDA approval for them in the future, insurance reimbursements may be necessary to facilitate their market acceptance. Accuracy We have performed clinical studies demonstrating the effectiveness of using urine as a reliable and clinically valid sample for HIV testing. In the clinical trials for FDA approval of our urine ELISA tests, which followed FDA protocol of using the screening and supplemental tests together, our tests detected the presence of HIV-1 antibodies in urine with 99.7% sensitivity in subjects previously identified as HIV-1 infected through blood-based screening tests. Approximately 13,000 paired blood and urine specimens were tested. In subjects at low risk for HIV, the specificity of tests was 100%. "Specificity" is the ability to identify all non-HIV infected individuals correctly. "Sensitivity" is the ability to detect HIV infected individuals. Specificity and sensitivity of our urine ELISA tests in certain populations, including those at high risk and those with other medical conditions, was lower when compared to blood-based testing. Calypte's HIV-1 antibody test is a much-needed alternative for people who fail to get tested for HIV because they are afraid of needles. According to the Centers for Disease Control and Prevention ("CDC"), approximately 665,000 Americans are living with HIV and AIDS. An estimated one in four does not know they are infected. It is critical for all people at potential risk for HIV infection to learn their status because early detection and treatment have been shown to prevent debilitating opportunistic infections and to extend life. Studies have shown that between 21% and 50% of people would prefer a urine test to a blood test, and up to 80% of these individuals cited fear of needles as the reason for preferring a urine test. In spite of the benefits of our urine ELISA tests, these tests represent an alternative method of determining the presence of HIV antibodies. Blood-based and oral fluid-based tests have the advantage of already being commercially marketed and of having gained acceptance from the medical community. Both blood-based and oral fluid-based tests have been shown to be reliable media for HIV detection. There can be no assurance that our urine ELISA tests will gain any significant degree of market acceptance among physicians, other health care providers or patients. Moreover, some blood-based HIV tests have also been proven effective in testing for both HIV-1 and HIV-2. Our urine ELISA tests are currently limited to testing for HIV-1 only. Although HIV-1 is the predominant strain of the virus, there are certain regions of the world, such as western Africa, where HIV-2 also exists. To date, although our urine ELISA tests are limited to HIV-1, we believe that factor has not had a materially adverse effect on our operations and revenues. However, there can be no assurance that this HIV-1 screening limitation will not have an adverse effect on our ability to market our urine ELISA tests in the future if another strain of HIV not detectable by our urine ELISA tests develops or if HIV-2 becomes more prevalent. Additionally, although we are working on development of rapid HIV diagnostic tests, there can be no assurance that our current lack of a rapid test will not adversely affect our operations and revenues. Test Methodology. Our EIA Screening Test uses an industry-standard 96 well microtiter plate to detect antibodies to HIV-1 in urine. The HIV-1 antibodies, when present in urine, bind to our proprietary antigen 5 coated on prepared microtiter plates. A subsequent enzymatic reaction produces a color change revealing the presence of HIV-1 antibodies. The screening test requires only 200 microliters of urine (approximately four drops) and can be performed using standard laboratory equipment. Samples can be shipped and stored at 15 to 30 degrees centigrade for up to 55 days, or for up to 1 year at 2 to 8 degrees centigrade, before testing. The laboratory protocol for testing urine is nearly identical to that of blood, and therefore requires few, if any, modifications to existing laboratory protocols. Our Urine Western Blot test is an in vitro qualitative assay for the detection and identification of antibodies to HIV-1. This more specific assay is used as a supplemental test with urine specimens that tested repeatedly reactive using our EIA Screening Test. Our Urine Western Blot test is manufactured from HIV-1 propagated in an H9/HTLV-IIIB T-Lymphocyte cell line. The virus is inactivated and specific HIV-1 proteins are bound to a nitrocellulose strip. Each strip contains all of the proteins and glycoproteins of HIV arranged in bands across the strip in order of molecular weight. If HIV-1 antibodies are present in the specimen, they will bind to the viral antigens present on the nitrocellulose strip. The position of bands on the nitrocellulose strips allows this antibody reactivity to be associated with specific viral antigens. Our Urine Western Blot supplemental test uses the same commercially available western blot kit components as used in our Serum Western Blot supplemental test. The test procedure is virtually identical as well, except that the Urine Western Blot supplemental test requires 1.0 milliliter of urine added directly to the standard kit diluent and requires additional times of incubation for the two detection steps. The same laboratory equipment is used for both the Urine and Serum Western Blot supplemental tests. Additionally, our Urine Western Blot test is differentiated by the blot controls it employs and the use of a positive criterion for blot interpretation. In urine, blots showing the presence of a single band, gp160, equal to or greater in intensity than the low positive urine western blot control are interpreted as a positive HIV-1 result. Urine blots have a lower indeterminate rate than blood, allowing more definitive negative or positive results. The Cambridge Biotech Serum-Based HIV-1 Supplemental Test Our Serum Western Blot test was the first supplemental western blot test to be FDA-approved and licensed for the detection of HIV-1 antibodies in blood. Our Serum Western Blot test has been distributed commercially for more than 15 years. Today, there are only two such products on the market. Since the FDA's November 1999 approval of a "Day Assay" format, the supplemental test is available in both a five-hour and an overnight format. We sell our Serum Western Blot test as a supplemental test to HIV-1 EIA screening tests produced by other manufacturers. Additionally, our Serum Western Blot test has been approved by the FDA for use as a supplemental test to HIV-1 rapid blood tests products by other manufacturers. Products Under Development Our research and development efforts are currently directed toward the development of select high-priority new diagnostic tests, primarily for the detection of HIV-1 and HIV-2. Priority is determined on the basis of feasibility, probable cost to develop, ability to acquire necessary intellectual property rights, regulatory complexity, market size and competition. Our product development strategy includes both internal product development and partnering with other companies to optimize existing tests and test formats and to obtain freedom to operate in conformity with other companies' intellectual property rights. Rapid Tests. In response to reports by the CDC on the value of rapid HIV antibody test results, we have been pursuing the development of HIV-1 and HIV-2 rapid tests as our primary new products effort. We believe that such rapid tests are feasible and that a significant market exists for such tests. The high number of individuals who do not return for test results and counseling constitutes a threat to public health. In addition, in emergency rooms, delivery rooms and other settings, there is an urgent need to immediately know the HIV status of patients. For example, since azidothymidine ("AZT") treatment of pregnant mothers, even at delivery, has been shown to result in a substantial decrease in mother-to-child HIV transmission, there appears to be a ready market for reliable rapid HIV tests. Internationally, lesser-developed countries have the highest incidence of HIV infection and the least effective medical infrastructure with which to diagnose and treat it. This situation largely exists in 6 the "next wave" countries in northern Africa, Russia, India and China. We believe that a rapid test is much more appropriate in these countries than a laboratory test. We are designing our rapid tests to comply with the rapid testing protocol promulgated by WHO. Under that protocol, if a sample is non-reactive on the basis of a single rapid test, testing is complete and the diagnosis is considered negative for HIV infection. If the sample is reactive using the first rapid test, it is tested with a second, different rapid test. A reactive sample using the second test, having already been indicated as a presumptive positive by the first test, is considered to be a positive diagnosis for HIV. A sample that is non-reactive to the second test, after having been reactive to the first test, is re-tested using a third, different rapid test. A reactive sample on the third test is considered a positive diagnosis for HIV; a non-reactive sample is considered a negative diagnosis. We have already conducted in-house trials of certain blood and urine rapid tests in development and are currently conducting field evaluations in Thailand to validate the performance of these products. Through the validation process, any enhancements necessary and/or desired in the performance of the rapid tests in the field are worked on in the laboratory. The reworked rapid tests are then returned to the field for further evaluation. This process is iterative and precedes the larger clinical trials that will be required for regulatory approval in many countries prior to bringing the products to market. Once each of these rapid tests demonstrates the desired performance in field evaluations, we will begin the manufacturing and clinical trial testing processes. We may elect to proceed with the commercialization of one of the tests while continuing to evaluate or modify the other. One of the most critical components affecting the design and composition of our rapid test products is the acquisition of patent rights. A number of patents from a number of third parties are required for the manufacture of the rapid test platforms and contents. These patent rights may restrict us as to use, territories in which we may sell products and modes of operation. These restrictions may impact whether we can transfer any of our rights to manufacture and/or distribute products incorporating particular patents and how we may conduct such manufacturing and/or distribution arrangements. We may need to enter into partnering arrangements with other entities in order to manufacture and/or distribute our products, but we may be restricted from doing so because of restrictions on certain patent rights. We may be required to devote substantial funds and other resources to acquire the necessary patent rights in a manner that will not hinder our ability to commercialize our products. There can be no assurance that we will be successful in our endeavors to commercialize these products. Over-the-Counter. There are currently no FDA approved over-the-counter HIV test products providing an immediate diagnosis. Nonethless, we believe there may be interest in an over-the-counter in-home rapid test in a number of countries worldwide. We will continue to explore the potential for an over-the-counter in-home urine collection kit for use in HIV diagnosis. However, due to regulatory approval uncertainties and cost concerns in the more developed countries, and especially in the United States, this is not a near-term priority development for us on our own. Other Diagnostics. We intend to develop and/or market additional or improved tests, focusing on our expertise in urine, for other infectious and viral diseases, including other sexually transmitted diseases. We intend to focus on developing and marketing products that are complementary to our existing product lines, technical expertise and market opportunities. These efforts are in the early research and evaluation stages and are not expected to result in revenues in 2004, if at all. Research and Development Spending. We continue to invest funds in research and development that we believe are necessary and appropriate to bring our rapid HIV-1 and HIV-2 tests to market, to ensure that our ELISA tests meet customer requirements and to explore the potential for other new diagnostic test products. We spent $1.5 million and $0.9 million on product research and development in 2003 and 2002, respectively. We expect future spending will continue to be devoted to development and commercialization of HIV-1 and HIV-2 rapid tests and improvements for our existing products, as well as to investigation of other potential new test products. There can be no assurance that we will achieve or sustain any revenues from sales of rapid HIV diagnostic tests, internationally or domestically, or from other new products we may develop or introduce. 7 SALES, MARKETING AND DISTRIBUTION Our marketing strategy is to continue to expand our global distribution network through the use of third party distributors and joint venture partners. In addition to FDA approvals, to date, we have received approval to market our ELISA urine tests in Indonesia, South Africa, Uganda, Kenya, China and Malaysia. Other international approvals for the ELISA urine tests are pending. We are working collaboratively with our third party distributors and through our Beijing Calypte Joint Venture to obtain regulatory approval to market and promote our products in certain international markets. We anticipate that a greater portion of our revenues for the next several years will be derived from sales to international distributors and by manufacturing collaborations in key markets. International sales and operations involve a number of inherent risks and may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in managing international operations and fluctuations in foreign currency exchange rates. Distributors of medical products in developing countries where the need for cost-effective HIV diagnostic tests may be the most acute often find it difficult to establish and maintain the necessary transportation, storage and credit facilities. Certain of our distributors have limited international marketing experience, and there can be no assurance that our distributors will be able to successfully market our products in any international market. The following table summarizes the markets and geographic regions that we and our current marketing partners for our ELISA tests cover. The table includes marketing and distribution arrangements that were in effect at December 31, 2003 and those expected to become effective in the first half of 2004. Material terms of the respective distribution arrangements are described in more detail below.
TYPE OF EFFECTIVE DATE TERM OF GEOGRAPHIC ARRANGEMENT MARKETING PARTNER/ COMPANY OF ARRANGEMENT ARRANGEMENT REGION MARKETS/PRODUCTS (1) - ------------------------------- ----------------- ------------- ------------ ------------------- --------------- Calypte United All States and Canada Otsuka Pharmaceutical 12/98 Evergreen Japan Urine only Exclusive Teva Medical Ltd. 12/94 Evergreen Israel Urine only Exclusive Uni-Health Services Sdn. Bhd. 4/01 3 years, with 2 Malaysia All Exclusive- year renewal urine option Non- exclusive- serum BioBras S. A. 5/00 3 years; 2 year Brazil All Exclusive- renewal option urine Non- exclusive- serum Medicure, Inc. 3/01 3 years with 2 Philippines All Exclusive- year renewal urine option Non- exclusive- serum PCN Healthcare 6/01 3 years with 2 Thailand All Exclusive year renewal urine option Non- exclusive- serum Centrum Promotora Internacional 4/01 2/04 Mexico All Exclusive- urine Non- exclusive- serum
8
TYPE OF EFFECTIVE DATE TERM OF GEOGRAPHIC ARRANGEMENT MARKETING PARTNER/ COMPANY OF ARRANGEMENT ARRANGEMENT REGION MARKETS/PRODUCTS (1) - ------------------------------- ----------------- ------------- ------------ ------------------- --------------- REM Industria E. Comerica LTDA 12/01 3 years with 2 Brazil Serum only Non- year renewal Exclusive option Zhong Yang Pute Biomedical Co. 10/02 2 years, with 2 20 Provinces All except drug Exclusive- year renewal in China rehabilitation urine option (2) and criminal Non- justice exclusive- serum Beijing Calypte Biomedical 11/03 Not applicable China All 51%-owned Technology Ltd. joint venture Sumit Exports and Trades 6/02 3 years, with 2 India All Exclusive- Pvt. Ltd. year renewal urine option Non- exclusive- serum bioMerieux Mexico S.A. de C.V. 12/01 3 years with 2 Mexico Serum only Non- year renewal exclusive option bioCiencia Tecnologia e 4/02 3 years with 2 Brazil Serum only Non- Comercio Ltda. year renewal exclusive option Adaltis Inc. 3/02 3 years with 2 Worldwide Serum only Non- year renewal exclusive option Mistaire LLC 3/03 3 years with 2 Gulf All Exclusive- year renewal Cooperative serum in GCC option Council, Non-exclusive- Botswana urine and serum in Botswana
(1) All serum products are sold on a non-exclusive basis. Urine EIA screening and supplemental tests are distributed on the basis of country or territory exclusivity. (2) The agreement calls for minimum purchases of $3 million over the two-year term of the agreement, and provides for a two-year extension contingent upon the distributor's purchase of a specified minimum number of tests (EIA - 1,500,000 tests the first twelve months and 2,500,000 tests the second twelve months; Urine Western Blot - 15,000 tests the first twelve months and 30,000 tests the second twelve months) during the original term of the agreement. Based on purchases to date, it is not likely that the distributor will achieve the required minimum purchases and, consequently, the agreement will likely not be renewed. This distribution agreement has been assigned to Beijing Calypte Joint Venture. The agreement can be terminated by either party upon ninety days notice. In 2003, our revenue from product sales totaled $3.5 million. Approximately 95% of our 2003 revenues were derived from sales to customers in the United States. 9 MANUFACTURING The manufacture of our urine ELISA tests involves antigen production, plate processing and preparation of certain washes and other reagents. All processes are carried out under FDA Quality System/ Good Manufacturing Practices ("GMP") regulations. Antigen production involves cell culture, antigen expression and purification. Following purification, the antigen is tested extensively and optimized for plate coating. The coating of standard 96 well microtiter plates with antigen is completed using industry standard plate coating equipment. Following binding of the antigen to the plates, the plates are blocked and stabilized to prevent nonspecific binding of the antigen. The plates are then dried and packaged in foil pouches. The washes and reagents are produced using standard solution preparation techniques. The consolidation of our manufacturing operations in Rockville will require significant capital investments to transfer the manufacturing processes and procedures for our urine ELISA tests, to reconfigure space and purchase new equipment, to hire and train current and additional staff, to conduct validation studies, and to complete comparability studies for FDA review and approval. We have pre-market approval ("PMA") from the FDA for the manufacture and sale of our EIA screening test for our Alameda, California facility. We have a Biologics License ("BL") from the FDA for the manufacture and sale of our serum Western Blot tests for our Rockville, Maryland facility. We also have a PMA from the FDA for the manufacture and sale of our urine Western Blot tests for our Rockville facility. We have applied for a PMA to manufacture and sell our EIA test kits at our Rockville facility and expect to receive it in the spring of 2005. Until we receive the PMA, we will not be able to manufacture our EIA screening test for sale in the United States at our Rockville facility. As a result, we have recently increased our production of EIA screening tests at our Alameda facility in an attempt to establish a sufficient supply of inventory to meet our expected demand during the consolidation period. We considered historical sales levels and the expected length of time required to complete the consolidation and obtain the PMA in determining the amount of inventory we would need to cover demand during the transition period. Demand could significantly exceed historical levels and consolidation of operations or FDA approval could take longer than expected. If one or more of these events occur, our transition inventory may not be sufficient to supply customer orders. Alternatively, demand could fall significantly below historical levels, in which case we will have manufactured excess inventory that we may have to dispose of at additional cost. The lease for our Alameda facility expires on June 30, 2004. We intend to wind up manufacturing operations in our Alameda facility in early June 2004. We plan to keep our corporate headquarters in the San Francisco bay area and are in the process of looking for suitable office space. The FDA did not inspect either of our facilities during 2002. It inspected our Alameda facility in June 2003 and our Rockville facility in October 2003. Both inspections resulted in a few minor observations requiring response or corrective action, which we have made. Although we believe the FDA is currently satisfied with our responses and corrective actions resulting from its latest inspections, if it subsequently determines that it is not satisfied with them or, if it observes new conditions requiring corrective actions which remain unresolved following a future inspection, the FDA could take regulatory actions against us, including license suspension, revocation, and/or denial, seizure of products and/or injunction, and/or civil penalties or criminal sanctions. Any such FDA action would likely have a material adverse effect upon our ability to conduct our ELISA test business. Except as may be limited by licensed patent right restrictions and other regulatory or government imposed considerations, we expect to outsource the manufacture of our rapid test products and are in the process of identifying manufacturers and potential joint venture partners that we believe could manufacture the rapid tests in the quantity and quality that we desire. There can be no assurance that we can successfully develop and transfer our rapid test technologies to another manufacturer or that the manufacturer will be able to successfully obtain local regulatory approval or meet expected commercial demand. Additionally, more than one manufacturer may produce various components of the tests, and there can be no assurance that the production from various sources will be successfully coordinated. Governmental regulations will likely affect the cost of production and time to production in amounts and manners that we cannot quantify. 10 We purchase and expect to purchase or have our manufacturing partners purchase raw materials and other components obtained from various suppliers in the manufacture of our test products. We also use some single-source components. Any delay or interruption in supply of these raw materials or components, especially in regard to single-source components, could significantly impair our ability to manufacture products in sufficient quantities to meet established and increasing commercial demand because additional or replacement suppliers cannot be quickly established. As a result of limited financial resources in the past and related personnel turnover, we have had limited experience in the commercial-scale manufacture of our products. We currently manufacture our products for sale, for submission to FDA for ongoing compliance, for clinical trials, and for building our inventory. We may encounter difficulties in scaling-up production of our products, including problems involving production yields, quality control and assurance, raw material supply and shortages of qualified personnel. Due to our limited manufacturing experience, our estimates with regard to these and other operational requirements may be incomplete or inaccurate and unanticipated events and circumstances are likely to occur. Difficulties we may encounter in the current scale-up of manufacturing inventory for our transition period or in our consolidation of manufacturing operations could have a material adverse effect on our business, financial condition and results of operations. Due to the nature of our manufacturing processes, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, discharge, handling and disposal of certain materials and wastes. There can be no assurance that we will not be required to incur significant costs to comply with land use and environmental regulations as manufacturing is scaled-up to commercial levels, nor that our operations, business or financial condition will not be materially and adversely affected by current or future environmental laws, rules, regulations and policies. There can be no assurance that we will be able to obtain and maintain all required permits in connection with the operation of our manufacturing facilities. If we attempt to manufacture our products on a larger commercial scale, we may become a significant user and disposer of water. The disposal of water used in our manufacturing processes must comply with applicable federal, state and local environmental protection laws, and compliance with these laws may be costly and difficult. Our Rockville facility is a specialized facility incorporating Biosafety Level 3 controls for the manipulation of potentially infectious biological agents (HIV viruses). It also uses hazardous chemical materials. As such, this facility and the products manufactured there are subject to rigorous federal, state and local regulatory controls including registration, licensing and specific material use permits. TECHNOLOGY Our urine ELISA tests are based on the discovery by scientists at the New York University Medical Center ("NYU") in 1988 that antibodies to HIV could be found in urine. Prior to this discovery, it was commonly held that antibodies to systemic infections could not pass through the kidneys, and thus, could not be found in the urine of infected individuals. The NYU scientists showed that antibodies to HIV-1 envelope antigens were present in all urine samples from HIV-1 seropositive subjects. Building on this discovery, we developed our enzyme immunoassay ("EIA") to detect antibodies to HIV-1 in urine. There are two proprietary features of our EIA test that result in a format sensitive enough to detect the low levels of HIV antibodies in urine, the antigen target and the sample buffer in the assay. Recognizing the prominence of envelope antibodies in urine, the antigen target in the assay is a full length, recombinant glycosylated HIV-1 envelope protein, rgp160. Although this antigen is a recombinant glycoprotein, it is identical to the viral envelope protein gp160 in amino acid sequence and in the presence of carbohydrate at glycosylation sites. This kind of antigen target can efficiently capture the full range of HIV-1 envelope specific antibodies produced in the human polyclonal response to the virus. The microwell assay format permits the high availability of epitopes of the recombinant envelope glycoprotein for antibody binding. This availability of epitopes results in the sensitivity verified in clinical trials. We have non-exclusive rights to the proprietary process used to express the recombinant HIV-1 envelope glycoprotein from Texas A&M University System ("TAMUS"). This proprietary process for the manufacture of rgp160 begins with the baculovirus expression vector system established in an insect cell culture. The consistent 11 and high levels of rgp160 expression in baculovirus infected insect cell culture are a critical step in the overall manufacturing of rgp160. We improved and upgraded the Repligen Corporation process with a proprietary process which uses a system in which the HIV-1 envelope protein is produced in the insect cell membrane rather than typical tissue culture systems where the protein is secreted into insect cell culture media. Rgp160 is an insoluble protein and requires detergent based extraction and purification procedures which are proprietary. We developed and have obtained a United States patent claiming a sample buffer formulation, which is used in the HIV-1 urine test. This sample buffer acts as a diluent for urine in the assay procedure and significantly increases test specificity by reducing non-specific binding of immunoglobulins (non-specific antibodies) and other substances in urine that would decrease specificity and sensitivity of HIV-1 antibody binding. Sample buffer is currently manufactured in our Alameda facility and will be transferred as part of our consolidation in our Rockville facility. Our products incorporate established immunoassay technology based on antibody-antigen reactions. Antibodies are immune system proteins produced as a result of an organism's immune response to substances (antigens) foreign to the body and specifically bind to antigens and signal the immune system to assist in eliminating them. Immunoassays are used for diagnostic applications where the presence or absence of a specific analyte is being evaluated and allow the detection of some analytes at levels as low as one part per billion. Antigens include viruses, bacteria, parasites, chemical toxins and other foreign substances and hormones. The HIV-1 urine assay format includes a standard 96 well microtiter plate which is compatible with standard laboratory instrumentation. The microwell plates are coated with proprietary recombinant HIV-1 envelope protein antigen. Patient urine and the unique specimen diluent are introduced to the microwell simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated well and remain during the subsequent wash steps. An enzyme labeled conjugate is added to the well. This conjugate binds specifically to human antibodies which remain from the previous step. Following another wash, substrate reagent is added and color development occurs due to the presence of the enzyme conjugate in the well. This color is measured spectrophotometrically on a standard laboratory microwell plate reader. The presence of HIV antibodies in the specimen is indicated by the development of color in the microwell, and the intensity of the color is proportional to the amount of antibody. Our Urine Western Blot supplemental test combines the Cambridge Biotech HIV-1 Western Blot test with a procedure we developed for testing urine specimens. Our Urine Western Blot test is based on the combination of electrophoretic separation of complex mixtures of proteins with the highly sensitive immunoblotting technique. This method has been highly useful in characterizing the antigenic profile of HIV-1 and describing the immune response to HIV-1 in the serum/plasma of exposed or infected persons. The manufacture of our Urine Western Blot and Serum Western Blot tests involves the production of an inactivated, partially purified HIV-1 lysate from HIV-1 propagated in an H9/HTLV-IIIb T-lymphcyte cell line. HIV-1 proteins are separated by molecular size using gel electrophoresis of the lysate in the presence of detergent (sodium dodecylsulfate). The separated HIV-1 proteins are electrotransferred from gel to a nitrocellulose membrane that is washed, blocked to minimize non-specific immunoglobulin binding and packaged. These tests provide controls and components which enable the detection and visualization of HIV-1 antibodies present in the specimen incubated with individual nitrocellulose membrane strips. Bands corresponding to specific location of HIV-1 proteins are used to interpret a positive, negative or indeterminate result. The format of both of our urine and blood rapid tests under development is based on a lateral flow device where the specimen enters by capillary action into a sample pad, where conditioning of the specimen takes place. The specimen then moves into a conjugate pad where the presence of antibodies in the urine or blood results in binding to a detection molecule carrying a color indicator. This antibody complex moves to a nitrocellulose test strip containing the HIV-1 and HIV-2 antigen targets and in a separate area as a control zone. If HIV-1 or HIV-2 specific antibodies are present in the complex, binding occurs between the antibody complex and the antigen band forming a red line. Absence of a red line at this location indicates the absence of HIV-1 and/or HIV-2 antibodies and a non-reactive result for the specimen. The validity of that result depends on the binding of the antibody complex to the control zone to form a red line. Results are seen in about 20 minutes in contrast with the laboratory based EIA tests that take 2 to 3 hours to perform. 12 PATENTS, PROPRIETARY RIGHTS AND LICENSES We seek patent and other intellectual property rights to protect and preserve our proprietary technology and our right to capitalize on the results of our research and development activities. We also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to provide competitive advantages for our products in our markets and to develop new products. We have two United States patents, one pending United States patent application, six foreign patents, and eight pending foreign patent applications. In addition, we currently license the right to use certain patents and other intellectual proprietary rights from NYU, Cambridge Biotech and TAMUS. These licenses secure intellectual property rights necessary for the manufacture and sale of our ELISA test products as summarized below:
+--------------------------+-------------------+----------------------------+------------------------+-----------------+ | | | | |EXPIRATION - | | | | | |UPON EXPIRATION | | | | | |OF PATENT IN: | |ISSUER OF LICENSE |OWNER |DESCRIPTION |ADDITIONAL PROVISIONS | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ |EIA: | | | | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | NYU |NYU |Exclusive license for |Right to make, use, | 2009 | | | |using urine in place of |sell and sublicense | | | | |blood as a specimen sample |products utilizing the | | | | |for detecting HIV |technology described | | | | | |in the patent | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | Texas A&M University |TAMUS |Non-exclusive license for |Right to make, have | 2009 | | System (TAMUS) | |using insect cells to |made, use and sell | | | | |obtain gp160 |products based on its | | | | | |proprietary | | | | | |recombinant expression | | | | | |systems | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | bioMerieux (Cambridge |Harvard University | Non-exclusive license for | Sublicense to make, | 2005 | | Biotech Corporation) | | using gp160 to detect HIV | have made, use and | | | | | infection | sell products that | | | | | | relate to the licensed | | | | | | technology | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ |URINE WESTERN BLOT | | | | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | NYU |NYU |Exclusive license for |Right to make, use, | 2009 | | | |using urine in place of |sell and sublicense | | | | |blood as a specimen sample |products utilizing the | | | | |for detecting HIV |technology described | | | | | |in the patent | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | NIH |Pasteur Institute |HIV 1 virus | | 2112 | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ |SERUM WESTERN BLOT | | | | | +--------------------------+-------------------+----------------------------+------------------------+-----------------+ | NIH |Pasteur Institute |HIV 1 virus | | 2112 | +--------------------------+-------------------+----------------------------+------------------------+-----------------+
As we pursue the development of our rapid HIV tests, we will need to obtain licenses or other rights under, or enter into distribution or other business arrangements in connection with, certain patents for HIV-2, peptides, analytes and lateral flow technology, in order to manufacture and sell our rapid HIV tests. See the Section entitles, "Risk Factors" for a further discussion of these issues. To obtain these licenses, we will have to pay upfront fees and ongoing royalties. We have filed patent applications in the United States, China and Russia for a "Rapid Test For Antibodies Against HIV In Urine." These applications are in the early stages of prosecution but establish a priority date for our invention. Although important, the issuance of a patent or existence of trademark or trade secret protection does not in itself ensure the success of our business. Competitors may be able to produce products competing with our patented products without infringing our patent rights. Issuance of a patent in one country generally does not prevent 13 manufacture or sale of the patented product in other countries. The issuance of a patent is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent can be challenged by litigation after its issuance. If the outcome of such litigation is adverse to the owner of the patent, the owner's rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. We are not aware of any pending claims of infringement or other challenges to our patents or our rights to use our trademarks or trade secrets in the United States or in other countries. We require our employees, consultants, outside collaborators, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed by or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual during his or her tenure with us will be our exclusive property. GOVERNMENT REGULATION Overview Our products are subject to extensive regulation by the FDA and, to varying degrees, by state and foreign regulatory agencies. Our products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act (the "Act"), as amended by the Medical Device Amendments of 1976, the Safe Medical Devices Act of 1990, the FDA Modernization Act of 1997, and the Medical Devices User Fee and Modernization Act ("MDUFMA") among other laws. Under the Act, the FDA regulates the pre-clinical and clinical testing, manufacturing, labeling, distribution, sale and promotion of medical devices in the United States. Beginning in October 2002, MDUFMA requires companies to pay substantial user fees for many FDA applications for new product approvals and for some product modifications. The FDA prohibits a device, whether or not cleared under a 510(k) pre-market notification, or approved under a pre-market approval ("PMA") or a biologics license application, from being marketed for unapproved uses. If the FDA believes that a company is not in compliance with the regulations, it can institute proceedings to detain or seize a product, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. We plan to sell our products in certain foreign countries which impose local regulatory requirements. The preparation of required applications and subsequent FDA and foreign regulatory approval processes are expensive, lengthy and uncertain. Failure to comply with FDA and foreign regulatory requirements could result in civil monetary penalties or criminal sanctions, restrictions on or injunctions against marketing of our products. Additional enforcement actions may potentially include seizure or recall of our products, and other regulatory actions. There can be no assurance that we will be able to obtain necessary regulatory approvals or clearances in a timely manner or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations. HIV-1 Screening and Supplemental Tests Our ELISA tests are regulated by the FDA Center for Biologics Evaluation and Research. When our EIA screening test was submitted to the FDA in September 1992, the FDA required a product license application ("PLA") and an establishment licensing application ("ELA") for our Berkeley, California manufacturing facility. In August 1996, we received a product license and an establishment license from the FDA to manufacture and sell, in interstate and foreign commerce, our EIA screening test for use in laboratory settings. In December 1998, when we acquired the assets relating to the Cambridge Biotech Western Blot tests for HIV-1, Cambridge Biotech had a product license and an establishment license from the FDA for both the urine and serum-based Western Blot tests. In March 1999, the licenses were transferred from Cambridge Biotech to us and replaced with a Biologics License ("BL"). In January 2001, our EIA screening test was transferred from the biologics license to an approved PMA license as a Class III medical device concurrent with the approval of our 14 Alameda, California manufacturing facility. In June 2001, our urine Western Blot test, manufactured in our Rockville, Maryland facility, was transferred from the biologics license to an approved PMA license as a Class III medical device. In December 2002, we received FDA approval to eliminate the lot release testing requirement for our EIA test. In February 2003, we received FDA approval for elimination of lot release testing for our urine Western Blot test. Clinical Laboratory We have not established nor do we plan to establish a clinical reference laboratory. Our customers depend upon the services and facilities of independent clinical reference laboratories to process our ELISA tests. Manufacturing Facilities The FDA requires our products to be manufactured in compliance with its Quality System/Good Manufacturing Practices ("GMP") regulations. In addition, we are subject to certain additional manufacturing regulations imposed by the State of California for our Alameda facility and the State of Maryland for our Rockville facility. These regulations require that we manufacture our products and maintain related documentation for testing and control activities. Our facilities and manufacturing processes have been periodically inspected by the FDA and other agencies and remain subject to audit from time to time. We believe that we are in substantial compliance with all applicable federal and state regulations. Nevertheless, there can be no assurance that our manufacturing facilities will satisfy FDA, GMP or California and Maryland manufacturing requirements. Enforcement of the GMP regulations has increased significantly in the last several years, and the FDA has publicly stated that compliance will be more strictly enforced. In the event the FDA determines that we are not in compliance with its regulations and, to the extent that we are unable to convince the FDA of the adequacy of our compliance, the FDA has the power to assert penalties, including injunctions or temporary suspension of shipment until compliance is achieved. In addition, the FDA will not approve a biologics license or PMA if the facility is found in noncompliance with GMPs. Such penalties could have a material adverse effect on our business, financial condition and results of operations. We are also subject to regulation by other federal entities, such as the Occupational Safety and Health Agency, the Environmental Protection Agency, and by various state agencies, including the California Environmental Protection Agency. Federal and state regulations regarding the manufacture, sale or use of our products are subject to future change, and these changes could have a material adverse effect on our business, financial condition and results of operations. Product Liability and Recall Risk; Limited Insurance Coverage. The manufacture and sale of medical diagnostic products subjects us to risks of product liability claims or product recalls, particularly in the event of false positive or false negative reports. A product recall or a successful product liability claim or claims that exceed our insurance coverage could have a material adverse effect on us. We maintain a $10,000,000 claims made policy of product liability insurance against which no claims have been made. However, product liability insurance is expensive. In the future, we may not be able to obtain coverage on acceptable terms, if at all. Moreover, our insurance coverage may not adequately protect us from liability that we incur in connection with clinical trials or sales of our products. International Our Alameda, California manufacturing site was awarded International Organization for Standardization ("ISO") 9001/EN 46001/ ISO 13485 certification on March 14, 2001 and we expect this approval to remain in effect until the facility is closed as part of our consolidation of manufacturing operations in Rockville. Our Rockville, Maryland manufacturing site underwent an assessment in December 2003 for ISO certification. We believe we will receive such certification shortly. Distribution of our products outside the United States is subject to regulatory requirements that vary from country to country. Our export from the United States of certain of products that have not yet been approved for domestic commercial distribution is subject to FDA export restrictions. The European Union ("EU") requires a CE mark as well as ISO 9001 certification to qualify for sale in the EU. We have no immediate plans to seek 15 such qualification. In a number of foreign countries, FDA approval is required prior to approval in that country to avoid additional in-country regulatory processes. Other countries require approval in the country of manufacture to avoid the in-country regulatory processes. Still other countries look to the results of WHO evaluations for guidance. WHO serves as both a quasi-regulatory body and a potential funding source for many developing countries that might not otherwise possess the regulatory infrastructure or financial resources to avail themselves of products for the diagnosis and treatment of HIV and AIDS. We believe that a strong performance of our proposed rapid urine tests in a WHO evaluation would be an equally, if not more, effective demonstration of the viability of urine testing for HIV antibodies than the evaluation we earlier contemplated for our ELISA tests. We have been advised by WHO that its bulk procurement program for HIV tests focuses on diagnostic and blood donation screening tests capable of detecting the presence of both HIV-1 and HIV-2 antibodies. Although WHO has previously reported the results of its Phase 1 trials of our current EIA and Western Blot tests on its website, WHO has advised us that, in principle, it views those tests as suitable only for surveillance purposes and therefore not eligible for WHO's bulk procurement program. We anticipate that certain countries will look to the results of WHO evaluations for guidance on the potential uses of urine tests and for this reason we intend to continue to work with WHO. In our view, the attributes of our planned rapid tests for HIV-1 and HIV-2 in both urine and whole blood samples more closely match the needs of the developing world and, once evaluated by WHO, are more likely to meet its bulk procurement eligibility criteria. For these reasons, we may request WHO either to put further evaluations of our ELISA tests on hold or to drop them entirely in order to help WHO focus its limited resources on evaluation of the technology to be employed by the rapid tests. We have obtained regulatory approval for our ELISA tests in certain international markets including Malaysia, China, Indonesia, the Republic of South Africa, Kenya and Uganda. These approvals validate the use of urine testing in the diagnosis of HIV. We believe that the two largest international markets for our urine ELISA tests are (1) China, where our ELISA tests have already been granted approval as a medical device and where we are attempting to achieve expanded access to governmental testing applications by obtaining an additional Biologics Branch approval, and (2) Russia, where we are considering expansion. Although we have obtained approval for our urine ELISA tests in certain African countries and are engaged in the approval process in others, we have determined that most hospitals and voluntary testing centers in these countries, due to their limited infrastructure, can best utilize our proposed HIV urine rapid test. Even though many hospitals, clinics or testing centers may recognize the advantages of and prefer urine testing, there is negligible demand for our current urine ELISA tests as they would prefer to wait for the availability of our announced rapid test products than implement procedures applicable to the current lab-based urine testing alternative. Since we are still in the development stage for our rapid test products, we have not begun the regulatory process for those tests in any target market. We believe that the regulatory processes in certain foreign countries having a greater prevalence of HIV will be faster, which should result in a quicker timeframe for approval and right to bring our rapid tests to market. Consequently, we plan to focus our efforts on obtaining approvals for our rapid tests in those countries. We expect that our initial focus for obtaining approval of our rapid tests will be in Africa and the key "next wave" countries of China, Russia and, subsequently, India. We anticipate that there will be distinct approval processes for the professional market (hospitals, clinics, testing centers and government testing applications) and the over-the-counter market. The over-the-counter approval process may include additional requirements relating to self-testing with the rapid test. In China, regulatory approval for a product is granted only for products manufactured in China and only to the Chinese manufacturer of such product. As a result, for us to maintain control of our products in China, we plan to manufacture our products in China through our Beijing Calypte Joint Venture. Failure to obtain necessary regulatory approvals for our rapid tests would have a material adverse effect on our business, financial condition and results of operations. COMPETITION Competition in the market for HIV testing is intense and is expected to increase. We believe that the principal competition will come from existing laboratory-based blood tests, point-of-care rapid blood tests, oral fluid-based tests, or other laboratory-based urine assays that may be developed. Our competitors include specialized biotechnology firms as well as pharmaceutical companies with biotechnology divisions and medical diagnostic 16 companies, many of which are substantially larger and have greater financial, research, manufacturing, and marketing resources. Important competitive factors for our products include product quality, price, ease of use, customer service, and reputation. Industry competition is based on the following: o Scientific and technological capability; o Proprietary know-how; o The ability to develop and market products and processes; o The ability to obtain FDA or other regulatory approvals; o The ability to manufacture products that meet applicable FDA requirements (i.e., good manufacturing practices); o Access to adequate capital; o The ability to attract and retain qualified personnel; and o The availability of patent protection. We expect competition to intensify as technological advances are made and become more widely known, and as new products reach the market. Furthermore, new testing methodologies could be developed in the future that render our products impractical, uneconomical or obsolete. There can be no assurance that our competitors will not succeed in developing or marketing technologies and products that are more effective than those we develop or that would render our technologies and products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that our competitors will not succeed in obtaining regulatory approval for these products, or introduce or commercialize them before we can do so. These developments could have a material adverse effect on our business, financial condition and results of operations. Significant competitors for our current and developmental stage HIV antibody tests are Abbott Laboratories, bioMerieux, the Ortho Diagnostics division of Johnson & Johnson and Bio-Rad Laboratories, which sell blood-based HIV-1 EIAs and Orasure Technologies, Inc., which sells FDA-approved HIV tests including an oral fluid-based laboratory test, a blood-based rapid HIV-1 and HIV-2 test and an oral fluid-based rapid HIV-1 test. MedMira and Trinity Biotech each recently received FDA approval to sell rapid HIV-1 blood tests in the United States. We believe other companies may seek FDA approval to sell competing rapid HIV tests in the future. Several companies market or have announced plans to market blood-based or oral fluid-based HIV rapid tests in the United States and abroad. We expect the number of blood-based and oral fluid-based HIV rapid tests to increase as these tests become more widely accepted. We are not aware of any companies marketing or planning to market competing urine-based HIV rapid tests, although, Murex Corporation, owned by Abbott Laboratories, has previously announced urine capability for an HIV test. Outside of the United States, where regulatory requirements for HIV screening tests are sometimes less demanding, a much wider range of competitors may be found. Manufacturers from Japan, Canada, Europe, and Australia offer a number of HIV screening tests in those markets including HIV-1 and HIV-2 tests, rapid tests and other non-EIA format tests. There can be no assurances that our products will compete effectively against these products in foreign markets, or that these competing products will not achieve FDA approval. EMPLOYEES As of December 31, 2003, we had an aggregate of 70 full time, part time and temporary employees, 11 of whom were engaged in or directly supported our research and development activities, 47 of whom were in manufacturing, manufacturing support and quality assurance, two of whom were in marketing and sales and ten of whom were in administration. Our employees are not represented by a union or collective bargaining entity. We believe our relations with our employees are good. 17 WHERE TO GET MORE INFORMATION Our Website address is http://www.calypte.com. We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). These reports are available on our website free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. RISK FACTORS See Item 6, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 2. PROPERTIES We lease approximately 20,000 square feet of office, research and manufacturing space in Alameda, California under a lease that expires in June 2004. We are not renewing this lease. We plan to vacate this space by June 30, 2004 and lease a smaller amount of office space in the San Francisco bay area to house our corporate headquarters. We also lease two manufacturing sites in Rockville, Maryland, a 26,000 square foot manufacturing, research and office site and a 3,000 square foot site which houses our BSL-3 virus laboratory. Our lease on the virus lab site expires in October 2006 and our lease on the larger site expires in February 2009. We believe that the facilities described above are adequate for our current requirements. We are currently evaluating our requirements for our developmental stage rapid test products. ITEM 3. LEGAL PROCEEDINGS On January 27, 2003, an action was filed in San Francisco County Superior Court against us by Heller Ehrman White & McAuliffe, LLP ("Heller"), our former attorneys. On April 30, 2003, we reached a settlement agreement with Heller whereby we agreed to pay a total of $463,000 to settle this claim, after which Heller would dismiss the suit. As a part of the settlement, we waived all of our defenses to Heller's claims, as well as our counterclaims, should we default on this payment plan. We made the final required payment to Heller in February 2004 and Heller filed a request for dismissal of the suit with prejudice. On January 24, 2003, we were informed that one of our former vendors, Validation Systems, Inc. ("Validation"), had commenced an action in Santa Clara County Superior Court on an open book account in the amount of $79,614, incurred between April 1999 and July 2002 and which we accrued, concurrently, plus $20,156 in interest, at the rate of 10% per annum until payment, wherein it has claimed that it rendered services related to the validation of biomedical equipment and processes at our facilities. We have contested the claim as the alleged services claimed by Validation were not performed in a timely fashion and were, thus, unusable. On September 9, 2003 the Court dismissed Validation's lawsuit against us due to the failure of Validation's counsel to appear at a mediation status review and to respond to an order to show cause regarding the failure to appear. Validation has filed a motion to vacate this dismissal on grounds of inadvertence, mistake, surprise and excusable neglect. The Court vacated the dismissal and reinstated the case at a hearing on December 2, 2003 in return for Validation's payment of fees incurred by us in connection with Validation's failure to appear. Additonally, the Court ordered the parties to mediation. The parties are in the process of scheduling the mediation. We believe that we have meritorious defenses to the action. On May 22, 2003, we were informed that a former vendor, Professional Maintenance Management LLC ("PMM"), had instituted an action against us in the Montgomery County Circuit Court of Maryland for the sum of $64,925 plus post-judgment interest. We agreed to resolve the matter by making an initial payment in the amount of $10,000 and subsequent monthly payments in the amount of $7,500 toward the outstanding amount claimed by PMM. All payments have been made and plaintiff's counsel has filed a dismissal of the action with the Court. 18 In September of 2003, we were served a lawsuit filed in the United States District Court for the Northern District of California by three individuals, Michael Serro, Michael Caland and Assad Ali Assad, seeking shares of our stock to which they claim they are entitled based on consulting services they claim to have provided pursuant to consulting agreements they had with us. We disputed the liability and contended that these three individuals did not provide the consulting services to us upon which their claims are based. A Stipulation of Dismissal was filed with the Court in February 2004 and the matter is now closed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of 2003. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK SPLIT Our Common Stock commenced trading on the Nasdaq SmallCap Market on July 26, 1996, the time of our Initial Public Offering, under the symbol "CALY". Our Company's stock was removed from listing on the Nasdaq Small Cap Market on July 13, 2001 as a result of our failure to meet the market's listing maintenance requirements. Beginning on July 13, 2001 and until May 28, 2003, our stock traded on the Over the Counter Bulletin Board under the symbol "CALY". On May 20, 2003, our shareholders approved a 1:30 reverse stock split, which became effective on May 28, 2003. Since May 28, 2003, our stock has traded on the Over the Counter Bulletin Board under the symbol "CYPT". At the time of the reverse split, the stated par value of our common stock was changed to $0.03 from $0.001 per share. The number of our authorized shares of common stock remained at 800 million. High and low sales prices reported by the Over the Counter Bulletin Board during the periods indicated are shown below. All share prices have been restated to reflect the reverse stock split.
FISCAL YEAR (REFLECTS STOCK SPLIT) QUARTER HIGH LOW - ------------------------------------------------------------------------ ---------- -------- -------- 2003 4th $ 1.74 $ 0.44 2003 3rd 1.80 0.11 2003 2nd 1.05 0.25 2003 1st 3.45 0.75 2002 4th 4.80 1.50 2002 3rd 12.90 2.40 2002 2nd 8.70 0.30 2002 1st 8.10 5.10
On March 22, 2004, there were approximately 200 holders of record of our common stock, and the closing price of our common stock was $0.52. We have never paid any cash dividends, and our Board of Directors does not anticipate paying cash dividends in the foreseeable future. We intend to retain any future earnings to provide funds for the operation and expansion of our business. SALES OF COMMON STOCK Private Placements of Common Stock On January 22, 2001, the Company signed an agreement to place up to $1.1 million in convertible short-term debentures. Under this arrangement, the Company issued two convertible debentures to the debenture holders in the principal amount of $550,000, pursuant to Regulation S of the Securities Act. Each debenture had an interest rate of 6% and was issued at an original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. Each debenture matured 90 days from the date of issuance, or on April 26, 2001 and June 11, 2001, respectively. Under the terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Company's common stock at a fixed price that represented a 5% discount to the average trading price of the shares for the 10 trading days preceding the issuance of each debenture. If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture holder increased to 15% of the average low bid price for the Company's common stock for any three of the 22 trading days prior to the date of conversion. Concurrent with the issuance of the first debenture, the Company also issued a warrant to the debenture holder for 6,667 shares of common stock at an exercise price of $45. The shares underlying the debentures and warrant were registered using a Form S-3 Registration Statement. The Company received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001. 20 On January 24, 2001, the Company amended a common stock purchase agreement with a private investment fund for the issuance and purchase of its common stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. The facility generally operated with the investor committed to purchase up to $25 million or up to 20% of the Company's outstanding shares of common stock over a twelve-month period. Once during each draw down pricing period, the Company could request a draw, subject to a formula based on the Company's average stock price and average trading volume setting the maximum amount of the request for any given draw. The amount of money that the investor provided to the Company and the number of shares the Company issued to the investor in return for that money was settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22 day period and the Company received the settled amount of the draw down. By June 30, 2001, the Company had issued 169,500 shares of its common stock, the total number registered for the equity line with the Securities and Exchange Commission, at an average price of $12.60 per share and had received net proceeds of approximately $2,014,000 after deducting expenses of the transaction. There are no further funds available to the Company under this equity line. In August 2001, the Company and the same private investment fund mentioned in the preceding paragraph signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Company's common stock over a twenty-four month period. The initial closing of the transaction occurred in October 2001. Under this arrangement, the Company, at its sole discretion, could draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund was obligated to purchase shares of the Company's common stock. The purchase price of the common stock purchased pursuant to any draw down was equal to 88% of the daily volume weighted average price of the Company's common stock on the applicable date. In conjunction with the signing of the stock purchase agreement, in October 2001, the Company issued a 7-year fully-vested warrant to the investment fund to purchase up to 139,742 shares of common stock at an exercise price of $8.23 per share and 3,833 shares of its common stock as additional fees to the investment fund. The private placement of the related warrants was exempt from registration pursuant to Regulation S. From the time the Registration statement became effective in November 2001 through the expiration of the facility in October 2003, the Company issued a total of 855,776 shares of its common stock at an average price of $3.93 per share and received proceeds of approximately $3.2 million after deducting expenses of the transactions. At the time the facility expired, 633 registered shares remained available for sale under this facility. In November 2001, the Company sold 52,528 shares of common stock under Regulation D of the Securities Act of 1933 ("the Securities Act") to various investors in a private placement at $5.70 per share, receiving net proceeds of $295,000. The private placement did not include registration rights. Therefore, pursuant to Rule 144 of the Securities Act, the transfer of the securities purchased by the investors was restricted for twelve months from the date of purchase. Three former members of the Company's Board of Directors, Nancy Katz, Mark Novitch and David Collins, purchased an aggregate of 24,038 shares of this offering. The proceeds of this offering were used to fund the Company's current operations. The purchase transactions by the Company's Board members were on a fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a result of the tenuous financial condition of the Company at the time. 21 Subsequently, beginning in 2002, the Company negotiated several new financings from which, through March 22, 2004, it has raised approximately $21.6 million in gross proceeds. The following table summarizes these financings by major category and the subsequent table provides the details of these financings. SUMMARY OF FINANCINGS - JANUARY 1, 2002 TO MARCH 22, 2004
TOTAL GROSS NET SHARES RESTRICTED FINANCING SOURCE PROCEEDS PROCEEDS ISSUED (1) SHARES (2) ------- -------- ---------- ---------- Bristol 12% Convertible $ 562 $ 505 1,476.1 -- Debentures and Warrants 8% Convertible Notes 3,232 2,594 46,084.3 3,492.6 Other Restart Financings 750 730 2,720.3 1051.3 Mercator 12% and 10% Debentures 4,550 3,650 34,153.4 11,643.8 Marr Private Placements 12,500 11,900 28,333.3 28,333.3 ------- -------- --------- -------- $21,594 $ 19,379 112,767.4 44,521.0 ======= ======== ========= ========
(1) At March 22, 2004, the holders have converted all but approximately $958,000 of principal of the convertible notes and debentures issued since February 2002. Based on current market prices, the Company would be required to issue approximately 2.5 to 3.0 million additional shares of its common stock if the holders elected to convert the remaining principal and accrued interest of their debentures at this time. (2) Based upon ownership information supplied by the Company's transfer agent as of March 11, 2004. Certain of these shares may be eligible for resale under Rule 144 now or at various times in the future. As of March 22, 2004, approximately 34% of the Company's outstanding shares, or approximately 47.1 million shares, were restricted. In addition to the amounts summarized here, certain vendors, consultants and other parties who have agreed to accept our common stock in lieu of cash hold an additional 2.6 million restricted shares. 22 DETAIL OF FINANCINGS - JANUARY 1, 2002 TO MARCH 22, 2004
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- 12% CONVERTIBLE DEBENTURE AND Lesser of $425 2/11/02 $7.50 1,019.4/ $525 WARRANTS (i) 60% of 100 5/10/02 $0.90 Bristol Investment Fund, Ltd. the average ---- of 3 lowest $525 $468 closing bid prices for 22 days preceding conversion or (ii)$1.50 Class A Warrant Lesser of $4 $4 2/11/02 $7.50 56.7/ N/A (i) 70% of the average of lowest 3 trading prices for 20 days preceding conversion or (ii)$3.45 Class B Warrant Lesser of $ 33 $33 2/11/02 $ 7.50 400/ N/A (i) 70% of -------- the average of lowest 3 trading pricing for 20 days preceding conversion or (ii) $6.45. Total Bristol $562 $505 1,476.1/$525 ==== ==== ============
23
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- 8% CONVERTIBLE NOTES Lesser of Alpha Capital Aktiengesellshaft (i) $3.00 or $500 5/24/02 $ 3.60 7,260.7/$500 Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 3.60 7,075.7/$500 Filter International Ltd. the average of $150 5/24/02 $ 3.60 2,452.4/$150 Camden International Ltd. the 3 lowest $350 5/24/02 $ 3.60 5,279.1/$350 Domino International Ltd. trades for 30 $150 5/24/02 $ 3.60 1,767.4/$150 Thunderbird Global Corporation days $ 75 5/24/02 $ 3.60 1,083.1/$75 BNC Bach International Ltd. preceding $200 5/24/02 $ 3.60 2,463.8/$200 Excalibur Limited Partnership conversion $200 5/24/02 $ 3.60 1,678.9/$200 Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/$150 SDS Capital International Ltd. $300 7/10/02 $10.20 4,189.8/$300 Camden International Ltd. $100 7/10/02 $10.20 1,707.9/$100 Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/$250 Stonestreet Limited Partnership $250 8/21/02 $ 3.90 4,042.2/$250 Alpha Capital Aktiengesellshaft $107 5/9/03 $ 0.63 1,302.5/$107 ---- ------------- 46,084.3/ $3,232 Total 8% Convertible Notes $3,232 $2,594 ================ ====== ====== OTHER RESTART FINANCINGS: 10% CONVERTIBLE NOTE BNC Bach International Ltd. 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8/$150 (Note: on 7/14/02 the average of 3 $10.80 on maturity date was extended lowest 7/14/02; until 12/31/02; on December closing bid $1.92 on 27, 2002, the maturity date prices for 12/27/02; was extended until January 22 days $1.80 on 15, 2003; on January 15, preceding 1/15/03; 2003 the maturity date was conversion $1.50 on extended until March 17, 3/17/03; 2003, on March 17, 2003 the $0.99 on maturity date was extended 4/2/03 until April 4, 2003; on $0.75 on April 2, 2003, the maturity 4/30/03 date was extended until May 5, 2003; on April 30, 2003, the maturity date was subsequently extended until May 10, 2004)(5) 8% CONVERTIBLE DEBENTURES Su So 80% of the $ 100 $ 90 6/17/02 $4.20 36.7 (4)/$100 lower of the average closing bid or trade price for the 5 days preceding conversion, but not less than $3.00
24
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- Jason Arasheben 70% of the $ 100 $ 90 7/03/02 $8.10 15.8 (4)/$100 lower of the average closing bid or trade price for the 5 days preceding conversion, but not less than $3.00 PIPE AT $1.50 PER SHARE Careen Ltd. $1.50 per $ 200 $ 200 8/28/02 $ 4.80 225.0/N/A Caledonia Corporate Group Share $ 200 $ 200 8/28/02 $ 4.80 225.0/N/A ----- ----- --------- Limited Total Other Restart Financings $ 750 $ 730 2,720.3/$350 ===== ===== ============ Mercator 12% and 10% Debentures 12% CONVERTIBLE DEBENTURES Mercator Momentum Fund, L.P. 85% of the $ 550 $345 (6) 9/12/02 $3.00 4,866.1 (4)/ ($2,000 total commitment) average of $550 the 3 lowest Mercator assigned its rights to: trading Alpha Capital AG prices for 250 250 7/24/03 $0.115 2,673.8/$250 Gamma Opportunity Capital the 20 250 250 7/24/03 $0.115 2,685.6/$250 Partners, LP trading days Goldplate Investment Partners preceding 250 250 7/24/03 $0.115 2,673.8/$250 Marr Technologies, B.V. (11) conversion 570 570 9/1/03 $0.820 5,181.8/$570 (8) ------ ------ 1,870 1,665 Dr. Khalid Ahmed 50 50 10/2/03 $1.310 84.6/$50 Roger Suyama 20 20 10/2/03 $1.310 33.8/$20 Logisticorp, Inc. 20 20 10/2/03 (12) $1.310 - Southwest Resource 40 40 10/2/03 (12) $1.310 - ------ ------ --------------- Preservation Inc. $2,000 $1,795 18,199.5/$1,940 ------ ------ --------------- Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $3.90 0/$300 (7) average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not less than $1.50
25
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- Mercator Momentum Fund L.P. (10) 70% of the $300 $245 4/29/03 $0.825 3,455.5/ $294 average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $1.20 Mercator warrant $3.00 per $0 $0 10/22/02 $3.90 0 share 10% CONVERTIBLE DEBENTURES Mercator Focus Fund, L.P. (10) 80% of the $1,000 $510 1/14/03 $1.92 5,831.8/ $422 average of (6) the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $3.00 Mercator Momentum Fund, L.P. 80% of the $450 $440 1/30/03 $1.86 2,592.6/ $358 (10) average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $3.00 Mercator Focus Fund, L.P. (10) $400 3/13/03 $1.47 2,437.7/ $178 Mercator Momentum Fund III, L.P. 65% of the 100 1,636.3/ $100 average of ------ ------------- the 3 lowest $500 $400 trading ------ ----- prices for the 20 trading days preceding conversion, but not more than $2.10 Total Mercator Debentures $4,550 $3,650 34,153.4/ $3,592 ====== ====== ================
26
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- MARR PRIVATE PLACEMENTS PIPE AT $0.30 PER SHARE Marr Technologies B.V. (9)(11) $0.30 per $2,500 $2,300 8/1/03 $0.152 8,333.3 share PIPE AT $0.50 PER SHARE Marr Technologies B.V. (9)(11) $0.50 per $10,000 $9,600 9/1/03 $0.820 20,000.0 ------- ------ -------- share Total Marr Private Placements $12,500 $11,900 28,333.3 ======= ======= ========
(1) The Bristol Debentures and Warrants, the 8% Convertible Notes, the Other Restart Financings, the Mercator 12% and 10% Debentures and warrants and the Marr Technologies B.V. PIPE's were issued under exemptions provided by Regulation S. The Company could issue no shares under the equity line with Townsbury until it had completed an effective registration for the underlying shares. With the exception of Marr Technologies B.V., which is an affiliate of the Company based on its August and September 2003 investments, none of the entities listed above is or has been an affiliate of the Company. Other than Marr Technologies B.V., all of the listed investors were subject to ownership limitations restricting their ownership of the Company's stock to a maximum of 4.9% or 9.9%, depending on the specific agreement. (2) At March 22, 2004, the holders have converted all but approximately $958,000 of principal of the convertible notes and debentures issued since February 2002. Based on current market prices, the Company would be required to issue approximately 2.5 to 3.0 million additional shares of its common stock if the holders elected to convert the remaining principal and accrued interest of their debentures at this time. (3) On February 14, 2003 the registration statement for the shares underlying the $525,000 of the Bristol Debentures became effective. On July 18, 2003, the registration statement for 52,500,000 shares underlying the Other Recent Financings became effective. As a result of a decline in the market price of the Company's stock subsequent to the effective date of the July 2003 registration statement, the number of shares registered was insufficient to permit the complete conversion of the notes and debentures into registered shares. The shares underlying certain of the convertible securities have become eligible for resale under Rule 144, and certain investors have availed themselves of that eligibility to convert restricted shares issued pursuant to conversions into free-trading shares. As of March 22, 2004, approximately 34% of the Company's outstanding common stock, or approximately 47.1 million shares, are unregistered. Of this amount, Marr Technologies holds 33.5 million restricted shares issued pursuant to their two PIPE transactions and the conversion of their investment in $570,000 principal value of 12% convertible notes. Other investors in our convertible notes and debentures hold approximately 11.0 million restricted shares issued pursuant to their conversions. The Company has agreed to register the shares of common stock on a cost-free basis to the holders of said shares of common stock. (4) Includes fee shares. (5) On April 30, 2003, when the market price of Calypte common stock was $0.75, the Company and BNC Bach amended the conversion price to eliminate a conversion price ceiling of $1.50 per share and to increase the discount applicable to the conversion price from 40% to 50%. In return for this modification of the conversion price, BNC Bach agreed to extend the maturity of the note until May 10, 2004. BNC Bach subsequently converted the outstanding principal and accrued interest into shares of the Company's common stock. (6) Reflects a 10% cash commitment fee on the entire $2 million commitment paid to The Mercator Group less additional fees and expenses. As of September 30, 2003, an additional $130,000 remained available under this commitment. The Company issued the remaining $130,000 of additional debentures pursuant to this commitment on October 2, 2003, of which $70,000 has been converted into approximately 118,000 shares of its common stock. The Company has not yet registered any underlying shares for the final $700,000 of this commitment. (7) In conjunction with the issuance of the $1 million 10% convertible debenture to Mercator Focus Fund, L.P., the Company used the proceeds to repay the $0.3 million outstanding principal balance of the 12% convertible debenture previously issued to Mercator Momentum Fund, L.P. plus accrued interest. The balance of costs incurred represents transactional and legal fees. 27 (8) On March 31, 2003, when the market price of Calypte Common Stock was $0.0295, the Company amended the conversion price to eliminate a conversion price floor of $0.05 per share in return for an extension of time in which to register the shares of common stock underlying the various Mercator financings. (9) The Securities Purchase Agreements for both transactions between the Company and Marr require that the Company provide cost-free registration rights to Marr; however, Marr is subject to a one-year lock-up provision following the transaction date with respect to the shares purchased. (10) On January 14, 2004, when the market price of Calypte common stock was $0.60, the Company extended the maturity date of the following debentures until July 14, 2004: o 10% Convertible Debenture dated January 14, 2003 issued to Mercator Focus Fund, LP o 10% Convertible Debenture dated January 30, 2003 issued to Mercator Momentum Fund, LP o 10% Convertible Debentures dated March 13, 2003 issued to Mercator Momentum Fund III, LP and Mercator Focus Fund o 12% Convertible Debenture dated April 29, 2003 issued to Mercator Momentum Fund, LP In return for the extension of the maturity dates, the Company has agreed to pay an additional extension fee equal to 2% of the outstanding principal balance per month until the earlier of the extended maturity date or conversion. The extension fee is payable 1% in cash and 1% in shares of the Company's common stock. Additionally, the Company agreed to file a registration statement including the shares potentially applicable to the conversion of the outstanding debenture balances by no later than April 29, 2004. The shares issuable as a portion of the extension fee are to be included in the registration statement. (11) On January 23, 2004, when the market price of Calypte common stock was $0.695, the Company and Marr agreed to extend the registration rights period attributable to 5,181,818 shares of the Company's common stock issued in conjunction with Marr's conversion of $570,000 principal amount of the Company's 12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return for the extension, the Company agreed to include in its next registration statement an aggregate of 28,333,333 shares of its common stock purchased by Marr in PIPE transactions in the third quarter of 2003. (12) The holder claims an earlier transaction date, which is disputed by the Company. This debenture has not yet been converted by the Company pending resolution of the transaction date dispute, which may determine the number of shares of the Company's stock to which the holder is entitled upon conversion. On November 13, 2003, when the market price of the Company's common stock was $0.88 per share, the Company and Marr, its largest stockholder, entered into an agreement in which Marr agreed to provide the Company up to an aggregate of $10,000,000 (the "Marr Credit Facility") pursuant to promissory notes issuable to Marr on an as-needed basis by the Company (the "Notes"). Each Note will bear interest at the rate of 5% per annum and will have a 12-month term. The Marr Credit Facility is available during the period beginning on February 28, 2004 and ending on May 31, 2004. The aggregate amount available under the Marr Credit Facility will be proportionally reduced by the amount of any equity financing obtained by the Company during the term of the Marr Credit Facility. Marr has the right of first refusal to participate in any such equity financing on the same terms as the other investors. The Marr Credit Facility provides for earlier termination as of March 31, 2004, if the Company fails to have its common stock listed on an established stock exchange by that date. Moreover, upon the failure to obtain such stock exchange listing, any outstanding Notes would be due and payable on April 30, 2004. As of March 22, 2004, no Notes have been issued under the Marr Credit Facility. As consideration for the Marr Credit Facility, the Company issued to Marr a warrant to purchase 375,000 shares of its common stock at an exercise price of $0.80 per share. The warrant is immediately exercisable and expires two years after issuance on November 12, 2005. On March 19, 2004, when the market price of the Company's common stock was $0.575 per share, the Company and Marr amended the Marr Credit Facility to increase the aggregate amount available under the Marr Credit Facility to $15,000,000 and to eliminate the termination provision upon failure to have the common stock listed on an established stock exchange by March 31, 2004. As additional consideration for the amendment of the Marr Credit Facility, the Company issued to Marr an additional warrant to purchase 400,000 shares of its common stock at an exercise price of $0.46 per share. This warrant is immediately exercisable and expires two years from its date of issuance on March 18, 2006. 28 Warrants, Options and Stock Grants Since January 2002, the Company has entered into various contracts and agreements with consultants who have agreed to accept payment for their services in the form of warrants, options and/or stock grants. The Company has obtained various services under these arrangements, including legal, financial, business advisory, and other services including business introductions and arrangements with respect to potential domestic and international product placement and the development of potentially synergistic relationships with appropriate public service or other governmental and non-governmental organizations. The Company has generally issued the warrants at a discount to the then-current market price and has registered the shares underlying the warrants, options and stock grants on Form S-8 Registration Statements for resale by the consultants. The Company has, since January 2002, issued approximately 9.6 million shares of its common stock as a result of warrant or option exercises and stock grants related to these consulting agreements, of which approximately 7.9 million shares have been issued during 2003. In May 2002, Calypte issued warrants and options to purchase 633,333 shares of its common stock under agreements with consultants to perform legal, financial, business advisory and other services associated with the restart of its operations. The warrants were issued at $0.45 per share on May 9, 2002 when the market price of our common stock was $0.90 per share. The option was granted at $0.90 per share on May 10, 2002, when the market price of our common stock was $0.90 per share. All of the warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. The consultants exercised all the warrants and options and Calypte issued 633,333 shares and received proceeds of $292,500. All but one of the consulting agreements discussed above expired in August and we have entered into new agreements for legal, financial, business advisory, and other services including introductions and arrangements with respect to potential domestic and international product development of synergistic relationships with appropriate public service organizations. In November 2002, Calypte issued warrants to purchase 950,000 shares of our common stock and stock grants for 70,000 shares of our stock to consultants under the terms of these new agreements. The Company issued 350,000 warrants at an exercise price of $1.50 per share on November 1, 2002, when the market price of our stock was $4.20 per share. The Company issued an additional 600,000 warrants at an exercise price of $1.50 on November 20, 2002, when the market price of our common stock was $2.70. All of the warrant grants were non-cancelable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. By February 2003, the consultants had exercised all the warrants and the Company had received aggregate proceeds of $1.425 million. The Company issued 986,667 shares of its common stock pursuant to the exercises of the November 2002 warrant and stock grants. In January and February 2003, the Company entered into new contracts and extended certain other contracts with existing consultants to perform services as described above. On February 14, 2003, when the market price of the Company's stock was $2.01, the Company issued warrants exercisable at $1.50 per share and stock grants for an aggregate of 975,216 shares of its common stock as compensation for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of $0.8 million. During March 2003, when the market price of the Company's stock ranged from $1.32 to $1.50 per share, the Company issued warrants exercisable at $0.75 per share and stock grants for an aggregate of 1,350,400 as compensation for services under new or extended contracts. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.9 million. In April 2003, when the price of the Company's stock ranged from $0.81 to $0.885 per share, the Company entered into additional contracts, extended certain contracts, and modified certain other contracts with existing consultants who agreed to settle a portion of the outstanding balance due for services under their contracts in stock. The Company issued warrants at $0.75 per share and stock grants for an aggregate of 1,490,600 shares of its common stock as compensation or settlement for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.1 million. 29 In May 2003, when the price of the Company's stock ranged from $0.552 to $0.576 per share, the Company again entered into new contracts, extended certain contracts, and modified certain other contracts with existing consultants who agreed to settle a portion of the outstanding balance due for services under their contracts in shares of stock. The Company issued warrants at $0.30 per share and stock grants for an aggregate of 2,080,305 shares of its common stock as compensation or settlement for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By September 30, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.5 million. In July 2003, when the price of the Company's stock ranged from $0.11 to $0.30 per share, the Company extended a contract for consulting and other services and granted the consultant a warrant to purchase 722,500 shares of its common stock at 50% of the closing market price on the date of any exercise as compensation under the contract. The warrant was granted as fully-vested and expired on September 30, 2003. By September 30, 2003, the consultant had exercised the entire warrant at prices ranging from $0.08 to $0.61 per share and the Company had received proceeds of approximately $0.4 million. Also during July 2003, the Company issued stock grants to consultants for an aggregate of 356,344 shares of its common stock as compensation under their contracts. On August 20, 2003, when the price of the Company's stock was $0.18 per share, the Company issued consulting contracts to two new consultants pursuant to which it issued warrants for 100,000 shares each, exercisable at $0.18 per share. The warrants were non-cancelable and fully-vested at the date of issuance. At December 31, 2003, the consultants had exercised none of the warrants. In September 2003, when the price of the Company's stock ranged from $0.50 to $1.80 per share, the Company issued an aggregate of 800,000 shares of its common stock to consultants and other service providers who agreed to take shares of stock in lieu of cash as compensation under their contracts. In October and November 2003, when the price of the Company's stock ranged from $0.53 to $1.65 per share, the Company issued an aggregate of 125,000 shares of its common stock to consultants and other service providers who agreed to take shares of stock in lieu of cash as compensation under their contracts. In February 2004, when the price of the Company's stock was $0.67 per share, the Company issued 500,000 shares of its common stock to a consultant who had agreed to accept shares of stock as a portion of its compensation under a consulting agreement. To conserve cash and to obtain goods and services, the Company may continue to issue options and warrants at discounts to market or issue direct stock grants. In the event that the Company issues additional options and warrants, it is anticipated that the securities will contain cost-free registration rights which will be granted to holders of the options and warrants, and that there may be dilution to the Company's existing stockholders. Restructure of Trade Debt On February 12, 2002, the Company completed a restructuring of approximately $1.7 million of its past due accounts payable and certain 2002 obligations with 27 of its trade creditors. Under the restructuring, the Company issued approximately 47,000 shares of its common stock at various negotiated prices per share with the trade creditors in satisfaction of the specified debt. The issuance of shares was exempt from registration pursuant to Regulation D of the Securities Act. The shares issued are now eligible for resale under the provisions of Rule 144. Summary of Financing Activities To successfully implement our business plan, we must obtain sustainable cash flow and profitability. Our future liquidity and capital requirements will depend on numerous factors, including successful completion of the development of our new rapid tests, acquisition and protection of intellectual property rights, costs of developing our new products, ability to transfer technology, set up manufacturing and obtain regulatory approvals of our new rapid tests, market acceptance of all our products, existence of competing products in our current and 30 anticipated markets, actions by the FDA and other international regulatory bodies, and the ability to raise additional capital in a timely manner. Since December 31, 2003, we have entered into new financing arrangements that management believes will be adequate to sustain operations at expected levels through at least year end 2004. Under our new financing arrangements, we will have the ability to borrow up to $15,000,000 pursuant to 5% promissory notes we may issue between February 28, 2004 and May 31, 2004 to finance our operations. Each promissory note will be due and payable 12 months after its issuance, which will be no later than May 31, 2005. If sufficient funds are not available from our operations to repay the promissory notes when due, we may need to arrange additional financing, attempt to extend or otherwise modify the promissory notes or make other arrangements. There can be no assurance that additional financing would be available or, if it is available, that it would be on acceptable terms. Our longer-term liquidity and capital requirements are dependent on factors similar to those which impact our current liquidity and capital resource considerations and which will be critical in validating our business model during 2004. Consequently, we cannot predict the adequacy of our capital resources on a long-term basis. There can be no assurance that we will achieve or sustain profitability or positive cash flows in the future. In addition, there can be no assurance that additional financings, if and as necessary, would be available, or if it is available, that it would be on acceptable terms. The terms of an additional financing could involve a change of control and/or require stockholder approval, or could require us to obtain waivers of certain covenants that are contained in existing agreements. We would or might be required to consider strategic opportunities, such as a merger, consolidation, sale or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such new strategic opportunity, and there can be no assurance that any such opportunities will be available to us on acceptable terms, or at all. If additional financing is not available when and if required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. SUBSEQUENT EVENTS Extension of Mercator Debentures On January 14, 2004, when the market price of Calypte common stock was $0.60, the Company extended the maturity date of the following debentures until July 14, 2004: o 10% Convertible Debenture dated January 14, 2003 issued to Mercator Focus Fund, LP o 10% Convertible Debenture dated January 30, 2003 issued to Mercator Momentum Fund, LP o 10% Convertible Debentures dated March 13, 2003 issued to Mercator Momentum Fund III, LP and Mercator Focus Fund o 12% Convertible Debenture dated April 29, 2003 issued to Mercator Momentum Fund, LP In return for the extension of the maturity dates, the Company has agreed to pay an additional extension fee equal to 2% of the outstanding principal balance per month until the earlier of the extended maturity date or conversion. The extension fee is payable 1% in cash and 1% in stock. Additionally, the Company agreed to file a registration statement including the shares potentially applicable to the conversion of the outstanding debenture balances by no later than April 29, 2004. The shares issuable as a portion of the extension fee are to be included in the registration statement. Extension of Registration Rights On January 23, 2004, when the market price of Calypte common stock was $0.695, the Company and Marr agreed to extend the registration rights period attributable to 5,181,818 shares of the Company's common stock issued in conjunction with Marr's conversion of $570,000 principal amount of the Company's 12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return for the extension, the Company agreed to include in its next registration statement an aggregate of 28,333,333 shares of its common stock purchased by Marr in PIPE transactions in the third quarter of 2003. 31 Amendment of Marr Credit Facility On March 19, 2004, when the market price of the Company's common stock was $0.575 per share, the Company and Marr amended the Marr Credit Facility to increase the aggregate amount available under the Marr Credit Facility to $15,000,000 and to eliminate the termination provision upon failure to have the common stock listed on an established stock exchange by March 31, 2004. As additional consideration for the amendment of the Marr Credit Facility, the Company issued to Marr an additional warrant to purchase 400,000 shares of its common stock at an exercise price of $0.46 per share. This warrant is immediately exercisable and expires two years from its date of issuance on March 18, 2006. Management Changes On January 24, 2004, the Company announced the appointment of J. Richard George, Ph.D. as its new President and Chief Executive Officer and Richard Van Maanen as its new Vice President of Operations. The Company also announced that Jay Oyakawa had resigned from his position as President, Chief Operating Officer and as a member of the Company's Board of Directors. The Company entered into a Separation Agreement and Release with Mr. Oyakawa wherein he will be paid a severance of one year's salary of $350,000 over a twelve month period and was vested in options to purchase 750,000 shares of the Company's common stock exercisable at $0.32 granted to him in accordance with the Company's 2000 Equity Incentive Plan. Dr. George has been the Company's Vice President of Government Affairs since January 2003 and Mr. Van Maanen has been employed by the Company since 1993 as Director of Marketing and Director of International Business Development. Operating Lease Extension On March 1, 2004, we entered into a new lease agreement with the primary landlord of our manufacturing facility in Rockville, Maryland. The new agreement extends the lease of the premises through February 28, 2009, or 28 months beyond the expiration of our current sublease. Additionally, the new lease provides for tenant improvements to be made in connection with the consolidation of our manufacturing operations, in the amount of approximately $250,000. The base rent for the tenant improvements will be approximately $5,500 per month from March 2004 through October 2006. Following the expiration of our current sublease, the base rent from November 2006 through February 2009 will be approximately $40,000 per month. 32 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the consolidated financial statements and related notes that are provided under Part II, Item 7 of this Annual Report on Form 10-KSB. Information we provide in this Form 10-KSB or statements made by our directors, officers or employees may constitute "forward-looking" statements and may be subject to numerous risks and uncertainties. Any statements made in this Form 10-KSB, including any statements incorporated herein by reference, that are not statements of historical fact are forward-looking statements (including, but not limited to, statements concerning the characteristics and growth of our market and customers, our objectives and plans for future operations and products and our liquidity and capital resources). Such forward-looking statements are based on current expectations and are subject to uncertainties and other factors which may involve known and unknown risks that could cause actual results of operations to differ materially from those projected or implied. Further, certain forward-looking statements are based upon assumptions about future events which may not prove to be accurate. Risks and uncertainties inherent in forward looking statements include, but are not limited to: o fluctuations in our operating results; o announcements of technological innovations or new products which we or our competitors make; o FDA and international regulatory actions; o developments with respect to patents or proprietary rights; o changes in stock market analysts' recommendations regarding Calypte, other medical products companies or the medical product industry generally; o changes in domestic or international conditions beyond our control that may disrupt our or our customers' or distributors' ability to meet contractual obligations; o changes in health care policy in the United States or abroad; o our ability to obtain additional financing as necessary to fund both our long- and short-term business plans; o fluctuations in market demand for and supply of our products; o public concern as to the safety of products that we or others develop and public concern regarding HIV and AIDS; o availability of reimbursement for use of our products from private health insurers, governmental health administration authorities and other third-party payors; and o price and volume fluctuations in the stock market at large which do not relate to our operating performance. The forward-looking information set forth in this Annual Report on Form 10-KSB is as of March 22, 2004, and Calypte undertakes no duty to update this information. Should events occur subsequent to March 22, 2004 that make it necessary to update the forward-looking information contained in this Form 10-KSB, the updated forward-looking information will be filed with the SEC in a Quarterly Report on Form 10-QSB, or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the SEC's website at www.sec.gov or our website at www.calypte.com. More information about potential factors that could affect Calypte's business and financial results is included in the section entitled "Risk Factors" beginning on page 55 of this Form 10-KSB. OVERVIEW AND OUTLOOK Since 1998, following FDA approval for both the current ELISA screening and supplemental tests, Calypte has been marketing and selling in the United States the only available FDA-approved urine-based HIV testing method. We have since received regulatory approval to sell our ELISA tests in China, Malaysia, Indonesia, and in parts of Africa. Unfortunately, the tests have not received significant acceptance in those markets. We believe that there is a small established market for our current ELISA tests in the United States and a potential market in certain foreign countries with established medical diagnostic and treatment infrastructures as well. We believe that rapid tests are more suitable in many of the countries in which HIV/AIDS is epidemic, and particularly so in the "next wave" countries of Russia, China, Africa and India. Consequently, we are now 33 actively working to commercialize our HIV rapid test products -and to obtain requisite regulatory approvals to introduce these products in these countries, as well as in other international markets. There can be no assurance that we will achieve or sustain significant revenues from sales of HIV diagnostic tests, internationally or domestically, or from other new products we may develop or introduce. During the first quarter of 2002, our financial condition and cash availability deteriorated so significantly that by early April 2002 we had determined that we would need to curtail our operations and consider filing for bankruptcy protection. We announced that the situation had reached a critical point in mid-April 2002, at which time management began the process of winding down operations, with the likely expectation of a complete cessation of business. In early May 2002, however, before the wind-down process was completed, we received commitments for what management deemed to be sufficient additional financing to resume operations and stopped the wind-down process. In conjunction with the new financing commitment, the Board of Directors appointed a new chairman and we resumed operations. Subsequently, we began an initiative to critically reassess our current and long-term business plan and capital requirements. While the validation of our business plan is ongoing, we have identified and begun to implement certain critical components: o We have significantly strengthened our financial position with the receipt of an aggregate of $12.5 million in new investment financing in two third-quarter 2003 transactions from Marr. Based on this investment, debt conversion and its purchase of shares in the public market, Marr now owns approximately 28% of our outstanding common stock and has identified itself in a public filing with the SEC as a "related party." The availability of the amended Marr Credit Facility in the aggregate amount of $15,000,000 has also significantly strengthened our financial position. We believe that our currently available working capital, the aggregate investment of $12.5 million by Marr and the funds available through the Marr Credit Facility, should be adequate to sustain our operations at current levels through at least year-end 2004. If, however, sufficient funds are not available from our operations to repay the promissory notes issued under the amended Marr Credit Facility when due, we may need to arrange additional financing, attempt to extend or otherwise modify the promissory notes or make other arrangements. There can be no assurance that additional financing would be available or, if it is available, that it would be on acceptable terms. o The consolidation of our manufacturing operations, when completed, is expected to eliminate approximately $1 million of annual expenses, including approximately $500,000 in annual occupancy costs, and create a more efficient and cost effective manufacturing structure. o We are committed to and focused on the introduction of one or more rapid HIV-1 and HIV-2 diagnostic tests in international markets. We will continue to distribute our ELISA test products internationally through our current distribution networks and will also seek new distribution relationships for our current and future test products. We may set up international manufacturing and distribution facilities utilizing joint venture or similar entities. We believe our initial international focus will be on China and Russia, two of the "next wave" HIV epidemic countries. We intend to pursue additional international distribution opportunities from government AIDS initiatives and humanitarian organizations as they provide funds for HIV testing in lesser-developed countries where the HIV infection is epidemic. Guidance We projected fourth quarter 2003 revenues to be in the range of $900,000 to $1,000,000. Revenue for the fourth quarter was $1,037,000. We have indicated that our focus for 2004 is completing the development and commercialization of certain rapid HIV tests. While we are accomplishing that, however, we expect sales from our legacy business, our current, primarily domestic, ELISA tests to remain essentially unchanged. On that basis, we expect sales of those products to generate approximately $3.2 million to $4.0 million in aggregate revenues during 2004, spread generally evenly over the four quarters of the year. Sales of our urine ELISA test products will continue to be primarily to reference laboratories supporting the domestic life insurance industry and sales of our Serum Western Blot supplemental test will continue to be primarily to distributors, blood banks and similar testing institutions. Although we have received certain international approvals for our ELISA tests, we cannot predict any international sales volume for these test products as we have not received any firm purchase orders. We have contemplated entering into an exclusive distribution 34 agreement with a third party distributor which would grant such distributor the exclusive right to market and sell our ELISA test products in the United States. While we are currently not contemplating entering into any such business arrangement, if we were to enter into such an agreement, expected 2004 revenues for our ELISA test products would be at the lower end of the guidance range. We have begun international field trials of our developmental stage urine and blood rapid HIV tests in Thailand. While the early results from these trials are favorable, the trials have identified certain enhancements of the tests that we plan to make prior to initiating formal clinical trials and international manufacturing operations. We anticipate that these desired enhancements can be made relatively quickly and we plan to return the reworked rapid tests for further field evaluation. The test development process is iterative and subject to unanticipated delays. Attention to intellectual property considerations is critical, as our choices will affect our future ability to commercialize the test products. Based on our current estimates, we will need until the end of the second quarter of 2004, approximately three additional months beyond our previously anticipated timetable, to improve the tests to meet our high standards of performance and to conduct additional field trials. However, there can be no assurance that we will complete the development process during this timeframe. Should additional improvements or modifications be required for only one of the developmental stage rapid HIV tests, we may elect to proceed with the commercialization of the other rapid HIV test. Commercialization entails many steps and variables not under our control. We expect that different regulations and customs in each foreign country will further complicate the commercialization process. As a result, we are unable to predict with any certainty a timetable for the various steps and milestones required for the successful commercialization of our developmental stage products. Nevertheless, we believe that we have identified the primary milestones necessary to achieve commercialization of our rapid HIV tests: o Achievement of desired performance in one or more field evaluations. o Acquisition of necessary intellectual property rights. o Entrance into manufacturing arrangements in targeted countries. o Acquisition of regulatory approval in targeted countries. o Performance of clinical trials. o Initiation of manufacturing and distribution efforts for commercial sale. o Prediction with certainty of the amount of investment required. Based on our current understanding of the intellectual property landscape and the various regulatory processses, we do not expect to generate significant revenues, if any, from the sale of any rapid HIV test products during 2004. We intend to commence the regulatory approval process in China during the second quarter of 2004 and anticipate that the regulatory process will take at least six months to complete. Depending on the manufacturing site chosen to manufacture products for importation into Russia, we may be able to commence a regulatory process of six to 12 months there in the third quarter of 2004. Products might then be ready for market late in 2004 or early in 2005. While we cannot estimate the regulatory approval process in various other international markets, we are encouraged by the interest we have received in our proposed rapid HIV tests. We believe that the key to our penetration of the Chinese market will hinge on the success of the Beijing Calypte Joint Venture in the manufacture and distribution of our rapid HIV test products in China. Early indications, based on meetings with high-level Chinese authorities in which both we and representatives of our joint venture partner participated, lead us to expect that there is great potential for significant revenues from the sale of rapid HIV tests in China. We have had similar indications of interest in our proposed rapid HIV tests in meetings with various Russian officials. After receiving regulatory approval, we visited local hospitals and voluntary testing centers in Africa during the third quarter of 2003 to determine how best to proceed with sales of our current urine ELISA tests there. As a result of these visits, we have determined that most of these installations, due to their limited infrastructure, can best utilize our rapid HIV tests. Even though many centers indicated a preference for urine testing, there is negligible demand for our current ELISA tests. The clinics and testing centers indicated that they preferred to wait for the rapid HIV tests. At this time, we do not expect that our rapid HIV tests will be available for sale in Africa prior to late 2004, if at all. We believe that our currently available working capital plus the up to $15,000,000 available to us as a result of the amended Marr Credit Facility will enable us to pursue the commercialization of our rapid HIV test products 35 currently in development at least through 2004, in the absence of any unanticipated material costs and expenses that are not factored into our cash flow projections. Our operating cash burn rate for the year ended December 31, 2003 averaged approximately $1.1 million per month and averaged approximately $1.2 million per month for the quarter ended December 31, 2003. Our working capital of approximately $2.9 million at December 31, 2003 plus the $15 million available under the amended Marr Credit Facility should support the current average annual burn rate for over 16 months and the higher, fourth quarter average burn rate for approximately 14 months, into at least the first quarter of 2005. Our cash flow requirements may vary materially from those now planned due to many factors, including, but not limited to, the progress of our research and development of our rapid HIV test products, the scope and timing of strategic alliances, the costs and timing of the expansion of our manufacturing capacity, the results of clinical testing, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the time and costs of obtaining regulatory approvals, the costs involved in obtaining and enforcing patents, proprietary rights and other necessary licenses, the cost and timing of expansion of sales and marketing activities, the timing of the commercial launch of our new rapid HIV test products, market acceptance of our new rapid HIV tests, competing technological and market developments, the ability to raise additional capital in a timely manner, costs and charges that may potentially occur as a result of the pending informal inquiry by the SEC (see Item 8) and other factors. Additionally, if, and as, we borrow money under the Marr Credit Facility, the Notes would become due 12 months after their issuance dates, with the full amount borrowed due on or before May 31, 2005, further increasing our capital requirements. There can be no assurance that subsequent additional financings, if and as necessary, would be available, or if it is available, that it would be on acceptable terms. The terms of an additional financing could involve a change of control and/or require stockholder approval, or could require us to obtain waivers of certain covenants that are contained in existing agreements. We would or might be required to consider strategic opportunities, including merger, consolidation, sale or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such new strategic opportunity, and there can be no assurance that any such opportunities will be available to us on acceptable terms, or at all. If additional financing is not available when and if required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii). CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon Calypte's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, and contingencies and litigation. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. o Revenue Recognition We recognize revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred. Should changes in terms cause us to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. 36 o Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts on a specific account identification basis for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or regulatory issues with our products were raised, additional allowances may be required. o Inventory Valuation We adjust the value of our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and development of new products by our competitors. Further, since we have continued to incur negative gross profit on an annual basis, and have high fixed manufacturing costs, we also review our inventories for lower of cost or market valuation. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In connection with the build-up of inventory of our screening test prior to the transfer of its manufacturing to our Rockville, MD facility, demand for this product could fall significantly below the historical levels on which the production was based, in which case we may have built excess inventory that we may have to dispose of at additional cost, or at a loss. o Deferred Tax Asset Realization We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. WIND-DOWN AND RESTART In mid-April 2002, as a result of insufficient cash to continue our operations, we announced that we were winding down our operations and might have to cease our operations entirely and file for bankruptcy. We immediately furloughed all but a few manufacturing and administrative employees, making no separation payments or payments of accrued vacation to any employees. The manufacturing employees who were retained completed certain lots of in-process inventory and readied them for sale and were then also furloughed. Immediately prior to the restart, we had terminated all but 5 employees, retaining only the minimum necessary to ensure regulatory compliance for our facilities should additional financing enabling a restart become available. Upon receipt of the initial financing commitment that permitted the restart, we recalled key management and manufacturing employees and began the process of resuming our manufacturing operations. Other employees, such as administrative and sales personnel, were recalled in stages as required and as funding permitted. We had 73 full- and part-time employees prior to our wind-down and we have returned to our approximate pre-wind-down headcount levels. Not all of the pre-wind-down employees were rehired, and we believe our current complement is generally sufficient to meet our operational needs. The costs of the wind-down and restart are difficult to quantify precisely. 2002 operations reflect both the inherent inefficiencies in the restart of our manufacturing processes, including the excess overhead and capacity costs incurred, as well as the lower sales demand resulting from abnormally-large purchases prior to the wind-down, and the time required to rebuild demand among customers concerned with our longer-term stability. Additionally, we have incurred incremental general and administrative costs, as well as financial costs in obtaining new capital investments and financing in the Company, (some of them non-cash) attributable to consultants engaged in the restart process and thereafter in investor relations initiatives within the financial community, and in other areas of expertise. CUSTOMER TRENDS ELISA Test Sales Sales of our EIA Screening Test accounted for 45% and 63% of our total sales for the years ended December 31, 2002, and 2003, respectively. Sales of our Urine Western Blot supplemental test accounted for approximately 4% of calendar year 2002 and 2003 revenue. The impact of the second quarter 2002 announcement of our possible cessation of operations caused many customers to modify their traditional product purchase patterns during 2002. The increase in the sales of our urine ELISA screening and supplemental tests as a proportion of total sales in 2003 is primarily the result of (1) these altered order patterns in 2002, and (2) a decrease in sales of Serum Western Blot sales primarily as a result of a change in distributors. We do not expect 37 significant changes in the level of sales or the purchasers of our current urine EIA screening test in the near future, although we are exploring opportunities in "next wave" countries such as China and Russia. We do expect, however, that our rapid urine HIV tests, once completely developed and commercialized, will comprise an increasing proportion of our future sales, as we expand our distribution of these products internationally. Domestic Sales Sales of our EIA Screening Test to domestic life insurance reference laboratories accounted for 85% and 89% of screening test revenue for years 2002 and 2003, respectively. These reference laboratory sales were distributed among four laboratories in both periods. Individual laboratory sales as a percentage of total reference laboratory sales ranged from 2% to 59% in calendar year 2002 and from 2% to 63% during 2003, with LabOne being the largest of the four in both periods. In October 2003, LabOne acquired the smallest of the above mentioned reference laboratories, bringing the number of laboratories to which we sell to three. We do not expect this acquisition to have a material effect on our sales to reference laboratories. We sell our product to the reference laboratories who service over 100 life insurance companies who have committed to urine testing for HIV screening of at least some of their policy applicants and who employ the labs to conduct their applicant testing. Individual life insurance companies can and do move their business from one laboratory to another based on a number of considerations, including the availability of urine testing. As the only supplier of an FDA-approved urine based testing algorithm for HIV-1, reference laboratories must use our testing products to satisfy the demand of insurance companies desiring urine testing. Based on our recent multi-year agreement with LabOne, we do not expect to lose LabOne, or any of the other current reference laboratories, as a customer. However, should such a loss occur, the insurance companies using urine-based testing in their policy underwriting determinations could realign themselves with another lab offering our urine-based testing algorithm. We could, however, potentially lose a significant amount of business because insurance companies that rely on this large laboratory could switch to another form of testing, either blood or oral fluid, and remain with LabOne. Direct or distributor sales of our screening test to domestic diagnostic clinics, public health agencies and community-based organizations were not material in either period. During the third quarter of 2003 we eliminated the sales force that had focused on this diverse and disaggregated market. We have considered the consolidation of our United States sales effort under a single non-affiliated distributor. While no decision has been made at this time, this would not change our commitments with the reference laboratories and we do not expect that the result will affect our domestic trends. However, any disruption in the supply of this sole-source product would force our customers to find alternative testing solutions - either blood or oral fluid. In such a situation, it is unlikely that we could subsequently regain a material amount of this business. Sales of our Urine Western Blot test are generally made to the same customers who purchase the EIA Screening Test. International Sales International sales of our EIA Screening Test are not currently a material component of our revenue. Although we have obtained approval of our EIA Screening Test in several international markets and we believe that such approvals validate the use of urine as a testing medium, we see little interest in our current format screening test in most international markets and project minimal revenues from their sale internationally again in 2004. Our distribution agreement with our initial Chinese distributor requires the purchase of at least $3 million of our ELISA tests during the two-year term of the agreement. Although we resumed shipments of our ELISA tests to our initial Chinese distributor in the third quarter of 2003, the anticipated introduction of our rapid HIV tests is expected to impact the ability of this distributor to meet its $3 million ELISA test commitment. We are in the process of expanding our Chinese ELISA test approval, which may open new markets within the government sector in China. We have no firm commitments at this time, however. We are also seeking approval for our ELISA tests in Russia. While we believe there is interest in our rapid HIV tests currently under development, we do not expect to generate significant, if any, revenues from the sale of a rapid HIV test in 2004. The timing of revenues from our rapid HIV tests will be contingent upon completing our field evaluations and clinical trials, acquiring intellectual property rights, establishing manufacturing operations and obtaining the necessary regulatory approvals, as more fully discussed in the comments on Guidance earlier in this Item 6. Following the completion of development activities for our rapid HIV tests, our primary focus will be on developing manufacturing relationships and developing or expanding distribution relationships. 38 While many counties have their own regulatory approval processes, others look to the results of WHO evaluations for guidance. The World Health Organization ("WHO") serves as both a quasi-regulatory body and a potential funding source for many developing countries that might not otherwise possess the regulatory infrastructure or financial resources to avail themselves of products for the diagnosis and treatment of HIV and AIDS. Calypte believes that a strong performance of the rapid urine tests in a WHO evaluation would be an equally, if not more, effective demonstration of the viability of urine testing for HIV antibodies as the evaluation we earlier contemplated for the EIA and Western Blot algorithm. We have been advised by WHO that its bulk procurement program for HIV tests focuses on diagnostic and blood donation screening tests capable of detecting the presence of both HIV-1 and HIV-2 antibodies. Although WHO has previously reported the results of its Phase 1 trials of Calypte's current HIV-1 EIA and Western Blot tests on its website, WHO has advised us that, in principle, it views those tests as suitable only for surveillance purposes and therefore not eligible for WHO's bulk procurement program. We anticipate, however, that certain countries will look to the results of WHO evaluations for guidance on the potential uses of urine tests and for this reason the Company wants to continue to work with WHO. In our view, the attributes of Calypte's planned rapid tests for HIV-1 and HIV-2 in both urine and whole blood samples will more closely match the needs of the developing world and, once evaluated by WHO, are more likely to meet its bulk procurement eligibility criteria. For these reasons, Calypte may request WHO either to put further evaluations of our EIA and Western Blot on hold or to drop them entirely in order to help WHO focus its limited resources on evaluation of the technology employed by the rapid tests. Serum Western Blot Sales Sales of our Serum Western Blot supplemental test accounted for 43% and 32% of our revenues for the years ended December 31, 2002 and 2003, respectively. We sold this test to bioMerieux Inc. prior to our wind down in the second quarter of 2002, but bioMerieux has not purchased this product from us since the restart of our operations in May 2002. Sales to bioMerieux accounted for approximately 18% of total revenue for the year ended December 31, 2002. Although there is limited competition in the supplemental testing market, we have not yet been able to rebuild market share and revenues to previous levels absent the sales to bioMerieux. We engaged a new distributor for this product whose sales during the second half of 2002 represented approximately 5% of our full year 2002 revenues and whose sales during 2003 represented over 6% of our total revenues for that period. Additionally, certain customers who had previously purchased our Serum Western Blot from bioMerieux now purchase directly from us. Nevertheless, the loss of Serum Western Blot sales to bioMerieux has had a materially adverse impact on revenues. Further, while at this time our consolidation and outsourcing evaluations with respect to the urine EIA product do not impact the Serum Western Blot product, there can be no assurance that the final results will not impact the financial viability of this product and our ability to maintain it on a long-term basis. Furthermore, while the Western Blot is key in the FDA-regulated testing algorithm today, it is unclear if, or when, rapid testing may substantially replace ELISA-based testing. If that trend occurs, the need for Western Blot supplemental tests may also be significantly reduced or eliminated. RESULTS OF OPERATIONS Years Ended December 31, 2003 and 2002 Calypte's 2003 revenues totaled $3.5 million compared with $3.7 million for 2002, a decrease of $0.2 million or 6%. Screening test revenues increased by $508,000 or 30%. Sales of the screening tests to insurance company reference labs increased by $528,000 or 37%. During the fourth quarter of 2003, our largest customer purchased remaining consignment inventory on hand and switched to a standard contractual relationship. This increased our fourth quarter revenue by approximately $167,000. Additionally, screening tests revenues were lower than historical levels in 2002 due primarily to a reduction in product availability as a result of our wind-down and restart. International sales of our screening tests accounted for approximately $173,000 and $143,000 in 2003 and 2002, respectively. International sales amounted to approximately 5% of total revenue in 2003 and 4% in 2002. Our primary international sales in both 2003 and 2002 were to our Chinese distributor. Domestic diagnostic and direct screening test sales were insignificant in both 2003 and 2002. Revenue from the sale of our supplemental tests and viral lysate decreased $0.7 million or 35% in 2003 compared with 2002. Urine Western Blot sales decreased $7,000 or 5%, from $162,000 in 2002 to $154,000 in 39 2003. Serum Western Blot sales decreased by 30% or approximately $0.5 million compared with 2002 levels. The decrease is due to product availability issues related to the wind-down and restart, as well as to the loss of bioMerieux as a distributor after our restart. We engaged Adaltis Inc. as our new distributor in the second half of 2002, but have yet to regain our pre-wind-down market share, as there have not been significant sales by Adaltis. Sales of HIV viral lysate, a component we use in the production of our Western Blot products and which we previously sporadically sold to another manufacturer of serum-based HIV diagnostic tests and other parties, decreased by $0.2 million or nearly 100% compared to 2002 levels. The sale of viral lysate accounted for approximately 6% of 2002 revenues. We have not sold viral lysate since we restarted our operations in mid-2002 and we do not consider its sale to be a core component of our on-going business. Of customers accounting individually for more than 10% of our revenues, two customers accounted for an aggregate of 50% of our total revenues in 2003 and 3 customers accounted for an aggregate of 52% of our total revenues in 2002. As noted, previously, bioMerieux accounted for approximately 18% of our total revenues in 2002 and has not purchased from us since our mid-2002 restart. Gross margin decreased from a loss of $2,492,000 (-68% of sales in 2002) to a loss of $2,654,000 (-77% of sales in 2003). As an FDA-regulated manufacturing entity with two geographically diverse locations, we incur a significant level of relatively fixed costs, including personnel-related costs, to operate and maintain our manufacturing facilities in compliance with Good Manufacturing Practices. Once those relatively fixed manufacturing costs are covered, we enjoy a significant contribution margin on additional sales. When we incur those costs without sufficient revenues from the sale of our products to offset them, we report negative margins. To restart our manufacturing operations in 2002, we had a workforce in place at both facilities and incurred both personnel and manufacturing process expenses throughout the second and third quarters of 2002, however only late in the third quarter was a complete cycle of post-restart production and sales achieved at both manufacturing facilities. Partially mitigating the impact of the wind-down and restart on manufacturing operations and expenses during 2002 was the completion of a facility consolidation project at our Rockville, Maryland location during the first quarter 2002, which reduced occupancy costs by approximately $200,000 on an annualized basis without impacting quality or efficiency. 2003 results include a full year's facility costs in product cost expense whereas only a portion of these costs were included in product costs during 2002. Additionally, the higher margins we achieved from viral lysate sales compared with those achieved from sales of either our screening or supplemental tests improved the overall margin on sales in 2002. As noted previously, we did not sell viral lysate during 2003 and do not expect viral lysate sales to recur in the near term. Included in cost of sales, a component of gross margin, is royalty expense, which we pay on the sale of all of our products. Royalty expense was approximately $670,000 in 2003 and $412,000 in 2002. Our effective royalty rate varies based on our product mix, with the rate being higher on our EIA screening tests than on our urine or serum supplemental tests. Additionally, certain of our license agreements contain minimum royalty provisions which, in both 2003 and 2002, exceed amounts due based on the contractual percentage rates. In both 2002 and 2003, one licensor accepted shares of our common stock in satisfaction of discounted amounts due for one or more years in excess of the percentage royalty rate. The value of the common stock issued in both 2003 and 2002 was recorded as royalty expense. R&D costs increased $615,000 or 66% from $929,000 in 2002 to $1,544,000 in 2003. Approximately 47% of the increase is due to expenses associated with the increased headcount involved in our rapid test development. The remaining increase is due to expense associated with the acquisition of specimens and product prototypes in preparation for clinical trials to pursue our rapid test initiative. Selling, general and administrative costs increased from $9,006,000 in 2002 to $15,517,000 in 2003, an increase of $6,511,000 or 72%. Sales and marketing expenses increased by approximately $1,096,000 or 70% composed primarily of: o Increases of $1,455,000 in marketing consulting contracts, and o Increases of $247,000 for marketing materials. o Partially offsetting these increases was a decrease in salaries and benefits expenses due to the elimination of our direct sales and marketing force which occurred between June and August of 2003. 40 General and administrative expenses increased by approximately $5,415,000 or 80%. The primary components of the increase include the following: o An increase of $3,325,000 in primarily non-cash expense recorded in connection with the issuance of warrants and options to consultants and third party firms for various investor relations and other projects; o An increase of $1,200,000 in compensation expense comprised of o Severance costs paid to senior management o Restoration of certain management employees' salaries in June 2002 and certain increases in 2003; o Senior management salaries incurred for the full year in 2003 versus a portion of the year in 2002 and o Non-cash expense attributable to the intrinsic value of below-market grants of stock options to certain management employees in return for a salary deferral in 2003. o An increase of $259,000 in international and domestic travel related expense incurred primarily by senior executives. o Increased legal and auditor fees incurred in connection with the informal SEC inquiry. o Fees associated with our new auditor's re-audit of our financial statements for the year ended December 31, 2002. o Accrued severance-related costs attributable to the announced shutdown of our Alameda, California facility in mid-2004. The loss from operations for 2003, at $19,715,000, reflects a 59% increase over the $12,427,000 loss reported for 2002. Net interest expense for 2003 increased by $4,766,000, from $2,203,000 in 2002 to $6,969,000 in 2003. The change is primarily attributable to (in thousands):
2003 2002 Change ---- ---- ------ Interest on debt instruments $ 425 $ 332 $ 93 Non-cash expense composed of: Amortization and proportional write-off upon conversion of note and debenture discounts 4,835 1,188 3,647 Liquidated damages due to delayed registration of shares underlying convertible securities 620 546 74 Amortization and proportional write-off upon conversion of deferred offering costs 997 210 787 Expense attributable to warrants issued in conjunction with the Marr $10 million Promissory Note Agreement 322 - 322 Warrant liability mark-to-market adjustment (these warrants were exercised by Bristol during the third quarter of 2003 and the remaining warrant liability was written off to APIC at the time of exercise.) (275) (70) (205) Expense attributable to dividends on mandatorily redeemable Series A preferred stock 60 - 60 ------- -------- ------- Total interest expense 6,984 2,206 4,778 Interest income (15) (3) (12) ------- -------- ------- Net interest expense $ 6,969 $ 2,203 $ 4,766 ======= ======== =======
41 LIQUIDITY AND CAPITAL RESOURCES Financing Activities We have financed our operations from our inception primarily through the private placement of preferred stock and common stock, our Initial Public Offering (IPO) of common stock, two equity line facilities and the issuance of convertible notes and debentures. On May 20, 2003, our stockholders approved a 1:30 reverse split of our common stock, which became effective on May 28, 2003. All references to the number of shares issued or the issue, exercise or conversion price of any transaction described in this section reflect the $0.03 par value post-split basis of our common stock. Our financing activities for the most recent three years include the following. On January 22, 2001, the Company signed an agreement to place up to $1.1 million in convertible short-term debentures. Under this arrangement, the Company issued two convertible debentures to the debenture holder in the principal amount of $550,000 each, pursuant to Regulation S of the Securities Act. Each debenture had an interest rate of 6% and was issued at an original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. Each debenture matured 90 days from the date of issuance, or on April 26, 2001 and June 11, 2001, respectively. Under the terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Company's common stock at a fixed price that represented a 5% discount to the average trading price of the shares for the 10 trading days preceding the issuance of each debenture. If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture holder increased to 15% of the average low bid price for the Company's common stock for any three of the 22 trading days prior to the date of conversion. Concurrent with the issuance of the first debenture, the Company also issued a warrant to the debenture holder for 6,667 shares of common stock at an exercise price of $45. The shares underlying the debentures and warrant were registered using a form S-3 Registration Statement. The Company received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001. The Company redeemed the first debenture, plus accrued interest, prior to its contractual maturity using the proceeds from the sales of its common stock. The Company also redeemed a portion of the second debenture prior to its contractual maturity. On June 12, 2001, the debenture holder converted the remaining $168,000 balance on the second debenture plus accrued interest into 33,617 shares of the Company's common stock, in accordance with the conversion provisions of the debenture. On August 17, 2001, the Company modified the warrant that it had issued to the debenture holder pursuant to the terms of the warrant, reducing its exercise price to $4.50 per share, and the debenture holder exercised it for the entire 6,667 shares. The Company received $28,500 in net proceeds from the exercise of the warrants. On January 24, 2001 the Company amended a common stock purchase agreement with a private investment fund for the issuance and purchase of its common stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. The facility generally operated with the investor committed to purchase up to $25 million or up to 20% of the Company's outstanding shares of common stock over a twelve-month period. Once during each draw down pricing period, the Company could request a draw, subject to a formula based on the Company's average stock price and average trading volume setting the maximum amount of the request for any given draw. The amount of money that the investor provided to the Company and the number of shares the Company issued to the investor in return for that money was settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22-day period and the Company received the settled amount of the draw down. By June 30, 2001, the Company had issued 169,500 shares of its common stock, the total number registered for the equity line with the Securities and Exchange Commission, at an average price of $12.60 per share and had received net proceeds of approximately $2,014,000 after deducting expenses of the transactions. There are no further funds available to the Company under this equity line. The terms of the 6% convertible debentures discussed earlier required that 50% of the net proceeds of any equity sales, including sales under the equity draw down facility, be used to repay the debentures and related accrued interest. Accordingly, approximately $938,000 of the net proceeds from sales under the equity draw down facility was used to pay down the debentures. In conjunction with the agreement, the Company issued a 3-year warrant to the investor to purchase up to 33,333 shares of its stock at an exercise price of $46.50 per share. On August 2 and August 8, 2001, the Company modified the exercise price for an aggregate of 20,000 shares of the warrants to $6.00 per share, pursuant to the terms of the warrant, and the investor exercised it for an aggregate of 20,000 shares. The 42 Company received $114,000 in net proceeds from the exercise of these warrants. On August 21, 2001, the Company modified the exercise price for the remaining 13,333 shares of the warrant to $4.50 per share. The investor exercised the remaining balance of the warrant and the Company received net proceeds of $57,000 after deducting expenses of the transaction. In April 2001, the Company announced that it had concluded negotiations to sell its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic company, for $500,000. The Company received the proceeds from the sale in two installments in April and May 2001. In August 2001, the Company executed a promissory note in the amount of $400,000 to LHC Corporation, the parent company of its then-largest stockholder. The note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001. The note was subsequently extended after September 14, 2001 and in December 2001, the parties agreed to execute a new note in the amount of $411,000, representing the unpaid principal and accrued but unpaid interest on the previous note. This note required interest payable at 8.5% and was due in installments of $200,000 on February 28, 2002 and $35,000 per month thereafter until paid in full, plus accrued interest. The repayment terms of the note were renegotiated in February 2002. The amended note required payments of $17,500 at the end of February and March 2002, increasing to $35,000 monthly thereafter unless and until the Company raised at least $2 million in external financing, not including the Bristol 12% convertible debentures and warrants discussed below. If there was a remaining balance under the note upon the Company's obtaining proceeds of at least $2 million of external financing, the Company was obligated to repay $200,000 on the note and should any balance on the note remain thereafter, the Company was obligated to continue monthly payments of $35,000 until the note was repaid in full. The Company made the required $17,500 payment on February 28, 2002. On March 28, 2002, the Company again renegotiated the payment terms of this note, suspending any required principal or interest payments until 30 days after the effective date of the Company's registration statement for the 12% convertible debentures, at which time the Company was required to make a $200,000 payment and to resume making monthly payments of $35,000. The registration statement for the 12% convertible debentures became effective on February 14, 2003. No payments were made on this note from February 2002 through February 2003. On February 28, 2003, the Company and LHC Corporation executed a new note in the amount of $435,000, representing the unpaid principal and accrued but unpaid interest on the December 2001 note. The payment terms required monthly principal payments of $17,500 plus interest from March 2003 through May 2003, increasing to $35,000 monthly, plus interest, thereafter, unless and until the Company secured at least $5,000,000 in additional financing, at which time the remaining outstanding balance was due and payable. The Company made all required payments under the terms of the February 2003 renegotiated note and it was repaid in full in September 2003 following the securing of financing from Marr. On August 23, 2001, the Company and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Company's common stock over a twenty-four month period. The initial closing of the transaction occurred on October 19, 2001. Under this arrangement, the Company, at its sole discretion, could draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund was obligated to purchase shares of the Company's common stock. This facility operated similarly to the previous equity line facility employed earlier in 2001. The purchase price of the common stock purchased pursuant to any draw down under this facility was equal to 88% of the daily volume weighted average price of the Company's common stock on the applicable date. In conjunction with the signing of the stock purchase agreement, on October 19, 2001, the Company issued a 7-year warrant pursuant to Regulation S to the investment fund to purchase up to 139,742 shares of common stock at an exercise price of $8.229 per share and 3,833 shares of its common stock as additional fees to the investment fund. On October 26, 2001, the Company filed a Registration Statement on Form S-2 with the Securities and Exchange Commission to register for resale 1,000,000 shares of common stock that it might issue in conjunction with the equity line facility, the warrant and the fee shares. From the time the Registration Statement became effective in November 2001 through the expiration of the facility in October 2003, the Company issued a total of 855,776 shares of its common stock at an average price of $3.93 per share and received net proceeds of approximately $3.2 million after deducting expenses of the transactions. At the time the facility expired 633 registered shares remained available for sale. In November 2001, the Company sold 52,528 shares of common stock under Regulation D of the Securities Act to various investors in a private placement at $5.70 per share, receiving net proceeds of $295,000. The private placement did not include registration rights. Therefore, pursuant to Rule 144 of the Securities Act, the transfer 43 of the securities purchased by the investors was restricted for twelve months from the date of purchase. Three former members of the Company's Board of Directors, Nancy Katz, Mark Novitch, and David Collins, purchased an aggregate of 24,038 shares of this offering. The proceeds of this offering were used to fund the Company's current operations. The purchase transactions by the Company's Board members were on a fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a result of the tenuous financial condition of the Company at that time. On November 28, 2001, Calypte announced that it intended to offer up to $10 million of shares of its common stock to international investors pursuant to Regulation S of the Securities Act. There was no investor interest in the proposed offering, and consequently, the Company elected not to proceed with it. Subsequently, beginning in 2002, the Company negotiated several new financings from which, through March 22, 2004, it has raised approximately $21.6 million in gross proceeds. The following table summarizes these financings by major category and the subsequent table provides the details of these financings. SUMMARY OF FINANCINGS - JANUARY 1, 2002 TO MARCH 22, 2004
TOTAL GROSS NET SHARES RESTRICTED FINANCING SOURCE PROCEEDS PROCEEDS ISSUED (1) SHARES (2) ------- -------- ---------- ---------- Bristol 12% Convertible $ 562 $ 505 1,476.1 -- Debentures and Warrants 8% Convertible Notes 3,232 2,594 46,084.3 3,492.6 Other Restart Financings 750 730 2,720.3 1051.3 Mercator 12% and 10% Debentures 4,550 3,650 34,153.4 11,643.8 Marr Private Placements 12,500 11,900 28,333.3 28,333.3 ------- -------- --------- -------- $21,594 $ 19,379 112,767.4 44,521.0 ======= ======== ========= ========
(1) At March 22, 2004, the holders have converted all but approximately $958,000 of principal of the convertible notes and debentures issued since February 2002. Based on current market prices, the Company would be required to issue approximately 2.5 to 3.0 million additional shares of its common stock if the holders elected to convert the remaining principal and accrued interest of their debentures at this time. (2) Based upon ownership information supplied by the Company's transfer agent as of March 11, 2004. Certain of these shares may be eligible for resale under Rule 144 now or at various times in the future. As of March 22, 2003, approximately 34% of the Company's outstanding shares, or approximately 47.1 million shares, were restricted. In addition to the amounts summarized here, certain vendors, consultants and other parties who have agreed to accept our common stock in lieu of cash hold an additional 2.6 million restricted shares. 44 DETAIL OF FINANCINGS - JANUARY 1, 2002 TO MARCH 22, 2004
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- 12% CONVERTIBLE DEBENTURE AND Lesser of $425 2/11/02 $7.50 1,019.4/ $525 WARRANTS (i) 60% of 100 5/10/02 $0.90 Bristol Investment Fund, Ltd. the average ---- $468 of 3 lowest $525 closing bid prices for 22 days preceding conversion or (ii)$1.50 Class A Warrant Lesser of $4 $4 2/11/02 $7.50 56.7/ N/A (i) 70% of the average of lowest 3 trading prices for 20 days preceding conversion or (ii)$3.45 Class B Warrant Lesser of $ 33 $ 33 2/11/02 $ 7.50 400/ N/A (i) 70% of ---- ---- -------- the average of lowest 3 trading pricing for 20 days preceding conversion or (ii) $6.45. Total Bristol $562 $505 1,476.1/ $525 ==== ==== =============
45
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- 8% CONVERTIBLE NOTES Lesser of Alpha Capital Aktiengesellshaft (i) $3.00 or $500 5/24/02 $ 3.60 7,260.7/ $500 Stonestreet Limited Partnership (ii) 70% of $500 5/24/02 $ 3.60 7,075.7/ $500 Filter International Ltd. the average of $150 5/24/02 $ 3.60 2,452.4/ $150 Camden International Ltd. the 3 lowest $350 5/24/02 $ 3.60 5,279.1/ $350 Domino International Ltd. trades for 30 $150 5/24/02 $ 3.60 1,767.4/ $150 Thunderbird Global Corporation days $ 75 5/24/02 $ 3.60 1,083.1/ $ 75 BNC Bach International Ltd. preceding $200 5/24/02 $ 3.60 2,463.8/ $200 Excalibur Limited Partnership conversion $200 5/24/02 $ 3.60 1,678.9/ $200 Standard Resources Ltd. $100 5/24/02 $ 3.60 1,542.5/ $150 SDS Capital International Ltd. $300 7/10/02 $ 10.20 4,189.8/ $300 Camden International Ltd. $100 7/10/02 $ 10.20 1,707.9/ $100 Excalibur Limited Partnership $250 7/24/02 $ 6.60 4,238.3/ $250 Stonestreet Limited Partnership $250 8/21/02 $ 3.90 4,042.2/ $250 Alpha Capital Aktiengesellshaft $107 5/9/03 $ 0.63 1,302.5/ $107 ---- ------------- Total 8% Convertible Notes $3,232 $2,594 46,084.3/ $3,232 ====== ====== ================ OTHER RESTART FINANCINGS: 10% CONVERTIBLE NOTE BNC Bach International Ltd. 50% of the $ 150 $ 150 5/14/02 $4.20 2,217.8/ $150 (Note: on 7/14/02 the average of 3 $10.80 on maturity date was extended lowest 7/14/02; until 12/31/02; on December closing bid $1.92 on 27, 2002, the maturity date prices for 12/27/02; was extended until January 22 days $1.80 on 15, 2003; on January 15, preceding 1/15/03; 2003 the maturity date was conversion $1.50 on extended until March 17, 3/17/03; 2003, on March 17, 2003 the $0.99 on maturity date was extended 4/2/03 until April 4, 2003; on $0.75 on April 2, 2003, the maturity 4/30/03 date was extended until May 5, 2003; on April 30, 2003, the maturity date was subsequently extended until May 10, 2004)(5) 8% CONVERTIBLE DEBENTURES Su So 80% of the $ 100 $ 90 6/17/02 $4.20 36.7 (4)/ $100 lower of the average closing bid or trade price for the 5 days preceding conversion, but not less than $3.00
46
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- Jason Arasheben 70% of the $ 100 $ 90 7/03/02 $8.10 15.8 (4)/ $100 lower of the average closing bid or trade price for the 5 days preceding conversion, but not less than $3.00 PIPE AT $1.50 PER SHARE Careen Ltd. $1.50 per $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A Caledonia Corporate Group Share $ 200 $ 200 8/28/02 $ 4.80 225.0/ N/A ----- ----- ---------- Limited Total Other Restart Financings $ 750 $ 730 2,720.3/ $350 ===== ===== ============= Mercator 12% and 10% Debentures 12% CONVERTIBLE DEBENTURES Mercator Momentum Fund, L.P. 85% of the $ 550 $345 (6) 9/12/02 $3.00 4,866.1(4)/ ($2,000 total commitment) average of $550 the 3 lowest Mercator assigned its rights to: trading Alpha Capital AG prices for 250 250 7/24/03 $0.115 2,673.8/ $250 Gamma Opportunity Capital the 20 250 250 7/24/03 $0.115 2,685.6/ $250 Partners, LP trading days Goldplate Investment Partners preceding 250 250 7/24/03 $0.115 2,673.8/ $ 250 Marr Technologies, B.V. (11) conversion 570 570 9/1/03 $0.820 5,181.8/ $570 (8) -------- ---------- 1,870 1,665 Dr. Khalid Ahmed 50 50 10/2/03 $1.310 84.6/ $ 50 Roger Suyama 20 20 10/2/03 $1.310 33.8/ $20 Logisticorp, Inc. 20 20 10/2/03 (12) $1.310 - Southwest Resource 40 40 10/2/03 (12) $1.310 - -------- ---------- ---------------- Preservation Inc. $2,000 $1,795 18,199.5/ $1,940 -------- ---------- ---------------- Mercator Momentum Fund, L.P. 80% of the $300 $260 10/22/02 $3.90 0/$300 (7) average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not less than $1.50
47
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- Mercator Momentum Fund L.P. (10) 70% of the $300 $245 4/29/03 $0.825 3,455.5/ $294 average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $1.20 Mercator warrant $3.00 per $0 $0 10/22/02 $3.90 0 share 10% CONVERTIBLE DEBENTURES Mercator Focus Fund, L.P. (10) 80% of the $1,000 $510 1/14/03 $1.92 5,831.8/ $422 average of (6) the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $3.00 Mercator Momentum Fund, L.P. 80% of the $450 $440 1/30/03 $1.86 2,592.6/ $358 (10) average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $3.00 Mercator Focus Fund, L.P. (10) $400 3/13/03 $1.47 2,437.7/ $178 Mercator Momentum Fund III, L.P. 65% of the 100 1,636.3/ $100 average of ---- ---- the 3 lowest $500 $400 trading ---- ---- prices for the 20 trading days preceding conversion, but not more than $2.10 Total Mercator Debentures $4,550 $3,650 34,153.4/ $3,592 ====== ====== ================
48
CALYPTE SHARES FINANCING TYPE AND CONVERSION GROSS NET TRANSACTION CLOSING ISSUED/ $ INVESTOR (1) FEATURE PROCEEDS PROCEEDS DATE PRICE REDEEMED (2)(3) - ------------ ------- -------- -------- ---- ----- --------------- MARR PRIVATE PLACEMENTS PIPE AT $0.30 PER SHARE Marr Technologies B.V. (9)(11) $0.30 per $2,500 $2,300 8/1/03 $0.152 8,333.3 share PIPE AT $0.50 PER SHARE Marr Technologies B.V. (9)(11) $0.50 per $10,000 $9,600 9/1/03 $0.820 20,000.0 ------- ------ -------- share Total Marr Private Placements $12,500 $11,900 28,333.3 ======= ======= ========
(1) The Bristol Debentures and Warrants, the 8% Convertible Notes, the Other Restart Financings, the Mercator 12% and 10% Debentures and warrants and the Marr Technologies B.V. PIPE's were issued under exemptions provided by Regulation S. The Company could issue no shares under the equity line with Townsbury until it had completed an effective registration for the underlying shares. With the exception of Marr Technologies B.V., which is an affiliate of the Company based on its August and September 2003 investments, none of the entities listed above is or has been an affiliate of the Company. Other than Marr Technologies B.V., all of the listed investors were subject to ownership limitations restricting their ownership of the Company's stock to a maximum of 4.9% or 9.9%, depending on the specific agreement. (2) At March 22, 2004, the holders have converted all but approximately $958,000 of principal of the convertible notes and debentures issued since February 2002. Based on current market prices, the Company would be required to issue approximately 2.5 to 3.0 million additional shares of its common stock if the holders elected to convert the remaining principal and accrued interest of their debentures at this time. (3) On February 14, 2003 the registration statement for the shares underlying the $525,000 of the Bristol Debentures became effective. On July 18, 2003, the registration statement for 52,500,000 shares underlying the Other Recent Financings became effective. As a result of a decline in the market price of the Company's stock subsequent to the effective date of the July 2003 registration statement, the number of shares registered was insufficient to permit the complete conversion of the notes and debentures into registered shares. The shares underlying certain of the convertible securities have become eligible for resale under Rule 144, and certain investors have availed themselves of that eligibility to convert restricted shares issued pursuant to conversions into free-trading shares. As of March 22, 2004, approximately 34% of the Company's outstanding common stock, or approximately 47.1 million shares, are unregistered. Of this amount, Marr Technologies holds 33.5 million restricted shares issued pursuant to their two PIPE transactions and the conversion of their investment in $570,000 principal value of 12% convertible notes. Other investors in our convertible notes and debentures hold approximately 11.0 million restricted shares issued pursuant to their conversions. The Company has agreed to register the shares of common stock on a cost-free basis to the holders of said shares of common stock. (4) Includes fee shares. (5) On April 30, 2003, when the market price of Calypte common stock was $0.75, the Company and BNC Bach amended the conversion price to eliminate a conversion price ceiling of $1.50 per share and to increase the discount applicable to the conversion price from 40% to 50%. In return for this modification of the conversion price, BNC Bach agreed to extend the maturity of the note until May 10, 2004. BNC Bach subsequently converted the outstanding principal and accrued interest into shares of the Company's common stock. (6) Reflects a 10% cash commitment fee on the entire $2 million commitment paid to The Mercator Group less additional fees and expenses. As of September 30, 2003, an additional $130,000 remained available under this commitment. The Company issued the remaining $130,000 of additional debentures pursuant to this commitment on October 2, 2003, of which $70,000 has been converted into approximately 118,000 shares of its common stock. The Company has not yet registered any underlying shares for the final $700,000 of this commitment. (7) In conjunction with the issuance of the $1 million 10% convertible debenture to Mercator Focus Fund, L.P., the Company used the proceeds to repay the $0.3 million outstanding principal balance of the 12% convertible debenture previously issued to Mercator Momentum Fund, L.P. plus accrued interest. The balance of costs incurred represents transactional and legal fees. 49 (8) On March 31, 2003, when the market price of Calypte Common Stock was $0.0295, the Company amended the conversion price to eliminate a conversion price floor of $0.05 per share in return for an extension of time in which to register the shares of common stock underlying the various Mercator financings. (9) The Securities Purchase Agreements for both transactions between the Company and Marr Technologies B.V. require that the Company provide cost-free registration rights to Marr; however, Marr is subject to a one-year lock-up provision following the transaction date with respect to the shares purchased. (10) On January 14, 2004, when the market price of Calypte common stock was $0.60, the Company extended the maturity date of the following debentures until July 14, 2004: o 10% Convertible Debenture dated January 14, 2003 issued to Mercator Focus Fund, LP o 10% Convertible Debenture dated January 30, 2003 issued to Mercator Momentum Fund, LP o 10% Convertible Debentures dated March 13, 2003 issued to Mercator Momentum Fund III, LP and Mercator Focus Fund o 12% Convertible Debenture dated April 29, 2003 issued to Mercator Momentum Fund, LP In return for the extension of the maturity dates, the Company has agreed to pay an additional extension fee equal to 2% of the outstanding principal balance per month until the earlier of the extended maturity date or conversion. The extension fee is payable 1% in cash and 1% in shares of the Company's common stock. Additionally, the Company agreed to file a registration statement including the shares potentially applicable to the conversion of the outstanding debenture balances by no later than April 29, 2004. The shares issuable as a portion of the extension fee are to be included in the registration statement. (11) On January 23, 2004, when the market price of Calypte common stock was $0.695, the Company and Marr agreed to extend the registration rights period attributable to 5,181,818 shares of the Company's common stock issued in conjunction with Marr's conversion of $570,000 principal amount of the Company's 12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return for the extension, the Company agreed to include in its next registration statement an aggregate of 28,333,333 shares of its common stock purchased by Marr in PIPE transactions in the third quarter of 2003. (12) The holder claims an earlier transaction date, which is disputed by the Company. This debenture has not yet been converted by the Company pending resolution of the transaction date dispute, which may determine the number of shares of the Company's stock to which the holder is entitled upon conversion. On November 13, 2003, when the market price of the Company's common stock was $0.88 per share, the Company and Marr, its largest stockholder, entered into an agreement in which Marr agreed to provide the Company up to an aggregate of $10,000,000 (the "Marr Credit Facility") pursuant to promissory notes issuable to Marr on an as-needed basis by the Company (the "Notes"). Each Note will bear interest at the rate of 5% per annum and will have a 12-month term. The Marr Credit Facility is available during the period beginning on February 28, 2004 and ending on May 31, 2004. The aggregate amount available under the Marr Credit Facility will be proportionally reduced by the amount of any equity financing obtained by the Company during the term of the Marr Credit Facility. Marr has the right of first refusal to participate in any such equity financing on the same terms as the other investors. The Marr Credit Facility provides for earlier termination as of March 31, 2004, if the Company fails to have its common stock listed on an established stock exchange by that date. Moreover, upon the failure to obtain such stock exchange listing, any outstanding Notes would be due and payable on April 30, 2004. As of March 22, 2004, no Notes have been issued under the Marr Credit Facility. As consideration for the Marr Credit Facility, the Company issued to Marr a warrant to purchase 375,000 shares of its common stock at an exercise price of $0.80 per share. The warrant is immediately exercisable and expires two years after issuance on November 12, 2005. On March 19, 2004, when the market price of the Company's common stock was $0.575 per share, the Company and Marr amended the Marr Credit Facility to increase the aggregate amount available under the Marr Credit Facility to $15,000,000 and to eliminate the termination provision upon failure to have the common stock listed on an established stock exchange by March 31, 2004. As additional consideration for the amendment of the Marr Credit Facility, the Company issued to Marr an additional warrant to purchase 400,000 shares of its common stock at an exercise price of $0.46 per share. This warrant is immediately exercisable and expires two years from its date of issuance on March 18, 2006. 50 Warrants, Options and Stock Grants Since January 2002, the Company has entered into various contracts and agreements with consultants who have agreed to accept payment for their services in the form of warrants, options and/or stock grants. The Company has obtained various services under these arrangements, including legal, financial, business advisory, and other services including business introductions and arrangements with respect to potential domestic and international product placement and the development of potentially synergistic relationships with appropriate public service or other governmental and non-governmental organizations. The Company has generally issued the warrants at a discount to the then-current market price and has registered the shares underlying the warrants, options and stock grants on Form S-8 Registration Statements for resale by the consultants. The Company has, since January 2002, issued approximately 9.6 million shares of its common stock as a result of warrant or option exercises and stock grants related to these consulting agreements, of which approximately 8.0 million shares have been issued during 2003. In May 2002, Calypte issued warrants and options to purchase 633,333 shares of its common stock under agreements with consultants to perform legal, financial, business advisory and other services associated with the restart of its operations. The warrants were issued at $0.45 per share on May 9, 2002 when the market price of our common stock was $0.90 per share. The option was granted at $0.90 per share on May 10, 2002, when the market price of our common stock was $0.90 per share. All of the warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. The consultants exercised all the warrants and options and Calypte issued 633,333 shares and received proceeds of $292,500. All but one of the consulting agreements discussed above expired in August and we have entered into new agreements for legal, financial, business advisory, and other services including introductions and arrangements with respect to potential domestic and international product development of synergistic relationships with appropriate public service organizations. In November 2002, Calypte issued warrants to purchase 950,000 shares of our common stock and stock grants for 70,000 shares of our stock to consultants under the terms of these new agreements. The Company issued 350,000 warrants at an exercise price of $1.50 per share on November 1, 2002, when the market price of our stock was $4.20 per share. The Company issued an additional 600,000 warrants at an exercise price of $1.50 on November 20, 2002, when the market price of our common stock was $2.70. All of the warrant grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8. By February 2003, the consultants had exercised all the warrants and the Company had received aggregate proceeds of $1.425 million. The Company issued 986,667 shares of its common stock pursuant to the exercises of the November 2002 warrant and stock grants. In January and February 2003, the Company entered into new contracts and extended certain other contracts with existing consultants to perform services as described above. On February 14, 2003, when the market price of the Company's stock was $2.01, the Company issued warrants exercisable at $1.50 per share and stock grants for an aggregate of 975,216 shares of its common stock as compensation for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of $0.8 million. During March 2003, when the market price of the Company's stock ranged from $1.32 to $1.50 per share, the Company issued warrants exercisable at $0.75 per share and stock grants for an aggregate of 1,350,400 as compensation for services under new or extended contracts. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.9 million. In April 2003, when the price of the Company's stock ranged from $0.81 to $0.885 per share, the Company entered into additional contracts, extended certain contracts, and modified certain other contracts with existing consultants who agreed to settle a portion of the outstanding balance due for services under their contracts in stock. The Company issued warrants at $0.75 per share and stock grants for an aggregate of 1,490,600 shares of its common stock as compensation or settlement for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By May 31, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.1 million. 51 In May 2003, when the price of the Company's stock ranged from $0.552 to $0.576 per share, the Company again entered into new contracts, extended certain contracts, and modified certain other contracts with existing consultants who agreed to settle a portion of the outstanding balance due for services under their contracts in shares of stock. The Company issued warrants at $0.30 per share and stock grants for an aggregate of 2,080,305 shares of its common stock as compensation or settlement for these services. The warrants were non-cancelable and fully-vested at the date of issuance. By September 30, 2003, the consultants had exercised warrants to purchase all of the shares granted to them and the Company had received proceeds of approximately $0.5 million. In July 2003, when the price of the Company's stock ranged from $0.11 to $0.30 per share, the Company extended a contract for consulting and other services and granted the consultant a warrant to purchase 722,500 shares of its common stock at 50% of the closing market price on the date of any exercise as compensation under the contract. The warrant was granted as fully-vested and expired on September 30, 2003. By September 30, 2003, the consultant had exercised the entire warrant at prices ranging from $0.08 to $0.61 per share and the Company had received proceeds of approximately $0.4 million. Also during July 2003, the Company issued stock grants to consultants for an aggregate of 356,344 shares of its common stock as compensation under their contracts. On August 20, 2003, when the price of the Company's stock was $0.18 per share, the Company issued consulting contracts to two new consultants pursuant to which it issued warrants for 100,000 shares each, exercisable at $0.18 per share. The warrants were non-cancelable and fully-vested at the date of issuance. At December 31, 2003, the consultants had exercised none of the warrants. In September 2003, when the price of the Company's stock ranged from $0.50 to $1.80 per share, the Company issued an aggregate of 800,000 shares of its common stock to consultants and other service providers who agreed to take shares of stock in lieu of cash as compensation under their contracts. In October and November 2003, when the price of the Company's stock ranged from $0.53 to $1.65 per share, the Company issued an aggregate of 125,000 shares of its common stock to consultants and other service providers who agreed to take shares of stock in lieu of cash as compensation under their contracts. In February 2004, when the price of the Company's stock was $0.67 per share, the Company issued 500,000 shares of its common stock to a consultant who had agreed to accept shares of stock as a portion of its compensation under a consulting agreement. To conserve cash and to obtain goods and services, the Company may continue to issue options and warrants at discounts to market or issue direct stock grants. In the event that the Company issues additional options and warrants, it is anticipated that the securities will contain cost-free registration rights which will be granted to holders of the options and warrants, and that there may be dilution to the Company's existing stockholders. Restructure of Trade Debt On February 12, 2002, the Company completed a restructuring of approximately $1.7 million of its past due accounts payable and certain 2002 obligations with 27 of its trade creditors. Under the restructuring, the Company issued approximately 47,000 shares of its common stock at various negotiated prices per share with the trade creditors in satisfaction of the specified debt. The issuance of shares was exempt from registration pursuant to Regulation D of the Securities Act. The shares issued are now eligible for resale under the provisions of Rule 144. Summary of Financing Activities To successfully implement our business plan, we must obtain sustainable cash flow and profitability. We believe that our currently available working capital and the $15,000,000 available under the amended Marr Credit Facility will be adequate to sustain our operations at current levels through at least year end 2004. If sufficient funds are not available from our operations to repay the promissory notes when due, however, we may need to arrange additional financing, attempt to extend or otherwise modify the promissory notes or make other arrangements. There can be no assurance that additional financing would be available, or it if is available, that it 52 would be on acceptable terms. Our future liquidity and capital requirements will depend on numerous factors, including successful completion of the development of our new rapid tests, acquisition and protection of intellectual property rights, costs of developing our new products, ability to transfer technology, set up manufacturing and obtain regulatory approvals of our new rapid tests, market acceptance of all our products, existence of competing products in our current and anticipated markets, actions by the FDA and other international regulatory bodies, and the ability to raise additional capital in a timely manner. Our longer-term liquidity and capital requirements are dependent on factors similar to those which impact our current liquidity and capital resource considerations and which will be critical in validating our business model during 2004. Consequently, we cannot predict the adequacy of our capital resources on a long-term basis. There can be no assurance that we will achieve or sustain profitability or positive cash flows in the future. In addition, there can be no assurance that subsequent additional financings, if and as necessary, would be available to us on a timely basis, or that if it is available, that it would be on acceptable terms, if at all. The terms of a additional financing could involve a change of control and/or require stockholder approval, or could require us to obtain waivers of certain covenants that are contained in existing agreements. We would or might be required to consider strategic opportunities, such as merger, consolidation, sale or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such new strategic opportunity, and there can be no assurance that any such opportunities will be available to us on acceptable terms, or at all. If additional financing is not available when and if required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. Operating Activities During, 2003 and 2002, the Company used cash of $13.4 million and $8.7 million, respectively, in its operations. In both periods, the cash used in operations was primarily for manufacturing, promoting and marketing the Company's complete urine-based HIV-1 testing method, and for research, selling, and general and administrative expenses of the Company. Newly-Adopted Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements no. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in APB No. 30 have been met. The Company adopted SFAS 145 in 2003 and as a result, the gain from settlement of debt in 2002 has been reclassified from an extraordinary gain to an ordinary gain. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002. This standard did not have a material impact on the Company's consolidated financial position or results of operations, however the Company has recognized exit costs associated with the closure of its Alameda, California manufacturing facility in accordance with the standard. In May 2003, the FASB issued FAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, many of which have been previously classified as equity or on the "mezzanine". The Company adopted this standard during the third quarter of 2003 and, accordingly, has classified its mandatorily redeemable Series A preferred stock as a long 53 term liability for all periods presented. Additionally, effective with the adoption and on a prospective basis, the dividend on the mandatorily redeemable Series A preferred stock is classified as interest expense in the Company's consolidated statement of operations. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies the financial accounting and reporting requirements, as were originally established in SFAS 133, for derivative instruments and hedging activities. SFAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. This statement is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, excluding certain implementation issues that have been effective prior to this date under SFAS 133. The Company's adoption of this statement has not had a material impact on our results of operations or financial condition. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. FIN 46 provides guidance on how to apply the controlling financial interest criteria in ARB 51 to variable interest entities ("VIE"). Given the complexity of FIN 46 and implementation issues after its original issuance, particularly with respect to its scope and application of the consolidation model, the FASB staff issued several FASB staff positions throughout 2003 to clarify the Board's intent on certain of the interpretation's provisions. In December 2003, the Board issued FIN 46R to address certain technical corrections and clarify the implementation issues that had arisen. In general, a VIE is subject to consolidation if it has (1) an insufficient amount of equity for the entity to carry on its principal operations without additional subordinated financial support provided by any parties, (2) a group of equity owners that are unable to make decisions about the entity's activities or (3) equity that does not absorb the entity's losses or receive the entity's benefits. Variable interest entities are to be evaluated for consolidation based on all contractual, ownership or other interests that expose their holders to the risks and rewards of the entity. These interests may include equity investments, loans, leases, derivatives, guarantees, service and management contracts and other instruments whose values change with changes in the VIE. Any of these interests may require its holder to consolidate the entity. The holder of a variable interest that receives the majority of the potential variability in gains or losses of the VIE is the VIE's primary beneficiary and is required to consolidate the VIE. FIN 46R became effective immediately for entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has determined that the adoption of the provisions of FIN 46 will not have an impact upon its financial condition or results of operations. 54 RISK FACTORS Calypte has identified a number of risk factors faced by the Company. These factors, among others, may cause actual results, events or performance to differ materially from those expressed in any forward-looking statements made in this Form 10-KSB or in press releases or other public disclosures. Investors should be aware of the existence of these factors. RISKS RELATED TO AN INFORMAL SECURITIES AND EXCHANGE COMMISSION INQUIRY Our Former Independent Auditors Did Not Complete Their Review of Our Interim Financial Statements Which May Result in Us Being Viewed as Deficient in Our Periodic Filing Obligations We were contacted by the San Francisco District Office of the SEC on October 28, 2003 and advised of an informal inquiry being conducted by the enforcement staff of the SEC regarding the Company. The staff has requested, among other things, documents related to certain press releases issued by the Company. While the SEC has advised us that the inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred, we informed our former independent auditors and they advised us that they could not complete their quarterly review of our interim financial statements in our 10-QSB or issue an audit opinion on our 2003 annual financial statements in our Form 10-KSB until such time as our Audit Committee completed their investigation of this matter, the same was reviewed by our former auditors and they were satisfied that, in their opinion, an adequate investigation was conducted and appropriate conclusions were reached and actions taken. Our interim financial statements are required to be reviewed under Statement of Auditing Standards 100 ("SAS 100") by an independent public accountant pursuant to Item 310(b) of Regulation S B and our annual financial statements must be audited by an independent public accountant pursuant to Item 310(a) of Regulation S B. While we have filed an amended 10-QSB subsequent to the conclusion of the Audit Committee investigation on which our new independent auditors have completed an SAS 100 review, the staff of the SEC may take the position that our Form 10-QSB is deficient because the required review was not completed on a timely basis. That could mean that we may be viewed as not being current in our filings under the Securities Exchange Act of 1934. If we were determined by the Commission to be deficient in our periodic filings, we could be ineligible to use Forms S-2 and S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. As a result of the registration rights agreements we entered into with respect to various financing arrangements, we may be required to utilize a Form S-1 Registration Statement for registration of the underlying shares of common stock that we are required to register, which may result in additional costs and expenses and possible delay in such registrations. Our Audit Committee hired independent counsel to investigate the matter addressed in the SEC's informal inquiry, and counsel determined that there was no evidence of management malfeasance, however, there is no assurance that the SEC will not continue to pursue the inquiry, or that the SEC will not change it to a formal investigation, or that there will not be sanctions against the Company or its officers or directors. RISKS RELATED TO OUR FINANCIAL CONDITION If We are Unable to Obtain Additional Funds When and If Required We May Have to Significantly Curtail the Scope of Our Operations and Alter Our Business Model. We believe that our currently available working capital plus the funds which will be available, if necessary, from the Marr Credit Facility, as amended, will be adequate to sustain our operations at current levels through at least year end 2004. While we believe that recent financing agreements and current resources provide adequate funding for our operations at current levels at least through 2004, there can be no assurance that such resources will be adequate. Further, there can be no assurance that we will be able to achieve expanded acceptance of or realize significant revenues from our current or potential new products, including our rapid tests, or that we will achieve significant improvements in the efficiency of our manufacturing processes. In addition, there can be no assurance that we will achieve or sustain profitability or positive cash flows in the future. In the absence of adequate resources from current working capital and existing financing commitments, we would need to raise additional capital to sustain our operations. In that case, we would or might be required to consider strategic opportunities, including 55 merger, consolidation, sale or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance that any such opportunity will be available to us on acceptable terms, or at all. If additional financing is not available to us when required or is not available to us on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. The terms of a subsequent financing may involve a change of control, require stockholder approval, and/or require us to obtain waivers of certain covenants that are contained in existing agreements. Our Financial Condition has Adversely Affected Our Ability to Pay Suppliers, Service Providers and Licensors on a Timely Basis Which May Jeopardize Our Ability to Continue Our Operations and to Maintain License Rights Necessary to Continue Shipments and Sales of Our Products. As of December 31, 2003 our accounts payable totaled $2.2 million, of which $1.8 million was over sixty days old. We currently have primarily cash-only arrangements with suppliers and certain arrangements require that we pay down certain outstanding amounts due when we make a current payment. These past due payments vary monthly depending on the items purchased and range from approximately $50,000 to $200,000 per month. As of December 31, 2003 we have accrued an aggregate of approximately $582,000 in royalty obligations to our patent licensors, of which approximately $409,000 were past due. The licenses attributable to past due royalty payments relate to technology utilized in both our urine EIA screening test and our supplemental urine and serum tests. Because of the interdependence of the screening and supplemental tests in our testing algorithm, the inability to use any one of the patents could result in the disruption of the revenue stream from all of our products. While at this time we are current with our payment plans for past-due amounts, if we are unable to maintain sufficient working capital, our ability to make payments on past due negotiated royalty obligations, make timely payments to our critical suppliers, service providers and to licensors of intellectual property used in our products will be jeopardized and we may be unable to obtain critical supplies and services and to maintain licenses necessary for us to continue to manufacture, ship and sell our products. Additionally, certain vendors and service providers with whom we have not currently arranged payment plans have or may choose to bring suit against the Company to recover amounts they deem owing. While we may dispute these claims, should the creditor prevail and we be required to pay all amounts due to the creditor, and if working capital that will enable us to make the required payment is not available when required, the Company will be placed in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all. We Have Incurred Losses in the Past and We Expect to Incur Losses in the Future. We have incurred losses in each year since our inception. Our net loss for the years ended December 31, 2003 and 2002 was $26.5 million and $13.3 million, respectively and our accumulated deficit at December 31, 2003 was $127.8 million. We expect operating losses to continue during 2004 and perhaps beyond, as we complete the development and begin commercializing our rapid tests, complete our manufacturing restructuring and consolidation, and conduct additional research and development for product improvements and clinical trials on potential new products. An Economic Downturn or Terrorist Attacks May Adversely Affect Our Business. Changes in economic conditions could adversely affect our business. For example, in a difficult economic environment, customers may be unwilling or unable to invest in new diagnostic products, may elect to reduce the amount of their purchases or may perform less HIV testing. A weakening business climate could also cause longer sales cycles and slower growth, and could expose us to increased business or credit risk in dealing with customers adversely affected by economic conditions. Terrorist attacks and subsequent governmental responses to these attacks could cause further economic instability or lead to further acts of terrorism in the United States and elsewhere. These actions could adversely affect economic conditions outside the United States and reduce demand for our products internationally. Terrorist attacks could also cause regulatory agencies, such as the FDA or agencies that perform similar functions outside the United States, to focus their resources on vaccines or other products intended to address the 56 threat of biological or chemical warfare. This diversion of resources could delay our ability to obtain regulatory approvals required to manufacture, market or sell our products in the United States and other countries. RISKS RELATED TO THE MARKET FOR OUR COMMON STOCK The Price of Our Common Stock Has Been Highly Volatile Due to Several Factors Which Will Continue to Affect the Price of Our Stock. Our common stock has traded as low as $0.11 per share and as high as $3.45 per share in the twelve months ended December 31, 2003. We believe that some of the factors leading to the volatility include: o price and volume fluctuations in the stock market at large which do not relate to our operating performance; o fluctuations in our operating results; o concerns about our ability to finance our continuing operations; o financing arrangements which may require the issuance of a significant number of shares in relation to the number of shares currently outstanding; o announcements of technological innovations or new products which we or our competitors make; o FDA, SEC and international regulatory actions; o availability of reimbursement for use of our products from private health insurers, governmental health administration authorities and other third-party payors; o developments with respect to patents or proprietary rights; o public concern as to the safety of products that we or others develop; o changes in health care policy in the United States or abroad; o changes in stock market analysts' recommendations regarding Calypte, other medical products companies or the medical product industry generally; o fluctuations in market demand for and supply of our products; and o certain world conditions, such as SARS, an economic downturn or terrorist attacks. The Company and the Price of Our Shares May Be Adversely Affected By the Public Sale of a Significant Number of the Shares Eligible for Future Sale. At December 31, 2003, approximately 89.9 million or 66% of the outstanding shares of our common stock were freely tradable. Sales of common stock in the public market could materially adversely affect the market price of our common stock. Such sales also may inhibit our ability to obtain future equity or equity-related financing on acceptable terms. From inception through December 31, 2003, the Company has issued approximately 136 million shares and raised approximately $129 million. At a Special Meeting of Stockholders on February 14, 2003, our stockholders approved an increase in the number of authorized shares of the Company's common stock from 200 million to 800 million. Although the Company has no plans to do so, at December 31, 2003, it has the ability, without further strockholder approval, to issue in excess of 500 million shares of its common stock for financing or other purposes. The perceived risk of dilution from this amount of authorized but unissued stock may cause our existing stockholders and other holders to sell their shares of stock, which would contribute to a decrease in our stock price. In this regard, significant downward pressure on the trading price of our stock may also cause investors to engage in short sales, which would further contribute to significant downward pressure on the trading price of our stock. 57 Our Issuance of Warrants, Options and Stock Grants to Consultants for Services and the Granting of Registration Rights for the Underlying Shares of Common Stock May Have a Negative Effect on the Trading Price of Our Common Stock. As we continue to look for ways to minimize our use of cash while obtaining required services, we have issued and may continue to issue warrants and options at or below the current market price or make additional stock bonus grants. We have, from January 1 through December 31, 2003, issued warrants, options and stock bonuses for nearly 19.8 million shares, including approximately 10.0 million shares from employee benefit plans and the 2003 Non-Qualified Stock Option Plan, in payment for consulting services as more fully described in "Liquidity and Capital Resources". In addition to the potential dilutive effect of a large number of shares and a low exercise price for the warrants and options, there is the potential that a large number of the underlying shares may be sold on the open market at any given time, which could place downward pressure on the trading price of our common stock. Our Planned Registration of a Significant Amount of Our Outstanding Restricted Stock May Have a Negative Effect on the Trading Price of Our Stock. At March 15, 2004, investors in our common stock hold approximately 47.1 million shares of restricted stock, of which approximately 33.5 million shares relates to purchases of our common stock by Marr. and another 11.0 million shares relate to issuances pursuant to our convertible notes and debentures. Additionally, Calypte would be required to issue approximately 2.5 to 3.0 million additional shares of its common stock if the holders of currently outstanding convertible debentures elected to convert the remaining principal and accrued interest of their debentures. Calypte has committed to file a registration statement including essentially all of these shares during the second quarter of 2004. Although the Marr agreements require that Marr hold its shares for one year following their purchase, essentially all of the other shares would be freely tradable upon the effectiveness of the planned registration statement. If investors holding a significant number of freely tradable shares decided to sell them in a short period of time following the effectiveness of a registration statement, such sales could contribute to significant downward pressure on the trading price of our stock. Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market In Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock. Shares of our common stock are "penny stocks" as defined in the Exchange Act, which are traded in the Over-The-Counter Market on the OTC Bulletin Board. As a result, investors may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the common stock being registered hereby. In addition, the "penny stock" rules adopted by the Commission under the Exchange Act subject the sale of the shares of our common stock to certain regulations which impose sales practice requirements on broker/dealers. For example, brokers/dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Included in this documents are the following: o the bid and offer price quotes in and for the "penny stock", and the number of shares to which the quoted prices apply. o the brokerage firm's compensation for the trade. o the compensation received by the brokerage firm's sales person for the trade. In addition, the brokerage firm must send the investor: o a monthly account statement that gives an estimate of the value of each "penny stock" in the investor's account. o a written statement of the investor's financial situation and investment goals. Legal remedies, which may be available to you as an investor in "penny stocks", are as follows: o if "penny stock" is sold to you in violation of your rights listed above, or other federal or states 58 securities laws, you may be able to cancel your purchase and get your money back. o if the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. o if you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration. If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker/dealer, the broker/dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker/dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission's rules may limit the number of potential purchasers of the shares of our common stock. Resale restrictions on transferring "penny stocks" are sometimes imposed by some states, which may make transaction in our stock more difficult and may reduce the value of the investment. Various state securities laws pose restrictions on transferring "penny stocks" and as a result, investors in our common stock may have the ability to sell their shares of our common stock impaired. RISKS RELATED TO OUR BUSINESS We May Be Unsuccessful in Implementing Our Restructuring and Consolidation Plans as Anticipated. We are in the process of consolidating our manufacturing facilities in a single facility at our Rockville, Maryland location. If the consolidation does not proceed as planned, or if the FDA does not approve the facility changes on the timeline anticipated, the anticipated cost reductions as well as increased efficiencies may not occur. There can be no assurance that we will successfully complete the development and commercialization of our rapid tests currently under evaluation, or that our international marketing efforts with respect to these tests will result in significant additional sales. Additionally, there can be no assurance that we will be able to successfully negotiate government or private-sector contracts for mass-testing applications. Consequently, our current financial resources and financing commitments may be inadequate and we may have to seek additional financing, which may not be available on the timetable required or on acceptable terms, or we may have to curtail our operations, or both. In conjunction with our manufacturing consolidation, we will be unable to produce our HIV-1 Urine EIA product for sale in the US for approximately 9 months. We are building sufficient inventories of our HIV 1 Urine EIA test in Alameda to continue to satisfy expected customer orders during the transition period. We have considered historical sales levels and the length of time required to complete the consolidation and obtain FDA approval in determining the amount of inventory required to bridge the transition period. Demand could significantly exceed historical levels, and consolidation of operations or FDA approval could take longer than expected. If one or more of these events occur, then our transition inventory may not be sufficient to supply customer orders and we may lose business that we may find difficult, or impossible, to recover. Alternatively, demand could fall significantly below historical levels, in which case we will have built excess inventory that we may have to dispose of at additional cost, or at a loss. Our Customers May Not Be Able to Satisfy Their Contractual Obligations and We May Not Be Able to Deliver Our Products as a Result of the Impact of Conditions Such as Severe Acute Respiratory Syndrome ("SARS") or Other Such World Events. Our expected first quarter 2003 shipment of urine HIV screening tests to our distributor in the People's Republic Of China was delayed until the third quarter of 2003 in part as a result of the impact of the SARS outbreak in that country. Our distributor has reported that both potential patients and medical personnel were reluctant to visit or report for work at hospitals, clinics and other sites for fear of contracting or spreading SARS and, consequently, both diagnostic and therapeutic procedures were postponed. Additionally, governmentally-imposed facility 59 closures and quarantine restrictions disrupted the ability of the distributor to receive and distribute our HIV tests. This situation may recur. Our business model and future revenue forecasts call for a significant expansion of sales in the People's Republic of China as well as in Russia and Africa upon successful completion of the rapid product evaluation and regulatory approval. Should conditions beyond our control, such as SARS, redirect attention more than temporarily from the worldwide HIV/AIDS epidemic, our customers' ability to meet their contractual purchase obligations or our ability to supply product internationally for either evaluation or commercial use may prevent us from achieving the revenues we have projected. As a result, we may have to seek additional financing beyond that which we have projected, which may not be available on the timetable required or on acceptable terms that are not substantially dilutive to our stockholders, or we may have to curtail our operations, or both. Our Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing and Competitive Factors Over Which We Have Little or No Control. The factors listed below, some of which we cannot control, may cause our revenues and results of operations to fluctuate significantly: o actions taken by the FDA or foreign regulatory bodies relating to our existing products or products we are currently developing or seeking to develop; o the extent to which our current or proposed new products gain market acceptance; o the timing and size of distributor or joint venture purchases; o introductions of alternative means for testing for HIV by competitors; and o customer concerns about the stability of our business which could cause them to seek alternatives to our product. Our Research, Development and Commercialization Efforts May Not Succeed or Our Competitors May Develop and Commercialize More Effective or Successful Diagnostic Products. In order to remain competitive, we must regularly commit substantial resources to research and development and the commercialization of new products. The research and development process generally takes a significant amount of time from inception to commercial product launch. This process is conducted in various stages. During each stage there is a substantial risk that we will not achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial amounts of money. During 2003, we incurred $1.5 million in research and development expenses. We expect to incur even more significant costs from our research and development activities in the future. A primary focus of our efforts has been, and is expected to continue to be, rapid HIV tests, which are still under development. However, there can be no assurance that we will succeed in our research and development efforts with respect to rapid tests or other technologies or products. Successful products require significant development and investment, including testing, to demonstrate their cost-effectiveness or other benefits prior to commercialization. In addition, regulatory approval must be obtained before most products may be sold. Additional development efforts on these products will be required before any regulatory authority will review them. Regulatory authorities may not approve these products for commercial sale. In addition, even if a product is developed and all applicable regulatory approvals are obtained, there may be little or no market for the product. Accordingly, if we fail to develop commercially successful products, or if competitors develop more effective products or a greater number of successful new products, customers may decide to use products developed by our competitors. This would result in a loss of revenues and adversely affect our results of operations, cash flows and business. 60 We Have Limited Experience Selling and Marketing Our HIV-1 Urine ELISA Tests and No Experience Marketing a Rapid Test. Our urine-based products incorporate a unique method of determining the presence of HIV antibodies and we have limited experience marketing and selling them either domestically or internationally. Our company's success depends upon alliances with third-party international distributors and joint venture partners and upon the ability of domestic distribution partners to penetrate expanded markets. There can be no assurance that: o our international distributors and joint ventures will successfully market our products; o our domestic selling efforts will be effective; o we will obtain any expanded degree of market acceptance among physicians, patients or health care payors; or others in the medical or public health community which are essential for expanded market acceptance of the products; or o if our relationships with distributors terminate, we will be able to establish relationships with other distributors on satisfactory terms, if at all. We have had FDA approval to market our current urine HIV-1 screening and supplemental tests in the United States and have been marketing these products since 1998. We have not yet introduced either an HIV-2 product or a rapid point of care test, both of which are desired in many areas of the world. Further, we have not achieved significant market penetration with our current ELISA tests within domestic or international markets. A disruption in our distribution, sales or marketing network could reduce our sales revenues and cause us to either cease operations or expend more resources on market penetration efforts than are available to us without affecting other parts of our business. Our Distribution and Sales Network for U.S. Hospitals, and Public and Private Health Markets Has Thus Far Failed to Yield Significant Sales and Revenues. Domestic health agencies are a fragmented marketplace with many small outlets which makes achieving market acceptance difficult. Because of our limited financial resources, we are not actively attempting to penetrate independent public and private health markets. We have terminated our direct sales force and may consider consolidating our US sales effort under a single distributor. The role of the new distributor would be to manage the current domestic sales of our urine EIA screening test in the life insurance reference laboratory market and the sales of our serum Western Blot supplemental tests and, to a lesser extent, to develop incremental business opportunities for our current products in other domestic markets. We view sales in these other domestic markets as a supplemental revenue source rather than a major contributor to our anticipated future revenue. We Currently Depend Upon the Viability of Three Primary Products -- Our HIV-1 Urine-Based Screening Test and Our Urine and Blood Based Supplemental Tests. Our HIV-1 urine-based screening test and urine and blood-based supplemental tests are our current products. Our sales of these products for the year ended December 31, 2003 decreased by 5% compared to the comparable period in 2002. If we cannot profitably introduce new products on a timely basis and if these products and our screening and supplemental tests fail to achieve market acceptance or generate significant revenues, we may have to cease operations. We May Not be Able to Successfully Develop and Market New Products That We Plan to Introduce. We plan to develop other urine-based diagnostic products including rapid HIV-1/2 screening tests, tests for other infectious diseases or health conditions and a serum-based rapid HIV-1/2 screening test. There are numerous developmental and regulatory issues that may preclude the introduction of these products into commercial sale. If we are unable to demonstrate the feasibility of these products, successfully transfer the technology for commercial-scale manufacturing to either internal, joint venture or outsourced manufacturers or meet regulatory requirements or resolve potential patent licensing requirements with respect to their marketing, we may have to 61 abandon them and alter our business plan. Such modifications to our business plan will likely delay achievement of sustainable cash flow from product sales and profitability. As a result, we may have to seek additional financing, which may not be available on the timetable required or on acceptable terms, or we may have to curtail our operations, or both. A Market for Our Products May Not Develop. Our future success will depend, in part, on the market acceptance, and the timing of such acceptance, of new products such as our developmental stage rapid HIV tests and other new products or technologies that may be developed or acquired. To achieve market acceptance, we must make substantial marketing efforts and spend significant funds to inform potential customers and the public of the perceived benefits of these products. We currently have limited evidence on which to evaluate the market reaction to products that may be developed, and there can be no assurance that any products will obtain market acceptance and fill the market need that is perceived to exist. Our Success Depends on Our Ability to Protect Our Proprietary Technology. The diagnostics test industry places considerable importance on obtaining patent, trademark, and trade secret protection, as well as other intellectual property rights, for new technologies, products and processes. Our success depends, in part, on our ability to develop and maintain a strong intellectual property portfolio or obtain licenses to patents for products and technologies both in the United States and in other countries. As appropriate, we intend to file patent applications and obtain patent protection for our proprietary technology. These patent applications and patents will cover, as applicable, compositions of matter for our products, methods of making those products, methods of using those products, and apparatus relating to the use or manufacture of those products. We will also rely on trade secrets, know-how, and continuing technological advancements to protect our proprietary technology. We have entered, and will continue to enter, into confidentiality agreements with our employees, consultants, advisors and collaborators. However, these parties may not honor these agreements and we may not be able to successfully protect our rights to unpatented trade secrets and know-how. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. Many of our employees, including scientific and management personnel, were previously employed by competing companies. Although we encourage and expect all of our employees to abide by any confidentiality agreement with a prior employer, competing companies may allege trade secret violations and similar claims against us. We may collaborate with universities and governmental research organizations which, as a result, may acquire part of the rights to any inventions or technical information derived from collaboration with them. To facilitate development and commercialization of a proprietary technology base, we may need to obtain licenses to patents or other proprietary rights from other parties. Obtaining and maintaining such licenses may require the payment of substantial amounts. In addition, if we are unable to obtain these types of licenses, our product development and commercialization efforts may be delayed or precluded. We may incur substantial costs and be required to expend substantial resources in asserting or protecting our intellectual property rights, or in defending suits against us related to intellectual property rights. Disputes regarding intellectual property rights could substantially delay product development or commercialization activities. Disputes regarding intellectual property rights might include state, federal or foreign court litigation as well as patent interference, patent reexamination, patent reissue, or trademark opposition proceedings in the United States Patent and Trademark Office. Opposition or revocation proceedings could be instituted in a foreign patent office. An adverse decision in any proceeding regarding intellectual property rights could result in the loss or limitation of our rights to a patent, an invention or trademark. 62 We are Dependent Upon Patents, Licenses and Other Proprietary Rights From Third Parties. We currently have the right to use patent and proprietary rights which are material to the manufacture and sale of our HIV-1 urine-based screening test under licensing agreements with New York University, Cambridge Biotech Corporation and the Texas A&M University System. We also have the right to use patent and proprietary rights material to the manufacture and sale of our HIV-1 serum- and urine-based supplemental tests under a licensing agreement with National Institutes of Health. We will require license agreements from certain of these parties or other patent holders for technologies used in our rapid tests and other potential new products. As of December 31, 2003 we had accrued an aggregate of approximately $409,000 in past due royalty obligations to our patent licensors. In the event our financial condition inhibits our ability to pay royalty payments due under our license agreements, our rights to use those licenses could be jeopardized in the event of a default in payment of royalties. Specifically, during the 2002 and 2003 calendar years, revenues subject to the New York University, Cambridge Biotech and Texas A&M license agreements were $1.5 million and $2.0 million, respectively, and revenues subject to the National Institutes of Health agreement were $2.0 million and $1.3 million in calendar 2002 and 2003, respectively. The loss of any of the foregoing licenses could have a materially adverse effect on our ability to continue to produce our products since the license agreements provide necessary proprietary processes or components for the manufacture of our products. The Sales Potential for Our Rapid Test Products Will be Affected by Our Ability to Obtain Certain Licenses. There are two primary factors that will affect the specific countries in which we will be able to sell our rapid HIV tests and therefore the overall sales potential of the tests. One factor is whether we can arrange a sublicense or distribution agreement related to patents for detection of the HIV-2 virus. HIV-2 is a type of the HIV virus estimated to represent a small fraction of the known HIV cases worldwide. Nevertheless, HIV-2 is considered to be an important component in the testing regimen for HIV in many markets. Access to a license for one or more HIV-2 patents may be necessary to sell HIV-2 tests in countries where such patents are in force, or to manufacture in countries where such patents are in force and then sell into non-patent markets. Another factor that may affect the specific countries in which we will be able to sell our rapid HIV-1 or HIV-2 tests, and therefore the overall sales potential, concerns whether we can arrange a sublicense or distribution agreement related to any patents which claim lateral flow assay methods and devices covering the our rapid HIV tests or their use. Our developmental stage tests are lateral flow assay devices that test for specific antibodies or other substances. There are numerous patents in the United States and other countries which claim lateral flow assay methods and devices. Some of these patents may broadly cover the technology used in our rapid test products and are in force in the United States and other countries. We may not be able to make or sell our rapid test products in countries where these patents are in force. In the event that it is determined that a license is required and it is not possible to negotiate a license agreement under a necessary patent, our ability to manufacture and sell our rapid products could be limited. In such case, we may be able to modify our rapid tests such that a license would not be necessary. However, this alternative could delay or limit our ability to sell our rapid test products, which would adversely affect our results of operations, cash flows and business. 63 We Rely on Sole Source Suppliers that We Cannot Quickly Replace for Certain Components Critical to the Manufacture of Our Products. Among the critical items we purchase from qualified sole source suppliers are various conjugates, fetal bovine serum, and HIV-positive and HIV-negative urine samples. Any delay or interruption in the supply of these or other sole source components could have a material adverse effect on us by significantly impairing our ability to manufacture products in sufficient quantities, particularly as we increase our manufacturing activities in support of commercial sales. In addition, if our financial condition reduces our ability to pay for critical components on a timely basis, our suppliers may delay or cease selling critical components to us, which could also impair our ability to manufacture. We typically do not have long-term supply agreements with these suppliers, instead using purchase orders to arrange for our purchases of materials, so that suppliers could delay or decline to ship components until payment is made in advance or on a COD basis. We Have Limited Experience in Manufacturing Our Products and Little Experience in Manufacturing Our Products In Commercial Quantities. Our lack of working capital and turnover among our manufacturing personnel as a result of our wind-down and restart has resulted in material production difficulties in the past including problems involving: o scaling up production of new products; o developing market acceptance for new product; o production yields; o quality control and assurance; o raw material supply; and o shortages of qualified personnel. These difficulties that we have experienced, and may experience in the future could affect our ability to meet increases in demand should our products gain market acceptance and could impede the growth of our sales revenues. In an Effort to Scale Up Our Manufacturing Capacity Quickly, We May Engage Contract Manufacturers to Produce Some of Our Products, Including Our Rapid Tests Currently Under Development. Outsourcing some of our manufacturing processes to contract manufacturers may permit us to expand our manufacturing capacity more quickly, but it may also subject us to problems in such areas as: o lack of technical knowledge regarding regulated procedures; o uncertain or unreliable production yields; o maintaining quality control and assurance; o regulatory compliance, since most rapid test manufacturers do not produce products that are as stringently controlled as HIV diagnostics; and o misappropriation of intellectual property, particularly in foreign countries where patent protection is less stringent, and depending on the extent of manufacturing processes that are outsourced. The Success of Our Plans to Enter International Markets May Be Limited or Disrupted Due to Risks Related to International Trade and Marketing and the Capabilities of Our Distributors, Manufacturers and Joint Venture Partners. Following the completion of the development of our rapid tests, we anticipate that sales to international distributors and/or joint ventures will generate a significant portion of our revenues for the next several years. We believe that our urine-based tests can provide significant benefits in countries that do not have the facilities 64 or personnel to safely and effectively collect and test blood or other bodily fluid samples. However, sales to international customers accounted for only 4% of our revenue in our fiscal year ended December 31, 2002 and only 5% of our revenue during 2003. A majority of the companies with which we compete in the sale of HIV screening tests actively market their diagnostic products outside of the U.S. In addition, as regulatory requirements for HIV screening tests outside the United States are less demanding than those of the FDA, we compete with our EIA products against a much wider range of competitors that may not be FDA approved. Manufacturers from Japan, Canada, Europe, and Australia offer a number of HIV screening tests in those markets including HIV-1/2 tests, rapid tests and other non-EIA format tests, which are not approved for sale in the U.S. market. There can be no assurance that our products will compete effectively against these products in foreign markets, or that these competing products will not achieve FDA approval. The following risks may limit or disrupt our international sales: o the imposition of government controls (regulatory approval); o export license requirements; o political instability; o trade restrictions; o changes in tariffs; o difficulties in managing international operations (difficulty in establishing a relationship with a foreign distributor, joint venture partner, or contract manufacturer with the financial and logistical ability to maintain quality control of product); o the ability to secure licenses for intellectual property or technology that are necessary to manufacture or sell our products in the selected countries; o fluctuations in foreign currency exchanges rates; o the financial stability of our distributors; o the financial capabilities of potential customers in lesser-developed countries or, alternatively, our inability to obtain approvals which would enable such countries access to outside financing, such as the World Bank; o the ability of our distributors to successfully sell into their contractual market territory or to successfully cover their entire territory; o the possibility that a distributor may be unable to meet minimum contractual commitments; o establishing market awareness; and o external conditions such as regional conflicts or health crises resulting from SARS. Some of our distributors have limited international marketing experience. There can be no assurance that these distributors will be able to successfully market our products in foreign markets. Any such failure will delay or disrupt our plans to expand the Company's business. We Face Intense Competition in the Medical Diagnostic Products Market and Rapid Technological Advances by Competitors. Competition in our diagnostic market is intense and we expect it to increase. The marketplace where we sell our products is divided into two categories: (i) screening, and (ii) supplemental testing. Within the United States, our competitors for screening tests include a number of well-established manufacturers of HIV tests using blood samples, plus at least one system for the detection of HIV antibodies using oral fluid samples. In the supplemental testing category of the market, we offer the only FDA approved urine-based test as well as a blood-based test. One other company offers an FDA approved supplemental blood test. In addition to our urine and blood-based confirmation test, there is also an oral mucosal transidate (saliva) based supplemental test to complement the oral-fluid screening test. Many of our competitors have significantly greater financial, marketing and distribution resources than we do. Our competitors may succeed in developing or marketing 65 technologies and products that are more effective than ours, including several recently-FDA approved rapid blood tests. In addition, as the anticipated acceptance for urine testing grows, we may experience competition from companies in areas where intellectual property rights may not be as stringent as in the US. These developments could render our technologies or products obsolete or noncompetitive or otherwise affect our ability to increase or maintain our products' market share. Our Research and Development of HIV Urine Tests Involves the Controlled Use of Hazardous Materials. There can be no assurance that the Company's safety procedures for handling and disposing of hazardous materials such as azide will comply with applicable regulations. For example, azide, when present in high concentrations and not diluted with water, can have an explosive reaction. Azide is a chemical used as a preservative in our kits. In addition, we cannot eliminate the risk of accidental contamination or injury from these materials. We may be held liable for damages from such an accident and that liability could have a material adverse effect on the Company. We May Not Be Able to Retain Our Key Executives and Research and Development Personnel. As a small company, our success depends on the services of key employees in executive and research and development positions. The loss of the services of one or more of such employees could have a material adverse effect on us. As a Small Manufacturer of Medical Diagnostic Products, We Are Exposed to Product Liability and Recall Risks For Which Insurance Coverage is Expensive, Limited and Potentially Inadequate. We manufacture medical diagnostic products, which subjects us to risks of product liability claims or product recalls, particularly in the event of false positive or false negative reports. A product recall or a successful product liability claim or claims that exceed our insurance coverage could have a material adverse effect on us. We maintain a $10,000,000 claims made policy of product liability insurance. However, product liability insurance is expensive. In the future we may not be able to obtain coverage on acceptable terms, if at all. Moreover, our insurance coverage may not adequately protect us from liability that we incur in connection with clinical trials or sales of our products. Our Charter Documents May Inhibit a Takeover. Certain provisions of our Certificate of Incorporation and Bylaws could: o discourage potential acquisition proposals (i.e. shareholder rights plan also known as a "poison pill"); o delay or prevent a change in control of Calypte; o diminish stockholders' opportunities to participate in tender offers for our common stock, including tender offers at prices above the then-current market price; o inhibit increases in the market price of our common stock that could result from takeover attempts; or o grant to the Board of Directors the discretionary right to designate specific rights and preferences of preferred stock greater than those of our common stock. We Have Adopted a Stockholder Rights Plan That Has Certain Anti-takeover Effects. On December 15, 1998, the Board of Directors of Calypte declared a dividend distribution of one preferred share purchase right ("Right") for each outstanding share of common stock of the Company. The dividend was payable to the stockholders of record on January 5, 1999 with respect to each share of common stock issued thereafter until a subsequent "distribution date" defined in a Rights Agreement and, in certain circumstances, with respect to shares of common stock issued after the Distribution Date. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial 66 number of Rights being acquired. However, the Rights should not interfere with any tender offer, or merger, which is approved by the Company because the Rights do not become exercisable in the event of an offer or other acquisition exempted by Calypte's Board of Directors. Our Board of Directors has Certain Discretionary Rights With Respect to Our Preferred Shares That May Adversely Effect the Rights of our Common Stockholders. Our Board may, without shareholder approval, designate and issue our preferred stock in one or more series. Additionally, our Board may designate the rights and preferences of each series of preferred stock it designates which may be greater than the rights of our common stock. Potential effects on our common stock may include among other things: o restricting dividends; o dilution of voting power; o impairment of liquidation rights; and o delay or preventing a change in control of the Company. Additionally, following the 1:30 reverse split of our common stock that became effective in May 2003, we currently have over 500 million shares of common stock that could be issued without further stockholder approval. Although there are no current plans to issue such a large number of shares, the dilution resulting from such issuance could also adversely affect the rights of our current common stockholders. RISKS RELATED TO REGULATORY APPROVALS AND CLEARANCES The Time Needed to Obtain Regulatory Approvals and Respond to Changes in Regulatory Requirements Could Adversely Affect Our Business. Many of our proposed and existing products are subject to regulation by the FDA and other governmental or public health agencies. In particular, we are subject to strict governmental controls on the development, manufacture, labeling, distribution and marketing of our products. In addition, we are often required to obtain approval or registration with foreign governments or regulatory bodies before we can import and sell our products in foreign countries. The process of obtaining required approvals or clearances from governmental or public health agencies can involve lengthy and detailed laboratory testing, human clinical trials, sampling activities and other costly, time-consuming procedures. The submission of an application to the FDA or other regulatory authority does not guarantee that an approval or clearance to market a product will be received. Each authority may impose its own requirements and delay or refuse to grant approval or clearance, even though a product has been approved in another country or by another agency. Moreover, the approval or clearance process for a new product can be complex and lengthy. This time span increases our costs to develop new products as well as the risk that we will not succeed in introducing or selling them in the United States or other countries. Newly promulgated or changed regulations could also require us to undergo additional trials or procedures, or could make it impractical or impossible for us to market our products for certain uses, in certain markets, or at all. 67 Failure to Comply With FDA or Similar International Regulatory Bodies or Other Requirements May Require Us to Suspend Production of Our Products Which Could Result in a Loss of Revenues. We can manufacture and sell products, both in the United States and abroad, only if we comply with regulations of government agencies such as the FDA. We have implemented quality assurance and other systems that are intended to comply with applicable regulations in the United States. Although we believe that we have adequate processes in place to ensure compliance with these requirements, the FDA could force us to stop manufacturing our products if it concludes that we are out of compliance with applicable regulations. The FDA could also require us to recall products if we fail to comply with applicable regulations, which could force us to stop manufacturing such products. We will face similar risks when we establish our international manufacturing operations. See the Section entitled, "Government Regulations," for a further discussion of applicable regulatory requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2003, we face exposure to changes in the price of our common stock as it relates to the conversion price of the remaining aggregate of $892,000 principal of 10% convertible debentures issued during the first quarter 2003; the remaining $6,000 principal of a 12% convertible debenture issued in April 2003, and the remaining $60,000 principal of 12% convertible debentures issued in October 2003. The two 10% convertible debentures with aggregate remaining principal of $670,000 issued during January 2003 are convertible into shares of the Company's common stock at 80% of the average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $3.00. The 10% convertible debenture with a remaining principal of $222,000 issued during March 2003 is convertible into shares of the Company's common stock at 65% of the average of the 3 lowest trading prices for the 20 trading days preceding conversion, but not more than $2.10. The remaining $6,000 principal of the 12% convertible debenture issued in April 2003 is convertible into shares of the Company's common stock at 70% of the average of the three lowest trades for the 20 days preceding conversion, but not more than $1.20. The remaining aggregate of $60,000 principal of the 12% convertible debentures issued in October 2003 is convertible into shares of the Company's common stock at 85% of the average of the three lowest trades for the 20 days preceding conversion. Based on current market prices for its stock as of March 22, 2004, the Company would be required to issue approximately 2.5 to 3.0 million shares of its common stock if the holders elected to convert the remaining principal and accrued interest of their debentures at this time. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements are included on pages F-1 through F-36 of this Annual Report on Form 10-KSB. The following table presents summarized historical quarterly results of operations for each of the fiscal quarters in the Company's fiscal years ended December 31, 2003 and 2002. These quarterly results are unaudited, but, in the opinion of management, have been prepared on the same basis as the Company's audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The data should be read in conjunction with the Financial Statements and related notes included on pages F-1 through F-36 of this Annual Report on Form 10-KSB. The Company expects that its revenues and results of operations may fluctuate significantly from quarter to quarter and will depend on a number of factors, many of which are outside the Company's control. These factors include actions relating to regulatory matters, the extent to which the Company's products gain market acceptance, the timing and size of distributor purchases, introduction of alternative means for testing for HIV, competition, the timing and cost of new product introductions, and general economic conditions. 68 HISTORICAL QUARTERLY RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR ENDED DECEMBER 31, 2003 QUARTER QUARTER QUARTER QUARTER ============================================================== ======== ======== ======== ======== Total revenue $ 784 $ 749 $ 897 $ 1,037 Products costs 1,415 1,550 1,750 1,406 ----- ----- ----- ----- Gross profit (loss) (631) (801) (853) (369) Operating expenses 4,323 5,944 3,058 3,736 Interest income (expense), minority interest and other income (1,388) (1,179) (3,342) (788) Income taxes (2) -- -- -- Dividend on mandatorily redeemable Series A preferred stock (30) (30) -- -- ======== ======== ======== ======== Net loss attributable to common stockholders $ (6,374) $ (7,954) $ (7,253) $ (4,893) ======== ======== ======== ======== Net loss per share attributable to common stockholders* $ (1.11) $ (0.72) $ (0.11) $ (0.04) ======== ======== ======== ======== FIRST SECOND THIRD FOURTH YEAR ENDED DECEMBER 31, 2002 QUARTER QUARTER QUARTER QUARTER ============================================================== ======== ======== ======== ======== Total revenue $ 1,159 $ 1,209 $ 493 $ 809 Products costs 1,630 1,397 1,542 1,593 ----- ----- ----- ----- Gross profit (loss) (471) (188) (1,049) (784) Operating expenses 1,456 2,267 1,784 4,428 Interest income (expense) and other income (38) (2,477) 1,338 (1,010) Gain on settlement of debt 1,319 -- -- -- Income taxes (2) -- -- -- Dividend on mandatorily redeemable Series A preferred stock (30) (30) (30) (30) ======== ======== ======== ======== Net loss attributable to common stockholders $ (678) $ (4,962) $ (1,525) $ (6,252) ======== ======== ======== ======== Net loss per share attributable to common stockholders* $ (0.50) $ (2.55) $ (0.51) $ (1.54) ======== ======== ======== ========
- -------------- * The sum of earnings per share for the four quarters is different from the full year amount as a result of computing the quarterly and full year amounts on the weighted average number of common shares outstanding in the respective periods. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Calypte was contacted by the San Francisco District Office of the Securities and Exchange Commission ("Commission") on October 28, 2003 and advised of an informal inquiry being conducted by the enforcement staff of the Commission regarding the Company. The staff has requested, among other things, documents and information related to certain press releases issued by the Company. The Commission has advised the Company that the inquiry should not be construed as an indication by the Commission or its staff that any violation of law has occurred. The Company has voluntarily provided the information sought by the Commission and is cooperating with the Commission in connection with its informal inquiry. Independently, the Company's Audit Committee has investigated the matter and has retained outside counsel to assist in its investigation by reviewing the press releases and related information that were the subject matter of the Commission's informal inquiry letter. The Audit Committee has completed its investigation and reported the results of its investigation and associated recommendations to the Board of Directors. Counsel for the Audit Committee advised the Audit Committee and the Board of Directors that the results of their investigation, interviews and review of documents provided in response to the Commission's informal inquiry letter indicated no evidence of management malfeasance with respect to its inquiry. The Audit Committee, based upon its counsel's recommendations, 69 proposed that the Company implement certain practices and procedures, some of which represent a continuation or formalization of present practices. The recommendations and proposals of the Audit Committee that were approved by the Board of Directors include certain improvements in the Company's press release issuance process and investor relations and regulatory recordkeeping procedures. Additionally, the Board of Directors has directed management to implement the American Stock Exchange corporate governance standards (SR-AMEX-2003-65) approved by the Commission on December 1, 2003. The Company is in the process of implementing the directives of its Board of Directors regarding Corporate Governance and has submitted to the Board, and the Board has approved, certain policies and guidelines related to press releases and investor relations that reflect the recommendations of the Audit Committee. The interim financial statements contained in a Form 10-QSB are required to be reviewed under Statement of Auditing Standards No. 100 ("SAS 100") by an independent public accountant pursuant to Item 310(b) of the Commission's Regulation S-B. Calypte's former independent auditors, KPMG LLP ("KPMG"), informed the Company that they could not complete their quarterly review of the Company's interim financial statements contained in the Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003 or audit the Company's financial statements for its fiscal year ended December 31, 2003 until such time as the Company's Audit Committee had completed the investigation related to the Commission's informal inquiry letter, the same was reviewed by KPMG, and KPMG was satisfied that, in its opinion, an adequate investigation was conducted and appropriate conclusions were reached and actions taken. On December 23, 2003, the Company dismissed KPMG as independent auditors for the Company, effective immediately. The decision to dismiss KPMG was recommended by the Audit Committee of the Board of Directors. As of the date of KPMG's dismissal, KPMG had advised the Company that, in KPMG's opinion, the conditions necessary for KPMG to complete its review had not yet been satisfied. At the time of KPMG's dismissal, the Audit Committee had completed its investigation, had reported the results of its investigation and associated recommendations to the Board of Directors, and the Board of Directors had approved such recommendations. In addition, at such time, counsel for the Audit Committee had advised the Company that it had commenced to provide information to KPMG concerning the investigation conducted, the conclusions reached and the actions taken by the Company. On December 24, 2003, upon approval of the Audit Committee of the Board of Directors, the Company engaged Odenberg Ullakko Muranishi & Co. LLP ("OUM") to audit the consolidated financial statements of the Company for the years ended December 31, 2003 and 2002 and to review the interim financial statements of the Company contained in its Quarterly Report on Form 10-QSB/A (No. 1) for the quarterly period ended September 30, 2003. OUM completed its SAS 100 review associated with the Form 10-QSB/A (No.1) and the Company filed it on January 29, 2004. OUM has audited the Company's financial statements for the years ended December 31, 2003 and 2002 contained in this Annual Report on Form 10-KSB. ITEM 8A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Executive Chairman, Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and based on their evaluation, our Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the 70 Exchange Act is accumulated and communicated to our management, including our Executive Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Changes in internal controls. Not applicable. 71 PART III ITEM 9. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Following is a list of our Officers and Directors as of March 22, 2004
Director Name Age Principal Occupation Since - ---- --- ---------------------- -------- Anthony J. Cataldo 53 Executive Chairman, Calypte Biomedical Corporation 5/02 Richard D. Brounstein 54 Executive Vice President and Chief Financial Officer, Calypte - Biomedical Corporation John J. DiPietro 45 Chief Financial Officer, Chronix Biomedical, Inc. 10/99 Paul Freiman 69 President and Chief Executive Officer, Neurobiological 12/97 Technologies, Inc. J. Richard George 62 President and Chief Executive Officer, Calypte Biomedical - Corporation Julius R. Krevans, M.D. 79 Retired Chancellor Emeritus, Director of International Medical 3/95 Services University of California, San Francisco Zafar Randawa, Ph.D. 56 Director of the New Technology Evaluation Division, Otsuka 12/96 America Pharmaceutical
For additional information about the officers and directors of Calypte Biomedical Corporation, see the section captioned "Executive Officers and Directors of the Registrant" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders which the Company will file by April 29, 2004. ITEM 10. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION See the section captioned "Director Compensation" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders which the Company will file by April 29, 2004. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders which the Company will file by April 29, 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the section captioned "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders which the Company will file by April 29, 2004. 72 PART IV ITEM 13. EXHIBITS , AND REPORTS ON FORM 8-K (a) Certain Documents Filed as Part of the Form 10-KSB 1. The Company's Consolidated Financial Statements are included on pages F-1 through F-36 of this Annual Report on Form 10-KSB. 2. Exhibits 2.1 Asset Purchase Agreement, dated as of November 18, 1998, between Calypte and Cambridge; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated December 16, 1998. 3.1 Bylaws of the Registrant, as amended on January 19, 2004. incorporated by reference from an exhibit filed with the Company's Quarterly report on Form 10-QSB/A (No. 1) dated January 29, 2004. 3.2 Restated Certificate of Incorporation of Calypte Biomedical Corporation, a Delaware corporation, filed July 31, 1996; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 28, 1997. 3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Calypte Biomedical Corporation effective as of February 14, 2003 incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 26, 2003. 3.4 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Calypte Biomedical Corporation, effective as of May 27, 2003. 3.5 Certificate of Correction of Calypte Biomedical Corporation, effective as of May 28, 2003. 4.1 Rights Agreement between the Registrant and Chase Mellon Shareholders L.L.C. as Rights Agents dated December 15, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated December 16, 1998. 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers, as amended January 19, 2004. 10.2 1991 Incentive Stock Plan; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.3 1995 Director Option Plan, as amended effective May 20, 2003; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003. 10.4 1995 Employee Stock Purchase Plan, amended as of May 20, 2003; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003. 10.5 Lease Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated as of November 30, 1990; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.6 Second Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of May 14, 1991; incorporated by reference from exhibits filed with the 73 Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.7 Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of February 5, 1992; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.8 Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of April 15, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.9 Standard Form Lease 1255-1275 Harbor Bay Parkway Harbor Bay Business Park between Commercial Center Bank and the Registrant, dated as of August 22, 1992; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.12 Employment Agreement between the Registrant and Howard B. Urnovitz, dated as of January 25, 1995; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.15 License Agreement between the Registrant and New York University, dated as of August 13, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.16 First Amendment to License Agreement between the Registrant and New York University, dated as of January 11, 1995; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.17 Second Amendment to License Agreement between the Registrant and New York University, dated as of October 15, 1995; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.18 Third Amendment to License Agreement between the Registrant and New York University, dated as of January 31, 1996; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.19 Research Agreement between the Registrant and New York University, dated August 12, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.20 First Amendment to Research Agreement between the Registrant and New York University, dated as of January 11, 1995; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.21 Sublicense Agreement between the Registrant and Cambridge Biotech Corporation, dated as of March 31, 1992; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.22 Master Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as 74 amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.23 Sub-License Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.24 Agreement between the Registrant and Repligen Corporation, dated as of March 8, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.25 Non-Exclusive License Agreement between the Registrant and The Texas A&M University System, dated as of September 12, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.27 Distribution Agreement between the Registrant and Otsuka Pharmaceutical Co., Ltd., dated as of August 7, 1994; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.29 Distribution Agreement between the Registrant and Travenol Laboratories (Israel), Ltd., dated as of December 31, 1994; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.33 Form of Option Agreement for Stockholders of Pepgen Corporation, dated as of October 12, 1995; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.35 Equipment Lease Agreement between the Registrant and Phoenix Leasing, dated as of August 20, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.36 Equipment Lease Agreement between the Registrant and Meier Mitchell/GATX, dated as of August 20, 1993; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 10.37 Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated as of February 3, 1997; incorporated by reference from exhibits filed with the Company's Report on Form 10-K dated March 28, 1997. 10.39 Equipment Lease Agreement between the Registrant and MMC/GATX, dated September 30, 1996; incorporated by reference from exhibits filed with the Company's Report on Form 10-K dated March 28, 1997. 10.40 Joint Venture Agreement between the Registrant and Trinity Biotech plc.; incorporated by reference from exhibits filed with the Company's Report on Form 10-K dated March 28, 1997. 10.41 Second Addendum to Lease between the Registrant and Commercial Center Bank dated as of July 21, 1997; incorporated by reference from exhibits filed with the Company's Report on Form 10-K dated March 25, 1998. 10.42 Lease extension agreement between the Registrant and Charles A. Grant and Mark Greenberg, 75 dated December 9, 1997; incorporated by reference from exhibits filed with the Company's Report on Form 10-K dated March 25, 1998. 10.45 Lease extension agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated April 25, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 12, 1998. 10.46 Employment Agreement between the Registrant and William A. Boeger dated as of October 28, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 25, 1999. 10.47 Employment Agreement between the Registrant and John J. DiPietro dated as of October 28, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 25, 1999. 10.48 Guaranty made by Chih Ping Liu for the benefit of the Registrant dated September 30, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 25, 1999. 10.49 Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated December 21, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 15, 1999. 10.50 Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated February 26, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 15, 1999. 10.51 Non-Exclusive Patent and License Agreement between the Registrant and Public Health Service, dated June 30, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 15, 1999. 10.52 Distribution Agreement between the Registrant and Carter-Wallace, Inc., dated as of September 9,1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 15, 1999. 10.53 Letter Agreement between the Registrant and John J. DiPietro, dated as of September 17, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 15, 1999. 10.54 Consulting Agreement between the Registrant and John J. DiPietro, dated as of September 17, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 15, 1999. 10.55 Master Lease Agreement between Aquila Biopharmaceuticals, Inc., Landlord, and Biomerieux Vitek, Inc., Tenant, dated as of October 22, 1996; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.56 First Amendment to Lease between Aquila Biopharmaceuticals, Inc. Landlord, and Biomerieux Vitek, Inc., Tenant, dated October 2, 1997; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.57 Sublease Agreement between Registrant and Cambridge Biotech Corporation, assignee of Biomerieux, Inc. dated as of December 17, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.58 Sublease Agreement between Registrant and Cambridge Biotech Corporation, sub-lessee of DynCorp, dated as of December 17, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.59 Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated October 12, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.60 Consulting Agreement between the Registrant and William A. Boeger dated as of October 18, 1999; 76 incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.61 Consulting Agreement between the Registrant and David Collins dated as of October 18, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.62 Employment Agreement between the Registrant and Nancy E. Katz, dated as of October 18, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.63 Letter of Intent re Modification of Distribution Agreement between Registrant and Otsuka Pharmaceutical Co., Ltd. dated as of December 10, 1998; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 30, 2000. 10.64 Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of November 15, 1999; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 12, 2000. 10.65 Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of January 30, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 12, 2000. 10.66 Restated Technology Rights Agreement between Registrant and Howard B. Urnovitz, Ph.D. dated as of March 1, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 12, 2000. 10.67 Technology Rights Agreement between Registrant and Chronix Biomedical dated as of March 1, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 12, 2000. 10.68 Exclusive Independent Contractor Agreement for Project Sentinel between Clinical Reference Laboratory, Inc. and Registrant dated as of January 21, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated May 12, 2000. 10.69 Distribution Agreement between the Registrant and American Edge Medical, dated as of May 1, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.70 Distribution Agreement between the Registrant and Biobras S.A., dated as of May 11, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.71^ Distribution Agreement between the Registrant and Beijing Hua Ai Science and Technology Development Co. Ltd, dated as of May 16, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.72 Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated as of May 24, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.73^ Fourth Amendment to the License Agreement between the Registrant and New York University, dated as of June 1, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.74 2000 Equity Incentive Plan, amended as of May 20, 2003; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-106389) dated June 23, 2003. 10.75 Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated June 26, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.76 Secured Promissory Note between the Registrant and Howard B. Urnovitz, dated June 30, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 10, 2000. 10.77 Temporary Distribution Agreement between the Registrant and American Edge Medical 77 Company effective August 1, 2000; incorporated by reference from an exhibit filed with the Company's Report on 10-Q dated November 7, 2000. 10.78 Extension of Consulting Agreement between Registrant and John DiPietro effective as of September 17, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 7, 2000. 10.79 Convertible Debentures and Warrants Purchase Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001. 10.80 Extension of Consulting Agreement between the Registrant and William A. Boeger dated as of October 19, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 5, 2001. 10.81 Second Amendment to Employment Agreement between the Registrant and Howard B. Urnovitz dated October 31, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 5, 2001. 10.82 Consulting Agreement between the Registrant and David Collins dated as of October 19, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 5, 2001. 10.83^ Agreement between the Registrant and Carter-Wallace, Inc. dated December 12, 2000; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 5, 2001. 10.84 Stock Purchase Warrant to purchase common stock dated January 24, 2001 issued to Townsbury Investments Limited; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as amended on February 9, 2001. 10.85 Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated November 2, 2000; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as amended on February 9, 2001. 10.86 Registration Rights Agreement between Calypte and Townsbury Investments Limited dated November 2, 2000; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as amended on February 9, 2001. 10.87 Escrow Agreement among Calypte, Townsbury Investments Limited and Epstein, Becker & Green, P.C. dated November 2, 2000; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as amended on February 9, 2001. 10.88 Amendment to Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated January 24, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as amended on February 9, 2001. 10.89 Agreement for Purchase and Sale of Preferred Stock of Pepgen Corporation between Registrant and Biotechnology Development Fund, L.P. and Biotechnology Fund II, L.P. dated April 17, 2001; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 14, 2001. 10.90 Consulting Agreement between the Registrant and David Collins dated as of October 19, 2001; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 11, 2002. 10.91 Third Addendum to Lease between the Registrant and Gee-Aspora LLC dated as of October 31, 78 2001; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 11, 2002. 10.92 Registration Rights Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001. 10.93 Escrow Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001. 10.94 Stock Purchase Warrant to purchase common stock issued to AMRO International, S.A. on January 24, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001. 10.95 6% Convertible Debenture in the principal amount of $550,000, due April 26, 2001, issued to AMRO International, S.A. ; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001 10.96 6% Convertible Debenture in the principal amount of $550,000, due June 11, 2001, issued to AMRO International, S.A. ; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-3 (File No. 333-58960) filed on April 13, 2001 10.97 Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated August 23, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-72268) filed on October 26, 2001. 10.98 Registration Rights Agreement between Calypte and Townsbury Investments Limited dated August 23, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-72268) filed on October 26, 2001. 10.99 Escrow Agreement among Calypte, Townsbury Investments Limited and New York Escrow Services, LLC dated August 23, 2001; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-72268) filed on October 26, 2001. 10.100 Stock Purchase Warrant to purchase Common Stock dated October 19, 2001 issued to Townsbury Investments Limited; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2 (File No. 333-72268) filed on October 26, 2001. 10.101 Securities Purchase Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.102 Registration Rights Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.103 Security Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.104 Form of Secured Convertible Debenture Securities Purchase Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.105 Class A Stock Purchase Warrant for 56,667 shares of Common Stock issued to Bristol Investment Fund, Ltd.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 79 10.106 Class B Stock Purchase Warrant for 400,000 shares of Common Stock issued to Bristol Investment Fund, Ltd.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.107 Stock Purchase Warrant for 283 shares of Common Stock issued to Alexander Dunham Capital Group, Inc.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.108 Stock Purchase Warrant for 2,550 shares of Common Stock issued to Bristol Capital, LLC. ; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated February 15, 2002. 10.109 Form of Common Stock Purchase Agreement between the Registrant and certain Purchasers dated November 13, 2001; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 11, 2002. 10.110 Form of Common Stock Purchase Agreement with certain trade creditors issued pursuant to a private placement completed on February 12, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 10-K dated March 11, 2002. 10.111 Form of Subscription Agreement and 8% Convertible Note; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated June 3, 2002. 10.112 Form of Subscription Agreement and 8% Convertible Note Issued July 17, 2002 by Registrant; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 14, 2002. 10.113 Employment Agreement between the Registrant and Anthony J. Cataldo dated May 10, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 14, 2002. 10.114 Amendment to Non-Exclusive Patent and License Agreement between Registrant and Public Health Service, dated April 5, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated August 14, 2002. 10.115 Investment Commitment Arrangement with Cataldo Investment Group; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated November 12, 2002. 10.116 Term Sheet for Mercator Momentum Fund LP and Form of Registration Rights Agreement; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated November 12, 2002. 10.117 Form of Subscription Agreement under Regulation S for Caledonia Corporate Group Ltd. and Careen Ltd.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated November 12, 2002 10.118 Bi-Coastal Consulting, Inc. Agreements; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated November 12, 2002. 10.119 Employment Agreement between the Registrant and Nancy E. Katz, dated October 31, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q dated November 14, 2002. 10.120 12% Convertible Debenture Agreement and related Warrant and Registration Rights Agreement dated as of October 22, 2002 between Registrant and Mercator Momentum Fund, L.P.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated December 10, 2002. 10.121 Distribution Agreement between the Registrant and Zhong Yang Pute Co. dated as of October 10, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 10-Q/A (No.3) dated February 4, 2003. 80 10.122 Amendment to Agreement with Mercator Momentum Fund dated as of December 23, 2002; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K/A dated January 21, 2003. 10.123 10% convertible Debenture and related Registration Rights Agreement dated as of January 14, 2003 between Registrant and Mercator Focus Fund, L.P.; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated January 21, 2003. 10.124 Distribution and Usage Memorandum of Understanding between Registrant and Safe Blood for Africa Foundation, dated as of December 10, 2002; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-2/A (No. 5) (File No. 333-84660) dated February 4, 2003. 10.125 Employment Agreement between Registrant and Richard D. Brounstein dated as of January 1, 2003; incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K dated March 26, 2003. 10.126 Letter Agreement between Registrant and Nancy E. Katz dated February 14, 2003; incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K dated March 26, 2003. 10.127 Letter Agreement between Registrant and Bristol Investment Fund, Ltd. dated February 28, 2003; incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K dated March 26, 2003. 10.128 2003 Non-Qualified Stock Option Plan; incorporated by reference from an exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-106387) dated June 23, 2003. 10.129 Consulting Agreement between Registrant and Junebug Enterprises effective as of April 23, 2003; incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB dated August 14, 2003. 10.130 Employment Agreement between Registrant and Jay Oyakawa, dated as of August 12, 2003; incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB dated August 14, 2003. 10.131 Separation Agreement, Mutual Release and Waiver of Claims between Registrant and Nancy E. Katz, effective as of June 27, 2003; incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB dated August 14, 2003. 10.132 Subscription Agreement between Registrant and Marr Technologies B.V. dated as of August 1, 2003 incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB dated August 14, 2003. 10.133 Subscription Agreement between the Company and Marr Technologies B.V. for 20,000,000 shares of Registrant's Common Stock dated August 28, 2003; incorporated by reference from an exhibit filed with the Company's Report on Form 8-K dated September 12, 2003. 10.134 Agreement for Commitment to Purchase Aggregate of $10,000,000 of 5% Promissory Notes between the Company and Marr Technologies B.V. dated November 13, 2003; incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB dated November 14, 2003. 10.135 Separation Agreement and Release between the Company and Jay Oyakawa dated January 19, 2004; incorporated by reference from an exhibit filed with the Company's Report on Form 10-QSB/A (No. 1) dated January 29, 2004. 10.136 Employment Agreement between the Company and J. Richard George effective as of January 20, 2004. 10.137 Lease Agreement between the Company and ARE-1500 East Gude LLC dated as of March 1, 2004 81 10.138 Amendment No. 1 to Agreement for Commitment to Purchase Aggregate of $10,000,000 of 5% Promissory Notes between the Company and Marr Technologies B.V. dated March 19, 2004 filed as an exhibit with the Company's Report on Form 8-K dated March 19, 2004. 10.139 Common Stock Purchase Warrant to Purchase 400,000 Shares of Common Stock between the Company and Boodle Hatfield dated March 19, 2004 filed as an exhibit with the Company's Report on Form 8-K dated March 19, 2004 16.1 Letter From KPMG to SEC regarding Registrant's change in accountants; incorporated by reference from an exhibit filed on the Company's Report on Form 8-K dated January 2, 2004 and amended January 9, 2004. 21.1 Subsidiaries of the Registrant; incorporated by reference from exhibits filed with the Company's Registration Statement on Form S-1 (File No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26, 1996. 23.1 Consent of Odenberg Ullakko Muranishi & Co. LLP, Independent Registered Public Accounting Firm. 24.1 Power of Attorney (see page S-1). 31.1 Certification of Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ----------- ^ Confidential treatment has been granted as to certain portions of this exhibit. (b) Reports on Form 8-K Form 8-K regarding Other Material Events, filed November 5, 2003 - Supplementing its October 17, 2003 press release regarding approval of its urine based HIV ELISA tests in the Republic of Kenya, with documents provided as attachments: o Company Press Release dated October 17, 2003 regarding approval of the Company's urine ELISA tests in Kenya o Letter of Intent from World Vision Africa dated September 16, 2003 o Letter of Approval from Kenyan Ministry of Health National Public Health Laboratory dated October 17, 2003 o Company Press Release dated November 3, 2003 announcing the filing of the 8-K and related documents and stating that the Company had no knowledge of any events or conditions that would account for the volatility in its stock price on November 3, 2003. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES See the section captioned "Principal Accountant Fees and Services" in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders which the Company will file by April 29, 2004. 82 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Calypte Biomedical Corporation: We have audited the accompanying consolidated balance sheets of Calypte Biomedical Corporation and its subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board. 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 audited by us present fairly, in all material respects, the financial position of Calypte Biomedical Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company has adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. As a result, the gain from settlement of debt in 2002 has been reclassified from an extraordinary to an ordinary gain. As described in Notes 1, 6 and 18, a financing agreement between the Company and its largest stockholder has been amended subsequent to December 31, 2003. Under the amended agreement the Company may borrow up to $15 million for general corporate purposes until May 31, 2004, in exchange for 5% promissory notes maturing one year after issuance. /s/ Odenberg Ullakko Muranishi & Co. LLP San Francisco, California March 19, 2004 F-2 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, --------------------------- 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 5,084 $ 147 Accounts receivable, net of allowance of $36 and $32 at December 31, 2003 and 369 327 2002, respectively Inventory 2,153 963 Prepaid expenses 872 163 Deferred offering costs, net of accumulated amortization of $333 and $213 at December 31, 2003 and 2002, respectively 14 662 Other current assets 63 15 ---------- ---------- Total current assets 8,555 2,277 Property and equipment, net 727 917 Other assets 235 103 ---------- ---------- $ 9,517 $ 3,297 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 4,322 $ 5,145 Notes and debentures payable, net of $90 and $2,638 discount at December 31, 2003 and 2002, respectively 868 2,181 Deferred revenue 500 500 ---------- ---------- Total current liabilities 5,690 7,826 Warrant liability - 356 Other long term liabilities 157 33 Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized at December 31, 2003 and 2002; 100,000 shares issued and outstanding at December 31, 2003 and 2002; aggregate redemption and liquidation value of $1,000 plus cumulative 2,696 2,576 dividends Minority interest in consolidated joint venture 57 - ---------- ---------- Total liabilities 8,600 10,791 ---------- ---------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued - - or outstanding Common stock, $0.03 par value; 800,000,000 and 200,000,000 shares authorized at December 31, 2003 and 2002; 136,300,885 and 5,058,484 shares issued and outstanding as of December 31, 2003 and 2002, respectively 4,089 152 Additional paid-in capital 124,699 93,804 Deferred compensation (7) - Accumulated deficit (127,864) (101,450) ---------- ---------- Total stockholders' equity (deficit) 917 (7,494) ---------- ---------- $ 9,517 $ 3,297 ========== ==========
See accompanying notes to consolidated financial statements. F-3 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, --------------------------- 2003 2002 ------------ ------------ Revenues: Product sales $ 3,467 $ 3,670 ---------- ---------- Operating expenses: Product costs 6,121 6,162 Research and development costs 1,544 929 Selling, general and administrative costs (non-cash of $6,648 and $3,243 in 2003 and 2002, respectively) 15,517 9,006 ---------- ---------- Total operating expenses 23,182 16,097 ---------- ---------- Loss from operations (19,715) (12,427) Interest expense, net (non-cash of $6,559 and $1,874 in 2003 and 2002, respectively) (6,969) (2,203) Gain on settlement of trade debt - 1,319 Minority interest in joint venture 90 - Other income, net 182 16 ---------- ---------- Loss before income taxes (26,412) (13,295) Income taxes 2 2 ---------- ---------- Net loss (26,414) (13,297) Less dividends on mandatorily redeemable Series A preferred stock (60) (120) ---------- ---------- Net loss attributable to common stockholders $(26,474) $(13,417) ========== ========== Net loss per share attributable to common stockholders (basic and diluted) $ (0.47) $ (5.18) ========== ========== Weighted average shares used to compute net loss per share attributable to common stockholders (basic and diluted) 55,903 2,591 ========== ==========
See accompanying notes to consolidated financial statements. F-4 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA)
Total Number of Common Additional Deferred Accumulated Stockholders' Common Shares Stock Paid-in Capital Compensation Deficit Equity (Deficit) ------------- ----- --------------- ------------ ------- ---------------- Balances at December 31, 2001 1,259,738 $ 38 $ 82,623 $ (8) $ (88,153) $ (5,500) Shares issued under the Employee Stock Purchase Plan 3,437 - 5 - - 5 Stock issued in lieu of cash to employees, vendors and consultants 450,494 13 1,320 - - 1,333 Shares issued under Equity Line agreements (including warrant exercise) 922,801 28 2,964 - - 2,992 Cost of issuance of common stock under Equity Line agreement - - (280) - - (280) Shares issued through private placement 266,667 8 392 - - 400 Costs for issuance of private placement 16,666 - (109) - - (109) Shares issued upon conversion of debentures, accrued interest and delayed registration penalties 489,540 15 389 - - 404 Shares issued upon exercise of warrants and options 1,649,141 50 1,865 - - 1,915 Fair value of warrants and beneficial conversion feature granted in conjunction with issuance of convertible debentures - - 3,626 - - 3,626 Amortization of deferred offering costs associated with convertible notes and debentures and equity line - - (953) - - (953) Write off of deferred offering costs upon conversion of notes and debentures - - (224) - - (224) Dividend requirements of mandatorily redeemable Series A preferred stock - - (120) - - (120) Compensation related to stock option grants - - 2,306 (75) - 2,231 Amortization of deferred compensation - - - 83 - 83 Net loss - - - - (13,297) (13,297) ---------- --------- ----------- ---------- ---------- ---------- Balances at December 31, 2002 5,058,484 $ 152 $ 93,804 $ - $ (101,450) $ (7,494) ========= ======= ======== ========== =========== ============
(Continued) F-5 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) YEARS ENDED DECEMBER 31, 2002 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA)
Total Number of Common Additional Deferred Accumulated Stockholders' Common Shares Stock Paid-in Capital Compensation Deficit Equity (Deficit) ------------- ----- --------------- ------------ ------- ---------------- Balances at December 31, 2002 5,058,484 $ 152 $ 93,804 $ - $ (101,450) $ (7,494) Shares issued under the Employee Stock Purchase Plan 18,192 - 4 - - 4 Stock issued in lieu of cash to employees, vendors and consultants 6,374,523 183 3,716 - - 3,899 Shares issued through private placement 28,333,333 850 11,650 - - 12,500 Shares issued upon conversion of debentures, accrued interest and delayed registration penalties 83,067,064 2,492 5,902 - - 8,394 Shares issued upon exercise of warrants and options 13,418,738 411 4,029 - - 4,440 Costs for issuance of stock - - (677) - - (677) Fair value of warrants and beneficial conversion feature granted in conjunction with issuance of convertible debentures - - 2,287 - - 2,287 Repurchase of beneficial conversion feature - - (128) - - (128) Dividend requirements of mandatorily redeemable Series A preferred stock - - (60) - - (60) Compensation related to stock option grants - - 4,136 (10) - 4,126 Amortization of deferred compensation - - - 3 - 3 Shares issued to acquire intellectual property 30,561 1 36 - - 37 Net loss - - - - (26,414) (26,414) ---------- --------- ----------- ---------- ---------- ---------- Balances at December 31, 2003 136,300,885 $ 4,089 $ 124,699 $ ( 7) $ (127,864) $ 917 =========== ========= ========= ============ ========== ==========
See accompanying notes to consolidated financial statements. F-6 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, --------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $(26,414) $(13,297) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 567 512 Amortization of deferred compensation 3 83 Non-cash interest expense attributable to: Amortization of debenture discounts and charge for beneficial conversion feature 4,835 1,187 Amortization of deferred offering costs 997 214 Liquidated damages due to delayed registration of stock underlying convertible debentures 540 546 Dividends on mandatorily redeemable Series A preferred stock 60 - Non-cash loss (gain) on settlement of trade debt 54 (1,319) Fair market value of common stock warrants, options and bonuses granted 7,082 2,952 Gain on repurchase of beneficial conversion feature (128) - Warrant liability adjustment (275) (69) Loss on sale of equipment 55 - Minority interest in joint venture 57 Changes in operating assets and liabilities: Accounts receivable (41) (2) Inventory (1,190) 166 Prepaid expenses and other current assets (299) 127 Deferred offering costs and other assets 19 25 Accounts payable and accrued expenses 502 238 Other long-term liabilities 129 (28) ---------- ---------- Net cash used in operating activities (13,447) (8,665) ---------- ---------- Cash flows from investing activities: Acquisition of intellectual property (113) - Purchase of equipment (433) (242) ---------- ---------- Net cash used in investing activities (546) (242) ---------- ---------- Cash flows from financing activities: Proceeds from sale of stock 16,994 5,311 Expenses related to sale of stock (678) (444) Net proceeds from issuance of notes and debentures 3,353 3,980 Repayment of notes and debentures (735) (42) Principal payments on capital lease obligations (4) (38) ---------- ---------- Net cash provided by financing activities 18,930 8,767 ---------- ---------- Net increase (decrease) in cash and cash equivalents 4,937 (140) Cash and cash equivalents at beginning of period 147 287 ---------- ---------- Cash and cash equivalents at end of period $ 5,084 $ 147 ========== ==========
(Continued) F-7
Year Ended December 31, ---------------------- 2003 2002 -------- ------- Supplemental disclosure of cash flow activities: Cash paid for interest $ 37 $ 73 Cash paid for income taxes 2 2 Supplemental disclosure of non-cash activities: Dividend on mandatorily redeemable Series A preferred stock 60 120 Common stock grants 435 612 Conversion of notes and debentures payable and accrued interest to common stock 8,488 408 Fair market value of warrants issued in conjunction with debenture 81 900 Beneficial conversion feature, net of write off upon conversion 2,287 3,452 Accrued interest converted to note payable 148 -
See accompanying notes to consolidated financial statements. F-8 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (1) THE COMPANY Calypte Biomedical Corporation (the "Company") develops, manufactures and markets urine-based screening and supplemental tests for the detection of antibodies to the Human Immunodeficiency Virus, Type-1 ("HIV-1"), the cause of Acquired Immunodeficiency Syndrome ("AIDS"). The Company's tests include its screening enzyme immunoassay (EIA) and supplemental Western Blot tests, the only two FDA-licensed HIV-1 antibody tests that can be used on urine samples. The Company believes that accurate, non-invasive urine-based testing methods for HIV and other chronic diseases make important contributions to public health by helping to foster an environment in which testing may be done safely, economically, and painlessly. The Company also manufactures and markets an FDA-licensed serum-based supplemental test for detecting HIV-1 antibodies in serum. In December 1998, Calypte acquired from Cambridge Biotech Corporation certain assets primarily relating to the manufacture of its HIV-1 urine and serum Western Blot products. The Company's revenues are currently generated from the sale of its EIA and its urine- and serum-based Western Blot supplemental tests, together referred to as its "ELISA tests". The ELISA tests are manufactured in a format that makes them most suitable for high-volume laboratory settings. In November 2003, the Company filed an Investigational Device Exemption ("IDE") with the FDA announcing its intent to develop a rapid serum-based screening test that provides a test result in less than twenty minutes and which is more suitable for point-of care applications, particularly in international venues. The Company is currently developing both serum- and urine-based rapid screening tests and anticipates that the primary source of its future revenues will be from sales of its rapid products, both internationally and domestically. Calypte commenced operations in 1989 and was incorporated as a Delaware corporation in June 1996, concurrent with the initial public offering of its stock. On June 1, 1998, the Company ceased being a development stage enterprise when it announced that the FDA had approved its urine HIV-1 Western Blot test. That test is used on samples that are repeatedly reactive in the Company's HIV-1 urine antibody screening test. The supplemental test completed the only available urine-based HIV-1 test method. Calypte is headquartered in Alameda, California and manufactures its HIV-1 screening test there. The Company manufactures its urine and serum HIV-1 Western Blot supplemental tests at its facilities in Rockville, Maryland. At December 31, 2003, both the Alameda and Rockville manufacturing facilities were FDA approved. Calypte and its distributors market its ELISA tests in approximately half a dozen countries worldwide. The Company's marketing strategy is to use distributors, focused direct selling and joint-venture marketing partners to penetrate targeted domestic and international markets. We are currently selling internationally primarily in the People's Republic of China and Brazil. The Company incurred net losses attributable to common stockholders of $26.5 million and $13.4 million in 2003 and 2002, respectively. The accumulated deficit at December 31, 2003 was $127.8 million. As described more completely in Note 18, since December 31, 2003, the Company has amended a financing arrangement that management believes will provide adequate funds to sustain operations at expected levels at least through 2004. To the extent that the Company issues notes under this financing arrangement, however, it must repay those notes at their maturity dates during the first half of 2005. The Company must achieve profitability and sustainable cash flows for its business model to succeed. If sufficient funds are not available from the Company's operations to repay the promissory notes when due, however, the Company may need to arrange additional financing, attempt to extend or otherwise modify the promissory notes or make other arrangements. There can be no assurance that additional financing would be available, or it if is available, that it would be on acceptable terms. The Company's future liquidity and capital requirements will depend on numerous factors, including successful completion of the development of its new rapid tests, acquisition and protection of intellectual property rights, costs of developing its new products, ability to transfer technology, set up manufacturing and obtain regulatory approvals of its new rapid tests, market acceptance of all its products, existence of competing products in its current and anticipated markets, actions by the FDA and other international regulatory bodies, and its ability to raise additional capital in a timely manner. Management expects to be able to raise additional capital; however, the Company may not be able to obtain additional financing on acceptable terms, or at all. STOCK SPLIT On May 20, 2003, the Company's shareholders approved a 1:30 reverse stock split, which became effective on May 28, 2003. The stated par value of the common shares was changed to $0.03 from $0.001 per share. The number of authorized shares of common stock remained at 800 million. All share and per share amounts presented reflect the stock split. F-9 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (2) SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the results of operations of the Company, its wholly-owned subsidiary, Calypte, Inc. and its 51% owned joint venture in China, Beijing Calypte Biomedical Technology Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents consist of investments in money market accounts. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts on a specific identification basis when, due to passage of time or receipt of information, there is appropriate evidence of a customer's inability to make the required payments. Inventories Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Machinery and equipment, furniture and fixtures, and computer equipment are depreciated using the straight line method over the estimated useful lives of the assets, generally as follows: Computer equipment 3 years Machinery and equipment 5 years Furniture and fixtures 5 years Leasehold improvements 3-7 years Leasehold improvements and equipment under capital leases are amortized or depreciated over the shorter of the remaining lease term or the useful life of the equipment or improvement. Long-Lived Assets Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Fair Value of Financial Instruments Financial assets and short-term liabilities, with the exception of the convertible notes and debentures, have carrying values which approximate their fair values for all periods presented. The carrying amounts of cash equivalents approximate fair value because of their short-term nature and because such amounts are invested in accounts earning market rates of interest. The face amount of the convertible notes and debentures approximate fair value and are offset by the calculated value of the beneficial conversion feature embedded in the respective notes or debentures. F-10 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 Revenue Recognition The Company records revenues only upon the occurrence of all of the following conditions: o The Company has received a binding purchase order or similar commitment from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale). o The purchase price has been fixed, based on the terms of the purchase order. o The Company has delivered the product from one of its manufacturing plants to a common carrier acceptable to the purchaser. The Company's customary shipping terms are FOB shipping point. Because of the need for controlled conditions during shipment, the Company suggests, but leaves to the purchaser's discretion, acquiring insurance for the value of the shipment. If the purchaser elects to insure the shipment, the insurance is at the purchaser's expense. o The Company deems the collection of the amount invoiced probable. The Company currently deals with a limited number of customers or distributors, with most of whom it has had a relationship for a number of years. To eliminate the credit risk associated with international distributors with whom the Company has had little or no experience, the Company requires prepayment of the order or a letter of credit before shipment. The Company does not permit product returns. The Company's products must be maintained under rigidly controlled conditions that it cannot control after the product has been shipped to the customer. The Company provides no price protection. With the exception of sales to one distributor through October 2003, the Company recognizes revenue upon shipment of product. In the case of that distributor, the distributor held the Company's inventory on consignment and reported monthly its usage of the products. The Company recorded revenue on sales to this distributor based on the distributor's reported usage. In October, 2003, this distributor purchased from the Company the inventory on hand and switched to a standard contractual relationship; thereafter, the Company recognized revenue upon shipment. Deferred Revenue Pursuant to a 1991 License and Supply Agreement, a Japanese distributor made a payment of $500,000 to Calypte representing an advance creditable against royalties and other payments to be paid by the distributor to Calypte under the terms of the Agreement. In a 1994 Distribution Agreement between Calypte and the distributor, the distributor agreed to waive its right to have the advance payment credited to subsequent payments it might owe Calypte under the License and Supply Agreement or the Distribution Agreement in return for a 50% discount on products supplied by Calypte to the distributor, until such time as the distributor has received cumulative discounts totaling $500,000. Pursuant to that agreement, Calypte recorded the $500,000 payment as deferred revenue that was to be recognized as product was sold at the stipulated 50% discount. As of this date, Calypte has sold no product to the distributor under the terms of the Distribution Agreement and the deferred revenue balance remains unchanged. The Company's current sales practices do not require the deferral of revenues and no entries to record deferred revenue have been made during the period included in the accompanying consolidated financial statements. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability approach for the financial reporting of income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, establishes a fair-value method of accounting for stock options and similar equity instruments. The fair-value method requires that compensation cost be measured on the F-11 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 value of the award at the grant date, and recognized over the service period. SFAS No. 123 as amended allows companies to either account for stock-based compensation to employees under the provisions of SFAS No. 123 as amended or under the provisions of Accounting Principles Board (APB) Opinion No. 25 and its related interpretations. The Company accounts for its stock-based compensation to employees in accordance with the provisions of APB Opinion No. 25. The Company has recorded deferred compensation for the difference, if any, between the exercise price and the deemed fair market value of the common stock for financial reporting purposes of stock options granted to employees. The compensation expense related to such grants is amortized over the vesting period of the related stock options on a straight-line basis. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Had the Company determined compensation cost based on the fair value at the grant date for its employee stock options and purchase rights under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below for the years ended December 31:
2003 2002 =================== =================== (in thousands) (in thousands) Net loss attributable to common stockholders, as reported $ (26,474) $ (13,417) Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects 1,082 131 Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (2,794) (355) ------- ------- Pro forma net loss attributable to common stockholders $ (28,186) $ (13,641) ======= ======= Net loss per share attributable to common stockholders: As reported $ (0.47) $ (5.18) Pro forma $ (0.50) $ (5.26)
Net Loss Per Share Attributable to Common Stockholders Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per common share is similar to the computation of basic net loss per share attributable to common stockholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants to the extent they are dilutive using the treasury stock method. The weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders were the same for the two years ended December 31, 2003 and 2002. Options and warrants for 707,783 shares and 717,970 shares were excluded from the computation of loss per share at December 31, 2003 and 2002, respectively, as their effect is anti-dilutive. The difference between net loss and net loss attributable to common stockholders relates to accrued dividends on the Company's mandatorily redeemable Series A preferred stock discussed in Note 10. Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts receivable. The Company has investment policies that limit investments to short-term, low-risk investments. Concentration of credit risk with respect to trade accounts receivable are limited due to the fact that the Company sells its products primarily to established distributors and laboratories and requires prepayment for certain orders where the relationship between the parties is not well-established. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 Risks and Uncertainties Calypte purchases certain raw materials and components used in manufacturing its products from a number of suppliers, but relies on single sources for certain other components. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. Any delay or interruption in the supply of these components could have a material adverse effect on the Company by significantly impairing its ability to manufacture products in sufficient quantities to meet commercial sales demand. Additionally, if the Company's financial condition reduces its ability to pay for critical components or to make royalty payments under its license agreements, suppliers may delay or cease selling critical components to it or its rights to use license agreements could be jeopardized, both of which could also impair its ability to manufacture. Comprehensive Loss The Company has no components of other comprehensive loss other than its net loss, and, accordingly, its comprehensive loss is equivalent to its net loss for all periods presented. Segment and Geographic Information SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" requires an enterprise to report segment information based on how management internally evaluates the operating performance of its business units (segments). The Company's operations are currently confined to a single business segment: the development and sale of HIV diagnostics. Substantially all of the Company's sales through 2003 have been to United States customers. Sales to international customers accounted for 5% and 4% of the Company's revenues in 2003 and 2002, respectively. Sales to two major domestic customers accounted for approximately 50% of total net sales for the year ended December 31, 2003. Sales to those customers accounted for approximately 36% and 14% of the Company's 2003 net sales and 24% and 11%, respectively, of the Company's net sales in 2002. The Company made no sales in 2003 to a customer who had accounted for approximately 17% of its net sales in 2002. Reclassifications Certain previously-reported amounts in the financial statements have been reclassified to conform to the current year presentation. Newly-Adopted Accounting Pronouncements In April 2002, the Financial Accounting Standards Board, ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires gains and losses from extinguishment of debt to be classified as an extraordinary item only if the criteria in APB No. 30 have been met. The Company adopted SFAS 145 in 2003 and as a result, the gain from settlement of debt in 2002 has been reclassified from an extraordinary gain to an ordinary gain. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002. This standard did not have a material impact on the Company's consolidated financial position or results of operations, however the Company has recognized exit costs associated with the closure of its Alameda, California manufacturing facility in accordance with the standard. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, many of which have been previously classified as equity or on the "mezzanine". The Company adopted this standard during the third quarter of 2003 and, accordingly, has classified its mandatorily redeemable Series A preferred stock as a long term liability for all periods presented. Additionally, effective with F-13 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 the adoption and on a prospective basis, the dividend on the mandatorily redeemable Series A preferred stock is classified as interest expense in the consolidated statement of operations. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies the financial accounting and reporting requirements, as were originally established in SFAS 133, for derivative instruments and hedging activities. SFAS 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. This statement is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, excluding certain implementation issues that have been effective prior to this date under SFAS 133. The Company's adoption of this statement has not had a material impact on our results of operations or financial condition. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. FIN 46 provides guidance on how to apply the controlling financial interest criteria in ARB 51 to variable interest entities ("VIE"). Given the complexity of FIN 46 and implementation issues after its original issuance, particularly with respect to its scope and application of the consolidation model, the FASB staff issued several FASB staff positions throughout 2003 to clarify the Board's intent on certain of the interpretation's provisions. In December 2003, the Board issued FIN 46R to address certain technical corrections and clarify the implementation issues that had arisen. In general, a VIE is subject to consolidation if it has (1) an insufficient amount of equity for the entity to carry on its principal operations without additional subordinated financial support provided by any parties, (2) a group of equity owners that are unable to make decisions about the entity's activities or (3) equity that does not absorb the entity's losses or receive the entity's benefits. Variable interest entities are to be evaluated for consolidation based on all contractual, ownership or other interests that expose their holders to the risks and rewards of the entity. These interests may include equity investments, loans, leases, derivatives, guarantees, service and management contracts and other instruments whose values change with changes in the VIE. Any of these interests may require its holder to consolidate the entity. The holder of a variable interest that receives the majority of the potential variability in gains or losses of the VIE is the VIE's primary beneficiary and is required to consolidate the VIE. FIN 46R became effective immediately for entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has determined that the adoption of the provisions of FIN 46 will not have an impact upon its financial condition or results of operations. (3) INVENTORY Inventory as of December 31, 2003 and 2002 consisted of the following (in thousands): 2003 2002 ---- ---- Raw materials $ 708 $ 197 Work-in-process 962 443 Finished goods (including consigned inventory of $101 at December 31, 2002) 483 323 ------- ------- Total Inventory $ 2,153 $ 963 ======= ======= F-14 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (4) PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2003 and 2002 consisted of the following (in thousands): 2003 2002 ---- ---- Computer equipment $ 424 $ 766 Machinery and equipment 3,582 3,344 Furniture and fixtures 289 276 Leasehold improvements 1,227 1,132 -------- --------- 5,522 5,518 Accumulated depreciation and amortization (4,795) (4,601) --------- --------- Property and equipment, net $ 727 $ 917 ========= ========= The Company recognized depreciation expense of $527,000 and $512,000 for the years ended December 2003 and 2002, respectively. Included in leasehold improvements is approximately $90,000 related to improvements in the Rockville, Maryland facility. The Company has committed approximately an additional $400,000 in 2004 to complete leasehold improvements at this facility. (5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses as of December 31, 2003 and 2002 consisted of the following (in thousands): 2003 2002 ---- ---- Trade accounts payable $ 2,189 $ 3,462 Accrued royalties 582 338 Accrued salary and vacation pay 125 240 Accrued interest (including non-cash liquidated damages related to delayed registration of stock underlying convertible and other securities of $271 and $546 in 2003 and 2002, respectively) 308 789 Other 1,118 316 -------- -------- Total accounts payable and accrued expenses $ 4,322 $ 5,145 ======== ======== (6) NOTES AND DEBENTURES PAYABLE The table below summarizes notes and debentures payable activity for the years ended December 31, 2003 and 2002 (in thousands).
Discount Net Balance Balance at Balance at 12/31/02 Additions Payments Conversions 12/31/03 12/31/03 12/31/03 -------- --------- -------- ----------- -------- -------- -------- 8% Convertible Notes $ 2,985 $ 107 $ - $ (3,092) $ - $ - $ - 8.5% Note - LHC Corporation 393 42 (435) - - - - 10% Convertible Note - BNC Bach 126 - - (126) - - - 10% Convertible Debentures - Mercator - 1,950 - (1,058) 892 (36) 856 12% Convertible Debenture - Bristol Investment Fund, 465 - - (465) - - - Ltd. 12% Convertible Debenture - Mercator 850 1,750 (300) (2,234) 66 (54) 12 -------- -------- ------- --------- -------- ------ ------ Total $ 4,819 $ 3,849 $ (735) $ (6,975) $ 958 $ (90) $ 868 ======== ======== ======= ========= ======== ====== ======
F-15 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002
Discount Net Balance Balance at Balance at 12/31/01 Additions Payments Conversions 12/31/02 12/31/02 12/31/02 -------- --------- -------- ----------- -------- -------- -------- 8% Convertible Notes $ - $ 3,125 $ - $ (140) $ 2,985 $ (2,052) $ 933 8% Convertible Debentures - 200 - (200) - - - 8.5% Note - LHC Corporation 411 - (18) $ - 393 - 393 10% Convertible Note - BNC Bach - 150 (24) - 126 - 126 12% Convertible Debenture - Bristol Investment Fund, Ltd. - 525 - (60) 465 (273) 192 12% Convertible Debenture - Mercator Group, LLP - 850 - - 850 (313) 537 -------- -------- ------- --------- -------- -------- --------- Total current notes payable $ 411 $ 4,850 $ (42) $ (400) $ 4,819 $ (2,638) $ 2,181 ======== ======== ======= ========= ======== ======== =========
8% Convertible Notes Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes in the aggregate principal amount of $3.125 million in 2002 and an additional $107,000 in 2003. These notes have a 24 month term and are convertible into shares of the Company's common stock at the lesser of $3.00 or 70% of the average of the three lowest trades during the 30 day period preceding conversion and are convertible at any time prior to maturity. Calypte has received approximately $2.6 million in proceeds after deducting fees and costs associated with these notes. The note issued during 2003 represented accrued interest due on one of the previous notes. During 2003, various holders of the 8% convertible notes converted $3,092,000 face value plus accrued interest and liquidated damages resulting from delayed registration of the underlying common stock into approximately 45.7 million shares of the Company's common stock at conversion prices ranging from $1.014 to $0.077 per share. During 2002, various holders of the 8% convertible notes converted $140,000 face value plus accrued interest into approximately 0.3 million shares of the Company's common stock at a conversion price of $0.49 per share. The Company was required to file a registration statement for the shares underlying the convertible notes within 30 days of the closing date. The Company did not file a registration statement for those shares until July 8, 2003. As a result of the delayed registration, the Company was required to pay, in cash or stock, at the subscribers' option, liquidated damages in an amount equal to 2% of the note principal for each month of delay. Between July 2002 and December 31, 2003, the Company recognized an aggregate of approximately $768,000 as liquidated damages attributable to these notes, substantially all of which was recorded as non-cash interest expense. The shares underlying these agreements were included in the Company's S-2 registration statement filed with the SEC that became effective on July 18, 2003. F-16 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 The following table sets forth the investors who subscribed to the 8% convertible notes in 2003 and 2002:
Transaction Calypte Shares Investor Amount Date Closing Price Issued (000) (1) -------- ------ --------- ------------- ---------------- 8% CONVERTIBLE NOTES 2003 ---- Alpha Capital Aktiengesellshaft $ 107,000 5/9/03 $ 0.63 1,302.5 ========== ======== 2002 ---- Alpha Capital Aktiengesellshaft $ 500,000 5/24/02 $ 3.60 7,260.7 Stonestreet Limited Partnership 500,000 5/24/02 $ 3.60 7,075.7 Filter International Ltd. 150,000 5/24/02 $ 3.60 2,452.4 Camden International Ltd. 350,000 5/24/02 $ 3.60 5,279.1 Domino International Ltd. 150,000 5/24/02 $ 3.60 1,767.4 Thunderbird Global Corporation 75,000 5/24/02 $ 3.60 1,083.1 BNC Bach International Ltd. 200,000 5/24/02 $ 3.60 2,463.8 Excalibur Limited Partnership 200,000 5/24/02 $ 3.60 1,678.9 Standard Resources Ltd. 100,000 5/24/02 $ 3.60 1,542.5 SDS Capital International Ltd. 300,000 7/10/02 $ 10.20 4,062.1 Camden International Ltd. 100,000 7/10/02 $ 10.20 1,707.9 Excalibur Limited Partnership 250,000 7/24/02 $ 6.60 4,238.3 Stonestreet Limited Partnership 250,000 8/21/02 $ 3.90 4,042.2 ---------- -------- $3,125,000 44,654.1 ========== ========
(1) includes shares issued for accrued interest and liquidated damages as of December 31, 2003 8% Convertible Debentures In 2002, Calypte issued two (2) 8% convertible debentures in the aggregate face amount of $200,000 pursuant to Regulation S. One of these debentures was convertible into shares of the Company's common stock at a 20% discount to the average closing price for the five trading days prior to conversion, the other at a 30% discount, and each had a conversion floor of $3.00 per share. Both of these debentures have been converted into shares of Calypte's common stock. Calypte received cash of $180,000, net of fees, from the issuance of these two debentures. The Company agreed to use its best efforts to register the shares of common stock and provided cost free piggyback registration rights to the debenture holders. There were no defined penalties and/or time requirements imposed on Calypte with respect to filing and achieving the effectiveness of a registration statement for the underlying shares. The shares underlying these agreements were included in the Company's S-2 registration statement filed with the SEC that became effective on July 18, 2003. The following table lists the individual investors and transaction dates related to the issuance of the 8% convertible debentures:
Calypte Transaction Closing Shares 8% CONVERTIBLE DEBENTURES Amount Date Price Issued (1) ------------------------- ------ ---- ----- ---------- Su So $100,000 6/17/02 $4.20 36,667 Jason Arasheben $100,000 7/03/02 $8.10 15,826
(1) includes fee shares The Company determined that the above 8% convertible notes and 8% convertible debentures were issued with beneficial conversion features. The beneficial conversion features were recognized by allocating an amount equal to the intrinsic value of each feature to note or debenture discount to be amortized over the life of the note or debenture, subject to a limitation of the face amount of the respective note or debenture. Upon earlier conversion, the proportionate share of unamortized discount was charged to interest expense. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the note or debenture and the fair value of the Company's common stock into which the note or debenture was convertible, multiplied by the number of common shares into which the debenture was convertible. In the case of the 8% convertible notes, the beneficial conversion feature was generally limited by the face amount of the note. The beneficial conversion feature for each of the 8% convertible debentures was less than the face amount of the debenture, however, both debentures were converted soon after issuance. F-17 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 8.5% Note In August 2001, the Company executed a promissory note in the amount of $400,000 to the parent company of its then-largest stockholder. The note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001. In December 2001, the parties agreed to execute a new note in the amount of $411,000, representing the unpaid principal and accrued but unpaid interest on the previous note. The note required interest at 8.5% per annum and principal payments were due beginning in February 2002. In February 2002, the Company renegotiated the payment terms to require monthly principal payments of $17,500 in February and March 2002, increasing to $35,000 thereafter unless and until the Company secured at least $2 million in additional financing, excluding the $850,000 of 12% convertible debentures and warrants discussed below, at which time a $200,000 principal payment would be required. The Company made the payment required on February 28, 2002. In March 2002, the Company further renegotiated the repayment terms of this note, suspending any required principal or interest payments until 30 days after the Company's registration statement for the 12% convertible debentures described below, at which time the Company was required to make a $200,000 payment and to resume making monthly payments of $35,000 until the principal and accrued interest were repaid in full. On February 28, 2003, the Company and the investor executed a new note in the amount of $435,000, representing the unpaid principal and accrued but unpaid interest on the December 2001 note between the parties. The Company renegotiated the terms of the December 2001 note due to a lack of available funds and to avoid a default. The terms of the February 2003 note required monthly principal payments of $17,500 plus interest from March 2003 through May 2003, increasing to $35,000 monthly, plus interest, thereafter, until the Company secured at least $5,000,000 in additional financing, at which time the remaining outstanding balance became due and payable. The remaining balance of the note was repaid in September 2003 following the securing of financing. 10% Convertible Note On May 14, 2002, the Company issued, pursuant to Regulation S, a $150,000 10% convertible promissory note to BNC Bach International Ltd. ("BNC Bach"), a private investment fund that is a related party to Townsbury Investments Ltd. ("Townsbury"), the investor in a prior investment that provided the Company with financing pursuant to an equity line. The closing price for Calypte common stock on May 14, 2002 was $4.20. This note was originally convertible into shares of the Company's common stock at $1.50 per share and was due on the earlier of July 14, 2002 or the settlement date of Calypte's next drawdown under the equity line. On July 14, 2002, Calypte and BNC Bach agreed to extend the maturity date of the note from July 14, 2002 to December 31, 2002. The market price for Calypte common stock was $10.80 on July 14, 2002. In return for the extension of the maturity date, Calypte agreed to amend the conversion price of the note from $1.50 per share to the lesser of (a) $1.50 per share or (b) 60% of the lowest three closing bid prices of Calypte's common stock during the 22 business days prior to the date BNC Bach notifies Calypte of its election to convert the note. No accounting adjustments were required as a result of the extension of the note's maturity or the amendment of the conversion price. In December 2002, the Company repaid approximately $24,000 of the outstanding principal plus accrued interest from the proceeds of a draw down under its equity line with Townsbury. On January 15, 2003, the Company and BNC Bach agreed to extend the maturity date of the Note to March 17, 2003. On March 17, 2003, the Company and BNC Bach agreed to further extend the maturity date to April 4, 2003. On April 2, 2003, the Company and BNC Bach agreed to extend the maturity date of the Note to May 5, 2003. On April 30, 2003, the Company and BNC Bach amended the conversion price to eliminate a conversion price ceiling of $1.50 per share and to increase the discount applicable to the conversion price from 40% to 50%. In return for this modification of the conversion price, BNC Bach agreed to extend the maturity of the note until May 10, 2004. No accounting adjustments were required as a result of any of the extensions of the note's maturity. In September 2003, BNC Bach converted the remaining $126,000 face value plus accrued interest into approximately 2.2 million shares of the Company's common stock at a conversion price of $0.0612 per share. 10% Convertible Debentures-Mercator Focus Fund, Mercator Momentum Fund and Mercator Momentum Fund III On January 14, 2003, when the market price of the Company's stock was $1.92, the Company issued a $1,000,000 10% convertible debenture to Mercator Focus Fund, L.P. ("Focus Fund") pursuant to Regulation S and received net proceeds of $818,000 net of fees and expenses. $308,000 of the proceeds was used to repay the $300,000 October 2002 12% convertible debenture and accrued interest issued to Mercator Momentum Fund L.P. ("MMF"). The debenture is convertible into the Company's common stock at 80% of the average of the three lowest trades for the 20 days preceding conversion, but not more than $3.00. Under the terms of the debenture agreement, the Company agreed to file a registration statement for the shares of common stock underlying the debenture within 30 days of the closing date and use its reasonable best commercial efforts to cause the registration statement to be declared effective within 120 days of the closing date. On February 14, 2003, when the price of the Company's common stock was $2.01, the Company and Focus Fund agreed to extend the registration period until April 4, 2003. On March 31, 2003, when the market price of Calypte's common stock was $0.885, Focus Fund granted the Company an additional 30-day extension, until May 5, 2003, in which to register the shares of common stock underlying this financing. On May 1, 2003, when the market price of Calypte's common stock was $0.711, the Company received a further extension until July 1, 2003. On June 26, 2003, when the trading price for the Company's stock was $0.36 per share, Focus Fund agreed to extend the period for filing the registration statement through July 15, 2003. The shares underlying this agreement F-18 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and which became effective on July 18, 2003. During the third quarter of 2003, Focus Fund converted $422,000 face value plus accrued interest and $43,000 of liquidated damages due to delayed registration into approximately 5.8 million shares of the Company's common stock at conversion prices ranging from $0.07 to $0.09 per share. See Note 18 for information regarding the extension of the maturity of this note. On January 30, 2003, when the market price of the Company's stock was $1.86, the Company issued a $450,000 10% convertible debenture to MMF pursuant to Regulation S and received net proceeds of $440,000, net of fees and expenses. The debenture is convertible into the Company's common stock at 80% of the average of the three lowest trades for the 20 days preceding conversion, but not more than $3.00. Under the terms of the debenture agreement, the Company agreed to file a registration statement for the shares of common stock underlying the debenture within 30 days of the closing date and use its reasonable best commercial efforts to cause the registration statement to be declared effective within 120 days of the closing date. On February 14, 2003, when the price of the Company's common stock was $2.01, the Company and MMF agreed to extend the registration period of the underlying common stock as required in the Registration Rights Agreement until April 4, 2003. On March 31, 2003, when the market price of Calypte's common stock was $0.885, MMF granted the Company an additional extension, until May 5, 2003, in which to register the shares of common stock underlying this financing. On May 1, 2003, when the market price of Calypte's common stock was $0.711, the Company received a further extension until July 1, 2003. On June 26, 2003, when the trading price for the Company's stock was $0.36 per share, MMF agreed to extend the period for filing the registration statement through July 15, 2003. The shares underlying this agreement were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and which became effective on July 18, 2003. During the third and fourth quarters of 2003, MMF converted $358,000 face value plus accrued interest and $29,000 of liquidated damages due to delayed registration into approximately 2.6 million shares of the Company's common stock at conversion prices ranging from $0.11 to $0.14 per share. See Note 18 for information regarding the extension of the maturity of this note. On March 13, 2003, when the market price of the Company's stock was $1.50, the Company issued a $400,000 10% convertible debenture to Focus Fund and a $100,000 10% convertible debenture to Mercator Momentum Fund III, L.P. ("Momentum Fund III"), each pursuant to Regulation S, and received aggregate net proceeds of $400,000, net of fees and expenses. Each debenture is convertible into the Company's common stock at 65% of the average of the three lowest trades for the 20 days preceding conversion, but not more than $2.10. Under the terms of the debenture agreements, Calypte agreed to file a registration statement for the shares of common stock underlying the debentures within 30 days of the closing date and use its reasonable best commercial efforts to cause the registration statement to be declared effective within 120 days of the closing date. On April 11, 2003, when the market price of Calypte's common stock was $0.735, the Company received an extension until May 5, 2003 in which to register the shares of common stock underlying this financing. On May 1, 2003, when the market price of Calypte's common stock was $0.711, the Company received an extension until July 1, 2003. On June 26, 2003, when the trading price for the Company's stock was $0.36 per share, Focus Fund and Momentum Fund III agreed to extend the period for filing the registration statement through July 15, 2003. The shares underlying this agreement were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and which became effective on July 18, 2003. During the third quarter of 2003, Focus Fund and Momentum Fund III converted an aggregate of $278,000 face value plus accrued interest and $50,000 of liquidated damages due to delayed registration into approximately 4.1 million shares of the Company's common stock at conversion prices ranging from $0.07 to $0.10 per share. See Note 18 for information regarding the extension of the maturity of this note. The Company determined that each of the 10% convertible debentures was issued with a beneficial conversion feature. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture and the fair value of the Company's common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible, limited by the face amount of the debenture. The Company has treated the beneficial conversion features as a discount to the face amount of the debentures and is amortizing them over the term of the respective debentures. Upon conversion of all or a portion of the debenture, the proportionate share of unamortized discount has been charged to interest expense. 12% Convertible Debentures On February 11, 2002, the Company signed a securities purchase agreement with a private investment fund, Bristol Investment Fund, Ltd. ("Bristol") pursuant to which Bristol agreed to purchase two 12% secured convertible debentures for an aggregate of $850,000, each of which matures two years after its issuance. The first debenture, in the amount of $425,000, was purchased by Bristol, under an exemption provided by Regulation S, on February 11, 2002 and the Company received net proceeds of $368,000. The closing price for Calypte stock on February 11, 2002 was $7.50. On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to Bristol, also under an exemption provided by Regulation S, and received net proceeds of $90,000. This debenture has the same terms as those of the initial debenture and reduced the remaining commitment under the agreement to $325,000. The closing price for Calypte stock on May 10, 2002 was $0.90. The outstanding debentures bear interest at the annual rate of 12%, payable quarterly in common stock or cash at Bristol's option. Under the terms of the debentures, Bristol could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of F-19 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 the Company's common stock. The conversion price, as modified, for any debenture issued pursuant to this agreement is equal to the lesser of (i) the average of the lowest three closing bid prices during the 20 trading days immediately prior to the conversion date discounted by 40% and (ii) $1.50, subject to certain anti-dilution provisions. During May 2002, Bristol converted a principal amount of approximately $60,000 plus accrued interest into 148,747 shares of the Company's common stock at $0.42 per share. Subsequent to the February 14, 2003 effective date of the registration statement on Form S-2/A (No. 6) which registered shares of common stock underlying the 12% Convertible Debentures in the amount of $525,000 that we issued to Bristol Investment Fund, Ltd. ("Bristol") in February 2002, Bristol converted its remaining balance due under the debentures, an aggregate of $465,000 face value, plus accrued interest and $122,000 of liquidated damages due to delayed registration, into approximately 0.9 million shares of the Company's common stock at conversion prices ranging from $0.525 to $0.966 per share during the first half of 2003. The debenture discounts were eliminated concurrent with the conversions. In conjunction with this transaction, the Company issued a Class A warrant to purchase up to 56,667 shares of its common stock. The Class A warrant was exercisable for a period of seven years after issuance at a price per share equal to the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the exercise date discounted by 30% and (ii) $3.45. Bristol exercised the warrant in September 2003 at a price of $0.077 per share. The warrant was valued on the date of issue at $6.30 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of 7 years, and volatility of 80%. As additional fees for this transaction, the Company also issued a warrant to purchase 2,833 shares of its common stock. The warrant to purchase the 2,833 shares has the same terms and the same fair market value as the Class A warrant and has not yet been exercised. The Company also issued Bristol a Class B warrant to purchase an additional 400,000 shares of its common stock. Upon the effectiveness of the related registration statement for the shares underlying the Class B warrant, Bristol was required to exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company would issue to Bristol, pursuant to the Class B warrant, a number of shares equal to 150% of the shares issued to the fund pursuant to the monthly conversion of the debentures. The Class B warrant was exercisable at a price per share equal to the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the exercise date discounted by 30% and (ii) $6.45. The Company was not permitted to include the shares underlying the 400,000 share Class B warrant in its registration statement, and Bristol was not obligated to begin exercising the warrant until such time as the underlying shares were registered, however Bristol exercised it in its entirety in September 2003 at a price of $0.0825 per share. The warrant was valued on the date of issue at $4.20 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%. In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Stock," and the terms of the Class A and Class B warrants issued to Bristol in conjunction with the 12% debentures in February 2002, the fair value of the warrants was accounted for as a liability, with an offsetting discount to the carrying value of the first $425,000 debenture, which was to be amortized as interest expense over the 24 month term of the debenture. The combined fair values of the Class A and Class B warrants treated as a discount to the debenture exceeded the $425,000 amount of the debenture. Accordingly, the aggregate amount of the warrant liability and the offsetting debenture discount recorded attributable to the Class A and Class B warrants was limited to $425,000 at the time of issuance. In September 2003, Bristol exercised both the Class A and Class B warrants. The Company issued 456,667 shares of its common stock and received proceeds of approximately $38,000. The Company reclassified the warrant liability to equity at the time of the exercise of the warrants. Until the warrants were exercised, the liability was marked to market through earnings. The Company recorded a net non-cash interest expense reduction of approximately $275,000 attributable to the re-measurement of the warrant liability for the year ended December 31, 2003. Non-cash interest income in 2002 attributable to the re-measurement of the warrant liability was approximately $70,000. This is recorded as a reduction of non-cash interest expense in the financial statements. The Company did not receive any additional consideration over and above the negotiated price for the debentures in connection with the issuance of the Class A and B warrants. The Class A and B warrants were contemplated and considered a part of the negotiated transaction for the debentures issued to Bristol. The Class A and Class B warrants were intended to act as consideration for the investment by Bristol and also provided the Company with immediate cash upon their exercise. The Class B warrants were intended to provide the Company with cash over a one year period following the effective date of the registration statement for the shares underlying the debentures and warrants. Management believed that the terms of the financing were on the best possible terms available as a result of the Company's tenuous financial condition at the time of the arrangement. The Company determined that both of the debentures issued to Bristol were issued with a beneficial conversion feature. Upon conversion of a portion of the debenture, the Company charged the proportionate share of unamortized discount to interest expense. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture F-20 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 and the fair value of the Company's common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible. Because the Company also issued warrants in conjunction with the first $425,000 debenture, as described above, the value of the beneficial conversion feature was not accorded treatment as a discount to the debenture, since the valuation of the accompanying warrants had reduced the carrying value of the debenture to zero at the time of issuance. The beneficial conversion feature attributable to the second $100,000 debenture was limited to $100,000 by the face amount of the debenture and recorded as a discount to the debenture to be amortized to interest expense over the life of the debenture. 12% Convertible Debentures On September 12, 2002, the Company issued a $550,000 12% convertible debenture to MMF. The debenture was convertible into the Company's common stock at 85% of the average of the three lowest trades for the 20 days preceding conversion. This debenture was the first tranche of a $2.0 million commitment that was to become available upon the filing and effectiveness of a registration statement. Under the terms of the debenture agreement, the Company agreed to file a registration statement for the shares of common stock underlying the debenture within 45 days of the closing date and use its best commercial efforts to cause the registration statement to be declared effective within 135 days of the closing date. At December 31, 2002, the Company had obtained an extension of the registration period through February 18, 2003. On February 14, 2003, when the price of the Company's common stock was $2.01, the Company and MMF agreed to extend the registration period until April 4, 2003. On March 31, 2003, when the market price of Calypte common stock was $0.885, the Company amended the conversion price to eliminate a conversion price floor of $1.50 per share in return for an extension until May 5, 2003 in which to register the shares of common stock underlying this and certain other Mercator-group financings. On May 1, 2003, when the market price of Calypte's common stock was $0.711, the Company received a further extension until July 1, 2003. On June 26, 2003, when the trading price for the Company's stock was $0.36 per share, MMF agreed to further extend the period for filing the registration statement through July 15, 2003. The shares underlying this agreement were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and that became effective on July 18, 2003. During the third quarter 2003, MMF converted $550,000 face value plus accrued interest into approximately 4.8 million shares of the Company's common stock at conversion prices ranging from $0.09 to $0.22 per share. On October 22, 2002, the Company issued a $300,000 12% convertible debenture to MMF. The debenture and related accrued interest was repaid on January 13, 2003 in conjunction with the issuance of a $1,000,000 10% convertible debenture to Focus Fund. Upon the repayment, the Company charged the remaining unamortized amount of the beneficial conversion feature of approximately $271,000 to non-cash interest expense. Additionally, the repayment of this note resulted in the Company effectively repurchasing a portion of the beneficial conversion feature. In situations in which a debt instrument containing an embedded beneficial conversion feature is extinguished prior to conversion, a portion of the debt payment is allocated to the beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date. Any residual amount is then allocated to the convertible security with the Company recognizing a gain or loss to remove the remaining liability. The repurchase of the beneficial conversion feature upon repayment of the debenture resulted in a non-cash gain of $128,000, recorded as other income, during the first quarter of 2003. On April 29, 2003, when the price of the Company's common stock was $0.82, the Company issued a $300,000 12% convertible debenture to MMF and recorded net proceeds of $245,000. The debenture is convertible into the Company's common stock at 70% of the average of the three lowest trades for the 20 days preceding conversion, but not more than $1.20. Under the terms of the debenture agreement, Calypte agreed to file a registration statement for the shares of common stock underlying the debenture within 30 days of the closing date and use its reasonable best commercial efforts to cause the registration statement to be declared effective within 120 days of the closing date. On May 1, 2003, when the market price of Calypte's common stock was $0.711, the Company received an extension until July 1, 2003 in which to file a registration statement for the underlying shares. On June 26, 2003, when the trading price for the Company's stock was $0.36 per share, MMF agreed to extend the period for filing the registration statement through July 15, 2003. The shares underlying this agreement were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and which became effective on July 18, 2003. During the third quarter 2003, MMF converted $294,000 face value plus accrued interest and $11,000 liquidated damages due to delayed registration was converted into approximately 3.5 million shares of the Company's common stock at prices ranging from $0.077 to $0.12 per share. See Note 18 for information regarding the extension of the maturity of this note. Pursuant to the Registration Statement filed on July 8, 2003 and effective July 18, 2003, the Company registered shares underlying a 12% convertible debenture for $250,000 which was to be funded upon the filing of the Registration Statement and another for $500,000 to be funded by July 25, 2003 as portions of the September 2002 $2 million commitment by MMF. On July 24, 2003, when the market price for the Company's common stock was $0.115, the Company issued 12% convertible debentures in the principal amount of $250,000 each to Alpha Capital AG, Gamma Opportunity Capital Partners, LP and Goldplate Investment Partners, assignees under the MMF $2 million commitment agreement mentioned above covering these two commitments. The Company had prepaid $75,000 in fees and received gross proceeds of $750,000. A portion of the proceeds were used to repay a $400,000 MMF advance from June 6, 2003, along with a fee of $12,000. The debentures were convertible F-21 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 into the Company's common stock at 85% of the average of the three lowest trades for the 20 days preceding conversion. During the third quarter 2003, the investors converted $750,000 face value plus accrued interest into approximately 8.0 million shares of the Company's common stock at conversion pricees of approximately $0.09 per share. On September 1, 2003, when the market price for the Company's common stock was $0.498 per share, the Company issued a $570,000 12% convertible debenture to Marr Technologies BV, an additional assignee from MMF under the $2 million September 2002 commitment, and received net proceeds of $570,000. The debenture was convertible into the Company's common stock at 85% of the average of the three lowest trades for the 20 days preceding conversion but not less than $0.11 per share. On September 1, 2003, this note was converted into approximately 5.2 million shares of the Company's common stock at a conversion price of $0.11 per share. On October 2, 2003, when the market price for the Company's stock was $1.31 per share, the Company issued the final $130,000 of debentures to four assignees of MMF under the $2 million September 2002 12% convertible debenture commitment, and received net proceeds of $130,000. During October 2003, two of these investors converted $70,000 of principal of these debentures at a price of $0.59 per share and the Company issued approximately 118,400 shares of its common stock. The Company determined that the MMF 12% convertible debentures, including those issued to MMF assignees, were each issued with a beneficial conversion feature. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture and the fair value of the Company's common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible, limited by the face amount of the debenture. The Company treated the beneficial conversion feature as a discount to the face amount of the debenture and amortized it over the respective term. Upon conversion of all or a portion of the debenture, the proportionate share of unamortized discount is charged to interest expense. The table below summarizes the components of net interest expense reported in the consolidated statements of operations (in thousands).
2003 2002 ---- ---- Accrued interest on debt instruments $ 425 332 Non-cash interest expense composed of: Amortization and proportional write-off upon conversion of note and debenture discounts 4,835 1,188 Liquidated damages due to delayed registration of shares underlying convertible and other securities 620 546 Amortization and proportional write-off upon conversion of deferred offering costs 997 210 Expense attributable to warrants issued in conjunction with the Marr $10 million Promissory Note Agreement 322 - Warrant liability mark-to-market adjustment attributable to Bristol Class A and Class B warrants (275) (70) Expense attributable to dividends on mandatorily redeemable Series A preferred stock 60 - ------- ------- Total interest expense 6,984 2,206 Interest income (15) (3) ------- ------- Net interest expense $ 6,969 $ 2,203 ======= =======
5% Note Purchase Agreement On November 13, 2003, when the market price of the Company's common stock was $0.88 per share, the Company and Marr, its largest stockholder, entered into an agreement in which Marr agreed to provide the Company up to an aggregate of $10,000,000 (the "Marr Credit Facility") pursuant to promissory notes issuable to Marr on an as-needed basis by the Company (the "Notes"). Each Note will bear interest at the rate of 5% per annum and will have a 12-month term. The Marr Credit Facility is available during the period beginning on February 28, 2004 and ending on May 31, 2004. The aggregate amount available under the Marr Credit Facility will be proportionally reduced by the amount of any equity financing obtained by the Company during the term of the Marr Credit Facility. Marr has the right of first refusal to participate in any such equity financing on the same terms as the F-22 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 other investors. The Marr Credit Facility provides for earlier termination as of March 31, 2004, if the Company fails to have its common stock listed on an established stock exchange by that date. Moreover, upon the failure to obtain such stock exchange listing, any outstanding Notes would be due and payable on April 30, 2004. As of March 19, 2004, no Notes have been issued under the Marr Credit Facility. As consideration for the Marr Credit Facility, the Company issued to Marr a warrant to purchase 375,000 shares of its common stock at an exercise price of $0.80 per share. The warrant is immediately exercisable and expires two years after issuance on November 12, 2005. The warrant was valued at $0.859 per share on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.93%; expected dividend rate of 0.00%; volatility of 316.42%; and expected term of 2 years. The calculated value of the warrant was charged to interest expense. Refer to Note 18 for information regarding an amendment to this agreement in the first quarter of 2004. (7) GAIN ON SETTLEMENT OF TRADE DEBT On February 12, 2002, the Company completed a restructuring of approximately $1.7 million of its past due accounts payable and certain other obligations with 27 of its trade creditors. Under the restructuring, the Company issued approximately 47,000 restricted shares of its common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt. The issuance of the shares was pursuant to Regulation D of the Securities Act. The shares issued are now eligible for resale under the provisions of Rule 144. The creditors accepted the shares plus deferred cash payments ranging from 0% to 25% of the outstanding balance in satisfaction of $1,699,000 of indebtedness plus certain patent rights for 2002. On the date the shares were issued, the aggregate value of the Company's common stock issued to the trade creditors was $248,000 and the aggregate deferred cash payment yet to be made to the trade creditors totaled $132,000. During the third quarter of 2002, the Company made cash payments to the various creditors totaling 10% of the deferred cash balance, or approximately $13,000, leaving $119,000 remaining to be paid at December 31, 2003 and 2002. The Company recognized a gain of $1,319,000 during the first quarter of 2002 as a result of restructuring this indebtedness. (8) LEASE COMMITMENTS Capital Leases The Company has acquired equipment under capital lease agreements that are collateralized by the related equipment. The lease agreements carry effective interest rates of approximately 18% per annum. During 1993, the Company issued stock warrants for the purchase of 1,172 shares of the Company's common stock at exercise prices ranging from $150.00 to $225.00 per share as partial consideration for obtaining two of the lease agreements. These warrants expired in 2003. In 2000, the Company exercised its option to renew one of the capital leases for an additional three year term. In 2001, the Company acquired laboratory equipment under a capital lease having a four-year term and an effective interest rate of approximately 17.5% per annum. In 2002, the Company settled its liability under one of these leases by issuing 9,804 shares of its common stock. Equipment acquired under capital leases included in property and equipment as of December 31, 2003 and 2002 consisted of the following (in thousands): 2003 2002 ---- ---- Machinery and equipment $ 1,729 $ 1,763 Other 92 92 -------- -------- 1,821 1,855 Accumulated depreciation and amortization (1,802) (1,790) -------- -------- $ 19 $ 65 ======== ======== F-23 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 Future minimum lease payments under capital leases as of December 31, 2003 were (in thousands): Year ended December 31, 2004 12 2005 8 ------- 20 Less amount representing interest (2) ------- Present value of capital lease obligation 18 Capital lease obligations - current portion (12) ------- Capital lease obligations - long-term portion $ 6 ======= Operating Leases The Company leases office and manufacturing space in Alameda, California, under a noncancelable operating lease which expires in June 2004. The Company also leases manufacturing space in Rockville, Maryland under two operating subleases. Total rent expense under these leases was $836,000 and $867,000 for the years ended December 2003 and 2002, respectively. Future minimum rental payments under all noncancelable operating leases as of December 31, 2003 were (in thousands): Year ended December 31, 2004 $ 584 2005 385 2006 321 Thereafter - ------- Total $ 1,290 ======= Refer to Note 18 for information regarding an extension of the lease for the Company's Rockville, Maryland facilities. (9) MANDATORILY REDEEMABLE PREFERRED STOCK At the time of its original incorporation, the Company issued both common stock and $1,000,000 of mandatorily redeemable Series A preferred stock. The Company is required to redeem all shares of mandatorily redeemable Series A preferred stock within 60 days of any fiscal year-end in which the Company attains $3,000,000 in retained earnings, and funds are legally available. Based on losses accumulated through December 31, 2003, the Company must achieve in excess of $130,800,000 in future earnings before any repayment is required. The mandatorily redeemable Series A preferred stock is nonvoting and holders of these shares are entitled to receive cumulative dividends at the rate of $1.20 per share per annum. Through June 30, 2003, cumulative preferred dividends totaling $1,636,000 have been charged to stockholders' equity (deficit) to accrete for the mandatorily redeemable Series A preferred stock redemption value with a corresponding increase in the recorded amount of the mandatorily redeemable Series A preferred stock. Since the Company's third quarter 2003 adoption of SFAS No. 150, as described in Note 2, cumulative preferred dividends totaling $60,000 have been charged to interest expense to accrete for the mandatorily redeemable Series A preferred stock redemption value with a corresponding increase in the recorded amount of the mandatorily redeemable Series A preferred stock. In anticipation of using a portion of the proceeds from its Initial Public Offering to redeem the Series A preferred stock, the Company eliminated the Series A preferred stock from its articles of incorporation upon reincorporation of the Company in Delaware in June 1996. However, management subsequently chose not to redeem the Series A preferred stock and as of December 31, 2003 it remains outstanding. The holders of such shares maintain the same rights as held before the reincorporation. (10) STOCKHOLDERS' EQUITY (DEFICIT) Increase in Authorized Shares On February 14, 2003, the Company filed an Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware that increased the number of shares of authorized common stock from 200 million to 800 million. The Company's stockholders approved the Amendment to the Certificate of Incorporation at the Special Meeting of Stockholders held on February 14, 2003. A principal purpose for authorizing the additional shares was for issuance pursuant to arrangements to finance the Company's continuing operations. F-24 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 Private Placements As detailed in the Consolidated Statements of Stockholders' Equity (Deficit), the Company raised net proceeds $0.4 million and $12.5 million in private placement transactions with accredited investors who purchased 266,667 and 28,333,333 shares during 2002 and 2003, respectively. Under the terms of the August 2002 private placement, Calypte agreed to file a registration statement for the shares of common stock and use its reasonable best commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. Under the terms of the agreement, the Company was required to issue, as liquidated damages, 8,333 shares of its common stock for each ten days of delay past November 27, 2002. The shares underlying this agreement were included in the Company's S-2 registration statement that was filed with the SEC on July 8, 2003 and which became effective on July 18, 2003. Through the effective date of the Registration Statement, the Company charged an aggregate of $225,000 to interest expense representing the value of 183,333 shares issuable as liquidated damages. On April 1, 2003, when the price of the Company's common stock was $0.849, the Company issued 100,000 shares of its common stock in settlement of accumulated liquidated damages through March 27, 2003, pursuant to the terms of the agreement. On September 19, 2003, when the price of the Company's common stock was $1.43, the Company issued an additional 83,333 shares of its common stock in final settlement of liquidated damages under this agreement. On July 31, 2003, when the market price of the Company's stock was $0.18 the Company announced that it had entered into a financing agreement with Marr Technologies B.V. ("Marr") in which the Company would issue 8,333,333 restricted shares of its common stock priced at $0.30 for an aggregate of $2.5 million. The Company's stock just prior to the announcement had been trading in a range between $0.11 and $0.12 per share. The agreement contains a 12 month lock-up (holding period) provision. In conjunction with the investment, Marr has the right to nominate two mutually-agreeable individuals for appointment to the Calypte Board of Directors at a mutually-agreeable future date. The two companies also signed a Memorandum of Understanding and have formed a joint venture in China, with the intent of creating a platform for manufacturing, distribution and sale of Calypte's products in China. Calypte's existing distribution agreement has been assigned to the joint venture under the terms of this agreement. On September 2, 2003, when the market price of the Company's stock was $0.82, the Company announced that it had entered into an additional $10 million equity financing agreement with Marr in which the Company would issue 20 million restricted shares of its common stock priced at $0.50 per share. This agreement also contains a 12 month lock-up provision. Equity Line of Credit In August 2001, the Company and Townsbury Investments, Ltd. ("Townsbury"), a private investment fund, signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Company's common stock over a twenty-four month period. The initial closing of the transaction occurred in October 2001. Under this arrangement, the Company, at its sole discretion, could draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund was obligated to purchase shares of the Company's common stock. The purchase price of the common stock purchased pursuant to any draw down was equal to 88% of the daily volume weighted average price of the Company's common stock on the applicable date. In conjunction with the signing of the stock purchase agreement, in October 2001, the Company issued a 7-year fully-vested warrant to Townsbury to purchase approximately 140,000 shares of common stock at an exercise price of $8.229 per share and issued approximately 3,800 shares of its common stock as a fee to Townsbury. In October 2001, the Company filed a Registration Statement on Form S-2 with the Securities and Exchange Commission to register for resale 1,000,000 shares of common stock that it might issue in conjunction with the equity line facility, the warrant and the fee shares. During November and December 2001, the Company issued two draw down requests under this facility in the aggregate amount of $430,000. The Company issued 72,738 shares of its common stock and received aggregate net proceeds of $406,000 after deducting fees and expenses in settling these two draw downs. During 2002, the Company issued 783,038 shares of its common stock and received aggregate net proceeds of approximately $2.7 million after deducting fees and expenses in settling these fourteen draw downs. At the expiration of the facility in October 2003, the Company had issued all but approximately 633 shares of the registered stock. The warrant issued to Townsbury was valued on the date of issue at $6.60 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.3%, the contractual life of 7 years, and volatility of 80%. The warrant was accounted for as a deferred offering cost and was recognized as a cost of the financing in proportion to the amount of each draw-down in relation to the $10 million nominal commitment amount. The unamortized balanced was written off as interest expense at the termination of the facility. In conjunction with the issuance of the 10% convertible note to BNC Bach described in Note 6, on May 10, 2002 when the market price of the Company's common stock was $0.90, Calypte repriced from $8.23 to $0.45 the 140,000 share warrant issued to Townsbury pursuant to the equity line, as permitted by the warrant's originally negotiated terms. Townsbury exercised the warrant for the entire 140,000 shares and Calypte received $63,000 in proceeds. In light of the Company's precarious financial F-25 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 condition and its being in danger of ceasing operations, the exercise price was modified to serve as an inducement for the investor to exercise the warrant. The Company viewed the modification of the exercise price as fair and reasonable under the circumstances. Townsbury was and is viewed as an unaffiliated party of the Company. The fair value of the warrant had originally been treated as a deferred offering cost associated with the equity line. The fair value of the repriced warrant was less than that of the original warrant and therefore no accounting adjustment attributable to the repricing was required. Upon the exercise of the warrant, the Company reclassified the $807,000 unamortized balance of the deferred offering cost to additional paid-in capital. Warrants, options and stock grants During 2002, the Company looked for ways to minimize its use of cash while obtaining required services. It issued warrants and options to purchase an aggregate of 1,583,333 shares of its common stock under agreements with consultants to perform legal, financial, business advisory and other services associated with the restart of its operations including introductions and arrangements with respect to potential domestic and international product distribution agreements, assistance with international product trials and regulatory qualifications. At December 31, 2002, the consultants had exercised options and warrants to purchase 1,550,000 shares of the Company's common stock and they exercised the balance in 2003. The Company received approximately $1.7 million in proceeds in 2002 and 2003. The warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were valued using the Black-Scholes option pricing model using the following range of assumptions. Low High --- ---- Exercise price per share $0.45 $1.50 Market price of Calypte's stock on date of issuance $0.90 $4.20 Assumptions: Expected dividend yield 0.0% 0.0% Risk free rate of return 1.25% 5.16% Contractual life 3 months 10 years Volatility 80% 80% Fair Market Value $0.465 $7.59 Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to accounting for stock-based compensation, the Company recognized non-cash selling, general and administrative expense in the amount of $2.1 million attributable to these warrants at the date of grant in 2002. In addition to the above warrants and options, the Company issued stock grants for approximately 103,000 shares of its common stock to certain consultants and other vendors under various agreements and recorded non-cash selling, general and administrative expense of $364,000 based on the intrinsic value of the stock on the date granted during 2002. During 2003, the Company entered into new contracts and extended certain other contracts with existing consultants to perform various legal, business advisory, marketing and distribution functions similar to those entered into during 2002. The Company issued warrants to purchase an aggregate of 4,463,834 shares of its common stock as compensation for these services. During 2003, the consultants exercised warrants to purchase 4,263,834 shares of the Company's common stock and the Company received proceeds of $2,707,000. The warrants were non-forfeitable and fully-vested at the date of issuance and were valued using the Black-Scholes option pricing model using the following range of assumptions: Low High --- ---- Exercise price per share $0.080 $1.50 Market price of Calypte's stock on date of issuance $0.18 $2.01 Assumptions: Expected dividend yield 0.0% 0.0% Risk free rate of return 0.92% 1.86% Contractual life 3 months 24 months Volatility 131.35% 411.50% Fair Market Value $0.11 $1.46 Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to accounting for stock-based compensation, the Company recognized non-cash selling, general and administrative expense in the amount of $2.8 million attributable to these warrants at the date of grant in 2003. F-26 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 In addition to the warrants and options described above, during 2003, the Company also issued stock grants for approximately 3,637,000 shares of its common stock to certain consultants and other vendors under various agreements and recorded non-cash selling, general and administrative expense of $2,712,000 based on the intrinsic value of the stock on the date of grant. Change of Control Provisions Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of preventing, discouraging or delaying any change in the control of the Company and may maintain the incumbency of the Board of Directors and management. The authorization of undesignated preferred stock makes it possible for the Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company. Additionally, in December 1998, the Company's Board of Directors declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of common stock of the Company. The dividend was payable to the stockholders of record on January 5, 1999. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial number of Rights being acquired. However, the Rights should not interfere with any tender offer or merger approved by the Company because the Rights do not become exercisable in the event of a permitted offer or other acquisition exempted by the Board. (11) INCENTIVE STOCK AND STOCK OPTIONS PLANS Stock option grants to employees are generally issued with an exercise price equal to the market price at the grant date. To the extent that the market price of the common stock exceeds the exercise price of the options, deferred compensation is recognized for the intrinsic value in accordance with APB 25 and FIN 44. This deferred compensation would be amortized on a straight-line basis over the vesting period of the option. Option grants to non-employees are valued at the date of grant using the Black-Scholes option-pricing model in accordance with FAS 123. Option grants that do not include sufficient disincentive for non-performance are accounted for in accordance with EITFs 96-18 and 00-18. In such instances, the deferred compensation is amortized over the term of the agreement on a straight-line basis. Until the awards are fully vested or a measurement date is achieved, the Company records an adjustment to deferred compensation and consultant expense to reflect the impact of the fair value, as remeasured at quarter-end, of the options based on changes to the Company's stock price. Stock bonuses and awards reflect shares of Calypte common stock granted to employees and consultants. Compensation expense is recognized at the time of grant, and is determined based on the number of shares awarded and the closing market price at the date of the award, in accordance with APB 25. 2000 Equity Incentive Plan In June 2000, the Company's Board of Directors and stockholders approved the adoption of the Company's 2000 Equity Incentive Plan (the "2000 Incentive Plan") to replace the Company's 1991 Incentive Stock Plan, which expired in April 2001. At the Annual Meeting of Stockholders in May 2003, the Company's stockholders approved an increase to 10,000,000 shares in the number of shares of the Company's common stock authorized for issuance under this plan. The Compensation Committee of the Company's Board of Directors administers the Plan. The Board of Directors may amend or modify the 2000 Incentive Plan at any time. It will expire in June 2010, unless terminated earlier by the Board of Directors. Under the terms of the 2000 Incentive Plan, nonstatutory stock options, restricted stock and stock bonuses may be granted to employees, including directors who are employees, non-employee directors, and consultants. Incentive stock options may be granted only to employees. Nonstatutory stock options may be granted under the 2000 Incentive Plan at a price less than the fair market value of the common stock on the date the option is granted. Prior to the amendment of the 2000 Incentive Plan approved by the Company's stockholders at the May 2003 Annual Meeting of Stockholders, nonstatutory stock options could not be granted at a price less than 85% of the common stock on the grant date. Incentive stock options may be not be granted under the 2000 Incentive Plan at a price less than 100% of the fair market value of the common stock on the date the option is granted. Incentive stock options granted to employees who, on the date of grant, own stock representing more than 10% of the voting power of all classes of stock of the Company are granted at an exercise price not less than 110% of the fair market value of the common stock. Options granted to employees under the 2000 Incentive Plan generally vest monthly over periods of F-27 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 up to three years, as specified in the option agreements. The term of nonstatutory and incentive stock options granted is 10 years or less from the date of the grant, as provided in the option agreements. Restricted stock awards may be granted to purchase stock either in addition to, or in tandem with, other awards under the 2000 Incentive Plan, under conditions determined by the Compensation Committee. The purchase price for such awards must be no less than 85% of the fair market value of the Company's Common Stock on the date of the grant. The Compensation Committee may also grant stock bonus awards to employees or consultants for services rendered to the Company. Such awards may also be granted either in addition to, or in tandem with, other awards under the 2000 Incentive Plan, under conditions determined by the Compensation Committee. Deferred compensation is recorded related to options granted to non-employees and options granted to employees when the exercise price is below the fair market value of the underlying common stock, if any. For the years ended December 31, 2003 and 2002, the Company recorded deferred compensation of $10,000, and $75,000, respectively, for certain of the Company's common stock options granted under the Stock Plan. This amount is amortized over the relevant period of service. The amortized compensation expense for the years ended December 31, 2003 and December 31, 2002 was $3,000 and $83,000, respectively. The Company recorded compensation expense of $94,000 and $721,000, respectively, attributable to stock bonus awards of 48,667 shares of common stock granted during 2003 and 300,974 shares of common stock granted during 2002. Compensation expense attributable to stock bonuses is determined by multiplying the closing market price of the Company's common stock on the date of grant by the number of shares granted. The weighted average price of shares issued as stock bonuses was $1.92 in 2003 and $2.40 in 2002. In December 2002, at the Company's request, employees agreed to the cancellation of an aggregate of approximately 440,000 options (including approximately 88,000 options granted to officers) to purchase the Company's common stock previously issued from this Plan and from the 1991 Incentive Stock Plan. The cancelled options had exercise prices above the then-current market price. The Company agreed to reissue these options on a fully vested basis with an exercise price of the lesser of (i) $1.92 per share or (ii) market at the date of the 2003 Annual Stockholders' Meeting, subject to stockholder approval at the meeting of an amendment to the 2000 Incentive Plan to increase the number of authorized shares for the 2000 Incentive Plan and to increase the number of shares permitted to be granted annually to a plan participant from 900,000 to 2,500,000 shares. The Company's stockholders approved the amendment and the options were issued on May 29, 2003 at the market price of $0.32. The following table summarizes option grant activity under the 2000 Incentive Plan: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ========== ================ Outstanding as of December 31, 2001 292,418 $ 13.34 Granted 317,860 3.03 Exercised (99,140) 2.60 Cancelled (453,727) 9.70 --------- Outstanding as of December 31, 2002 57,411 $ 3.74 Granted 8,528,626 0.33 Exercised (1,426,510) 0.38 Cancelled (562,778) 0.36 --------- Outstanding as of December 31, 2003 6,596,749 $ 0.35 ========= Exercisable as of December 31, 2002 38,710 $ 3.68 Exercisable as of December 31, 2003 2,431,636 $ 0.34 F-28 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 As of December 31, 2003, 1,579,884 shares of common stock were available for grant under the 2000 Incentive Plan. The following table summarizes the per share weighted-average fair value of stock options granted during 2003 and 2002, on the date of grant using the Black-Scholes option-pricing model with the indicated weighted-average assumptions: 2003 2002 ============= ============= Per share weighted average fair value of options granted $0.336 $1.389 Expected dividend yield 0.00% 0.00% Risk-free interest rate 3.44% 3.55% Volatility 226.1% 80.0% Expected life 8.0 years 4.9 years 1991 Incentive Stock Plan In April 1991, the Company's Board of Directors approved the adoption of the Company's Incentive Stock Plan (the Stock Plan). A total of 141,366 shares of common stock were reserved for issuance under the Stock Plan. Since the adoption of the 2000 Equity Incentive Plan in June 2000, no additional shares have been granted from the Stock Plan. All of the shares reserved but not issued or subject to options granted under the Stock Plan, including shares subject to cancelled options, are available for grant under the 2000 Incentive Plan. At December 31, 2003, there were no shares of common stock available for grant under the Stock Plan. The following table summarizes activity under the Stock Plan: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ============ =================== Outstanding as of December 31, 2001 40,386 $ 50.45 Cancelled (33,630) 38.23 ------- Outstanding as of December 31, 2002 6,756 $ 111.31 Cancelled (500) 210.00 ------- Outstanding as of December 31, 2003 6,256 $ 103.42 ------- Exercisable as of December 31, 2002 6,756 $ 111.31 Exercisable as of December 31, 2003 6,256 $ 103.42 1995 Director Option Plan In December 1995, the Company's Board of Directors approved the Company's 1995 Director Option Plan (the Director Option Plan). At the Annual Meeting of Stockholders in May 2003, the Company's stockholders approved an increase to 2,000,000 shares in the number of shares of the Company's common stock authorized for issuance under this plan. Under the Director Option Plan, the Company's Board of Directors determines the number of shares of the Company's stock that will be granted each year to newly-elected and re-elected directors. Options may be granted under this plan to non-employee directors or, pursuant to an agreement between the Company and another person, entity or affiliate with whom a non-employee director is associated, that other person, entity, or affiliate. Each option granted under the Director Option Plan is exercisable at 100% of the fair market value of the Company's common stock on the date the option was granted. Each grant under the plan vests monthly over the twelve month period commencing with the director's date of election or re-election, provided that the option will become vested and fully exercisable on the date of the next annual meeting of stockholders if such meeting occurs less than one year after the date of the grant. The plan will expire in December 2005 unless terminated earlier in accordance with certain provisions of the Plan. The Company has not recorded any deferred compensation for the Company's common stock options granted under the Director Option Plan. F-29 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 The following table summarizes activity under the Director Option Plan: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ============ =================== Outstanding as of December 31, 2001 21,930 $ 37.65 Granted 6,667 4.80 Cancelled (7,916) 4.99 -------- Outstanding as of December 31, 2002 20,681 $ 39.56 Granted 631,667 0.33 Exercised (8,333) 0.32 Cancelled (206,335) 0.87 -------- Outstanding as of December 31, 2003 437,680 $ 1.93 ======== Exercisable as of December 31, 2002 20,681 $ 39.56 Exercisable as of December 31, 2003 271,004 $ 2.93 As of December 31, 2003, 1,553,962 shares of common stock were available for grant under the Director Option Plan. The following table summarizes the per share weighted-average fair value of stock options granted during 2003 and 2002, on the date of grant using the Black-Scholes option-pricing model with the indicated weighted-average assumptions: 2003 2002 ============= ============= Per share weighted-average fair value of options granted $0.332 $1.760 Expected dividend yield 0.00% 0.00% Risk-free interest rate 3.57% 5.16% Volatility 217.1% 80.0% Expected life 10.0 years 1.3 years 2003 Non-Qualified Stock Option Plan In June 2003, the Company's Board of Directors authorized and the Company registered a total of 10,000,000 shares of its common stock under a Form S-8 Registration Statement for issuance under the Company's 2003 Non-Qualified Stock Option Plan (the "2003 Plan"). Under the 2003 Plan, at the discretion of the Board of Directors, shares may be awarded in consideration of services rendered to the Company. Options or awards may be granted under this plan only to non-officer employees and consultants. The plan will expire in June 2013 unless terminated earlier in accordance with certain provisions of the plan. The following table summarizes 2003 option activity for the 2003 Plan: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ============ =================== Granted 7,227,500 $ 0.16 Exercised (7,227,500) 0.16 ---------- Outstanding as of December 31, 2003 - ========== Exercisable as of December 31, 2003 - $ - F-30 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 The following table summarizes the per share weighted-average fair value of stock options granted during 2003, on the date of grant using the Black-Scholes option-pricing model with the indicated weighted-average assumptions: 2003 ============== Per share weighted-average fair value of options granted $0.114 Expected dividend yield 0.00% Risk-free interest rate 0.918% Volatility 156.1% Expected life 0.22 years The Company also granted stock awards from the 2003 Plan for an aggregate of 2,689,552 shares of its common stock during 2003 and recorded compensation expense of $788,000. Compensation expense attributable to stock awards is determined by multiplying the closing market price of the Company's common stock on the date of grant by the number of shares granted. The weighted average price of shares issued as stock awards was $0.36 in 2003. At December 31, 2003, a total of 82,978 shares of common stock were available for grant as options or other awards under the 2003 Plan. The following table summarizes information about stock options outstanding at December 31, 2003 under the 2000 Equity Incentive Plan, the 1991 Incentive Stock Plan, and the 1995 Director Option Plan
Options Outstanding Options Exercisable =========================================================== ==================================== Weighted Number Average Weighted Number Weighted Outstanding at Remaining Years Average Exercisable at Average Exercise Range of Exercise Prices 12/31/03 to Expiration Exercise Price 12/31/03 Price ========================== ====================== ================= ================ ================ ================== $0.010 - $0.123 359,564 9.42 $ 0.014 345,564 $ 0.010 $0.126 - $0.180 819,000 3.78 $ 0.127 10,000 $ 1.126 $0.320 - $0.320 5,169,592 8.25 $ 0.320 2,281,151 $ 0.320 $0.610 - $1.405 646,900 9.29 $ 0.762 30,000 $ 0.900 $3.000 - $210.00 45,629 7.35 $ 33.318 42,181 $ 35.571 ====================== ================ $0.010 - $210.00 7,040,685 7.88 $ 0.536 2,708,896 $ 0.835 ====================== ================
1995 Employee Stock Purchase Plan In December 1995, the Company's Board of Directors approved the Company's Employee Stock Purchase Plan (the Purchase `Plan). The Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code (the Code). At the Annual Meeting of Stockholders in May 2003, the Company's stockholders approved an increase to 1,000,000 shares in the number of shares of the Company's common stock authorized for issuance under this plan. Under the Purchase Plan, an eligible employee may purchase shares of common stock from the Company through payroll deductions of up to 10% of his or her compensation, at a price per share equal to 85% of the lower of (i) the fair market value of the Company's common stock on the first day of an offering period under the Purchase Plan or (ii) the fair market value of the common stock on the last day of the six month purchase period during the offering period. Each offering period lasts for twenty four months; prior to 2002, stock purchases occurred on April 30 and October 31 of each year. The purchase period beginning November 1, 2001 and ending April 30, 2002 was terminated due to the wind-down of the Company's operations and all payroll deductions withheld from employees were returned. A new purchase period began on July 1, 2002 and was completed on December 31, 2002, when employees purchased 3,437 shares of the Company's common stock. During the year ended December 31, 2003, employees purchased 18,192, shares under the Purchase Plan. Cumulative purchases under the Purchase Plan through December 31, 2003 totaled 28,380 shares, leaving 971,620 shares reserved for future purchases. F-31 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (12) SECTION 401(K) PLAN Effective January 1, 1995, the Company adopted a Retirement Savings and Investment Plan (the 401(k) Plan) covering the Company's full-time employees located in the United States. The 401(k) Plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Under the terms of the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and to have the amount of such reduction contributed to the 401(k) Plan. The Company matched participant's contributions up to the first $2,000 during 2003, for approximately $98,000; no such Company contribution was made in 2002. (13) INCOME TAXES The provision for income taxes for all periods presented in the consolidated statements of operations represents minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following: 2003 2002 ---- ---- Computed expected tax expense (8,960) $ (4,520) Losses and credits for which no benefits have been recognized 8,950 4,514 Meals and entertainment expenses, and officers life insurance not deductible for income tax purposes 11 7 State tax expense, net of federal income tax benefit 1 1 ------ -------- $ 2 $ 2 ====== ======== The tax effect of temporary differences that give rise to significant portions of the deferred tax asset is presented below: December 31, ------------ 2003 2002 ---- ---- Deferred tax assets: Employee benefit reserves, including accrued vacation and bonuses $ 46 $ 50 Start-up and other capitalization 556 673 Fixed assets, due to differences in depreciation 300 173 Deferred rent and revenue 199 210 Net operating loss carryovers 44,070 33,544 Research and development credits 1,576 1,596 Other 622 704 ------- ------- Total gross deferred tax assets 47,369 36,950 Valuation allowance (47,369) (36,950) ------- ------- Net deferred tax asset - - ======= ======= The net change in the valuation allowance for the years ended December 2003 and 2002 was an increase of $10,419,000 and $4,623,000, respectively. Because there is uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established. When realized, approximately $171,000 of deferred tax assets will be creditable to additional paid-in capital. As of December 31, 2003, the Company had federal tax net operating loss carryforwards of approximately $122,977,000, which will expire in the years 2004 through 2023. The Company also has federal research and development credit carryforwards as of December 31, 2003 of approximately $1,156,000, which will expire in the years 2005 through 2022. State tax net operating loss carryforwards were approximately $38,700,000 and state research and development credit carryforwards were $619,000 as of December 31, 2003. The state net operating loss carryforwards will expire in the years 2004 through 2013 and the state research and development credits will carryforward indefinitely. F-32 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 The Company's ability to utilize its net operating loss and research and development tax credit carryforwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code. (14) ROYALTY, LICENSE, AND RESEARCH AGREEMENTS Royalty and License Agreements The Company has entered into arrangements with various organizations to receive the right to utilize certain patents and proprietary rights under licensing agreements in exchange for the Company making certain royalty payments based on sales of certain products and services. The royalty obligations are based on a percentage of net sales of licensed products and include minimum annual royalty payments under some agreements. The Company pays royalties to five entities on its urine-based screening test and to one entity on its serum- and urine-based Western Blot supplemental tests. The patents underlying the royalties expire between 2004 and 2009. There are minimum payments required by certain of the agreements that apply regardless of the amount of actual sales. The Company did not make all of the required minimum and sales-based payments for 2003 or 2002. At December 31, 2003, the Company is approximately $409,000 in arrears on the payment of royalties under certain of its licensing agreements. Under certain of the Company's licensing agreements, the patent holder or other organization granting rights to the Company has the right to revoke the license for non-payment of royalties. Should the patent holder or other granting organization take that step, the Company could find it necessary to modify its manufacturing practices or change its business plan. During 2002, the Company settled approximately $1 million of its past due royalties by issuing 25,000 shares of its common stock. This transaction was a part of the debt restructuring discussed in Note 7. In September 2003, the Company issued 500,000 shares of its common stock valued at the date of issuance at approximately $610,000 to maintain its exclusivity under certain license agreements for the years 2003 and 2004. The portion applicable to exclusivity during 2004 is recorded as a prepaid expense at December 31, 2003. (15) EMPLOYMENT AND CONSULTING AGREEMENTS In October 2001, the Company renewed an agreement with a former member of the Board of Directors to serve as Chairman of the Board of Directors for a twelve month term. The director was granted options to purchase 10,000 shares of the Company's stock at an exercise price of $6.60. The options were to vest ratably over the twelve-month term of the agreement. The Board member resigned as Chairman and as a member of the Board in May 2002. All options not vested at the time of his resignation were cancelled. In May 2002, in conjunction with the financing proposal enabling the restart of operations, the independent members of the Company's Board of Directors entered into an employment agreement with the Company's new Executive Chairman. The employment agreement specifies an annual salary of $400,000 and allows for annual increases based on the Company's performance and approval of the Compensation Committee of the Board of Directors. The Company deferred approximately 30% of the Executive Chairman's cash compensation during 2002, which the Company accrued. The Company continued to defer and accrue this compensation until it was paid during the third quarter of 2003. In the event the Company terminates the Executive Chairman's employment other than for cause, he is entitled to receive his base salary for at least twelve months. On May 10, 2002, when the market price of the Company's common stock was $0.90 per share, the Executive Chairman was granted fully-vested options to purchase 65,556 shares of the Company's common stock at $0.45 per share and options to purchase 200,000 shares of the Company's common stock at $0.90 per share, with the option to purchase 100,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term. In the fourth quarter of 2002, the Company renegotiated the terms of the option grant contained in the Executive Chairman's Employment Agreement, canceling all but 30,000 of the options granted at $0.90. The Executive Chairman was granted 235,556 fully-vested options at an exercise price of $0.32 per share, the market price of the Company's stock on the May 29, 2003 grant date, following stockholder approval at the May 20, 2003 Annual Stockholders' Meeting of amendments to the Company's 2000 Equity Incentive Plan. Additionally, on May 29, 2003, the Executive Chairman was also granted fully-exercisable options to purchase 256,785 shares of the Company's stock at $0.01 per share, in recognition of an additional salary deferral arrangement, and options to purchase 2,000,000 shares of the Company's stock at $0.32 per share. The latter options were exercisable 50% upon grant and 50% on the one year anniversary of the grant. In October 2002, the Company entered into a new five-year agreement with a former officer and director that included an annual salary of $300,000, subject to annual review. The previous agreement, which commenced in October 1999, provided for an initial annual salary of $220,000, subject to annual increases. In conjunction with the new agreement, the Company also granted the officer options to purchase 146,667 shares of common stock, at an exercise price of $2.40, subject to stockholder approval of F-33 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 amendments at the 2003 Annual Meeting of Stockholders to the Company's 2000 Equity Incentive Plan. These options were to be fully vested on the grant date. In February 2003, the exercise price of this option was reduced to the lesser of $1.50 per share or the market price on the grant date. In the fourth quarter of 2002, the officer agreed to cancel all outstanding options previously granted under the 1991 Incentive Stock Plan and the 2000 Equity Incentive Plan, an aggregate of 62,573 options. The officer was granted 62,573 fully-vested options at an exercise price of $0.32 per share, the market price of the Company's stock on the May 29, 2003 grant date, following stockholder approval at the May 20, 2003 Annual Stockholders' Meeting of amendments to the Company's 2000 Equity Incentive Plan. The options granted conditionally under the Employment Agreement were also granted as fully vested at $0.32 per share on May 29, 2003. Additionally, on May 29, 2003, the officer was also granted fully-exercisable options to purchase 85,236 shares of the Company's stock at $0.01 per share, in recognition of a salary deferral arrangement, and options to purchase 1,250,000 shares of the Company's stock at $0.32 per share. The latter options were exercisable 50% upon grant and 50% on the one year anniversary of the grant. Under the terms of a Separation Agreement, Mutual Release and Waiver of Claims, the officer resigned effective June 2, 2003 as the Company's President and Chief Executive Officer and effective June 27, 2003 as a member of the Company's Board of Directors. Under the terms of the Separation Agreement, the Company agreed to pay approximately $313,000 over a period of up to one year and to permit previously issued options to vest in accordance with the terms of their grants. On January 1, 2003, the Company entered into a twelve month employment agreement, with automatic renewal options, with an officer of the Company that included a base salary of $200,000, and the grant of options to purchase 83,333 shares of the Company's common stock at an exercise price of $1.50 per share, subject to stockholder approval of amendments at the 2003 Annual Meeting of Stockholders to the Company's 2000 Equity Incentive Plan. These options were to be fully vested on the grant date. The officer had previously been granted options to purchase an aggregate of 25,000 shares of the Company's common stock in 2001 and 2002, pursuant to an earlier consulting contract. In the fourth quarter of 2002, the officer agreed to cancel all outstanding options previously granted to him. The officer was granted 25,000 fully-vested options at an exercise price of $0.32 per share, the market price of the Company's stock on the May 29, 2003 grant date, following stockholder approval at the May 20, 2003 Annual Stockholders' Meeting of amendments to the Company's 2000 Equity Incentive Plan. The options granted conditionally under the Employment Agreement were also granted as fully vested at $0.32 per share on May 29, 2003. Additionally, on May 29, 2003, the officer was also granted fully-exercisable options to purchase 24,038 shares of the Company's stock at $0.01 per share, in recognition of a salary deferral arrangement, and options to purchase 625,000 shares of the Company's stock at $0.32 per share. The latter options were exercisable 50% upon grant and 50% on the one year anniversary of the grant. In June 2003, the Company entered into a five year employment agreement with a director and officer of the Company that included a base annual salary of $350,000. Refer to Note 18 regarding management changes. In April 2003, the Company entered into a three-year consulting agreement for advisory and other services related to the marketing, distribution and sale of its products. The agreement obligates the Company to pay the consultant an aggregate of $3,000,000 in cash as follows: $750,000 in 2003, $1,000,000 in both 2004 and 2005, and $250,000 in 2006. At December 31, 2003, the Company had paid an aggregate of $675,000 pursuant to the contract and had accrued the remaining liability for the balance due in 2003. Additionally, the agreement requires the Company to issue 66,667 shares of its common stock annually as directed by the consultant in 2003, 2004 and 2005. (16) RELATED PARTY TRANSACTIONS As described in Note 6, in September 2001, the Company issued a $400,000 8.5% Promissory Note to the parent company of its then-largest stockholder. The Company renegotiated the note during 2001, 2002 and subsequently in 2003. This note was repaid in 2003. In connection with the aggregate $12.5 million investments by Marr Technologies BV during 2003, the Company signed a Memorandum Of Understanding to create a joint venture in China to market the Company's current and future products. Additionally, the Nominating Committee of the Company's Board of Directors agreed to grant Marr the right to appoint two mutually-agreeable representatives to the Company's Board of Directors at a mutually-agreeable future date. In November 2003, the joint venture, Beijing Calypte Biomedical Technology Ltd., was formed, with the Company owning 51% of its stock. (17) CONTINGENCIES On January 27, 2003, an action was filed in San Francisco County Superior Court against the Company by Heller Ehrman White & McAuliffe, LLP ("Heller"), the Company's former attorneys. On April 30, 2003, the Company and Heller reached a F-34 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 settlement agreement whereby the Company agreed to pay a total of $463,000 to settle this claim, after which the suit will be dismissed. As a part of the settlement, the Company waived all of its defenses to Heller's claims, as well as its counterclaims, should it default on this payment plan. The Company made the final required payment to Heller in February 2004 and Heller filed a request for dismissal of the suit with prejudice. On January 24, 2003, the Company was informed that one if its former vendors, Validation Systems, Inc. ("Validation"), had commenced an action in Santa Clara County Superior Court on an open book account in the amount of $79,614, incurred between April 1999 and July 2002 and which the Company accrued, concurrently, plus $20,156 in interest, at the rate of 10% per annum until payment, wherein it has claimed that it rendered services related to the validation of biomedical equipment and processes at the Company's facilities. The Company has contested the claim as the alleged services claimed by Validation were not performed in a timely fashion and were unable to be used by the Company. On September 9, 2003 the Court dismissed Validation's lawsuit against the Company due to the failure of Validation's counsel to appear at a mediation status review and to respond to an order to show cause regarding the failure to appear. Validation has filed a motion to vacate this dismissal on grounds of inadvertence, mistake, surprise and excusable neglect. The Court vacated the dismissal and reinstated the case at a hearing on December 2, 2003 in return for Validation's payment of fees incurred by the Company in connection with Validation's failure to appear. Additonally, the Court ordered the parties to mediation. The parties are in the process of scheduling the mediation. The Company believes that it has meritorious defenses to the action. On May 22, 2003, the Company was informed that a former vendor, Professional Maintenance Management LLC ("PMM"), had instituted an action against the Company in the Montgomery County Circuit Court of Maryland for the sum of $64,925 plus post-judgment interest. The Company agreed to resolve the matter by making an initial payment in the amount of $10,000 and subsequent monthly payments in the amount of $7,500 toward the outstanding amount claimed by PMM. All payments have been made and plaintiff's counsel has filed a dismissal of the action with the Court. In September of 2003, the Company was served a lawsuit filed in the United States District Court for the Northern District of California by three individuals, Michael Serro, Michael Caland and Assad Ali Assad, seeking shares of the Company to which they claim they are entitled based on consulting services they claim to have provided pursuant to consulting agreements they had with the Company. The Company disputed the liability and contended that these three individuals did not provide the consulting services to the Company upon which their claims are based. A Stipulation of Dismissal was filed with the Court in February 2004 and the matter is now closed. The Company was contacted by the San Francisco District Office of the Securities and Exchange Commission ("SEC") on October 28, 2003 and advised of an informal inquiry being conducted by the enforcement staff of the SEC regarding the Company. The staff has requested, among other things, documents and information related to certain press releases issued by the Company. The SEC has advised the Company that the inquiry should not be construed as an indication by the SEC or its staff that any violation of law has occurred. The Company has voluntarily provided the information sought by the SEC and is cooperating with the SEC in connection with its informal inquiry. Independently, the Company's Audit Committee has investigated the matter and has retained outside counsel to assist in its investigation by reviewing the press releases and related information that were the subject matter of the SEC's informal inquiry letter. The Audit Committee has completed its investigation and reported the results of its investigation and associated recommendations to the Board of Directors. Counsel for the Audit Committee advised the Audit Committee and the Board of Directors that the results of their investigation, interviews and review of documents provided in response to the SEC's informal inquiry letter indicated no evidence of management malfeasance with respect to its inquiry. The Audit Committee, based upon its counsel's recommendations, proposed that the Company implement certain practices and procedures, some of which represent a continuation or formalization of present practices. The recommendations and proposals of the Audit Committee that were approved by the Board of Directors include certain improvements in the Company's press release issuance process and investor relations and regulatory recordkeeping procedures. Additionally, the Board of Directors has directed management to implement the American Stock Exchange corporate governance standards (SR-AMEX-2003-65) approved by the SEC on December 1, 2003. The Company is in the process of implementing the directives of its Board of Directors regarding Corporate Governance and has submitted to the Board, and the Board has approved, certain policies and guidelines related to press releases and investor relations that reflect the recommendations of the Audit Committee. F-35 CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 (18) SUBSEQUENT EVENTS Extension of Mercator Debentures On January 14, 2004, the Company extended the maturity date of the following debentures until July 14, 2004: o 10% Convertible Debenture dated January 14, 2003 issued to Mercator Focus Fund, LP o 10% Convertible Debenture dated January 30, 2003 issued to Mercator Momentum Fund, LP o 10% Convertible Debentures dated March 13, 2003 issued to Mercator Momentum Fund III, LP and Mercator Focus Fund, LP o 12% Convertible Debenture dated April 29, 2003 issued to Mercator Momentum Fund, LP In return for the extension of the maturity dates, the Company has agreed to pay an additional extension fee equal to 2% of the outstanding principal balance per month until the earlier of the extended maturity date or conversion. The extension fee is payable 1% in cash and 1% in stock. Additionally, the Company agreed to file a registration statement including the shares potentially applicable to the conversion of the outstanding debenture balances by no later than April 29, 2004. The shares issuable as a portion of the extension fee are to be included in the registration statement. Extension of Registration Rights On January 23, 2004, the Company and Marr agreed to extend the registration rights period attributable to 5,181,818 shares of the Company's common stock issued in conjunction with Marr's conversion of $570,000 principal amount of the Company's 12% Convertible Debentures from February 27, 2004 to April 29, 2004. In return for the extension, the Company agreed to include in its next registration statement an aggregate of 28,333,333 shares of its common stock purchased by Marr in PIPE transactions in the third quarter of 2003. Amendment of Marr Credit Facility On March 19, 2004, when the market price of the Company's common stock was $0.575 per share, the Company and Marr amended the Marr Credit Facility to increase the aggregate amount available under the Marr Credit Facility to $15,000,000 and to eliminate the termination provision upon failure to have the common stock listed on an established stock exchange by March 31, 2004. As additional consideration for the amendment of the Marr Credit Facility, the Company issued to Marr an additional warrant to purchase 400,000 shares of its common stock at an exercise price of $0.46 per share. This warrant is immediately exercisable and expires two years from its date of issuance on March 18, 2006. Management Changes On January 24, 2004, the Company announced the appointment of J. Richard George, Ph.D. as its new President and Chief Executive Officer and Richard Van Maanen as its new Vice President of Operations. The Company also announced that Jay Oyakawa had resigned from his position as President, Chief Operating Officer and as a member of the Company's Board of Directors. The Company entered into a Separation Agreement and Release with Mr. Oyakawa wherein he will be paid a severance of one year's salary of $350,000 over a twelve month period and was vested in options to purchase 750,000 shares of the Company's common stock exercisable at $0.32 granted to him in accordance with the Company's 2000 Equity Incentive Plan. Dr. George has been the Company's Vice President of Government Affairs since January 2003 and Mr. Van Maanen has been employed by the Company since 1993 as Director of Marketing and Director of International Business Development. Operating Lease Extension In March 2004, the Company entered into a new lease agreement with the primary landlord of its manufacturing facility in Rockville, Maryland. The new agreement extends the lease of the premises through February 28, 2009, or 28 months beyond the expiration of the curent sublease. Additionally, the new lease provides for tenant improvements to be made in connection with the Company's consolidation of its manufacturing operations at this facility in the amount of approximately $250,000. The base rent for the tenant improvements will be approximately $5,500 per month from March 2004 through October 2006. Following the expiration of the Company's current sublease, the base rent from November 2006 through February 2009 will be approximately $40,000 per month. F-36 PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CALYPTE BIOMEDICAL CORPORATION (Registrant) /s/ J. Richard George By: ------------------------------------- J. RICHARD GEORGE PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 29, 2004 POWER OF ATTORNEY Each Director of the Registrant whose signature appears below, hereby appoints J. Richard George and Richard D. Brounstein as his attorney-in-fact to sign in his name and on his behalf as a Director of the Registrant, and to file with the Securities and Exchange Commission any and all Amendments to this report on Form 10-KSB to the same extent and with the same effect as if done personally. Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below, by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE DATE =========================================== ======================================================= ================ /s/ Anthony J. Cataldo Executive Chairman of the Board of Directors March 29, 2004 =========================================== ANTHONY J. CATALDO /s/ J. Richard George President, Chief Executive Officer March 29, 2004 =========================================== J. RICHARD GEORGE P /s/ Richard D. Brounstein Executive Vice President and Chief Financial Officer March 29, 2004 =========================================== (Principal Financial and Accounting Officer) RICHARD D. BROUNSTEIN /s/ John J. DiPietro Director March 29, 2004 =========================================== JOHN J. DIPIETRO /s/ Paul Freiman Director March 29, 2004 =========================================== PAUL FREIMAN /s/ Julius R. Krevans, M.D. Director March 29, 2004 =========================================== JULIUS R. KREVANS, M.D. /s/ Zafar I. Randawa, Ph.D. Director March 29, 2004 =========================================== ZAFAR I. RANDAWA, PH.D.
S-1 EX-3.4 3 ex3_4.txt Exhibit 3.4 CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CALYPTE BIOMEDICAL CORPORATION CALYPTE BIOMEDICAL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That at a meeting of the Board of Directors of CALYPTE BIOMEDICAL CORPORATION, resolutions were duly adopted by unanimous written consent dated March 28, 2003, setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Amended and Restated Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article thereof numbered "IV", so that, as amended, said paragraph shall read as follows: "IV: The corporation is authorized to issue two classes of shares of stock to be designated, respectively, Common Stock, $0.03 par value, and Preferred Stock, $0.001 par value. The total number of shares that the corporation is authorized to issue is 805,000,000 shares. The number of shares of Common Stock authorized is 800,000,000 and the number of Preferred Stock authorized is 5,000,000." THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or by reason of said amendment. FIFTH: That said amendment shall become effective on May 27, 2003. IN WITNESS WHEREOF, said CALYPTE BIOMEDICAL CORPORATION has caused this certificate to be signed by its Executive Chairman of the Board this 20th day of May, 2003. /s/Anthony J. Cataldo ------------------------------- Anthony J. Cataldo Executive Chairman of the Board EX-3.5 4 ex3_5.txt Exhibit 3.5 CERTIFICATE OF CORRECTION OF CALYPTE BIOMEDICAL CORPORATION Pursuant to Section 103(f) of Title 8 of the Delaware Code of 1953, as Amended I, the undersigned, being the Executive Chairman of the Board of Calypte Biomedical Caorporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DO HEREBY CERTIFY: RESOLVED, that a) In the Certificate of Amendment of the Amended and Restated Certificate of Incorporation of this corporation, filed with the Secretary of State on May 22, 2003, within the resolution setting forth the amendment of the par value of the Common Stock of the corporation, reference to the resolution authorizing a reverse stock split was inadvertently and incorrectly omitted, and b) In the Certificate of Amendment of the Amended and Restated Certificate of Incorporation of this corporation, the effective date of the amendment inadvertently was set forth incorrectly, therefore, Paragraphs FIRST and FIFTH of the Amended and Restated Certificate of Incorporation should be corrected to read as follows: "FIRST: That at a meeting of the Board of Directors of CALYPTE BIOMEDICAL CORPORATION, resolutions were duly adopted by unanimous written consent dated March 28, 2003, setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Amended and Restated Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article thereof numbered "IV", so that, as amended, said paragraph shall read as follows: `IV: The corporation is authorized to issue two classes of shares of stock to be designated, respectively, Common Stock, $0.03 par value, and Preferred Stock, $0.001 par value. The total number of shares that the corporation is authorized to issue is 805,000,000 shares. The number of shares of Common Stock authorized is 800,000,000 and the number of Preferred Stock authorized is 5,000,000.' IT IS FURTHER RESOLVED that CALYPTE BIOMEDICAL CORPORATION be and hereby is authorized and directed to cause a one for thirty (1:30) reverse stock split of the issued and outstanding Common Shares, which reverse stock split shall decrease the number of issued and outstanding shares of Common Stock by one-thirtieth, but shall have no effect on the 800,000,000 shares of authorized Common Stock." "FIFTH: That said amendment shall become effective on May 28, 2003." IN WITNESS WHEREOF, I have hereunto set my hand and seal this 27th day of May, 2003 /s/ Anthony J. Cataldo - ------------------------------- Anthony J. Cataldo Executive Chairman of the Board EX-10.1 5 ex10_1.txt INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT (this "Agreement"), made as of this _____ day of _____, 2004 by and between Calypte Biomedical Corporation, a Delaware corporation (the "Company"), and [NAME OF INDIVIDUAL] (the "Indemnitee"), a director [and] [officer] of the Company. WHEREAS, the Indemnitee is currently serving [has agreed to serve] as a [director] [and] [officer] of the Company and in such capacity has rendered [will render] valuable services to the Company; WHEREAS, the Company has investigated the availability and sufficiency of directors' and officers' liability insurance and Delaware statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and the Company has concluded that such insurance and statutory provisions may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and officers; and WHEREAS, in order to induce and encourage highly experienced and capable persons such as the Indemnitee [to continue] to serve as [directors] [and] [officers] of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other alternatives available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent, but necessary to promote and ensure the best interests of the Company and its stockholders; NOW, THEREFORE, in consideration of the premises and mutual agreements hereinafter set forth, and other good and valuable consideration, including, without limitation, the [continued] service of the Indemnitee, the receipt of which hereby is acknowledged, and in order to induce the Indemnitee [to continue] to serve as a [director] [and] [officer] of the Company, the Company and the Indemnitee hereby agree as follows: 1. Definitions. As used in this Agreement: (a) "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar or successor schedule or form) promulgated under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred (irrespective of the applicability of the initial clause of this definition) if (i) any individual or entity or any group or person (as such terms are used in Sections 13(d) and 14(d) of the Act, but excluding any trustee or other fiduciary holding securities pursuant to an employee benefit or welfare plan or employee stock plan of the Company or any subsidiary of the Company, or any entity organized, appointed, established or DOCSSF1:721870.1 14450-2 RVS holding securities of the Company with voting power for or pursuant to the terms of any such plan) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two-thirds of the Continuing Directors (as defined below) in office immediately prior to such person's attaining such interest; (ii) the Company is not the continuing or surviving corporation of a merger or consolidation of the Company or pursuant to which shares of the Company's voting stock would converted into cash, securities or other property, other than a merger of the Company in which the holders of such stock immediately prior to the merger have the same proportionate ownership of such stock of the surviving corporation immediately after such merger; (iii) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its assets or liquidates or dissolves, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) (such directors being referred to herein as "Continuing Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Company. (b) "Disinterested Director" with respect to any request by the Indemnitee for indemnification or advancement of expenses hereunder shall mean a director of the Company who neither is nor was a party to the Proceeding (as defined below) in respect of which indemnification or advancement is being sought by the Indemnitee. (c) The term "Expenses" shall mean, without limitation, expenses of Proceedings, including attorneys' fees, disbursements and retainers, accounting and witness fees, expenses related to the preparation or service as a witness, travel and deposition costs, expenses of investigations, judicial or administrative proceedings and appeals, amounts paid in settlement of a Proceeding by or on behalf of the Indemnitee, costs of attachment or similar bonds, any expenses of attempting to establish or establishing a right to indemnification or advancement of expenses, under this Agreement, the Company's Certificate of Incorporation or Bylaws, applicable law or otherwise, and reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which the Indemnitee is not otherwise compensated by the Company or any third party. The term "Expenses" shall not include the amount of judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, which are actually levied against or sustained by the Indemnitee to the extent sustained after final adjudication. (d) The term "Independent Legal Counsel" shall mean any firm of attorneys selected by lot from a list consisting of firms which meet minimum size criteria and other reasonable criteria established by the Board of Directors of the Company, so long as such firm has not represented the Company, the Indemnitee, any entity controlled by the Indemnitee, or any party adverse to the Company, within the preceding five years. Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any person who, under applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's DOCSSF1:721870.1 2 14450-2 RVS right to indemnification or advancement of expenses under this Agreement, the Company's Certificate of Incorporation or Bylaws, applicable law or otherwise. (e) The term "Proceeding" shall mean any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, or any other proceeding (including, without limitation, an appeal therefrom), formal or informal, whether brought in the name of the Company or otherwise, whether of a civil, criminal, administrative or investigative nature, and whether by, in or involving a court or an administrative, other governmental or private entity or body (including, without limitation, an investigation by the Company or its Board of Directors), by reason of (i) the fact that the Indemnitee is or was a [director] [or] [officer] of the Company, or is or was serving at the request of the Company as an agent of another enterprise, whether or not the Indemnitee is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement, (ii) any actual or alleged act or omission or neglect or breach of duty, including, without limitation, any actual or alleged error or misstatement or misleading statement, which the Indemnitee commits or suffers while acting in any such capacity, or (iii) the Indemnitee attempting to establish or establishing a right to indemnification or advancement of expenses pursuant to this Agreement, the Company's Certificate of Incorporation or Bylaws, applicable law or otherwise. (f) The phrase "serving at the request of the Company as an agent of another enterprise" or any similar terminology shall mean, unless the context otherwise requires, (i) serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust, employee benefit or welfare plan or other enterprise, foreign or domestic, and (ii) serving as a director, officer, employee or agent of a corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation. The phrase "serving at the request of the Company" shall include, without limitation, any service as a [director] [or] [officer] of the Company which imposes duties on, or involves services by, such [director] [or] [officer] with respect to the Company or any of the Company's subsidiaries, affiliates, employee benefit or welfare plans, such plan's participants or beneficiaries or any other enterprise, foreign or domestic. In the event that the Indemnitee shall be a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust, employee benefit or welfare plan or other enterprise, foreign or domestic, 40% or more of the common stock, combined voting power or total equity interest of which is owned by the Company or any subsidiary or affiliate thereof, then it shall be presumed conclusively that the Indemnitee is so acting at the request of the Company. 2. Services by the Indemnitee. The Indemnitee agrees [to continue] to serve as a [director] [and] [officer] of the Company [at the will of the Company] [under the terms of the Indemnitee's agreement with the Company] for so long as the Indemnitee is duly elected and qualified, appointed or until such time as the Indemnitee tenders a resignation in writing or is removed as a [director] [or] [officer]; provided, however, that the Indemnitee may at any time and for any reason resign from [either or both of] such position[s] (subject to any other contractual obligation or other obligation imposed by operation of law). DOCSSF1:721870.1 3 14450-2 RVS 3. Proceeding Other Than a Proceeding By or In the Right of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a [director] [or] [officer] of the Company, or is or was serving at the request of the Company as an agent of another enterprise, against all Expenses, judgments, fines, interest or penalties, and excise taxes assessed with respect to any employee benefit or welfare plan, which are actually and reasonably incurred by the Indemnitee in connection with such a Proceeding, to the fullest extent permitted by applicable law; provided, however, that any settlement of a Proceeding must be approved in advance in writing by the Company. 4. Proceedings By or In the Right of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee is or was a [director] [or] [officer] of the Company, or is or was serving at the request of the Company as an agent of another enterprise, against all Expenses, judgments, fines, interest or penalties, and excise taxes assessed with respect to any employee benefit or welfare plan, which are actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable law. 5. Indemnification for Costs, Charges and Expenses of Witness or Successful Party. Notwithstanding any other provision of this Agreement (except as set forth in subparagraph 9(a) hereof), and without a requirement for determination as required by Paragraph 8 hereof, to the extent that the Indemnitee (a) has prepared to serve or has served as a witness in any Proceeding in any way relating to (i) the Company or any of the Company's subsidiaries, affiliates, employee benefit or welfare plans, such plan's participants or beneficiaries or any other enterprise, foreign or domestic, or (ii) anything done or not done by the Indemnitee as a [director] [or] [officer] of the Company, as a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust, employee benefit or welfare plan or other enterprise, foreign or domestic, or as a director, officer, employee or agent of a corporation which was a predecessor corporation of the Company or of another enterprise, at the request of such predecessor corporation, or (b) has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee in connection therewith to the fullest extent permitted by applicable law. 6. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, which are actually and reasonably incurred by the Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not, however, for the total amount of the Indemnitee's Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, then the Company shall nevertheless indemnify DOCSSF1:721870.1 4 14450-2 RVS the Indemnitee for the portion of such Expenses, judgments, fines, interest penalties or excise taxes to which the Indemnitee is entitled. 7. Advancement of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable law; provided, however, that the Indemnitee shall set forth in such request reasonable evidence that such Expenses have been incurred by the Indemnitee in connection with such Proceeding, a statement that such Expenses do not relate to any matter described in subparagraph 9(a) of this Agreement, and an undertaking in writing to repay any advances if it is ultimately determined as provided in subparagraph 8(b) of this Agreement that the Indemnitee is not entitled to indemnification under this Agreement. 8. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim for indemnification or advancement of Expenses in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. Such notice shall be given to the secretary of the Company, who shall promptly advise the Board of Directors of the Company of such notification. The omission by the Indemnitee to so notify the Company will not relieve the Company from any liability which the Company may have to the Indemnitee under this Agreement, unless the Company shall have lost significant substantive or procedural rights with respect to the defense of any Proceeding as a result of such omission to so notify. (b) The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable law, for indemnification pursuant to this Agreement and shall be absolutely entitled to such indemnification, unless a determination by clear and convincing evidence is made that the Indemnitee has not met such standards by (i) the Board of Directors by a majority vote of the Disinterested Directors (whether or not they constitute a quorum of the Board of Directors), (ii) the stockholders of the Company by majority vote of a quorum thereof consisting of stockholders who are not parties to the Proceeding due to which a claim for indemnification is made under this Agreement, (iii) Independent Legal Counsel as set forth in a written opinion (it being understood that such Independent Legal Counsel shall make such determination only if there are no Disinterested Directors or if a majority the Disinterested Directors so directs and that such Independent Legal Counsel shall be selected by the Board of Directors and shall be reasonably acceptable to the Indemnitee), or (iv) a court of competent jurisdiction; provided, however, that if a Change of Control shall have occurred and the Indemnitee so requests in writing, such determination shall be made only by Independent Legal Counsel or a court of competent jurisdiction, as requested by the Indemnitee (it being understood that in such event the Indemnitee shall select the court or any Independent Legal Counsel). (c) If either a claim for (x) advancement of Expenses under this Agreement is not paid by the Company within 20 days after receipt by the Company of written notice thereof (together with the undertaking required by Paragraph 7 hereof) or (y) indemnification under this Agreement is not paid by the Company within 60 days after receipt by DOCSSF1:721870.1 5 14450-2 RVS the Company of written notice thereof, regardless of the reasons for such failure, then the Indemnitee shall be deemed to be, and shall be, entitled to such advancement or indemnification, unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for advancement or indemnification or in any supporting documentation or (B) such advancement or indemnification is prohibited by law. In such event, or in the event that a determination is made that the Indemnitee is not entitled to such advancement or indemnification, then the rights provided by this Agreement shall be enforceable by the Indemnitee, at his [her] sole election, in any court of competent jurisdiction or an arbitration to be conducted by a single arbitrator pursuant to the Rules of the American Arbitration Association. Such judicial proceeding or arbitration shall be made de novo. The burden of proving by clear and convincing evidence that advances or indemnification are not permitted under this Agreement shall be on the Company. Neither the failure of the directors or stockholders of the Company or Independent Legal Counsel to have made a determination prior to the commencement of such action that indemnification or advancement of Expenses is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or stockholders of the Company or Independent Legal Counsel that the Indemnitee has not met the applicable standard of conduct shall be a defense to an action or arbitration by the Indemnitee or create a presumption for the purpose of such an action or arbitration that the Indemnitee has not met the applicable standard of conduct or that the Indemnitee otherwise is not entitled to such advancement or indemnification. The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself (i) create a presumption that the Indemnitee did not act in good faith and in a manner which he [she] reasonably believed to be in the best interests of the Company and/or its stockholders, and, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that his [her] conduct was unlawful or (ii) otherwise adversely affect the rights of the Indemnitee to indemnification or advancement of Expenses under this Agreement, except as may be provided herein. The Company shall be precluded from asserting in any judicial proceeding or arbitration that the provisions, procedures and presumptions of this Agreement are not legal, valid, binding and enforceable and shall stipulate therein that the Company is bound by all the provisions, procedures and presumptions of this Agreement. (d) The Indemnitee's Expenses incurred in connection with any Proceeding concerning the Indemnitee's right to indemnification or advancement of Expenses in whole or in part pursuant to this Agreement shall also be indemnified by the Company, regardless of the outcome of such a Proceeding, to the fullest extent permitted by applicable law, the Company's Certificate of Incorporation, as amended, and the Company's Bylaws, as amended. In any event, if a court of competent jurisdiction or an arbitrator shall determine that the Indemnitee is entitled to an advancement of Expenses or indemnification hereunder, in whole or in part, the Company shall pay promptly all Expenses actually and reasonably incurred by the Indemnitee in connection with such adjudication (including, but not limited to, any appellate proceedings). (e) With respect to any Proceeding for which indemnification or advancement of Expenses is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel reasonably satisfactory to the DOCSSF1:721870.1 6 14450-2 RVS Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee under this Agreement for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employ his [her] own counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the defense of a proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advanced by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 9. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee for Expenses with respect to (i) Proceedings initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable law or (ii) Expenses incurred by the Indemnitee in connection with preparing to serve or serving, prior to a Change in Control, as a witness in cooperation with any party or entity who or which has threatened or commenced any action or proceeding against the Company, or any director, officer, employee, trustee, agent, representative, subsidiary, parent corporation or affiliate of the Company, but such indemnification or advancement of Expenses in each such case may be provided by the Company if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, and sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify the Indemnitee for any Expenses, judgments, fines, expenses or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Act or similar provisions of any federal, state or local statute or regulation; (d) To indemnify the Indemnitee for any Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, for which the Indemnitee is indemnified by the Company otherwise than pursuant to this Agreement; DOCSSF1:721870.1 7 14450-2 RVS (e) To indemnify the Indemnitee for any Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, on account of the Indemnitee's conduct if such conduct shall be finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct, including, without limitation, breach of the duty of loyalty; or (f) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 10. Continuation of Indemnification. All agreements and obligations of the Company contained herein shall continue during the period that the Indemnitee is a [director] [or] [officer] of the Company (or is or was serving at the request of the Company as an agent of another enterprise, foreign or domestic) and shall continue thereafter so long as the Indemnitee shall be subject to any possible Proceeding by reason of the fact that the Indemnitee was a [director] [or] [officer] of the Company or serving in any other capacity referred to in this Paragraph 10. 11. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed to be exclusive of any other rights to which the Indemnitee may be entitled under the Company's Certificate of Incorporation, as amended, the Company's Bylaws, as amended, any agreement, vote of stockholders or vote of Disinterested Directors, provisions of applicable law, or otherwise, both as to action or omission in the Indemnitee's official capacity and as to action or omission in another capacity on behalf of the Company while holding such office. 12. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 13. Successors and Assigns. (a) This Agreement shall be binding upon, and shall inure to the benefit of, the Indemnitee and the Indemnitee's heirs, executors, administrators and assigns, whether or not the Indemnitee has ceased to be a [director] [and/or] [officer], and the Company and its successors and assigns. Upon the sale of all or substantially all of the business, assets or capital stock of the Company to, or upon the merger of the Company into or with, any corporation, partnership, joint venture, trust or other person, this Agreement shall inure to the benefit of and be binding upon both the Indemnitee and such purchaser or successor person. Subject to the foregoing, this Agreement may not be assigned by either party without the prior written consent of the other party hereto. (b) If the Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify the Indemnitee's estate and the Indemnitee's spouse, heirs, executors, administrators and assigns against, and the Company shall, and does hereby agree to assume, any and all Expenses actually and reasonably incurred by or for the Indemnitee or the Indemnitee's estate, in connection with the investigation, defense, DOCSSF1:721870.1 8 14450-2 RVS appeal or settlement of any Proceeding. Further, when requested in writing by the spouse of the Indemnitee, and/or the Indemnitee's heirs, executors, administrators and assigns, the Company shall provide appropriate evidence of the Company's agreement set out herein to indemnify the Indemnitee against and to itself assume such Expenses. 14. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 15. Severability. Each and every paragraph, sentence, term and provision of this Agreement is separate and distinct so that if any paragraph, sentence, term or provision thereof shall be held to be invalid, unlawful or unenforceable for any reason, such invalidity, unlawfulness or unenforceability shall not affect the validity, unlawfulness or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable law. 16. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, interest or penalties, or excise taxes assessed with respect to any employee benefit or welfare plan, which are incurred with respect to any Proceeding to the fullest extent permitted by any (a) applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or (b) applicable provision of Delaware law. 17. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware without regard to the conflict of laws principles thereof. 18. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Certificate of Incorporation, Bylaws or by other agreements, including directors' and officers' liability insurance policies, of the Company. 19. Notices. Any notice required to be given under this Agreement shall be directed to Calypte Biomedical Corporation, 1265 Harbor Bay Parkway, Alameda, California 94502, Attention: ________________, and to the Indemnitee at _________________- or to such other address as either shall designate to the other in writing. IN WITNESS WHEREOF, the parties have executed this Indemnification Agreement as of the date first written above. INDEMNITEE DOCSSF1:721870.1 9 14450-2 RVS - ------------------------------ Name: CALYPTE BIOMEDICAL CORPORATION. By: --------------------------- Name: Title: DOCSSF1:721870.1 10 14450-2 RVS EX-10.136 6 ex10_36.txt EMPLOYMENT AGREEMENT AGREEMENT is effective as of the 20th day of January 2004 by and between CALYPTE BIOMEDICAL CORPORATION, having a place of business at 1265 Harbor Bay Parkway, Alameda, CA 94502 (hereinafter referred to as "EMPLOYER") and J. RICHARD GEORGE, residing at 9250 Mississippi Run, Brooksville FL 34613 (hereinafter referred to as "EMPLOYEE"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the EMPLOYER is engaged in the business of developing and marketing urine-based diagnostic products and services for Human Immunodeficiency Virus (HIV-1); and WHEREAS, the EMPLOYER is desirous of employing EMPLOYEE, and EMPLOYEE wishes to be employed by EMPLOYER in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES AND OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT OF WHICH IS HEREBY ACKNOWLEDGED, IT IS MUTUALLY AGREED AS FOLLOWS: 1. EMPLOYMENT DUTIES AND TERM: EMPLOYER and EMPLOYEE agree to enter ------------------------------- into an Employment Agreement, and the within Employment Agreement is effective as of the date first written above. The EMPLOYER does hereby employ, engage and hire the EMPLOYEE as President and Chief Executive Officer of EMPLOYER for a period of three (3) years commencing January 20, 2004 and terminating January 19, 2007. The duties of EMPLOYEE shall include, but not be limited to, acting as President and Chief Executive Officer of EMPLOYER. EMPLOYEE will perform services on behalf of EMPLOYER with respect to the management and general supervision of the business of EMPLOYER. 2. GOOD FAITH PERFORMANCE OF DUTIES: The EMPLOYEE agrees that he will, ----------------------------------- at all times, faithfully, industriously, and to the best of his ability, experience and talent, perform all of the duties that may be required of and from him, pursuant to the expressed and implicit term hereof. 3. COMPENSATION: EMPLOYER shall pay to the EMPLOYEE, and the EMPLOYEE --------------- agrees to accept from the EMPLOYER, in full payment for the 1 EMPLOYEE's services hereunder, compensation at the rate of $250,000 per annum. EMPLOYEE will be paid bi weekly during the term of the within Agreement. In addition, subject to the approval of the Company's 2004 Incentive Plan by its stockholders, EMPLOYER agrees to award to EMPLOYEE 5,000,000 stock options to purchase 5,000,000 shares of common stock pursuant to the Company's 2004 Incentive Plan for a term of 10 years from date of grant, which date shall be on or as soon as reasonably practicable after the date the Company's stockholders shall approve the 2004 Incentive Plan. The exercise price and the vesting schedule of the options shall be as determined by the Company's Compensation Committee and consistent with other 2004 grants to executive officers and key employees. In addition, EMPLOYER agrees to reimburse EMPLOYEE for all verifiable expenses incurred by EMPLOYEE during the term of his employment. EMPLOYEE agrees to provide adequate written documentation as may be required with respect to said expenses. 4. VACATION: Paid vacation (taken consecutively or in segments) in ------------ accordance with the EMPLOYER's policies generally applicable to other executives of the Company from time to time, taken at such times as is reasonably consistent with proper performance by Employee of Employee's duties and responsibilities hereunder. 5. TERMINATION WITHOUT CAUSE OR CHANGE IN CONTROL: In the event that --------------------------------------------------- the Employment Agreement is terminated by EMPLOYER without cause, or EMPLOYER sells an amount of its outstanding and issued common stock to any entity or third party which results in a change of control of EMPLOYER, then in such event, all stock options granted to EMPLOYEE in addition to options granted as per Paragraph "3" of this Agreement will be immediately vested in EMPLOYEE, and all payments due to EMPLOYEE for the full term of the Agreement will be due to EMPLOYEE. 6. DEDICATION OF TIME: EMPLOYEE shall devote all of his working time, ---------------------- attention, knowledge and skill solely and exclusively to the business and interest of the EMPLOYER. The EMPLOYEE expressly agrees that he will not, during the term hereof or for one (1) year from the termination of this Agreement, be involved directly or indirectly, in any form, fashion or manner, as a partner, officer, director, stockholder (owning in excess of 4.9%), advisor, consultant or employee in any other business similar to or in any way competing with the business of the EMPLOYER. Nothing herein contained shall, however, limit the rights of the EMPLOYEE to own up to 5% of the capital stock or other securities of any corporation, whose stock or securities are publicly owned or traded regularly on a public exchange or in the over-the-counter market, or to prevent the EMPLOYEE from investing financially in, or limiting the EMPLOYEE's rights to invest financially in, other businesses not allied with or competing with the business of the EMPLOYER, as long as EMPLOYEE continues to 2 devote all of his working time, attention, knowledge and skill, solely and exclusively to the business and interest of the EMPLOYER. EMPLOYEE will be permitted to serve on the Board of Directors of publicly owned companies. 7. CONFIDENTIALITY: During the terms of EMPLOYEE's employment under ------------------- this Agreement, and for one (1) year thereafter, the EMPLOYEE specifically agrees that he will not, at any time, in any fashion, form or manner, either directly or indirectly, use, divulge, disclose or communicate to any person, firm or corporation, in any manner whatsoever, any confidential or proprietary information of any kind, nature or description concerning any matters affecting or relating to the business of the EMPLOYER including, without limiting the generality of the foregoing, any of its customers, its manner of operations, its plans, its ideas, processes, programs, its intellectual property or other data, information or materials of any kind, nature or description, without regard to whether any or all of the foregoing matters shall be deemed confidential, material or important. The parties hereto stipulate that, as between them, the same are important, material, confidential and gravely affect the effective and successful conduct of the business of the EMPLOYER and its goodwill, and that any breach of the terms of this Paragraph is a material breach thereof, except where the EMPLOYEE shall be acting on behalf of the EMPLOYER. EMPLOYEE understands and agrees that, in the event that EMPLOYEE violates the terms and conditions, as stated in this Paragraph, that he will be subject to an injunction and damages, and understands and agrees that EMPLOYER's remedy to prevent further or continued damages will include a petition for injunctive relief. EMPLOYEE expressly acknowledges that the restrictions contained in this Paragraph are reasonable and are properly required for the adequate protection of the EMPLOYER's interests. EMPLOYEE further understands and agrees that EMPLOYER, in entering into this Agreement, is relying upon EMPLOYEE's representation and warranty that all trade secrets and other proprietary information of EMPLOYER will be kept strictly confidential by EMPLOYEE and not utilized by EMPLOYEE in any manner whatsoever other than on EMPLOYER's behalf during the course of EMPLOYEE's employment with EMPLOYER. 8. NON-COMPETITION: EMPLOYEE agrees that, during the term of this ------------------- Agreement and for one (1) year after termination hereof, he shall not, for himself or any third party, directly or indirectly, divert or attempt to divert from the EMPLOYER or its subsidiaries or affiliates any business of any kind in which it is engaged or employed, solicit for employment, or recommend for employment any person employed by the EMPLOYER or by any of its subsidiaries or affiliates, during the period of such person's employment and for a period of one (1) year thereafter. EMPLOYEE expressly acknowledges that the restrictions contained in this paragraph are reasonable and are properly required for the adequate protection of the EMPLOYER's interests. 9. EARLY TERMINATION: It is expressly understood and agreed --------------------- 3 that the terms of this Agreement, may be terminated by the EMPLOYER prior to January 19, 2007, upon the occurrence of any of the following events: (a) Automatically and without notice upon the death of the EMPLOYEE; it is also understood that EMPLOYEE will be entitled to three (3) months' salary which will be payable to his estate; (b) Persistent absenteeism on the part of the EMPLOYEE, which in the reasonable judgment of the Board of Directors of the Company is having or will have a material adverse effect on the performance of the EMPLOYEE's duties under this Agreement; (c) Deliberate and willful failure to perform normal services and duties required of EMPLOYEE pursuant to this Agreement, except if the performance of such duties or services would result in a violation of EMPLOYEE's fiduciary responsibility to the Company and its shareholders or is in a violation of applicable laws; (d) Any willful act or failure to act, which in the reasonable opinion of the Board, is in bad faith and to the material detriment of the EMPLOYER; (e) Conviction of a felony involving moral turpitude or dishonesty; (f) Total or partial disability of the EMPLOYEE for a period of three (3) consecutive months or ninety (90) days, in the aggregate, so that he is prevented from satisfactorily performing a substantial part of his duties; it being further understood and agreed that any proceeds received by EMPLOYEE from a policy of disability benefits insurance or any other proceeds received from any Federal, State or Municipal agency of government will be credited to the amount of compensation paid to EMPLOYEE by EMPLOYER; and (g) Fraudulent misconduct of the EMPLOYEE. The Agreement shall not be terminated by any: (a) Merger or consolidation, where the Company is not the consolidating or surviving; or (b) Transfer of all or a substantial majority of the assets of the Company; (c) Acquisition or control of fifty percent (50%) or more of the Company's issued and voting equity share capital by any party, or by parties 4 acting in concert or under common control. In the event of any merger or consolidation or transfer of all, or a substantial majority, of the assets of the Company or acquisition or control of fifty percent (50%) (or an amount of stock ownership that has the ability to elect the Board of Directors of EMPLOYER) or more of the Company's issued and voting equity share capital by any party or by parties acting in concert or under common control, the surviving or resulting entity or the transferee or transferees of the Company's assets or its issued and voting equity share capital, shall be bound by, and shall have the benefit of, the provision of this Agreement, and the Company shall endeavor to take all actions necessary to ensure that such entity or transferee or transferees shall be bound by the provisions of the Agreement. Moreover, in the event of such merger or consolidation, or transfer of all or a substantial majority of the assets of the Company or acquisition of the Company of the Company's issued and voting equity share capital as aforesaid, the EMPLOYEE may, at his option, continue his employment under the terms of this Agreement, or upon giving not less than thirty (30) days notice, no later than thirty(30) days (or as soon thereafter as a merger or consolidation or transfer of all or a substantial majority of assets is announced) prior to the announced or anticipated date of merger or consolidation or transfer of all or a substantial majority of assets of the Company, by registered mail, to the registered office of the Company, requiring the Company to effect full settlement of all the EMPLOYEE's entitlements under the terms of this Agreement, which settlement shall also include the payment of EMPLOYEE's remuneration for the full term of the Agreement. 10. BENEFITS: EMPLOYER agrees that EMPLOYEE will be entitled, during ------------- the term, to all fringe benefits in effect for executive officers of the EMPLOYER, such as Blue Cross/ Blue Shield and Major Medical 11. NO WAIVER: The parties hereto do further agree that no waiver or ------------- modification of this Agreement or of any covenant, condition or limitation herein contained, shall be valid, unless in writing and duly executed by the party to be charged therewith, and that no evidence of any proceedings or litigation between either of the parties arising out of or affecting this Agreement or the rights and obligations of any party hereunder shall be valid and binding unless such waiver or modification is in writing, duly executed, and the parties further agree that the provisions of this paragraph may not be waived except as herein set forth. 12. GOVERNING LAW: The parties hereto agree that it is their intention ------------------ and covenant that this Agreement and the performance hereunder shall be construed in accordance with and under the laws of the State of California, and that the terms hereof may be enforced in any court of competent jurisdiction in an action for specific performance which may be instituted under this Agreement, and that in the event of any dispute or claim under the within Agreement, that same will be resolved in the Courts of the State of California. 5 13. LIMITED INDEMNIFICATION: EMPLOYER indemnifies and holds harmless ---------------------------- EMPLOYEE from any claims of any type against EMPLOYER that arise prior to the date of the commencement of this Agreement. 14. OPPORTUNITY TO REVIEW: EMPLOYEE and EMPLOYER warrant and represent ------------------------- that each has had sufficient and adequate opportunity to consult with independent counsel concerning the within Agreement, and has requested that the firm of Baratta & Goldstein prepare the within Agreement, and is aware that said firm is relying upon the within representation prior to the parties entering into the Agreement herein. 15. NOTICES: All notices required or permitted to be given by either ----------- party hereunder shall be in writing and mailed by registered mail, return receipt requested and by regular mail to the other party addressed as follows: If to EMPLOYER at: CALYPTE BIOMEDICAL CORPORATION 1265 Harbor Bay Parkway Alameda, CA 94502 If to EMPLOYEE at: J. RICHARD GEORGE 9250 Mississippi Run Brooksville, FL 34613 Any notice mailed, as provided above, shall be deemed completed on the date of receipt, or five (5) days from the postmark on said postal receipt. 16. CAPTION HEADINGS: Caption headings in this Agreement are provided --------------------- merely for convenience and are of no force and effect. 17. ENTIRE AGREEMENT: This Agreement contains the total and entire ---------------------- Agreement between the parties and shall, as of the effective date hereof, supersede any and all other Agreements between the parties. The parties acknowledge and agree that neither of them has made any representations that are not specifically set forth herein, and each of the parties hereto acknowledges that he or it has relied upon his or its own judgment in entering into same, and that the within Agreement has been approved by the EMPLOYERS compensation committee and its board of directors. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day, month and year first above written. 6 CALYPTE BIOMEDICAL CORPORATION By: /s/ Julius R. Krevans for the ------------------------------- Compensation Committee ------------------------------- /s/ J. Richard George ------------------------------- J. RICHARD GEORGE EX-10.137 7 ex10_37.txt LEASE AGREEMENT THIS LEASE AGREEMENT is made this 1st day of March, 2004, between ARE-1500 East Gude LLC, a Delaware limited liability company ("Landlord"), and Calypte Biomedical Corporation, a Delaware corporation ("Tenant"). ADDRESS: 1500 East Gude Drive, Rockville, Maryland PREMISES: That portion of the Project, containing approximately 25,459 rentable square feet, as determined by Landlord, as shown on EXHIBIT A. PROJECT: The real property on which the building (the "BUILDING") in which the Premises are located, together with all improvements thereon and appurtenances thereto as described on EXHIBIT B. BASE RENT: $33,945.33 per month RENTABLE AREA OF PREMISES: 25,459 sq.ft. RENTABLE AREA OF PROJECT: 45,989 sq.ft. TENANT'S SHARE OF OPERATING EXPENSES: 55.36% SECURITY DEPOSIT: $150,000 COMMENCEMENT DATE: March 1, 2004 BASE RENT COMMENCEMENT DATE: The date the bioMerieux Lease (as defined in Section 1) is terminated. --------- RENT ADJUSTMENT PERCENTAGE: 3.5% BASE TERM: Beginning on the Base Rent Commencement Date and ending on February 28, 2009. PERMITTED USE: Research and development laboratory, related office and other related uses consistent with the character of the Project and otherwise in compliance with the provisions of Section 7 hereof. ADDRESS FOR RENT PAYMENT: LANDLORD'S NOTICE ADDRESS: 135 N. Los Robles Avenue, Suite 250 135 N. Los Robles Avenue, Suite 250 Pasadena, CA 91101 Pasadena, CA 91101 Attention: Accounts Receivable Attention: Corporate Secretary TENANT'S NOTICE ADDRESS: 1265 Harbor Bay Parkway Alameda, California 94502 Attention: Corporate Secretary The following Exhibits and Addenda are attached hereto and incorporated herein by this reference: [X] EXHIBIT A - PREMISES DESCRIPTION [X] EXHIBIT B - DESCRIPTION OF PROJECT [X] EXHIBIT C - WORK LETTER [ ] EXHIBIT D - COMMENCEMENT DATE [X] EXHIBIT E - RULES AND REGULATIONS [X] EXHIBIT F - TENANT'S PERSONAL PROPERTY (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 2 1. LEASE OF PREMISES. Upon and subject to all of the terms and conditions hereof, Landlord hereby leases the Premises to Tenant and Tenant hereby leases the Premises from Landlord effective as of the Base Rent Commencement Date. The portions of the Project which are for the non-exclusive use of tenants of the Project are collectively referred to herein as the "COMMON AREAS." Landlord reserves the right to modify Common Areas, provided that such modifications do not materially adversely affect Tenant's use of the Premises for the Permitted Use. 2. DELIVERY; ACCEPTANCE OF PREMISES; COMMENCEMENT DATE. Tenant shall accept delivery of the Premises on the Base Rent Commencement Date. The "COMMENCEMENT DATE" shall be the date of this Lease. The "TERM" of this Lease shall be the Base Term, as defined above on the first page of this Lease. Landlord shall have no obligation for any defects in the Premises; and Tenant's taking possession of the Premises on the Base Rent Commencement Date shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken. Tenant agrees and acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the condition of all or any portion of the Premises or the Project, and/or the suitability of the Premises or the Project for the conduct of Tenant's business, and Tenant waives any implied warranty that the Premises or the Project are suitable for the Permitted Use. This Lease constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof and supersedes any and all prior representations, inducements, promises, agreements, understandings and negotiations which are not contained herein. Landlord in executing this Lease does so in reliance upon Tenant's representations, warranties, acknowledgments and agreements contained herein. BIOMERIEUX LEASE. Landlord and Tenant hereby acknowledge that the Premises are presently leased by Landlord to bioMerieux Vitek, Inc. ("BIOMERIEUX") pursuant to that certain Lease Agreement dated as of October 22, 1996, by and between bioMerieux and Landlord's predecessor-in-interest in the Project, Aquila Biopharmaceuticals, as amended by that certain First Amendment to Lease, dated October 2, 1997, and that certain Second Amendment to Lease, dated December 21, 2001 (herein collectively, the "BIOMERIEUX LEASE"), and that Tenant presently is in possession of the Premises pursuant to a Sublease dated December 1998 (such Sublease, as the same may be amended from time to time, is herein the "CALYPTE SUBLEASE"). The parties further hereby acknowledge and agree that nothing contained in this Lease shall be deemed to or interpreted as, affecting in any way either the terms and conditions of the bioMerieux Lease, or Tenant's obligations under the Calypte Sublease. Tenant recognizes that its obligations hereunder regarding the payment of Additional Rent shall be independent from Tenant's right of possession of the Premises under this Lease. 3. RENT. (a) BASE RENT. No later than fifteen (15) days prior to the Base Rent Commencement Date, Tenant shall pay to Landlord, the first month's Base Rent. Tenant shall pay to Landlord in advance, without demand, abatement, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month during the Term hereof, after the Base Rent Commencement Date, in lawful money of the United States of America, at the office of Landlord for payment of Rent set forth above, or to such other person or at such other place as Landlord may from time to time designate in writing. Payments of Base Rent for any fractional calendar month shall be prorated. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any Rent (as defined in Section 5) due hereunder except for any abatement as may be expressly provided in this Lease. (b) ADDITIONAL RENT. In addition to Base Rent, Tenant agrees to pay to Landlord as additional rent ("ADDITIONAL RENT"): (x) from and after the Commencement Date through the remainder of the Term, an amount equal to $.2585 per annum for each dollar or portion thereof of the Tenant Improvement Allowance elected to be used by Tenant pursuant to Section 5(b) of the Work Letter; and ------------ (y) from and after the Base Rent Commencement Date, (i) Tenant's Share of "Operating Expenses" (as defined in Section 5), and (ii) any and all other ---------- amounts Tenant assumes or agrees to pay under the (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENAN TOFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 3 provisions of this Lease, including, without limitation, any and all other sums that may become due by reason of any default of Tenant or failure to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant, after any applicable notice and cure period. 4. BASE RENT ADJUSTMENTS. Base Rent shall be increased on each annual anniversary of the first day of the first full month during the Term of this Lease (each an "ADJUSTMENT DATE") by multiplying the Base Rent payable immediately before such Adjustment Date by the Rent Adjustment Percentage and adding the resulting amount to the Base Rent payable immediately before such Adjustment Date. Base Rent, as so adjusted, shall thereafter be due as provided herein. Base Rent adjustments for any fractional calendar month shall be prorated. 5. OPERATING EXPENSE PAYMENTS. Landlord shall deliver to Tenant a written estimate of Operating Expenses for each calendar year during the Term (the "ANNUAL ESTIMATE"), which may be revised by Landlord from time to time during such calendar year. During each month of the Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12th of Tenant's Share of the Annual Estimate. Payments for any fractional calendar month shall be prorated. The term "OPERATING EXPENSES" means all costs and expenses of any kind or description whatsoever incurred or accrued each calendar year by Landlord with respect to the Project (including, without duplication, Taxes (as defined in Section 9), reasonable reserves consistent with good business practice for future repairs and replacements, capital repairs and improvements amortized over the lesser of 7 years and the useful life of such capital items, and the costs of Landlord's third party property manager or, if there is no third party property manager, administration rent in the amount of 5.0% of Base Rent), excluding only: (a) the original construction costs of the Project and renovation prior to the date of the Lease and costs of correcting defects in such original construction or renovation; (b) capital expenditures for expansion of the Project; (c) interest, principal payments of Mortgage (as defined in Section 27) debts of Landlord, financing costs and amortization of funds borrowed by Landlord, whether secured or unsecured and all payments of base rent (but not taxes or operating expenses) under any ground lease or other underlying lease of all or any portion of the Project; (d) depreciation of the Project (except for capital improvements, the cost of which are includable in Operating Expenses); (e) advertising, legal and space planning expenses and leasing commissions and other costs and expenses incurred in procuring and leasing space to tenants for the Project, including any leasing office maintained in the Project, free rent and construction allowances for tenants; (f) legal and other expenses incurred in the negotiation or enforcement of leases; (g) completing, fixturing, improving, renovating, painting, redecorating or other work, which Landlord pays for or performs for other tenants within their premises, and costs of correcting defects in such work; (h) costs of utilities outside normal business hours sold to tenants of the Project; (i) costs to be reimbursed by other tenants of the Project or Taxes to be paid directly by Tenant or other tenants of the Project, whether or not actually paid; (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 4 (j) salaries, wages, benefits and other compensation paid to officers and employees of Landlord who are not assigned in whole or in part to the operation, management, maintenance or repair of the Project; (k) general organizational, administrative and overhead costs relating to maintaining Landlord`s existence, either as a corporation, partnership, or other entity, including general corporate, legal and accounting expenses; (l) costs (including attorneys' fees and costs of settlement, judgments and payments in lieu thereof) incurred in connection with disputes with tenants, other occupants, or prospective tenants, and costs and expenses, including legal fees, incurred in connection with negotiations or disputes with employees, consultants, management agents, leasing agents, purchasers or mortgagees of the Building; (m) costs incurred by Landlord due to the violation by Landlord, its employees, agents or contractors or any tenant of the terms and conditions of any lease of space in the Project or any Legal Requirement (as defined in Section 7); (n) penalties, fines or interest incurred as a result of Landlord`s inability or failure to make payment of Taxes and/or to file any tax or informational returns when due, or from Landlord<<`s failure to make any payment of Taxes required to be made by Landlord hereunder before delinquency; (o) overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in or to the Project to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis; (p) costs of Landlord's charitable or political contributions, or of fine art maintained at the Project; (q) costs in connection with services (including electricity), items or other benefits of a type which are not standard for the Project and which are not available to Tenant without specific charges therefor, but which are provided to another tenant or occupant of the Project, whether or not such other tenant or occupant is specifically charged therefor by Landlord; (r) costs incurred in the sale or refinancing of the Project; (s) net income taxes of Landlord or the owner of any interest in the Project, franchise, capital stock, gift, estate or inheritance taxes or any federal, state or local documentary taxes imposed against the Project or any portion thereof or interest therein; and (t) any expenses otherwise includable within Operating Expenses to the extent actually reimbursed by persons other than tenants of the Project under leases for space in the Project. Within 90 days after the end of each calendar year (or such longer period as may be reasonably required), Landlord shall furnish to Tenant a statement (an "ANNUAL STATEMENT") showing in reasonable detail: (a) the total and Tenant's Share of actual Operating Expenses for the previous calendar year, and (b) the total of Tenant's payments in respect of Operating Expenses for such year. If Tenant's Share of actual Operating Expenses for such year exceeds Tenant's payments of Operating Expenses for such year, the excess shall be due and payable by Tenant as Rent within 30 days after delivery of such Annual Statement to Tenant. If Tenant's payments of Operating Expenses for such year exceed Tenant's Share of actual Operating Expenses for such year Landlord shall pay the excess to Tenant within 30 days after delivery of such Annual Statement, except that after the expiration, or earlier termination of the Term or if Tenant is delinquent in its obligation to pay Rent, Landlord shall pay the excess to Tenant after deducting all other amounts due Landlord. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 5 The Annual Statement shall be final and binding upon Tenant unless Tenant, within 30 days after Tenant's receipt thereof, shall contest any item therein by giving written notice to Landlord, specifying each item contested and the reason therefor. Operating Expenses for the calendar years in which Tenant's obligation to share therein begins and ends shall be prorated. Notwithstanding anything set forth herein to the contrary, if the Project is not at least 95% occupied on average during any year of the Term, Tenant's Share of Operating Expenses for such year shall be computed as though the Project had been 95% occupied on average during such year. "TENANT'S SHARE" shall be the percentage set forth on the first page of this Lease as Tenant's Share. Landlord may equitably increase Tenant's Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project that includes the Premises or that varies with occupancy or use. Base Rent, Tenant's Share of Operating Expenses and all other amounts payable by Tenant to Landlord hereunder are collectively referred to herein as "RENT." 6. SECURITY DEPOSIT. Tenant shall deposit with Landlord, a security deposit (the "SECURITY DEPOSIT") for the performance of all of Tenant's obligations hereunder. The Security Deposit shall be paid in two (2) increments. On or before the Commencement Date, Tenant shall deposit with Landlord, a portion of the Security Deposit in an amount equal to $50,000, and no later than fifteen (15) days prior to the Base Rent Commencement Date, Tenant shall deposit with Landlord the remaining portion of the Security Deposit in an amount equal to $100,000. The Security Deposit shall be in the form of an unconditional and irrevocable letter of credit (the "LETTER OF CREDIT"): (i) in form and substance satisfactory to Landlord, (ii) naming Landlord as beneficiary, (iii) expressly allowing Landlord to draw upon it at any time from time to time by delivering to the issuer notice that Landlord is entitled to draw thereunder, (iv) issued by an FDIC-insured financial institution satisfactory to Landlord, and (v) redeemable by presentation of a sight draft in the state of Landlord's choice. If Tenant does not provide Landlord with a substitute Letter of Credit complying with all of the requirements hereof at least 10 days before the stated expiration date of any then current Letter of Credit, Landlord shall have the right to draw the full amount of the current Letter of Credit and hold the funds drawn in cash without obligation for interest thereon as the Security Deposit. The Security Deposit shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of a Default (as defined in Section 20), Landlord may use all or any part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Default, without prejudice to any other remedy provided herein or provided by law. Upon any such use of all or any portion of the Security Deposit, Tenant shall pay Landlord on demand the amount that will restore the Security Deposit to the amount required under this Section 5. Tenant hereby waives the provisions of any law, now or hereafter in force, which provide that Landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of Rent, to repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee of Tenant. Upon bankruptcy or other debtor-creditor proceedings against Tenant, the Security Deposit shall be deemed to be applied first to the payment of Rent and other charges due Landlord for periods prior to the filing of such proceedings. Upon any such use of all or any portion of the Security Deposit, Tenant shall, within 5 days after demand from Landlord, restore the Security Deposit to the amount required in this Section 5. If Tenant shall fully perform every provision of this Lease to be performed by Tenant, the Security Deposit, or any balance thereof (i.e., after deducting therefrom all amounts to which Landlord is entitled under the provisions of this Lease), shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within 90 days after the expiration or earlier termination of this Lease. If Landlord transfers its interest in the Project or this Lease, Landlord shall either (a) transfer any Security Deposit then held by Landlord to a person or entity assuming Landlord's obligations under this Section 6, or (b) return to Tenant any Security Deposit then held by Landlord and remaining after the deductions permitted herein. Upon such transfer to such transferee or the return of the Security Deposit (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 6 to Tenant, Landlord shall have no further obligation with respect to the Security Deposit, and Tenant's right to the return of the Security Deposit shall apply solely against Landlord's transferee. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee, and no interest shall accrue thereon. 7. USE. The Premises shall be used solely for the Permitted Use set forth in the basic lease provisions on page 1 of this Lease, and in compliance with all laws, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions now or hereafter applicable to the Premises, and to the use and occupancy thereof, including, without limitation, the Americans With Disabilities Act, 42 U.S.C. ss. 12101, et seq. (together with the regulations promulgated pursuant thereto, "ADA") (collectively, "LEGAL REQUIREMENTS" and each, a "LEGAL REQUIREMENT"). Tenant shall, upon 5 days' written notice from Landlord, discontinue any use of the Premises which is declared by any Governmental Authority (as defined in Section 9) having ---------- jurisdiction to be a violation of a Legal Requirement. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant's or Landlord's insurance, increase the insurance risk, or cause the disallowance of any sprinkler or other credits. Tenant shall not permit any part of the Premises to be used as a "place of public accommodation", as defined in the ADA or any similar legal requirement. Tenant shall reimburse Landlord promptly upon demand for any additional premium charged for any such insurance policy by reason of Tenant's failure to comply with the provisions of this Section or otherwise caused by Tenant's use and/or occupancy of the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit or permit waste, overload the floor or structure of the Premises, subject the Premises to use that would damage the Premises or obstruct or interfere with the rights of Landlord or other tenants or occupants of the Project, including conducting or giving notice of any auction, liquidation, or going out of business sale on the Premises, or using or allowing the Premises to be used for any unlawful purpose. Tenant shall cause any equipment or machinery to be installed in the Premises so as to reasonably prevent sounds or vibrations from the Premises from extending into Common Areas, or other space in the Project. Tenant shall not place any machinery or equipment weighing 500 pounds or more in or upon the Premises or transport or move such items through the Common Areas of the Project or in the Project elevators without the prior written consent of Landlord. Except as may be provided under the Work Letter, Tenant shall not, without the prior written consent of Landlord, use the Premises in any manner which will require ventilation, air exchange, heating, gas, steam, electricity or water beyond the existing capacity of the Project as proportionately allocated to the Premises based upon Tenant's Share as usually furnished for the Permitted Use. Tenant, at its sole expense, shall make any alterations or modifications to the interior or the exterior of the Premises or the Project that are required by Legal Requirements related to Tenant's use or occupancy of the Premises. Notwithstanding any other provision herein to the contrary, Tenant shall be responsible for any and all demands, claims, liabilities, losses, costs, expenses, actions, causes of action, damages or judgments, and all reasonable expenses incurred in investigating or resisting the same (including, without limitation, reasonable attorneys' fees, charges and disbursements and costs of suit) (collectively, "CLAIMS") arising out of or in connection with Legal Requirements, and Tenant shall indemnify, defend, hold and save Landlord harmless from and against any and all Claims arising out of or in connection with any failure of the Premises to comply with any Legal Requirement. 8. HOLDING OVER. If, with Landlord's express written consent, Tenant retains possession of the Premises after the termination of the Term, (i) unless otherwise agreed in such written consent, such possession shall be subject to immediate termination by Landlord at any time, (ii) all of the other terms and provisions of this Lease (including, without limitation, the adjustment of Base Rent pursuant to Section 4 hereof) shall remain in full force and effect --------- (excluding any expansion or renewal option or other similar right or option) during such holdover period, (iii) Tenant shall continue to pay Base Rent in the amount payable upon the date of the expiration or earlier termination of this Lease or such other amount as Landlord may indicate, in Landlord's sole and absolute discretion, in such written consent, and (iv) all other payments shall continue under the terms of this Lease. If Tenant remains in possession of the Premises after the expiration or earlier termination of the Term without the express written consent of Landlord, (A) Tenant shall become a tenant at sufferance upon the terms of this Lease except that the (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 7 monthly rental shall be equal to 200% of Rent in effect during the last 30 days of the Term, and (B) Tenant shall be responsible for all actual damages suffered by Landlord resulting from Tenant's holding over. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided, and this Section 8 shall not be construed as consent for Tenant to retain possession of the Premises. Acceptance by Landlord of Rent after the expiration of the Term or earlier termination of this Lease shall not result in a renewal or reinstatement of this Lease. 9. TAXES. Landlord shall pay, as part of Operating Expenses, all taxes, levies, assessments and governmental charges of any kind (collectively referred to as "TAXES") imposed by any federal, state, regional, municipal, local or other governmental authority or agency, including, without limitation, quasi-public agencies (collectively, "GOVERNMENTAL AUTHORITY") during the Term, including, without limitation, all Taxes: (i) imposed on or measured by or based, in whole or in part, on rent payable to Landlord under this Lease and/or from the rental by Landlord of the Project or any portion thereof, or (ii) based on the square footage, assessed value or other measure or evaluation of any kind of the Premises or the Project, or (iii) assessed or imposed by or on the operation or maintenance of any portion of the Premises or the Project, including parking, or (iv) assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by, any Governmental Authority, or (v) imposed as a license or other fee on Landlord's business of leasing space in the Project. Landlord may contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens securing Taxes. Taxes shall not include any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder. If any such Tax is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall pay, prior to delinquency, any and all Taxes levied or assessed against any personal property or trade fixtures placed by Tenant in the Premises, whether levied or assessed against Landlord or Tenant. If any Taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property, or if the assessed valuation of the Project is increased by a value attributable to improvements in or alterations to the Premises, whether owned by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, higher than the base valuation on which Landlord from time-to-time allocates Taxes to all tenants in the Project, Landlord shall have the right, but not the obligation, to pay such Taxes. Landlord's determination of any excess assessed valuation shall be binding and conclusive, absent manifest error. The amount of any such payment by Landlord shall constitute Additional Rent due from Tenant to Landlord immediately upon demand. 10. PARKING. Subject to all matters of record, Force Majeure, a Taking (as defined in Section 19 below) and the exercise by Landlord of its rights hereunder, Tenant shall have the right, in common with other tenants of the Project pro rata in accordance with the rentable area of the Premises and the rentable areas of the Project occupied by such other tenants, to park in those areas designated for non-reserved parking, subject in each case to Landlord's rules and regulations. Landlord may allocate parking spaces among Tenant and other tenants in the Project pro rata as described above if Landlord determines that such parking facilities are becoming crowded. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties, including other tenants of the Project. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 8 11. UTILITIES, SERVICES. Landlord shall provide, subject to the terms of this Section 11, water, ---------- electricity, heat, light, power, telephone, sewer, and other utilities (including gas and fire sprinklers to the extent the Project is plumbed for such services) (collectively, "UTILITIES"). Landlord shall pay, as Operating Expenses or subject to Tenant's reimbursement obligation, for all Utilities used on the Premises, all maintenance charges for Utilities, and any storm sewer charges or other similar charges for Utilities imposed by any Governmental Authority or Utility provider, and any taxes, penalties, surcharges or similar charges thereon. Landlord may cause, at Tenant's expense, any Utilities to be separately metered or charged directly to Tenant by the provider. Tenant shall pay directly to the Utility provider, prior to delinquency, any separately metered Utilities and services which may be furnished to Tenant or the Premises during the Term. Tenant shall pay, as part of Operating Expenses, its share of all charges for jointly metered Utilities based upon consumption, as reasonably determined by Landlord. No interruption or failure of Utilities, from any cause whatsoever other than Landlord's willful misconduct, shall result in eviction or constructive eviction of Tenant, termination of this Lease or the abatement of Rent. Tenant agrees to limit use of water and sewer with respect to Common Areas to normal restroom use. 12. ALTERATIONS AND TENANT'S PROPERTY. Any alterations, additions, or improvements made to the Premises by or on behalf of Tenant, including additional locks or bolts of any kind or nature upon any doors or windows in the Premises, but excluding installation, removal or realignment of furniture systems (other than removal of furniture systems owned or paid for by Landlord) not involving any modifications to the structure or connections (other then by ordinary plugs or jacks) to Building Systems (as defined in Section 13) ----------- ("ALTERATIONS") shall be subject to Landlord's prior written consent, which may be given or withheld in Landlord's sole discretion if any such Alteration affects the structure or Building Systems. If Landlord approves any Alterations, Landlord may impose such conditions on Tenant in connection with the commencement, performance and completion of such Alterations as Landlord may deem appropriate in Landlord's sole and absolute discretion. Any request for approval shall be in writing, delivered not less than 10 business days in advance of any proposed construction, and accompanied by plans, specifications, bid proposals, work contracts and such other information concerning the nature and cost of the alterations as may be reasonably requested by Landlord, including the identities and mailing addresses of all persons performing work or supplying materials. Landlord's right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Landlord shall have no duty to ensure that such plans and specifications or construction comply with applicable Legal Requirements. Tenant shall cause, at its sole cost and expense, all Alterations to comply with insurance requirements and with Legal Requirements and shall implement at its sole cost and expense any alteration or modification required by Legal Requirements as a result of any Alterations. Tenant shall pay to Landlord, as Additional Rent, on demand an amount equal to 5% of all charges incurred by Tenant or its contractors or agents in connection with any Alteration to cover Landlord's overhead and expenses for plan review, coordination, scheduling and supervision. Before Tenant begins any Alteration, Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable law. Tenant shall reimburse Landlord for, and indemnify and hold Landlord harmless from, any expense incurred by Landlord by reason of faulty work done by Tenant or its contractors, delays caused by such work, or inadequate cleanup. Tenant shall furnish security or make other arrangements satisfactory to Landlord to assure payment for the completion of all Alterations work free and clear of liens, and shall provide (and cause each contractor or subcontractor to provide) certificates of insurance for workers' compensation and other coverage in amounts and from an insurance company satisfactory to Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Alterations, Tenant shall deliver to Landlord: (i) sworn statements setting forth the names of all contractors and subcontractors who did the work and final lien waivers from all such contractors and subcontractors; and (ii) "as built" plans for any such Alteration. Other than (i) the items, if any, listed on EXHIBIT F attached hereto, (ii) any items agreed by Landlord in writing to be included on EXHIBIT F in the future, and (iii) any trade fixtures, machinery, equipment and other personal property not paid for out of the TI Fund (as defined in the Work Letter) (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 9 which may be removed without material damage to the Premises, which damage shall be repaired (including capping or terminating utility hook-ups behind walls) by Tenant during the Term (collectively, "TENANT'S PROPERTY"), all property of any kind paid for with the TI Fund, all Alterations, real property fixtures, built-in machinery and equipment, built-in casework and cabinets and other similar additions and improvements built into the Premises so as to become an integral part of the Premises such as fume hoods which penetrate the roof or plenum area, built-in cold rooms, built-in warm rooms, walk-in cold rooms, walk-in warm rooms, deionized water systems, glass washing equipment, autoclaves, chillers, built-in plumbing, electrical and mechanical equipment and systems, and any power generator and transfer switch (collectively, "INSTALLATIONS") shall be and shall remain the property of Landlord during the Term and following the expiration or earlier termination of the Term, shall not be removed by Tenant at any time during the Term and shall remain upon and be surrendered with the Premises as a part thereof in accordance with Section 28 ---------- following the expiration or earlier termination of this Lease; provided, -------- however, that Landlord shall, at the time its approval of such Installation is - ------- requested notify Tenant if it has elected to cause Tenant to remove such Installation upon the expiration or earlier termination of this Lease. If Landlord so elects, Tenant shall remove such Installation upon the expiration or earlier termination of this Lease and restore any damage caused by or occasioned as a result of such removal, including, when removing any of Tenant's Property which was plumbed, wired or otherwise connected to any of the Building Systems, capping off all such connections behind the walls of the Premises and repairing any holes. During any such restoration period, Tenant shall pay Rent to Landlord as provided herein as if said space were otherwise occupied by Tenant. 13. LANDLORD'S REPAIRS. Landlord, as an Operating Expense, shall maintain all of the structural, exterior, parking, roof, the common lobby and other Common Areas of the Project, including the sprinkler systems and fire alarms ("BUILDING SYSTEMS"), in good repair, reasonable wear and tear and uninsured losses and damages caused by Tenant, or by any of Tenant's agents, servants, employees, invitees and contractors (collectively, "TENANT Parties") excluded. Losses and damages caused by Tenant or any Tenant Party shall be repaired by Landlord, to the extent not covered by insurance, at Tenant's sole cost and expense. Landlord reserves the right to stop Building Systems services when necessary (i) by reason of accident or emergency, or (ii) for planned repairs, alterations or improvements, which are, in the judgment of Landlord, desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed. Landlord shall have no responsibility or liability for failure to supply Building Systems services during any such period of interruption; provided, however, that Landlord shall, except in case of emergency, make a commercially reasonable effort to give Tenant 24 hours advance notice of any planned stoppage of Building Systems services for routine maintenance, repairs, alterations or improvements. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Section, after which Landlord shall make a commercially reasonable effort to promptly effect such repair. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after Tenant's initial written notice of the need for such repairs or maintenance. Tenant waives its rights under any state or local law to terminate this Lease or to make such repairs at Landlord's expense and agrees that the parties' respective rights with respect to such matters shall be solely as set forth herein. Repairs required as the result of fire, earthquake, flood, vandalism, war, or similar cause of damage or destruction shall be controlled by Section 18. ---------- 14. TENANT'S REPAIRS. Subject to Section 13 hereof, Tenant, at its expense, ---------- shall repair, replace and maintain in good condition all portions of the Premises, including, without limitation, entries, doors, ceilings, interior windows, interior walls, the interior side of demising walls, and the elevator, and all equipment located on the roof of the Building servicing the Premises. Such repair and replacement may include capital expenditures and repairs whose benefit may extend beyond the Term. Tenant shall maintain at all times during the Term, at its sole cost and expense, with qualified contractors maintenance and repair contracts in form and content satisfactory to Landlord, for the elevator and all equipment located on the roof (the "MAINTENANCE CONTRACTS"). Landlord shall be a third party beneficiary of such Maintenance Contracts, and Tenant shall deliver copies of the Maintenance Contracts to Landlord on or before the Base Rent Commencement Date. Should Tenant fail to make any such repair or replacement or fail to maintain the Premises, Landlord shall give Tenant notice of such failure. If Tenant fails to commence cure of such failure within 10 days of Landlord's notice, and thereafter diligently prosecute (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 10 such cure to completion, Landlord may perform such work and shall be reimbursed by Tenant within 10 days after demand therefor; provided, however, that if such failure by Tenant creates or could create an emergency, Landlord may immediately commence cure of such failure and shall thereafter be entitled to recover the costs of such cure from Tenant. Subject to Sections 17 and 18, Tenant shall bear ----------- -- the full uninsured cost of any repair or replacement to any part of the Project that results from damage caused by Tenant or any Tenant Party and any repair that benefits only the Premises. 15. MECHANIC'S LIENS. Tenant shall discharge, by bond or otherwise, any mechanic's lien filed against the Premises or against the Project for work claimed to have been done for, or materials claimed to have been furnished to, Tenant within 30 days after the filing thereof, at Tenant's sole cost and shall otherwise keep the Premises and the Project free from any liens arising out of work performed, materials furnished or obligations incurred by Tenant. Should Tenant fail to discharge any lien described herein, Landlord shall have the right, but not the obligation, to pay such claim or post a bond or otherwise provide security to eliminate the lien as a claim against title to the Project and the cost thereof shall be immediately due from Tenant as Additional Rent. If Tenant shall lease or finance the acquisition of office equipment, furnishings, or other personal property of a removable nature utilized by Tenant in the operation of Tenant's business, Tenant warrants that any Uniform Commercial Code Financing Statement filed as a matter of public record by any lessor or creditor of Tenant will upon its face or by exhibit thereto indicate that such Financing Statement is applicable only to removable personal property of Tenant located within the Premises. In no event shall the address of the Project be furnished on the statement without qualifying language as to applicability of the lien only to removable personal property, located in an identified suite held by Tenant. 16. INDEMNIFICATION. Tenant hereby indemnifies and agrees to defend, save and hold Landlord harmless from and against any and all Claims for injury or death to persons or damage to property occurring within or about the Premises, arising directly or indirectly out of use or occupancy of the Premises or a breach or default by Tenant in the performance of any of its obligations hereunder, unless caused solely by the willful misconduct or gross negligence of Landlord. Landlord shall not be liable to Tenant for, and Tenant assumes all risk of damage to, personal property (including, without limitation, loss of records kept within the Premises). Tenant further waives any and all Claims for injury to Tenant's business or loss of income relating to any such damage or destruction of personal property (including, without limitation, any loss of records). Landlord shall not be liable for any damages arising from any act, omission or neglect of any tenant in the Project or of any other third party. 17. INSURANCE. Landlord shall maintain all risk property and, if applicable, sprinkler damage insurance covering the full replacement cost of the Project or such lesser coverage amount as Landlord may elect provided such -------- coverage amount is not less than 90% of such full replacement cost. Landlord shall further procure and maintain commercial general liability insurance with a single loss limit of not less than $2,000,000 for bodily injury and property damage with respect to the Project. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary, including, but not limited to, flood, environmental hazard and earthquake, loss or failure of building equipment, errors and omissions, rental loss during the period of repair or rebuilding, workers' compensation insurance and fidelity bonds for employees employed to perform services and insurance for any improvements installed by Tenant or which are in addition to the standard improvements customarily furnished by Landlord without regard to whether or not such are made a part of the Project. All such insurance shall be included as part of the Operating Expenses. The Project may be included in a blanket policy (in which case the cost of such insurance allocable to the Project will be determined by Landlord based upon the insurer's cost calculations). Tenant shall also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of Tenant's use of the Premises. Tenant, at its sole cost and expense, shall maintain during the Term: all risk property insurance with business interruption and extra expense coverage, covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant at Tenant's expense; workers' compensation insurance with no less than the minimum limits required by law; employer's liability insurance with such limits as required by law; commercial general liability insurance, with a minimum limit (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 11 of not less than $2,000,000 per occurrence for bodily injury and property damage with respect to the Premises and pollution legal liability insurance with a minimum limit of not less than $2,000,000 per occurrence. The commercial general liability insurance policy shall name Landlord, its officers, directors, employees, managers, agents, invitees and contractors (collectively, "LANDLORD PARTIES"), as additional insureds. The commercial general liability and pollution legal liability insurance policies shall insure on an occurrence and not a claims-made basis; shall be issued by insurance companies which have a rating of not less than policyholder rating of A and financial category rating of at least Class X in "Best's Insurance Guide"; shall not be cancelable for nonpayment of premium unless 10 days prior written notice shall have been given to Landlord from the insurer; contain a hostile fire endorsement and a contractual liability endorsement; and provide primary coverage to Landlord (any policy issued to Landlord providing duplicate or similar coverage shall be deemed excess over Tenant's policies). Copies of such policies (if requested by Landlord), or certificates of insurance showing the limits of coverage required hereunder and showing Landlord as an additional insured, along with reasonable evidence of the payment of premiums for the applicable period, shall be delivered to Landlord by Tenant upon commencement of the Term and upon each renewal of said insurance. Tenant's policy may be a "blanket policy" with an aggregate per location endorsement which specifically provides that the amount of insurance shall not be prejudiced by other losses covered by the policy. Tenant shall, at least 5 days prior to the expiration of such policies, furnish Landlord with renewal certificates. In each instance where insurance is to name Landlord as an additional insured, Tenant shall upon written request of Landlord also designate and furnish certificates so evidencing Landlord as additional insured to: (i) any lender of Landlord holding a security interest in the Project or any portion thereof, (ii) the landlord under any lease wherein Landlord is tenant of the real property on which the Project is located, if the interest of Landlord is or shall become that of a tenant under a ground or other underlying lease rather than that of a fee owner, and/or (iii) any management company retained by Landlord to manage the Project. The property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, and their respective officers, directors, employees, managers, agents, invitees and contractors ("RELATED PARTIES"), in connection with any loss or damage thereby insured against. Neither party nor its respective Related Parties shall be liable to the other for loss or damage caused by any risk insured against under property insurance required to be maintained hereunder, and each party waives any claims against the other party, and its respective Related Parties, for such loss or damage. The failure of a party to insure its property shall not void this waiver. Landlord and its respective Related Parties shall not be liable for, and Tenant hereby waives all claims against such parties for, business interruption and losses occasioned thereby sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon the Premises or the Project from any cause whatsoever. If the foregoing waivers shall contravene any law with respect to exculpatory agreements, the liability of Landlord or Tenant shall be deemed not released but shall be secondary to the other's insurer. Landlord may require insurance policy limits to be raised to conform with requirements of Landlord's lender and/or to bring coverage limits to levels then being generally required of new tenants within the Project. 18. RESTORATION. If, at any time during the Term, the Project or the Premises are damaged or destroyed by a fire or other insured casualty, Landlord shall notify Tenant within 60 days after discovery of such damage as to the amount of time Landlord reasonably estimates it will take to restore the Project or the Premises, as applicable (the "RESTORATION PERIOD"). If the Restoration Period is estimated to exceed 12 months (the "MAXIMUM RESTORATION PERIOD"), Landlord may, in such notice, elect to terminate this Lease as of the date that is 75 days after the date of discovery of such damage or destruction. Unless Landlord so elects to terminate this Lease, Landlord shall, subject to receipt of sufficient insurance proceeds (with any deductible to be treated as a current Operating Expense), promptly restore the Premises (excluding the improvements installed by Tenant or by Landlord and paid for by Tenant, subject to delays arising from the collection of insurance proceeds, from Force Majeure events or as needed to obtain any license, clearance or other authorization of any kind required to enter (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 12 into and restore the Premises issued by any Governmental Authority having jurisdiction over the use, storage, handling, treatment, generation, release, disposal, removal or remediation of Hazardous Materials (as defined in Section ------- 30) in, on or about the Premises (collectively referred to herein as "HAZARDOUS - -- MATERIALS CLEARANCES"); provided, however, that if repair or restoration of the -------- ------- Premises is not substantially complete as of the end of the Maximum Restoration Period or, if longer, the Restoration Period, Landlord may, in its sole and absolute discretion, elect not to proceed with such repair and restoration, in which event Landlord shall be relieved of its obligation to make such repairs or restoration and this Lease shall terminate as of the date that is 75 days after the later of: (i) discovery of such damage or destruction, or (ii) the date all required Hazardous Materials Clearances are obtained, but Landlord shall retain any Rent paid and the right to any Rent payable by Tenant prior to such election by Landlord or Tenant. Tenant, at its expense, shall promptly perform, subject to delays arising from the collection of insurance proceeds, from Force Majeure (as defined in Section 34) events or to obtain Hazardous Material Clearances, all repairs or - ---------- restoration not required to be done by Landlord and shall as soon as commercially reasonable re-enter the Premises and commence doing business in accordance with this Lease. Notwithstanding the foregoing, Landlord may terminate this Lease if the Premises are damaged during the last 1 year of the Term and Landlord reasonably estimates that it will take more than 3 months to repair such damage, or if insurance proceeds are not available for such restoration. Rent shall be abated from the date all required Hazardous Material Clearances are obtained until the Premises are repaired and restored, in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the total area of the Premises, unless Landlord provides Tenant with other space during the period of repair that is suitable for the temporary conduct of Tenant's business. Tenant shall determine in its sole but reasonable discretion if such space is suitable. Such abatement shall be the sole remedy of Tenant, and except as provided in this Section 18, Tenant waives any right to ---------- terminate the Lease by reason of damage or casualty loss. The provisions of this Lease, including this Section 18, constitute an ---------- express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, or any other portion of the Project, and any statute or regulation which is now or may hereafter be in effect shall have no application to this Lease or any damage or destruction to all or any part of the Premises or any other portion of the Project, the parties hereto expressly agreeing that this Section 18 sets forth their entire understanding and agreement with respect to such matters. 19. CONDEMNATION. If the whole or any material part of the Premises or the Project is taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "TAKING" or "TAKEN"), and the Taking would in Landlord's reasonable judgment either prevent or materially interfere with Tenant's use of the Premises or materially interfere with or impair Landlord's ownership or operation of the Project, then upon written notice by Landlord this Lease shall terminate and Rent shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, Landlord shall promptly restore the Premises and the Project as nearly as is commercially reasonable under the circumstances to their condition prior to such partial Taking and the rentable square footage of the Building, the rentable square footage of the Premises, Tenant's Share of Operating Expenses and the Rent payable hereunder during the unexpired Term shall be reduced to such extent as may be fair and reasonable under the circumstances. Upon any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have the right, to the extent that same shall not diminish Landlord's award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to Tenant's trade fixtures, if a separate award for such items is made to Tenant. Tenant hereby waives any and all rights it might otherwise have pursuant to any provision of state law to terminate this Lease upon a partial Taking of the Premises or the Project. 20. EVENTS OF DEFAULT. Each of the following events shall be a default ("DEFAULT") by Tenant under this Lease: (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 13 (a) PAYMENT DEFAULTS. Tenant shall fail to pay any installment of Rent or any other payment hereunder when due. (b) INSURANCE. Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or terminated or shall expire or shall be reduced or materially changed, or Landlord shall receive a notice of nonrenewal of any such insurance and Tenant shall fail to obtain replacement insurance at least 20 days before the expiration of the current coverage. (c) ABANDONMENT. Tenant shall abandon the Premises. (d) IMPROPER TRANSFER. Tenant shall assign, sublease or otherwise transfer or attempt to transfer all or any portion of Tenant's interest in this Lease or the Premises except as expressly permitted herein, or Tenant's interest in this Lease shall be attached, executed upon, or otherwise judicially seized and such action is not released within 90 days of the action. (e) LIENS. Tenant shall fail to discharge or otherwise obtain the release of any lien placed upon the Premises in violation of this Lease within 15 days after any such lien is filed against the Premises. (f) INSOLVENCY EVENTS. Tenant or any guarantor or surety of Tenant's obligations hereunder shall: (A) make a general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property (collectively a "PROCEEDING FOR RELIEF"); (C) become the subject of any Proceeding for Relief which is not dismissed within 90 days of its filing or entry; or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity). (g) ESTOPPEL CERTIFICATE OR SUBORDINATION AGREEMENT. Tenant fails to execute any document required from Tenant under Sections 23 or 27 within 5 days ----------- -- after a second notice requesting such document. (h) OTHER DEFAULTS. Tenant shall fail to comply with any provision of this Lease other than those specifically referred to in this Section 20, and, except ---------- as otherwise expressly provided herein, such failure shall continue for a period of 15 days after written notice thereof from Landlord to Tenant. Any notice given under Section 20(h) hereof shall: (i) specify the alleged ------------- default, (ii) demand that Tenant cure such default, (iii) be in lieu of, and not in addition to, or shall be deemed to be, any notice required under any provision of applicable law, and (iv) not be deemed a forfeiture or a termination of this Lease unless Landlord elects otherwise in such notice; provided that if the nature of Tenant's default pursuant to Section 20(h) is - -------- ------------- such that it cannot be cured by the payment of money and reasonably requires more than 15 days to cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said 15 day period and thereafter diligently prosecutes the same to completion; provided, however, that such cure shall be completed no later than 45 days from the date of Landlord's notice. 21. LANDLORD'S REMEDIES. (a) Upon a Default by Tenant hereunder, Landlord may, without waiving or releasing any obligation of Tenant hereunder, make such payment or perform such act. All sums so paid or incurred by Landlord, together with interest thereon, from the date such sums were paid or incurred, at the annual rate equal to 10% per annum (the "DEFAULT RATE"), shall be payable to Landlord on demand as additional Rent. Nothing herein shall be construed to create or impose a duty on Landlord to mitigate any damages resulting from Tenant's Default hereunder. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 14 (b) LATE PAYMENT RENT. Late payment by Tenant to Landlord of Rent and other sums due will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord under any Mortgage covering the Premises. Therefore, if any installment of Rent due from Tenant is not received by Landlord within 5 days after the date such payment is due, Tenant shall pay to Landlord an additional sum of 6% of the overdue Rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. In addition to the late charge, Rent not paid when due shall bear interest at the Default Rate from the 5th day after the date due until paid. (c) RE-ENTRY. Landlord shall have the right, immediately or at any time thereafter, without further notice to Tenant (unless otherwise provided herein), to enter the Premises, without terminating this Lease or being guilty of trespass, and do any and all acts as Landlord may deem necessary, proper or convenient to cure such default, for the account and at the expense of Tenant, any notice to quit or notice of Landlord's intention to re-enter being hereby expressly waived, and Tenant agrees to pay to Landlord as Additional Rent all damage and/or expense incurred by Landlord in so doing, including interest at the Default Rate, from the due date until the date payment is received by Landlord. (d) TERMINATION. Landlord shall have the right to terminate this Lease and Tenant's right to possession of the Premises and, with or without legal process, take possession of the Premises and remove Tenant, any occupant and any property therefrom, using such force as may be necessary, without being guilty of trespass and without relinquishing any rights of Landlord against Tenant, any notice to quit, or notice of Landlord's intention to re-enter being hereby expressly waived. Landlord shall be entitled to recover damages from Tenant for all amounts covenanted to be paid during the remainder of the Term (except for the period of any holdover by Tenant, in which case the Rent stated at Section 7 herein shall apply), which may be accelerated by Landlord at its option, together with (i) all expenses of any proceedings (including, but not limited to, legal expenses and attorney's fees) which may be necessary in order for Landlord to recover possession of the Premises, (ii) the expenses of the re-renting of the Premises (including, but not limited to, any commissions paid to any real estate agent, advertising expense and the costs of such alterations, repairs, replacements or modifications that Landlord, in its sole judgment, considers advisable and necessary for the purpose of re-renting), and (iii) interest computed at the Default Rate from the due date until paid; provided, however, that there shall be credited against the amount of such damages all amounts received by Landlord from such re-renting of the Premises, with any overage being refunded to Tenant. Landlord and Tenant expressly agree, however, that there shall be no credit against the amount of such damages relating to the payment of Additional Rent due in accordance with the terms of subsection ---------- 2(b)(x) of this Lease. Landlord shall in no event be liable in any way - ------- whatsoever for failure to re-rent the Premises or, in the event that the Premises are re-rented, for failure to collect the rent thereof under such re-renting and Tenant expressly waives any duty of the Landlord to mitigate damages. No act or thing done by Landlord shall be deemed to be an acceptance of a surrender of the Premises, unless Landlord shall execute a written agreement of surrender with Tenant. Tenant's liability hereunder shall not be terminated by the execution of a new lease of the Premises by Landlord, unless that new lease expressly so states. In the event Landlord does not exercise its option to accelerate the payment of amounts owed as provided hereinabove, then Tenant agrees to pay to Landlord, upon demand, the amount of damages herein provided after the amount of such damages for any month shall have been ascertained; provided, however, that any expenses incurred by Landlord shall be deemed to be a part of the damages for the month in which they were incurred. Separate actions may be maintained each month or at other times by Landlord against Tenant to recover the damages then due, without waiting until the end of the term of this Lease to determine the aggregate amount of such damages. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or being dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises by reason of the violation by Tenant of any of the covenants and conditions of this Lease. (e) LIEN FOR RENT. Upon any default by Tenant in the payment of Rent or other amounts owed hereunder, Landlord shall have a lien upon the property of Tenant in the Premises for the amount of (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 15 such unpaid amounts, and Tenant hereby specifically waives any and all exemptions allowed by law. In such event, Tenant shall not remove any of Tenant's property from the Premises except with the prior written consent of Landlord, and Landlord shall have the right and privilege, at its option, to take possession of all Tenant's property in the Premises, to store the same on the Premises, or to remove it and store it in such place as may be selected by Landlord, at Tenant's risk and expense. If Tenant fails to redeem the personal property so seized, by payment of whatever sum may be due Landlord hereunder (including all storage costs), Landlord shall have the right, after twenty (20) days written notice to Tenant of its intention to do so, to sell such personal property so seized at public or private sale and upon such terms and conditions as may appear advantageous to Landlord, and after the payment of all proper charges incident to such sale, apply the proceeds thereof to the payment of any balance due to Landlord on account of rent or other obligations of Tenant pursuant to this Lease. In the event there shall then remain in the hands of Landlord any balance realized from the sale of said personal property, the same shall be paid over to Tenant. The exercise of the foregoing remedy by Landlord shall not relieve or discharge Tenant from any deficiency owed to Landlord which Landlord has the right to enforce pursuant to any of the provisions of this Lease. Tenant shall also be liable for all expenses incident to the foregoing process, including any auctioneer or attorney's fees or commissions. (f) OTHER REMEDIES. In addition to the foregoing, Landlord, at its option, without further notice or demand to Tenant, shall have all other rights and remedies provided at law or in equity. 21. ASSIGNMENT AND SUBLETTING. (a) GENERAL PROHIBITION. Without Landlord's prior written consent subject to and on the conditions described in this Section 22, Tenant shall not, ----------- directly or indirectly, voluntarily or by operation of law, assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises, and any attempt to do any of the foregoing shall be void and of no effect. If Tenant is a corporation, partnership or limited liability company, the shares or other ownership interests thereof which are not actively traded upon a stock exchange or in the over-the-counter market, a transfer or series of transfers whereby 50% or more of the issued and outstanding shares or other ownership interests of such corporation are, or voting control is, transferred (but excepting transfers upon deaths of individual owners) from a person or persons or entity or entities which were owners thereof at time of execution of this Lease to persons or entities who were not owners of shares or other ownership interests of the corporation, partnership or limited liability company at time of execution of this Lease, shall be deemed an assignment of this Lease requiring the consent of Landlord as provided in this Section 22. ---------- (b) PERMITTED TRANSFERS. If Tenant desires to assign, sublease, hypothecate or otherwise transfer this Lease or sublet the Premises, then at least 15 business days, before the date Tenant desires the assignment or sublease to be effective (the "ASSIGNMENT DATE"), Tenant shall give Landlord a notice (the "ASSIGNMENT NOTICE") containing such information about the proposed assignee or sublessee, including the proposed use of the Premises and any Hazardous Materials proposed to be used, stored handled, treated, generated in or released or disposed of from the Premises, the Assignment Date, any relationship between Tenant and the proposed assignee or sublessee, and all material terms and conditions of the proposed assignment or sublease, including a copy of any proposed assignment or sublease in its final form, and such other information as Landlord may deem reasonably necessary or appropriate to its consideration whether to grant its consent. Landlord may, by giving written notice to Tenant within 15 business days after receipt of the Assignment Notice: (i) grant such consent, (ii) refuse such consent, in its sole and absolute discretion, if the proposed assignment, hypothecation or other transfer or subletting concerns more than (together with all other then effective subleases) 50% of the Premises, (iii) refuse such consent, in its reasonable discretion, if the proposed subletting concerns (together with all other then effective subleases) 50% or less of the Premises (provided that Landlord shall further have the right to review and approve or disapprove the proposed form of sublease prior to the effective date of any such subletting), or (iv) terminate this Lease with respect to the space described in the Assignment Notice as of the Assignment Date (an "ASSIGNMENT TERMINATION"). If Landlord delivers notice of its election to exercise an Assignment Termination, Tenant shall have the right to withdraw such Assignment Notice by written notice to Landlord of such election within 5 business days (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 16 after Landlord's notice electing to exercise the Assignment Termination. If Tenant withdraws such Assignment Notice, this Lease shall continue in full force and effect. If Tenant does not withdraw such Assignment Notice, this Lease, and the term and estate herein granted, shall terminate as of the Assignment Date with respect to the space described in such Assignment Notice. No failure of Landlord to exercise any such option to terminate this Lease, or to deliver a timely notice in response to the Assignment Notice, shall be deemed to be Landlord's consent to the proposed assignment, sublease or other transfer. Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in connection with its consideration of any Assignment Notice. (c) ADDITIONAL CONDITIONS. As a condition to any such assignment or subletting, whether or not Landlord's consent is required, Landlord may require: (i) that any assignee or subtenant agree, in writing at the time of such assignment or subletting, that if Landlord gives such party notice that Tenant is in default under this Lease, such party shall thereafter make all payments otherwise due Tenant directly to Landlord, which payments will be received by Landlord without any liability except to credit such payment against those due under the Lease, and any such third party shall agree to attorn to Landlord or its successors and assigns should this Lease be terminated for any reason; provided, however, in no event shall Landlord -------- ------- or its successors or assigns be obligated to accept such attornment; and (ii) A list of Hazardous Materials, certified by the proposed assignee or sublessee to be true and correct, which the proposed assignee or sublessee intends to use, store, handle, treat, generate in or release or dispose of from the Premises, together with copies of all documents relating to such use, storage, handling, treatment, generation, release or disposal of Hazardous Materials by the proposed assignee or subtenant in the Premises or on the Project, prior to the proposed assignment or subletting, including, without limitation: permits; approvals; reports and correspondence; storage and management plans; plans relating to the installation of any storage tanks to be installed in or under the Project (provided, said installation of tanks shall only be permitted after Landlord has given its written consent to do so, which consent may be withheld in Landlord's sole and absolute discretion); and all closure plans or any other documents required by any and all federal, state and local Governmental Authorities for any storage tanks installed in, on or under the Project for the closure of any such tanks. Neither Tenant nor any such proposed assignee or subtenant is required, however, to provide Landlord with any portion(s) of the such documents containing information of a proprietary nature which, in and of themselves, do not contain a reference to any Hazardous Materials or hazardous activities. (d) NO RELEASE OF TENANT, SHARING OF EXCESS RENTS. Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully and primarily responsible and liable for the payment of Rent and for compliance with all of Tenant's other obligations under this Lease. If the Rent due and payable by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto in any form) exceeds the rental payable under this Lease, (excluding however, any Rent payable under this Section) ("EXCESS RENT"), then Tenant shall be bound and obligated to pay Landlord as Additional Rent hereunder 50% of such Excess Rent within 10 days following receipt thereof by Tenant. If Tenant shall sublet the Premises or any part thereof, Tenant hereby immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any such subletting, and Landlord as assignee and as attorney-in-fact for Tenant, or a receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; except that, until the occurrence of a Default, Tenant shall have the right to collect such rent. (e) NO WAIVER. The consent by Landlord to an assignment or subletting shall not relieve Tenant or any assignees of this Lease or any sublessees of the Premises from obtaining the consent of Landlord to any further assignment or subletting nor shall it release Tenant or any assignee or sublessee of Tenant from full and primary liability under the Lease. The acceptance of Rent hereunder, or the acceptance of performance of any other term, covenant, or condition thereof, from any other person or (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 17 entity shall not be deemed to be a waiver of any of the provisions of this Lease or a consent to any subletting, assignment or other transfer of the Premises. (f) PRIOR CONDUCT OF PROPOSED TRANSFEREE. Notwithstanding any other provision of this Section 22, if (i) the proposed assignee or sublessee of ---------- Tenant has been required by any prior landlord, lender or Governmental Authority to take remedial action in connection with Hazardous Materials contaminating a property, where the contamination resulted from such party's action or use of the property in question, (ii) the proposed assignee or sublessee is subject to an enforcement order issued by any Governmental Authority in connection with the use, storage, handling, treatment, generation, release or disposal of Hazardous Materials (including, without limitation, any order related to the failure to make a required reporting to any Governmental Authority), or (iii) because of the existence of a pre-existing environmental condition in the vicinity of or underlying the Project, the risk that Landlord would be targeted as a responsible party in connection with the remediation of such pre-existing environmental condition would be materially increased or exacerbated by the proposed use of Hazardous Materials by such proposed assignee or sublessee, Landlord shall have the absolute right to refuse to consent to any assignment or subletting to any such party. 22. ESTOPPEL CERTIFICATE. Tenant shall, within 10 business days of written notice from Landlord, execute, acknowledge and deliver a statement in writing in any form reasonably requested by a proposed lender or purchaser, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect) and the dates to which the rental and other charges are paid in advance, if any, (ii) acknowledging that there are not any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iii) setting forth such further information with respect to the status of this Lease or the Premises as may be requested thereon. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part. Tenant's failure to deliver such statement within such time shall, at the option of Landlord, constitute a Default under this Lease, and, in any event, shall be conclusive upon Tenant that the Lease is in full force and effect and without modification except as may be represented by Landlord in any certificate prepared by Landlord and delivered to Tenant for execution. 23. QUIET ENJOYMENT. So long as Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant, Tenant shall, subject to the terms of this Lease, at all times during the Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under Landlord. 24. PRORATIONS. All prorations required or permitted to be made hereunder shall be made on the basis of a 360 day year and 30 day months. 25. RULES AND REGULATIONS. Tenant shall, at all times during the Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project. The current rules and regulations are attached hereto as EXHIBIT E. If there is any conflict between said rules and regulations and other provisions of this Lease, the terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the Project and shall not enforce such rules and regulations in a discriminatory manner. 26. SUBORDINATION. This Lease and Tenant's interest and rights hereunder are hereby made and shall be subject and subordinate at all times to the lien of any Mortgage now existing or hereafter created on or against the Project or the Premises, and all amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant; provided, -------- however that so long as there is no Default hereunder, Tenant's right to - ------- possession of the Premises shall not be disturbed by the Holder of any such Mortgage. Tenant agrees, at the election of the Holder of any such Mortgage, to attorn to any such Holder. Tenant agrees upon demand to execute, acknowledge and deliver such instruments, confirming such subordination, and such instruments of attornment as shall be requested by any such Holder, (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 18 provided any such instruments contain appropriate non-disturbance provisions assuring Tenant's quiet enjoyment of the Premises as set forth in Section 24 hereof. Tenant hereby appoints Landlord attorney-in-fact for Tenant irrevocably (such power of attorney being coupled with an interest) to execute, acknowledge and deliver any such instrument and instruments for and in the name of Tenant and to cause any such instrument to be recorded. Notwithstanding the foregoing, any such Holder may at any time subordinate its Mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such Mortgage without regard to their respective dates of execution, delivery or recording and in that event such Holder shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such Mortgage and had been assigned to such Holder. The term "MORTGAGE" whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference to the "HOLDER" of a Mortgage shall be deemed to include the beneficiary under a deed of trust. 27. SURRENDER. Upon the expiration of the Term or earlier termination of Tenant's right of possession, Tenant shall surrender the Premises to Landlord in the same condition as received, subject to any Alterations, Installations and Tenant Improvements made pursuant to the terms of this Lease or the Work Letter, free of Hazardous Materials brought upon, kept, used, stored, handled, treated, generated in, or released or disposed of from, the Premises by any person other than a Landlord Party (collectively, "TENANT HAZMAT OPERATIONS") and released of all Hazardous Materials Clearances, broom clean, ordinary wear and tear and casualty loss and condemnation covered by Sections 18 and 19 excepted. At least 3 months prior to the surrender of the Premises, Tenant shall deliver to Landlord a narrative description of the actions proposed (or required by any Governmental Authority) to be taken by Tenant in order to surrender the Premises (including any Installations permitted by Landlord to remain in the Premises) at the expiration or earlier termination of the Term, free from any residual impact from the Tenant HazMat Operations and otherwise released for unrestricted use and occupancy (the "SURRENDER PLAN"). Such Surrender Plan shall be accompanied by a current listing of (i) all Hazardous Materials licenses and permits held by or on behalf of any Tenant Party with respect to the Premises, and (ii) all Hazardous Materials used, stored, handled, treated, generated, released or disposed of from the Premises, and shall be subject to the review and approval of Landlord's environmental consultant. In connection with the review and approval of the Surrender Plan, upon the request of Landlord, Tenant shall deliver to Landlord or its consultant such additional non-proprietary information concerning Tenant HazMat Operations as Landlord shall request. On or before such surrender, Tenant shall deliver to Landlord evidence that the approved Surrender Plan shall have been satisfactorily completed and Landlord shall have the right, subject to reimbursement at Tenant's expense as set forth below, to cause Landlord's environmental consultant to inspect the Premises and perform such additional procedures as may be deemed reasonably necessary to confirm that the Premises are, as of the effective date of such surrender or early termination of the Lease, free from any residual impact from Tenant HazMat Operations. Tenant shall reimburse Landlord, as Additional Rent, for the actual out-of pocket expense incurred by Landlord for Landlord's environmental consultant to review and approve the Surrender Plan and to visit the Premises and verify satisfactory completion of the same, which cost shall not exceed $4,000. Landlord shall have the unrestricted right to deliver such Surrender Plan and any report by Landlord's environmental consultant with respect to the surrender of the Premises to third parties. If Tenant shall fail to prepare or submit a Surrender Plan approved by Landlord, or if Tenant shall fail to complete the approved Surrender Plan, or if such Surrender Plan, whether or not approved by Landlord, shall fail to adequately address any residual effect of Tenant HazMat Operations in, on or about the Premises, Landlord shall have the right to take such actions as Landlord may reasonably deem necessary to assure that the Premises and the Project are surrendered free from any residual impact from Tenant HazMat Operations, the reasonable cost of which actions shall be reimbursed by Tenant as Additional Rent. Tenant shall immediately return to Landlord all keys and/or access cards to parking, the Project, restrooms or all or any portion of the Premises furnished to or otherwise procured by Tenant. If any such access card or key is lost, Tenant shall pay to Landlord, at Landlord's election, either the reasonable cost of replacing such lost access card or key or the reasonable cost of reprogramming the access security system in which such access card was used or changing the lock or locks opened by such lost key. Any (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 19 Tenant's Property, Alterations and property not so removed by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and/or disposition of such property. All obligations of Tenant hereunder not fully performed as of the termination of the Term, including the obligations of Tenant under Section 30 hereof, shall survive the expiration or earlier ----------- termination of the Term, including, without limitation, indemnity obligations, payment obligations with respect to Rent and obligations concerning the condition and repair of the Premises. 28. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. 29. ENVIRONMENTAL REQUIREMENTS. (a) PROHIBITION/COMPLIANCE/INDEMNITY. Tenant shall not cause or permit any Hazardous Materials (as hereinafter defined) to be brought upon, kept, used, stored, handled, treated, generated in or about, or released or disposed of from, the Premises or the Project in violation of applicable Environmental Requirements (as hereinafter defined) by Tenant or any Tenant Party. If Tenant breaches the obligation stated in the preceding sentence, or if the presence of Hazardous Materials in the Premises during the Term or any holding over results in contamination of the Premises, the Project or any adjacent property or if contamination of the Premises, the Project or any adjacent property by Hazardous Materials brought into, kept, used, stored, handled, treated, generated in or about, or released or disposed of from, the Premises by anyone other than Landlord and Landlord's employees, agents and contractors otherwise occurs during the Term or any holding over, Tenant hereby indemnifies and shall defend and hold Landlord, its officers, directors, employees, agents and contractors harmless from any and all actions (including, without limitation, remedial or enforcement actions of any kind, administrative or judicial proceedings, and orders or judgments arising out of or resulting therefrom), costs, claims, damages (including, without limitation, punitive damages and damages based upon diminution in value of the Premises or the Project, or the loss of, or restriction on, use of the Premises or any portion of the Project), expenses (including, without limitation, reasonable attorneys', consultants' and experts' fees, court costs and amounts paid in settlement of any claims or actions), fines, forfeitures or other civil, administrative or criminal penalties, injunctive or other relief (whether or not based upon personal injury, property damage, or contamination of, or adverse effects upon, the environment, water tables or natural resources), liabilities or losses (collectively, "ENVIRONMENTAL CLAIMS") which arise during or after the Term as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, reasonable costs incurred in connection with any investigation of site conditions or any cleanup, treatment, remedial, removal, or restoration work required by any federal, state or local Governmental Authority because of Hazardous Materials present in the air, soil or ground water above, on, or under the Premises. Without limiting the foregoing, if the presence of any Hazardous Materials on the Premises, the Building, the Project or any adjacent property caused or permitted by Tenant or any Tenant Party results in any contamination of the Premises, the Project or any adjacent property, Tenant shall promptly take all actions at its sole expense and in accordance with applicable Environmental Requirements as are necessary to return the Premises, the Project or any adjacent property to the condition existing prior to the time of such contamination, provided that Landlord's approval of such action shall first be obtained, which approval shall not unreasonably be withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises or the Project. (b) BUSINESS. Landlord acknowledges that it is not the intent of this Section 30 to prohibit Tenant from using the Premises for the Permitted Use. Tenant may operate its business according to prudent industry practices so long as the use or presence of Hazardous Materials is strictly and properly monitored according to all then applicable Environmental Requirements. As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord prior to the Commencement Date a list identifying each type of Hazardous Materials to (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 20 be brought upon, kept, used, stored, handled, treated, generated on, or released or disposed of from, the Premises and setting forth any and all governmental approvals or permits required in connection with the presence, use, storage, handling, treatment, generation, release or disposal of such Hazardous Materials on or from the Premises ("HAZARDOUS MATERIALS List"). Tenant shall deliver to Landlord an updated Hazardous Materials List at least once a year and shall also deliver an updated list before any new Hazardous Material is brought onto, kept, used, stored, handled, treated, generated on, or released or disposed of from, the Premises. Tenant shall deliver to Landlord true and correct copies of the following documents (the "HAZ MAT DOCUMENTS") relating to the use, storage, handling, treatment, generation, release or disposal of Hazardous Materials prior to the Commencement Date, or if unavailable at that time, concurrent with the receipt from or submission to a Governmental Authority: permits; approvals; reports and correspondence; storage and management plans, notice of violations of any Legal Requirements; plans relating to the installation of any storage tanks to be installed in or under the Project (provided, said installation of tanks shall only be permitted after Landlord has given Tenant its written consent to do so, which consent may be withheld in Landlord's sole and absolute discretion); all closure plans or any other documents required by any and all federal, state and local Governmental Authorities for any storage tanks installed in, on or under the Project for the closure of any such tanks; and a Surrender Plan (to the extent surrender in accordance with Section 28 cannot be ---------- accomplished in 3 months). Tenant is not required, however, to provide Landlord with any portion(s) of the Haz Mat Documents containing information of a proprietary nature which, in and of themselves, do not contain a reference to any Hazardous Materials or hazardous activities. It is not the intent of this Section to provide Landlord with information which could be detrimental to Tenant's business should such information become possessed by Tenant's competitors. (c) TENANT REPRESENTATION AND WARRANTY. Tenant hereby represents and warrants to Landlord that (i) neither Tenant nor any of its legal predecessors has been required by any prior landlord, lender or Governmental Authority at any time to take remedial action in connection with Hazardous Materials contaminating a property which contamination was permitted by Tenant of such predecessor or resulted from Tenant's or such predecessor's action or use of the property in question, and (ii) Tenant is not subject to any enforcement order issued by any Governmental Authority in connection with the use, storage, handling, treatment, generation, release or disposal of Hazardous Materials (including, without limitation, any order related to the failure to make a required reporting to any Governmental Authority). If Landlord determines that this representation and warranty was not true as of the date of this lease, Landlord shall have the right to terminate this Lease in Landlord's sole and absolute discretion. (d) Landlord shall have the right to conduct annual tests of the Premises to determine whether any contamination of the Premises or the Project has occurred as a result of Tenant's use. Tenant shall be required to pay the cost of such annual test of the Premises; provided, however, that if Tenant conducts its own tests of the Premises using third party contractors and test procedures acceptable to Landlord which tests are certified to Landlord, Landlord shall accept such tests in lieu of the annual tests to be paid for by Tenant. In addition, at any time, and from time to time, prior to the expiration or earlier termination of the Term, Landlord shall have the right to conduct appropriate tests of the Premises and the Project to determine if contamination has occurred as a result of Tenant's use of the Premises. In connection with such testing, upon the request of Landlord, Tenant shall deliver to Landlord or its consultant such non-proprietary information concerning the use of Hazardous Materials in or about the Premises by Tenant or any Tenant Party. If contamination has occurred for which Tenant is liable under this Section 30, Tenant shall pay all costs to ---------- conduct such tests. If no such contamination is found, Landlord shall pay the costs of such tests (which shall not constitute an Operating Expense). Landlord shall provide Tenant with a copy of all third party, non-confidential reports and tests of the Premises made by or on behalf of Landlord during the Term without representation or warranty and subject to a confidentiality agreement. Tenant shall, at its sole cost and expense, promptly and satisfactorily remediate any environmental conditions identified by such testing in accordance with all Environmental Requirements. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights which Landlord may have against Tenant. (e) UNDERGROUND TANKS. If underground or other storage tanks storing Hazardous Materials located on the Premises or the Project are used by Tenant or are hereafter placed on the Premises or the (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 21 Project by Tenant, Tenant shall install, use, monitor, operate, maintain, upgrade and manage such storage tanks, maintain appropriate records, obtain and maintain appropriate insurance, implement reporting procedures, properly close any underground storage tanks, and take or cause to be taken all other actions necessary or required under applicable state and federal Legal Requirements, as such now exists or may hereafter be adopted or amended in connection with the installation, use, maintenance, management, operation, upgrading and closure of such storage tanks. (f) TENANT'S OBLIGATIONS. Tenant's obligations under this Section 30 shall -------- survive the expiration or earlier termination of the Lease. During any period of time after the expiration or earlier termination of this Lease required by Tenant or Landlord to complete the removal from the Premises of any Hazardous Materials (including, without limitation, the release and termination of any licenses or permits restricting the use of the Premises and the completion of the approved Surrender Plan), Tenant shall continue to pay the full Rent in accordance with this Lease for any portion of the Premises not relet by Landlord in Landlord's sole discretion, which Rent shall be prorated daily. (g) DEFINITIONS. As used herein, the term "ENVIRONMENTAL REQUIREMENTS" means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any Governmental Authority regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the Project, or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; and all state and local counterparts thereto, and any regulations or policies promulgated or issued thereunder. As used herein, the term "HAZARDOUS MATERIALS" means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous or toxic, or regulated by reason of its impact or potential impact on humans, animals and/or the environment under any Environmental Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed to be the "OPERATOR" of Tenant's "FACILITY" and the "OWNER" of all Hazardous Materials brought on the Premises by Tenant or any Tenant Party, and the wastes, by-products, or residues generated, resulting, or produced therefrom. 30. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within 30 days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of 30 days, then after such period of time as is reasonably necessary). Upon any default by Landlord, Tenant shall give notice by registered or certified mail to any Holder of a Mortgage covering the Premises and to any landlord of any lease of property in or on which the Premises are located and Tenant shall offer such Holder and/or landlord a reasonable opportunity to cure the default, including time to obtain possession of the Project by power of sale or a judicial action if such should prove necessary to effect a cure; provided Landlord shall have furnished to Tenant in -------- writing the names and addresses of all such persons who are to receive such notices. All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord's obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term "LANDLORD" in this Lease shall mean only the owner for the time being of the Premises. Upon the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Term upon each new owner for the duration of such owner's ownership. 31. INSPECTION AND ACCESS. Subject to the following sentence, Landlord and its agents, representatives, and contractors may enter the Premises at any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease and for any other business purpose. Landlord and Landlord's representatives may enter the Premises during business hours on not less than 48 hours advance written notice (except in the case of emergencies in which case (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 22 no such notice shall be required and such entry may be at any time) for the purpose of effecting any such repairs, inspecting the Premises, showing the Premises to prospective purchasers and, during the last year of the Term, to prospective tenants or for any other business purpose. All such access to the Premises shall be at times either agreed to by Tenant or that will not interfere with Tenant conducting its business. Landlord may erect a suitable sign on the Premises stating the Premises are available to let or that the Project is available for sale. Landlord may grant easements, make public dedications, designate Common Areas and create restrictions on or about the Premises, provided that no such easement, dedication, designation or restriction - -------- materially, adversely affects Tenant's use or occupancy of the Premises for the Permitted Use. At Landlord's request, Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. Tenant shall at all times, except in the case of emergencies, have the right to escort Landlord or its agents, representatives, contractors or guests while the same are in the Premises, provided such escort does not materially and adversely affect Landlord's access rights hereunder. 32. SECURITY. Tenant acknowledges and agrees that security devices and services, if any, while intended to deter crime may not in given instances prevent theft or other criminal acts and that Landlord is not providing any security services with respect to the Premises. Tenant agrees that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises. Tenant shall be solely responsible for the personal safety of Tenant's officers, employees, agents, contractors, guests and invitees while any such person is in, on or about the Premises and/or the Project. Tenant shall at Tenant's cost obtain insurance coverage to the extent Tenant desires protection against such criminal acts. 33. FORCE MAJEURE. Subject to the limitation set forth herein, neither Landlord nor Tenant shall be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, weather, natural disasters, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of such party ("FORCE MAJEURE"). This Section 32 shall not apply to Tenant's obligation to pay Rent. 34. BROKERS, ENTIRE AGREEMENT, AMENDMENT. Landlord and Tenant each represents and warrants that it has not dealt with any broker, agent or other person (collectively, "BROKER) in connection with this transaction and that no Broker brought about this transaction. Landlord and Tenant each hereby agree to indemnify and hold the other harmless from and against any claims by any Broker, other than the broker, if any named in this Section 35, claiming a commission or ---------- other form of compensation by virtue of having dealt with Tenant or Landlord, as applicable, with regard to this leasing transaction. 35. LIMITATION ON LANDLORD'S LIABILITY. NOTWITHSTANDING ANYTHING SET FORTH HEREIN OR IN ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT TO THE CONTRARY: (A) LANDLORD SHALL NOT BE LIABLE TO TENANT OR ANY OTHER PERSON FOR (AND TENANT AND EACH SUCH OTHER PERSON ASSUME ALL RISK OF) LOSS, DAMAGE OR INJURY, WHETHER ACTUAL OR CONSEQUENTIAL TO: TENANT'S PERSONAL PROPERTY OF EVERY KIND AND DESCRIPTION, INCLUDING, WITHOUT LIMITATION TRADE FIXTURES, EQUIPMENT, INVENTORY, SCIENTIFIC RESEARCH, SCIENTIFIC EXPERIMENTS, LABORATORY ANIMALS, PRODUCT, SPECIMENS, SAMPLES, AND/OR SCIENTIFIC, BUSINESS, ACCOUNTING AND OTHER RECORDS OF EVERY KIND AND DESCRIPTION KEPT AT THE PREMISES AND ANY AND ALL INCOME DERIVED OR DERIVABLE THEREFROM; (B) THERE SHALL BE NO PERSONAL RECOURSE TO LANDLORD FOR ANY ACT OR OCCURRENCE IN, ON OR ABOUT THE PREMISES OR ARISING IN ANY WAY UNDER THIS LEASE OR ANY OTHER AGREEMENT BETWEEN LANDLORD AND TENANT WITH RESPECT TO THE SUBJECT MATTER HEREOF AND ANY LIABILITY OF LANDLORD HEREUNDER SHALL BE STRICTLY LIMITED SOLELY TO LANDLORD'S INTEREST IN THE (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 23 PROJECT OR ANY PROCEEDS FROM SALE OR CONDEMNATION THEREOF AND ANY INSURANCE PROCEEDS PAYABLE IN RESPECT OF LANDLORD'S INTEREST IN THE PROJECT OR IN CONNECTION WITH ANY SUCH LOSS; AND (C) IN NO EVENT SHALL ANY PERSONAL LIABILITY BE ASSERTED AGAINST LANDLORD IN CONNECTION WITH THIS LEASE NOR SHALL ANY RECOURSE BE HAD TO ANY OTHER PROPERTY OR ASSETS OF LANDLORD OR ANY OF LANDLORD'S OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR CONTRACTORS. UNDER NO CIRCUMSTANCES SHALL LANDLORD OR ANY OF LANDLORD'S OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR CONTRACTORS BE LIABLE FOR INJURY TO TENANT'S BUSINESS OR FOR ANY LOSS OF INCOME OR PROFIT THEREFROM. 36. SEVERABILITY. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in effect to such illegal, invalid or unenforceable clause or provision as shall be legal, valid and enforceable. 37. SIGNS; EXTERIOR APPEARANCE. Tenant shall not, without the prior written consent of Landlord, which may be granted or withheld in Landlord's sole discretion: (i) attach any awnings, exterior lights, decorations, balloons, flags, pennants, banners, painting or other projection to any outside wall of the Project, (ii) use any curtains, blinds, shades or screens other than Landlord's standard window coverings, (iii) coat or otherwise sunscreen the interior or exterior of any windows, (iv) place any bottles, parcels, or other articles on the window sills, (v) place any equipment, furniture or other items of personal property on any exterior balcony, or (vi) paint, affix or exhibit on any part of the Premises or the Project any signs, notices, window or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises. Interior signs on doors and the directory tablet shall be inscribed, painted or affixed for Tenant by Landlord at the sole cost and expense of Tenant, and shall be of a size, color and type acceptable to Landlord. Nothing may be placed on the exterior of corridor walls or corridor doors other than Landlord's standard lettering. The directory tablet shall be provided exclusively for the display of the name and location of tenants. 38. MISCELLANEOUS. (a) NOTICES. All notices or other communications between the parties shall be in writing and shall be deemed duly given upon delivery or refusal to accept delivery by the addressee thereof if delivered in person, or upon actual receipt if delivered by reputable overnight guaranty courier, addressed and sent to the parties at their addresses set forth above. Landlord and Tenant may from time to time by written notice to the other designate another address for receipt of future notices. (b) JOINT AND SEVERAL LIABILITY. If and when included within the term "TENANT," as used in this instrument, there is more than one person or entity, each shall be jointly and severally liable for the obligations of Tenant. (c) RECORDATION. Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record. Landlord may prepare and file, and upon request by Landlord Tenant will execute, a memorandum of lease. (d) INTERPRETATION. The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. (e) NOT BINDING UNTIL EXECUTED. The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 24 (f) LIMITATIONS ON INTEREST. It is expressly the intent of Landlord and Tenant at all times to comply with applicable law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken, reserved, or received with respect to this Lease, then it is Landlord's and Tenant's express intent that all excess amounts theretofore collected by Landlord be credited on the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. (g) CHOICE OF LAW. Construction and interpretation of this Lease shall be governed by the internal laws of the state in which the Premises are located, excluding any principles of conflicts of laws. (h) TIME. Time is of the essence as to the performance of Tenant's obligations under this Lease. (i) INCORPORATION BY REFERENCE. All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. If there is any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall control. (j) HAZARDOUS ACTIVITIES. Notwithstanding any other provision of this Lease, Landlord, for itself and its employees, agents and contractors, reserves the right to refuse to perform any repairs or services in any portion of the Premises which, pursuant to Tenant's routine safety guidelines, practices or custom or prudent industry practices, require any form of protective clothing or equipment other than safety glasses. In any such case, Tenant shall contract with parties who are acceptable to Landlord, in Landlord's reasonable discretion, for all such repairs and services, and Landlord shall, to the extent required, equitably adjust Tenant's Share of Operating Expenses in respect of such repairs or services to reflect that Landlord is not providing such repairs or services to Tenant. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 25 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. TENANT: CALYPTE BIOMEDICAL CORPORATION, a Delaware corporation By: /s/ Richard D. Brounstein ------------------------- Its: EVP and CFO ----------- LANDLORD: ARE-1500 EAST GUDE, LLC, a Delaware limited liability company By: ARE-QRS CORP., a Maryland corporation, managing member By: /s/ Joel S. Marcus ------------------ CEO (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 1 EXHIBIT A TO LEASE DESCRIPTION OF PREMISES ----------------------- [Illustration of 1500 EAST GUDE DRIVE - SECOND FLOOR] (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 1 EXHIBIT B TO LEASE DESCRIPTION OF PROJECT ---------------------- LEGAL DESCRIPTION All that lot or parcel of land located in the 4th Election District of Montgomery County, Maryland and described as follows: Parcel I: Lot numbered Five (5) in Block lettered "A" in the subdivision known as "Red Gate Industrial Park" as per plat thereof recorded in Plat Book 102 at Plat 11503, among the Land Records of Montgomery County, Maryland. Parcel I.D. No.: 4-201-1762126 (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 1 EXHIBIT C TO LEASE [Tenant Build] WORK LETTER ----------- THIS WORK LETTER dated March __, 2004 (this "WORK LETTER") is made and entered into by and between ARE-East Gude Lease, LLC, a Delaware limited liability company ("LANDLORD"), and Calypte Biomedical Corporation, a Delaware corporation ("TENANT"), and is attached to and made a part of the Lease dated March 1, 2004 (the "Lease"), by and between Landlord and Tenant. Any initially capitalized terms used but not defined herein shall have the meanings given them in the Lease. 1. GENERAL REQUIREMENTS. (a) TENANT'S AUTHORIZED REPRESENTATIVE. Tenant designates Thomas Callanan and Richard Brounstein (either such individual acting alone, "TENANT'S REPRESENTATIVE") as the only persons authorized to act for Tenant pursuant to this Work Letter. Landlord shall not be obligated to respond to or act upon any request, approval, inquiry or other communication ("COMMUNICATION") from or on behalf of Tenant in connection with this Work Letter unless such Communication is in writing from Tenant's Representative. Tenant may change either Tenant's Representative at any time upon not less than 5 business days advance written notice to Landlord. No period set forth herein for any approval of any matter by Tenant's Representative shall be extended by reason of any change in Tenant's Representative. Neither Tenant nor Tenant's Representative shall be authorized to direct Landlord's contractors in the performance of Landlord's Work (as hereinafter defined). (b) LANDLORD'S AUTHORIZED REPRESENTATIVE. Landlord designates Lawrence J. Diamond and Oliver Sherrill (either such individual acting alone, "LANDLORD'S REPRESENTATIVE") as the only persons authorized to act for Landlord pursuant to this Work Letter. Tenant shall not be obligated to respond to or act upon any request, approval, inquiry or other Communication from or on behalf of Landlord in connection with this Work Letter unless such Communication is in writing from Landlord's Representative. Landlord may change either Landlord's Representative at any time upon not less than 5 business days advance written notice to Tenant. No period set forth herein for any approval of any matter by Landlord's Representative shall be extended by reason of any change in Landlord's Representative. Landlord's Representative shall be the sole persons authorized to direct Landlord's contractors in the performance of Landlord's Work. (c) ARCHITECTS, CONSULTANTS AND CONTRACTORS. Landlord and Tenant hereby acknowledge and agree that the architect (the "TI ARCHITECT") for the Tenant Improvements, the general contractor and any subcontractors for the Tenant Improvements shall be selected by Tenant, subject to Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed. 2. TENANT IMPROVEMENTS. (a) TENANT IMPROVEMENTS DEFINED. As used herein, "TENANT IMPROVEMENTS" shall mean all improvements to the Premises desired by Tenant of a fixed and permanent nature. Other than funding the TI Allowance (as defined below) as provided herein, Landlord shall not have any obligation whatsoever with respect to the finishing of the Premises for Tenant's use and occupancy. (b) TENANT'S SPACE PLANS. Tenant shall deliver to Landlord schematic drawings and outline specifications (the "TI DESIGN DRAWINGS") detailing Tenant's requirements for the Tenant Improvements within 15 business days of the date hereof. Not more than ten 10 business days thereafter, Landlord shall deliver to Tenant the written objections, questions or comments of Landlord and the TI Architect with regard to the TI Design Drawings. Tenant shall cause the TI Design Drawings to be revised to address such written comments and shall resubmit said drawings to Landlord for approval within 10 business days thereafter. Such process shall continue until Landlord has approved the TI Design Drawings. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 2 (c) WORKING DRAWINGS. Not later than 15 business days following the approval of the TI Design Drawings by Landlord, Tenant shall cause the TI Architect to prepare and deliver to Landlord for review and comment construction plans, specifications and drawings for the Tenant Improvements ("TI CONSTRUCTION DRAWINGS"), which TI Construction Drawings shall be prepared substantially in accordance with the TI Design Drawings. Tenant shall be solely responsible for ensuring that the TI Construction Drawings reflect Tenant's requirements for the Tenant Improvements. Landlord shall deliver its written comments on the TI Construction Drawings to Tenant not later than 10 business days after Landlord's receipt of the same; provided, however, that Landlord may not disapprove any matter that is consistent with the TI Design Drawings. Tenant and the TI Architect shall consider all such comments in good faith and shall, within 10 business days after receipt, notify Landlord how Tenant proposes to respond to such comments. Any disputes in connection with such comments shall be resolved in accordance with Section 2(d) hereof. Provided that the design reflected in ----------- the TI Construction Drawings is consistent with the TI Design Drawings, Landlord shall approve the TI Construction Drawings submitted by Tenant. Once approved by Landlord, subject to the provisions of Section 2(d) below, Tenant shall not ------------ materially modify the TI Construction Drawings except as may be reasonably required in connection with the issuance of the TI Permit (as defined in Section ------- 3(b) below). - --- (d) APPROVAL AND COMPLETION. Upon any dispute regarding the design of the Tenant Improvements, which is not settled within 10 business days after notice of such dispute is delivered by one party to the other, and except to the extent the proposed Tenant Improvements would adversely impact the base Building structure or the Building Systems, in which case Landlord shall make the final decision regarding the design of such Tenant Improvements, Tenant shall make the final decision regarding the design of the Tenant Improvements, provided Tenant acts reasonably and such final decision is either consistent with or a compromise between Landlord's and Tenant's positions with respect to such dispute, provided further that all costs and expenses resulting from any such decision by Tenant shall be payable out of the TI Fund (as defined in Section ------- 5(d) below). Any changes to the TI Construction Drawings following Landlord's - --- and Tenant's approval of same requested by Tenant shall be processed as provided in Section 4 hereof. --------- 3. PERFORMANCE OF TENANT'S WORK. (a) DEFINITION OF TENANT'S WORK. As used herein, "TENANT'S WORK" shall mean the work of constructing the Tenant Improvements. (b) COMMENCEMENT AND PERMITTING OF TENANT'S WORK. Tenant shall commence construction of the Tenant Improvements upon obtaining a building permit (the "TI PERMIT") authorizing the construction of the Tenant Improvements consistent with the TI Construction Drawings approved by Landlord and delivering a copy of the TI Permit to Landlord. The cost of obtaining the TI Permit shall be payable from the TI Fund. Landlord shall assist Tenant in obtaining the TI Permit. Prior to the commencement of construction of Tenant's Work, Tenant shall deliver to Landlord a fully executed copy of Tenant's contract with Tenant's general contractor and a copy of such general contractor's certificate of insurance or policy endorsement naming Landlord and any of Landlord's nominees as additional insureds. (c) SELECTION OF MATERIALS, ETC. Where more than one type of material or structure is indicated on the TI Construction Drawings approved by Tenant and Landlord, the option will be within Tenant's reasonable discretion, except to the extent the proposed material or structure would adversely impact the base Building structure or the Building Systems, in which case Landlord shall make the final decision at its discretion. 4. CHANGES. Any changes requested by Tenant to the Tenant Improvements after the delivery and approval by Landlord of the TI Design Drawings, shall be requested and instituted in accordance with the provisions of this Section 4 and --------- shall be subject to the written approval of Landlord, such approval not to be unreasonably withheld, conditioned or delayed. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 3 (a) TENANT'S RIGHT TO REQUEST CHANGES. If Tenant shall request changes ("CHANGES"), Tenant shall request such Changes by notifying Landlord in writing in substantially the same form as the AIA standard change order form (a "CHANGE REQUEST"), which Change Request shall detail the nature and extent of any such Change. Such Change Request must be signed by Tenant's Representative. Landlord shall review and approve or disapprove such Change Request within 5 business days thereafter, provided that Landlord's approval shall not be unreasonably withheld, conditioned or delayed. (b) IMPLEMENTATION OF CHANGES. If Landlord approves such Change and Tenant deposits with Landlord any Excess TI Costs (as defined in Section 5(d) below) ----------- required in connection with such Change, Tenant may cause the approved Change to be instituted. 5. COSTS. (a) BUDGET FOR TENANT IMPROVEMENTS. Before the commencement of construction of the Tenant Improvements, Tenant shall prepare a detailed breakdown, by trade, of the costs incurred or which will be incurred, in connection with the design and construction of Tenant's Work (the "BUDGET") and deliver a copy of the Budget to Landlord. The Budget shall be based upon the TI Construction Drawings approved by Landlord and shall include a payment to Landlord of administrative rent in an amount equal to $5,000 ("ADMINISTRATIVE RENT") to be used to reimburse Landlord for any actual out-of-pocket expenses incurred by Landlord in monitoring and inspecting the construction of Tenant's Work, which sum shall be payable from the TI Fund. Such Administrative Rent shall include, without limitation, all out-of-pocket costs, expenses and fees incurred by or on behalf of Landlord arising from, out of, or in connection with, such monitoring of the construction of the Tenant Improvements, and shall be payable out of the TI Fund. If the Budget is greater than the TI Allowance, Tenant shall deposit with Landlord the difference, in cash, prior to the commencement of construction of the Tenant Improvements, for disbursement by Landlord as described in Section ------- 5(d). - --- (b) Landlord shall provide to Tenant a tenant improvement allowance ("TI ALLOWANCE") of $10.00 per rentable square foot of the Premises. The Budget shall reflect how much TI Allowance Tenant has elected to receive from Landlord. Such election shall be final and binding on Tenant, and may not thereafter be modified without Landlord's consent, which may be granted or withheld in Landlord's sole and absolute discretion. The TI Allowance shall be disbursed in accordance with this Work Letter. Tenant shall have no right to the use or benefit of any portion of the Tenant Improvement Allowance not required for the construction of (i) the Tenant Improvements described in the TI Construction Drawings approved pursuant to Section 2(d) or (ii) any Changes pursuant to Section 4. (c) COSTS INCLUDABLE IN TI FUND. The TI Fund shall be used solely for the payment of design and construction costs in connection with the construction of the Tenant Improvements, including, without limitation, the cost of preparing the TI Design Drawings and the TI Construction Drawings, all costs set forth in the Budget, including Landlord's Administrative Rent, and the cost of Changes (collectively, "TI COSTS"). Notwithstanding anything to the contrary contained herein, the TI Fund shall not be used to purchase any furniture, personal property or other non-Building System materials or equipment, including, but not be limited to, biological safety cabinets and other scientific equipment not incorporated into the Improvements. (d) EXCESS TI COSTS. It is understood and agreed that Landlord is under no obligation to bear any portion of the cost of any of the Tenant Improvements except to the extent of the TI Allowance. (e) PAYMENT FOR TI COSTS. Landlord shall pay TI Costs once a month against a draw request in Landlord's standard form, containing such certifications, lien waivers, inspection reports and other matters as Landlord customarily obtains, to the extent of Landlord's approval thereof for payment, no later than 30 days following receipt of such draw request. Upon completion of the Tenant Improvements and prior to Landlord's funding of the final draw from the TI Fund, Tenant shall deliver to Landlord: (i) sworn statements setting forth the names of all contractors and subcontractors who did the work and final unconditional lien waivers from all such contractors and subcontractors; (ii) "as built" plans, (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 4 in both print and electronic format, and copies of all operating and maintenance manuals and warranties, as applicable, for such Tenant Improvements; and (iii) a certificate of occupancy. 6. MISCELLANEOUS. (a) CONSENTS. Whenever consent or approval of either party is required under this Work Letter, that party shall not unreasonably withhold, condition or delay such consent or approval, except as may be expressly set forth herein to the contrary. (b) MODIFICATION. No modification, waiver or amendment of this Work Letter or of any of its conditions or provisions shall be binding upon Landlord or Tenant unless in writing signed by Landlord and Tenant. (c) COUNTERPARTS. This Work Letter may be executed in any number of counterparts but all counterparts taken together shall constitute a single document. (d) GOVERNING LAW. This Work Letter shall be governed by, construed and enforced in accordance with the internal laws of the state in which the Premises are located, without regard to choice of law principles of such State. (e) TIME OF THE ESSENCE. Time is of the essence of this Work Letter and of each and all provisions thereof. (f) DEFAULT. Notwithstanding anything set forth herein or in the Lease to the contrary, Landlord shall not have any obligation to perform any work hereunder or to fund any portion of the TI Fund during any period Tenant is in Default under the Lease. (g) SEVERABILITY. If any term or provision of this Work Letter is declared invalid or unenforceable, the remainder of this Work Letter shall not be affected by such determination and shall continue to be valid and enforceable. (h) MERGER. All understandings and agreements, oral or written, heretofore made between the parties hereto and relating to Tenant's Work are merged in this Work Letter, which alone (but inclusive of provisions of the Lease incorporated herein and the final approved constructions drawings and specifications prepared pursuant hereto) fully and completely expresses the agreement between Landlord and Tenant with regard to the matters set forth in this Work Letter. (i) ENTIRE AGREEMENT. This Work Letter is made as a part of and pursuant to the Lease and, together with the Lease, constitutes the entire agreement of the parties with respect to the subject matter hereof. This Work Letter is subject to all of the terms and limitation set forth in the Lease, and neither party shall have any rights or remedies under this Work Letter separate and apart from their respective remedies pursuant to the Lease. [SIGNATURES ON NEXT PAGE] (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 5 IN WITNESS WHEREOF, Landlord and Tenant have executed this Work Letter to be effective on the date first above written. TENANT: CALYPTE BIOMEDICAL CORPORATION, a Delaware corporation By: /s/ Richard D.Brounstein -------------------------------------- Its: EVP and CFO -------------------------------------- LANDLORD: ARE-1500 EAST GUDE, LLC, a Delaware limited liability company By: ARE-QRS CORP., a Maryland corporation, managing member By: /s/ Joel S. Martin ---------------------------------- CEO (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 1 EXHIBIT E TO LEASE RULES AND REGULATIONS --------------------- 1. The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or any Tenant Party, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for animals assisting the disabled, no animals shall be allowed in the offices, halls, or corridors in the Project. 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person. 11. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises. 12. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 2 13. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14. No auction, public or private, will be permitted on the Premises or the Project. 15. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises. 17. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises. (C) All rights reserved - Alexandria Real Estate Equities 2001 CONFIDENTIAL - DO NOT COPY OR DISTRIBUTE MD_DOCS_A #1222447 v5 NET/MULTI-TENANT OFFICE/LABORATORY 1500 EAST GUDE DRIVE/CALYPTE-PAGE 1 EXHIBIT F TO LEASE TENANT'S PERSONAL PROPERTY -------------------------- None except as set forth below: EX-23.1 8 ex23-1.txt Consent of Independent Registered Public Accounting Firm EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Calypte Biomedical Corporation We consent to the incorporation by reference in the registration statements No. 333-106387 and No. 333-106389 on Form S-8 of our report dated March 19, 2004, relating to the consolidated balance sheets of Calypte Biomedical Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years then ended, which report appears in the December 31, 2003 annual report on Form 10-KSB of Calypte Biomedical Corporation. /s/ Odenberg Ullakko Muranishi & Co. LLP San Francisco, California March 19, 2004 S-2 EX-31.1 9 ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF EXECUTIVE CHAIRMAN PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Anthony J. Cataldo, certify that: 1. I have reviewed this annual report on Form 10-KSB of Calypte Biomedical Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 29, 2004 /s/ Anthony J. Cataldo - ---------------------- Anthony J. Cataldo Executive Chairman II-1 EX-31.2 10 ex31-2.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF OPERATING OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, J. Richard George, certify that: 1. I have reviewed this annual report on Form 10-KSB of Calypte Biomedical Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: March 29, 2004 /s/ J. Richard George - ---------------------- J. Richard George President and Chief Executive Officer II-2 EX-31.3 11 ex31-3.txt EXHIBIT 31.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard D. Brounstein, certify that: 1. I have reviewed this annual report on Form 10-KSB of Calypte Biomedical Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 29, 2004 /s/ Richard D. Brounstein - -------------------------- Richard D. Brounstein Executive Vice President and Chief Financial Officer II-3 EX-32.1 12 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Form 10-KSB of Calypte Biomedical Corporation (the "Company") for the year ended December 31, 2003 (the "Report"), Anthony Cataldo, Executive Chairman of the Company, J. Richard George, President and Chief Executive Officer of the Company, and Richard Brounstein, Chief Financial Officer of the Company, each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) to my knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Anthony J. Cataldo - ---------------------- Anthony J. Cataldo Executive Chairman March 29, 2004 /s/ J. Richard George - --------------------- J. Richard George President and Chief Executive Officer March 29, 2004 /s/ Richard D. Brounstein - ------------------------- Richard D. Brounstein Executive Vice President and Chief Financial Officer March 29, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Calypte Biomedical Corporation and will be retained by Calypte Biomedical and furnished to the Securities and Exchange Commission or its staff upon request. II-4 -----END PRIVACY-ENHANCED MESSAGE-----