SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
Commission File Number 1-6247
ALZA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0142070
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
950 Page Mill Road, P.O. Box 10950, Palo Alto, CA 94303-0802
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 494-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock New York Stock Exchange
5 1/4% Liquid Yield Option-trademark- Notes New York Stock Exchange
due 2014 (Zero Coupon-Subordinated)
5% Convertible Subordinated Debentures New York Stock Exchange
due 2006
Securities registered pursuant to Section 12(g) of the Act:
Warrants (to purchase Common Stock at $65 per share)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant, as of March 16, 1998:
$3,539,051,440.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 16, 1998:
Title of Class Number of Shares
Common Stock 86,052,152
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6, 7 and 8 are incorporated by reference
to the registrant's Annual Report to Stockholders for the year
ended December 31, 1997; Part III, Items 10, 11, 12 and 13 are
incorporated by reference to the definitive proxy statement for
the registrant's Annual Meeting of Stockholders to be held on May
7, 1998.
ALZA CORPORATION FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
Part I
Item 1. Business 3
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
EXECUTIVE OFFICERS OF THE REGISTRANT 28
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 30
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
Part III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management 31
Item 13. Certain Relationships and Related Transactions 31
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 32
PART I
Item 1. Business
Introduction
ALZA Corporation ("ALZA") is an emerging pharmaceutical
company with leading drug delivery technologies. ALZA applies
its technologies to develop pharmaceutical products with enhanced
therapeutic value for its own portfolio and for many of the
world's leading pharmaceutical companies. ALZA is currently
focusing its sales and marketing efforts in urology and oncology.
ALZA was incorporated under the laws of the State of California
on June 11, 1968, and changed its legal domicile from California
to Delaware in 1987. ALZA's mailing address is 950 Page Mill Road,
P.O. Box 10950, Palo Alto, California, 94303-0802.
Before the 1990s, ALZA's business consisted almost
exclusively of product development activities undertaken pursuant
to joint development and commercialization agreements with large
pharmaceutical companies. Among the ALZA-developed products
commercialized to date by client companies under these
arrangements are Procardia XL-registered trademark-/Adalat CR-
registered trademark- (nifedipine) for the treatment of angina
and hypertension, Transderm-Nitro-registered trademark-
(nitroglycerin) for the prevention and treatment of angina,
NicoDerm-registered trademark- CQ-trademark- (nicotine) for use
as an aid in smoking cessation, and Glucotrol XL-registered
trademark- (glipizide) for the treatment of Type II diabetes.
Beginning in the early 1990s and increasingly over the past
several years, ALZA has embarked on a new strategy to become a
fully-integrated commercial pharmaceutical company. While ALZA
has continued its traditional product development arrangements
with client companies, and currently has products in development
with a number of major pharmaceutical companies, ALZA has
expanded its commercialization capabilities and activities. In
1994, ALZA formed ALZA Pharmaceuticals, its sales and marketing
division, which now has a sales force of more than 100 sales
personnel. By the end of 1997, ALZA Pharmaceuticals was
marketing Ethyol-registered trademark- (amifostine), Testoderm-
registered trademark- (testosterone), Testoderm-registered
trademark- with Adhesive, Mycelex-registered trademark-
(clotrimazole) Troche, Ditropan-registered trademark-
(oxybutynin), Elmiron-registered trademark- (pentosan polysulfate
sodium), PolyCitra-registered trademark- (potassium citrate
monohydrate), BiCitra-registered trademark- (sodium citrate
dihydrate and citric acid monohydrate) and Neutra-Phos-registered
trademark- (potassium and sodium phosphates), as well as ALZET-
registered trademark- mini-osmotic pumps, Progestasert-registered
trademark- (progesterone) intrauterine contraceptive device
systems and Ocusert-registered trademark- (pilocarpine) ocular
therapeutic systems, three products developed by ALZA in its
early years. In March 1998, ALZA launched Testoderm-registered
trademark- TTS-trademark- (testosterone) CIII, the third product
in the Testoderm line. In addition, ALZA, through ALZA
Pharmaceuticals, co-promotes Duragesic-registered trademark-
(fentanyl), Hexalen-registered trademark- (altretamine),
NeuTrexin-registered trademark- (trimetrexate glucuronate) and
the ENACT AirWatch-trademark- system. A partnership of ALZA and
Procter & Gamble markets the Actisite-registered trademark-
(tetracycline hydrochloride) periodontal fiber for the treatment
of periodontal disease in the United States.
As part of its strategy to expand its commercialization
activities, and in order to decrease ALZA's dependence on client
companies, in 1993 ALZA formed Therapeutic Discovery Corporation
("TDC") to develop, with ALZA, a pipeline of products for
commercialization by ALZA. In the third quarter of 1997, ALZA
purchased all of the outstanding shares of TDC. Also in the
third quarter of 1997, ALZA distributed to its stockholders and
debenture holders the Class A Common Stock of Crescendo
Pharmaceuticals Corporation ("Crescendo"), which was formed by
ALZA to select and develop human pharmaceutical products and to
commercialize those products, most likely through licensing to
ALZA. ALZA and Crescendo have continued development of several
products previously under development by ALZA and TDC; ALZA and
Crescendo have also commenced the development or evaluation of
other products.
At the end of 1997, ALZA and Janssen Pharmaceutica, Inc.
(together with its affiliates, "Janssen") entered into new
arrangements with respect to two E-TRANS-trademark- fentanyl
products - one for the treatment of acute pain and one for the
treatment of chronic pain. Under these arrangements, discussed
below, ALZA will have the opportunity to share in the United
States operating profits from the products in exchange for making
an investment in the product development programs.
ALZA's 1997 activities serve as the foundation for ALZA's
expanding commercial activities.
Notice Concerning Forward-Looking Statements
Some of the statements made in this Form 10-K are forward-
looking in nature, including but not limited to ALZA's sales and
marketing plans, product development activities and plans, and
other statements that are not historical facts. Forward-looking
statements include, but are not limited to, statements that are
not historical facts, and statements including forms of the words
"intend", "believe", "will", "may", "could", "expect",
"anticipate", "possible", and similar terms. The occurrence of
the events described, and the achievement of the intended
results, are subject to the future occurrence of many events,
some or all of which are not predictable or within ALZA's
control; therefore, actual results may differ materially from
those anticipated in any forward-looking statements. Many risks
and uncertainties are inherent in the pharmaceutical industry;
others are more specific to ALZA's business. Many of the
significant risks related to ALZA's business are described in
this Form 10-K, including risks associated with introducing and
commercializing new pharmaceutical products, the risks inherent
in technology and product development, risks relating to clinical
development, regulatory clearance to market products and medical
acceptance of products, changes in the health care marketplace,
competition, patent and intellectual property matters, regulatory
risks and manufacturing issues.
Products Marketed and Co-Promoted by ALZA
At the end of 1997, ALZA, through ALZA Pharmaceuticals, was
marketing 13 pharmaceutical products and was co-promoting four
additional products marketed by third parties. ALZA
Pharmaceuticals has more than 100 field sales personnel. ALZA's
specialty sales force has been specially trained in ALZA's two
current areas of commercial focus - urology and oncology.
ALZA-Marketed Products
- Ethyol (amifostine) - In April 1996, ALZA Pharmaceuticals
began marketing Ethyol in the United States. Ethyol is a unique
cytoprotective agent developed by U.S. Bioscience, Inc. ("USB"),
indicated for the reduction of cumulative renal toxicity
associated with repeated administration of the chemotherapeutic
drug cisplatin in patients with advanced ovarian or non-small
cell lung cancer. USB co-promotes the product with ALZA. ALZA
has the right to market the product until mid-2001, with an
option for an additional year, and will receive residual payments
for a specified period after the end of ALZA's marketing term.
- Mycelex (clotrimazole) Troche - ALZA acquired the
exclusive United States rights to this product from Bayer
Corporation ("Bayer") in July 1997. Mycelex Troche is an
antifungal agent for the localized treatment of oral thrush.
Prior to acquiring the rights to the product, ALZA promoted the
product for Bayer.
- Elmiron (pentosan polysulfate sodium) - In October 1997,
ALZA acquired the exclusive rights in the United States and
Canada to this product, indicated for the treatment of the pain
and discomfort of interstitial cystitis, from IVAX Corporation
and its subsidiary, Baker Norton Pharmaceuticals, Inc. (together,
"IVAX"). In connection with that transaction, ALZA hired most of
the IVAX personnel involved in promoting the product in the
United States and Canada. The product was cleared for marketing
in the United States in late 1996, and in Canada in 1993.
- PolyCitra (potassium citrate), BiCitra (sodium citrate
and citric acid) and Neutra Phos (potassium and sodium phosphate)
- - The exclusive rights to these products in the United States and
Canada were acquired from IVAX in the same transaction in which
the rights to Elmiron were acquired. PolyCitra and BiCitra are
used in the treatment of kidney stones, and Neutra Phos is a
nutritional supplement used to treat phosphorous deficiency. All
three products are marketed in the United States; PolyCitra is
also marketed in Canada.
- Ditropan (oxybutynin) - In October 1997, ALZA acquired
the exclusive United States rights to the immediate release oral
Ditropan product from Hoechst Marion Roussel, Inc. ("HMRI"). The
product is indicated for the treatment of urge urinary
incontinence. As part of the transaction, ALZA also acquired the
right to use the Ditropan trademark in the United States with
other products. Subject to marketing clearance by the United
States Food and Drug Administration ("FDA"), and if ALZA licenses
the product from Crescendo, ALZA intends to use the Ditropan
trademark with the OROS-registered trademark- oxybutynin product
under development by ALZA and Crescendo. The New Drug
Application ("NDA") for the OROS oxybutynin product is currently
on file with the FDA.
- Testoderm (testosterone) line of products - ALZA has
developed three Testoderm products, once-daily transdermal
systems for testosterone replacement therapy in males for
conditions associated with a deficiency or absence of endogenous
testosterone. Testoderm was introduced in 1994; Testoderm with
Adhesive in 1996. Both products are worn on the scrotum. In
March 1998, ALZA launched Testoderm TTS, which was developed by
ALZA and TDC. This product can be worn on the arm, back or upper
buttocks and is also applied once daily.
In addition to the products described above, ALZA
Pharmaceuticals markets the ALZET, Progestasert and Ocusert
products. The Ocusert (pilocarpine) Pilo-20 and Pilo-40 ocular
therapeutic systems are used for the treatment of glaucoma. The
Progestasert (progesterone) intrauterine contraceptive device
provides contraception for one year by releasing the natural
hormone progesterone. ALZET mini-osmotic pumps are implantable,
capsule-shaped units that can deliver solutions containing a wide
range of agents in laboratory animals at controlled rates for up
to four weeks.
Product Marketing Risks
Many of the products described above have been introduced by
ALZA Pharmaceuticals during the last few years. Several, such as
Ethyol and Elmiron, are relatively new therapies that had no
established market at the time of their introduction. Others,
such as the Testoderm line, are used for the treatment of
conditions that may be underdiagnosed or not completely
understood. There can be no assurance that ALZA Pharmaceuticals
will be successful in its marketing and sales efforts. There are
numerous risks associated with the marketing and sales of
pharmaceutical products, including the following:
- Commercial Potential - In order to provide added value
and gain medical and commercial acceptance, a product generally
must show some performance improvement or other benefit over
products incorporating the same or similar drug compounds or
other products indicated for the same illness or condition. In
some cases, these benefits may be difficult to establish.
- Competition from Other Products - Many companies have a
presence in urology and oncology, in which ALZA is currently
focusing its sales and marketing efforts, including companies
that focus exclusively on oncology. Many competitors have far
larger sales forces, and significantly greater resources and
experience in marketing pharmaceutical products, than ALZA. In
addition, other companies may introduce products that offer
competitive advantages when compared to products marketed by
ALZA.
- Availability of Products for In-Licensing and/or
Acquisition - While ALZA has successfully acquired and in-
licensed several products during the past few years, there can be
no assurance of continued success in such activities. Other
companies are attempting to acquire and in-license products,
particularly in the oncology field, and ALZA may not be able to
acquire or in-license additional products on favorable terms.
- Pricing and Reimbursement - As pressures for cost
containment increase, particularly in the United States health
care industry, there can be no assurance that the prices ALZA can
charge for the products marketed by ALZA Pharmaceuticals will be
as favorable as historical pharmaceutical product prices.
Reimbursement by payors such as government and managed care
organizations has become increasingly important, as has the
listing of new products on large formularies. There can be no
assurance that innovative new products such as Ethyol and
Elmiron, or drug delivery products such as Testoderm TTS, will
achieve reimbursement and formulary acceptance that will result
in an appropriate return on ALZA's research and development
efforts or investment in the acquisition of the products. Failure
of one or more products to be included on formulary lists, or to
be reimbursed by managed care organizations, could have a
negative impact on the profitability of ALZA Pharmaceuticals.
- Physician and Patient Acceptance of Products -
Significant efforts will be required to educate physicians and
other health care practitioners, as well as patients, concerning
some of ALZA's current products in order that the full potential
of the products can be realized. For example, Ethyol is the first
chemoprotective therapy to be cleared for marketing in the United
States. Elmiron, the only oral therapy available for the pain
and discomfort associated with interstitial cystitis, is used in
the treatment of a disease that is often undiagnosed or
misdiagnosed. The Testoderm line is used to treat testosterone
deficiency in men, a condition that is not yet well understood,
and which is believed to be largely undiagnosed.
- Dependence on Third Party Manufacturers - The products
in-licensed and acquired by ALZA to date from third parties are
manufactured by the third parties. ALZA is therefore dependent
upon the manufacturing capabilities and capacity of the third
parties for supply of those products to sell in the marketplace.
- Need for International Distribution Arrangements - ALZA's
direct sales and marketing efforts are currently limited to the
United States and Canada. ALZA will need to enter into
arrangements with distributors or marketing partners outside the
United States and Canada for products as to which ALZA has rights
in other countries. There can be no assurance that acceptable
distribution partners can be obtained, or that ALZA's return from
the arrangements with international marketing partners will
contribute significantly to ALZA's profits.
Products Co-Promoted by ALZA Pharmaceuticals
In addition to marketing the products described above, ALZA
co-promotes four products with third parties.
- Duragesic (fentanyl) is a 72-hour system for management
of chronic pain in patients who require continuous opioid
analgesia for pain that cannot be controlled by lesser means,
marketed by Janssen. ALZA Pharmaceuticals has co-promoted the
product in the United States since 1994.
- NeuTrexin (trimetrexate glucuronate) is a product
developed and marketed by USB as an alternate treatment for
moderate to severe pneumocystis carinii pneumonia. ALZA
Pharmaceuticals has co-promoted the product in the United States
since 1996.
- Hexalen (altretamine) is a product developed and marketed
by USB for the palliative treatment of patients with persistent
or recurrent ovarian cancer as second-line therapy following
first-time therapy with a cisplatin and/or alkylating agent-based
combination. ALZA Pharmaceuticals has co-promoted the product in
the United States since 1996.
- The ENACT AirWatch system is a product developed by ENACT
Health Management Systems for daily monitoring of asthma. ALZA
Pharmaceuticals has co-promoted the product in the United States
since 1995.
For its co-promotion activities, ALZA receives co-promotion fees,
either pursuant to a specified formula or as a percentage of
sales (or incremental sales) of the product.
Arrangements with Pharmaceutical Company Clients
Client-Marketed Products
ALZA develops products under joint development arrangements
with a number of leading pharmaceutical companies. The products
combine one of ALZA's drug delivery systems with a client's
proprietary compound or, in some cases, a compound that is no
longer patented. ALZA's technologies are discussed below under
"ALZA Technologies." Under a typical arrangement with a client
company, the client pays all of ALZA's costs incurred in the
development of the product, and the client markets the product,
making payments to ALZA based on sales of the product. The
client approves the work plans for product development and
clinical testing (which may be conducted by ALZA, the client or
both), and makes the decisions concerning product
commercialization. As a result, decisions affecting the timing
of product development, the clinical plan, regulatory strategy,
and the level of marketing support are not within ALZA's control.
The products developed by ALZA under these joint development
arrangements and currently marketed by client companies
incorporate ALZA's D-TRANS-trademark- (transdermal) and OROS
technologies. The D-TRANS products developed by ALZA and
currently marketed by client companies include:
- Catapres-TTS-registered trademark- (clonidine) - Applied
once-weekly for the treatment of hypertension, marketed by
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer").
- Duragesic (fentanyl) - A 72-hour system for management of
chronic pain in patients who require continuous opioid analgesia
for pain that cannot be controlled by lesser means, marketed by
Janssen and co-promoted in the United States by ALZA
Pharmaceuticals.
- NicoDerm CQ/Nicoderm (nicotine) - Applied once-daily to
aid in smoking cessation. NicoDerm CQ is marketed for over-the-
counter use in the United States by SmithKline Beecham p.l.c.
("SKB") as part of a joint venture with HMRI, and Nicoderm is
marketed as a prescription product by HMRI in some countries
outside the United States.
- Transderm-Nitro (nitroglycerin) - Applied once-daily for
the prevention and treatment of angina pectoris, marketed by
Novartis Pharmaceuticals Corporation (together with its
affiliates, "Novartis").
- Transderm Scop-registered trademark- (scopolamine) -
Applied once every three days for prevention of nausea and
vomiting associated with motion sickness, marketed by Novartis in
the United States and several European countries, and by
Recordati Industria Chimica E Farmaceutica SPA in Italy.
The OROS products developed by ALZA and currently marketed
by client companies include:
- Covera-HS-trademark- (verapamil) - A once-daily
controlled-onset-extended release (COER-24-trademark-) tablet for
the treatment of hypertension and angina pectoris, marketed by
G.D. Searle ("Searle").
- DynaCirc CR-registered trademark- (isradipine) - A once-
daily system for the treatment of hypertension, marketed by
Novartis.
- Glucotrol XL (glipizide) - A once-daily treatment for
Type II diabetes, marketed by Pfizer, Inc. ("Pfizer").
- Minipress XL-registered trademark- / Alpress-registered
trademark- LP (prazosin) - A once-daily formulation for the
treatment of hypertension, marketed by Pfizer.
- Procardia XL / Adalat CR (nifedipine) - A once-daily
formulation for the treatment of both angina and hypertension,
marketed by Pfizer in the United States and by Bayer outside the
United States.
- Volmax-registered trademark- (albuterol) - A twice-daily
dosage form for the treatment of asthma, marketed by Muro
Pharmaceutical, Inc. and Forest Laboratories, Inc. in the United
States and by Glaxo Holdings p.l.c. outside the United States.
In early 1998, Warner-Lambert Consumer Healthcare ("Warner-
Lambert") introduced the OROS-registered trademark-
pseudoephedrine product, developed by ALZA, as Sudafed-registered
trademark- 24 Hour. The product is marketed by Warner-Lambert in
the United States as part of its Sudafed-registered trademark-
line, pursuant to semi-exclusive rights granted by ALZA. The
product was previously marketed by Novartis under the Efidac-
registered trademark- brand name.
Other products developed by ALZA and marketed by third
parties include the Actisite (tetracycline hydrochloride)
periodontal fiber, designed to treat adult periodontal disease by
providing rate-controlled delivery of tetracycline for ten days
after placement in the periodontal pocket by a dental
practitioner; the Baxter Infusor-registered trademark-, a
lightweight, disposable device for intravenous therapy; and
IVOMEC SR-registered trademark-, a product combining the
antiparasitic agent ivermectin with ALZA's ruminal bolus
technology which controls internal and external parasites in
cattle for an entire grazing season following a single
administration.
International Activities
Outside the United States and Canada, ALZA has arrangements
to market several of its products through distribution
arrangements with companies in designated countries. Actisite
(tetracycline hydrochloride), for the treatment of periodontal
disease, is distributed in several European countries by
distributors, and agreements were signed during 1996 for the
distribution of the product in Japan and South Korea, following
regulatory approval. In December 1996, ALZA signed agreements
with Ferring NV (together with its affiliate, "Ferring") granting
Ferring the right to market Testoderm, Testoderm with Adhesive
and Testoderm TTS in 12 European countries. ALZA has also signed
distribution agreements for 17 Asian countries (excluding Japan)
for Testoderm and Testoderm with Adhesive. In 1997, ALZA entered
into an agreement with SKB for the commercialization by SKB in
numerous international markets of the Nicoderm (nicotine)
transdermal product developed by ALZA. ALZA entered into an
agreement with Pfizer during 1997 for the commercialization of
the ALZA-developed OROS pseudoephedrine product in certain
countries outside the United States.
In order to continue the expansion of its international
activities, in 1997 ALZA opened a small office in London for its
subsidiary ALZA International, Inc. ("ALZA International"). This
presence in Europe is intended to help ALZA identify distributors
for ALZA products, to help identify new opportunities for product
development programs combining ALZA technologies with compounds
developed, or under development by, companies in Europe, and to
identify products under development, or marketed in Europe, for
potential acquisition or in-licensing by ALZA for United States
and Canadian marketing.
Also in 1997, ALZA expanded its sales and marketing
activities into Canada when ALZA acquired the United States and
Canadian rights to Elmiron, PolyCitra, BiCitra and Neutra Phos.
ALZA International now has approximately 12 employees (formerly
IVAX employees) located in Canada, marketing Elmiron and
PolyCitra. ALZA International is doing business in Canada as
ALZA Canada.
Disclosed Products in Development
ALZA has many products in development with Crescendo and
other clients. For competitive reasons, ALZA does not disclose
all of the products in development at any particular time.
Products in development include:
OROS oxybutynin - In December 1997, ALZA submitted a
New Drug Application ("NDA") to the FDA requesting clearance to
market a once-daily OROS dosage form of oxybutynin for the
treatment of urge urinary incontinence. The NDA is currently on
file with the FDA. Subject to FDA clearance and assuming ALZA
licenses the product from Crescendo, ALZA plans to market the
product under the tradename Ditropan-registered trademark- XL-
trademark-. The product was initially developed by ALZA and TDC,
and its development has been continued by ALZA and Crescendo.
DUROS-registered trademark- leuprolide - The DUROS
leuprolide product is a small osmotically-driven implantable
system designed to deliver leuprolide continuously for up to 12
months to provide palliative treatment of prostate cancer. The
product is currently in Phase III clinical trials with Crescendo.
OROS methylphenidate - The OROS methylphenidate product
is designed as a once-daily treatment for Attention Deficit
Disorder/Attention Deficit Hyperactivity Disorder. The product
is in Phase II clinical trials with Crescendo.
OROS hydromorphone - The OROS hydromorphone product is
designed as a once-daily dosage form of the opioid analgesic
hydromorphone. The product is in Phase III clinical trials under
ALZA's agreement with Knoll Pharmaceuticals and its parent Knoll
AG (together, "Knoll").
Cereport-trademark- (bradykinin-based receptor-mediated
permeabilizer) - In September 1997, ALZA entered into a clinical
development and option agreement with Alkermes, Inc. ("Alkermes")
relating to Cereport (previously called RMP-7-trademark-) a
compound intended to facilitate the delivery of chemotherapeutic
agents to the brain. Under the agreement, Alkermes is conducting
additional clinical activities related to Cereport, and ALZA has
the option to acquire exclusive worldwide commercialization
rights to the product.
E-TRANS fentanyl (acute pain) - ALZA and Janssen have
entered into a modified agreement pursuant to which the companies
are jointly developing an E-TRANS fentanyl product for the
treatment of acute pain. Under the modified agreement, ALZA paid
Janssen $21.5 million, and ALZA will receive a share of the
United States operating profits from the product and royalties
from sales of the product outside the United States. ALZA will
have the right to co-promote the product in the United States.
The product is currently in Phase III clinical trials.
E-TRANS fentanyl (chronic pain) - ALZA and Crescendo
are developing an E-TRANS fentanyl product for the treatment of
chronic pain. Under an agreement between ALZA and Janssen,
Janssen will have an option, until a specified time, to take over
funding the continued development of the product and to
commercialize the product worldwide. If Janssen exercises its
option, ALZA will receive a share of the United States operating
profits from the product and royalties from sales of the product
outside the United States. ALZA will have the right to co-
promote the product in the United States. If Janssen does not
exercise its option, ALZA may continue the development of the
product with Crescendo. The product is in early development.
E-TRANS LHRH - The E-TRANS LHRH product is designed to
provide a simple, effective treatment of infertility resulting
from ovulation problems. The product is in early development
with Crescendo.
E-TRANS Macroflux-trademark- Insulin - The E-TRANS
Macroflux insulin product combines ALZA's electrotransport
technology and a new skin interface (Macroflux) technology to
deliver insulin for the treatment of Type I and Type II diabetes.
The product is in preclinical development with Crescendo.
Product Development Risks
All pharmaceutical products require extensive development
and clinical activities before an application can be filed for
regulatory clearance to market the product. There are many risks
inherent in this process, and it should be expected that many of
the products for which development is initiated ultimately will
not become commercial products. Substantial technical, financial
and human resources are required to successfully complete the
development of a product.
Product Circumscription - For each new product, the
proper performance characteristics must be defined, and the
product must be designed and developed to meet those
characteristics. Every product faces significant technological
hurdles as it progresses through development, and often one or
more of these cannot be overcome. ALZA's DUROS, E-TRANS and
Macroflux technologies, as well as some of ALZA's oral
technologies, are relatively new, and none of these technologies
has yet been incorporated in a commercial product.
Pilot-Scale Manufacturing - Once a product is
developed, it must be manufactured, on a pilot scale, for
clinical testing. Pilot-scale manufacturing can be costly and
time consuming, and must comply with all of the FDA's regulations
concerning current Good Manufacturing Practices. Several of
ALZA's drug delivery technologies, such as the D-TRANS, DUROS and
E-TRANS technologies, require a series of complex manufacturing
steps. For example, DUROS products require aseptic
manufacturing, which ALZA has initiated in order to manufacture
clinical supplies of the DUROS leuprolide product.
Clinical Studies - Once a product has been successfully
manufactured on a pilot scale, studies to show clinical safety
and efficacy must be undertaken and completed. Clinical studies
are costly, and can take many years to complete. There can be no
assurance that the desired outcomes will be shown in the clinical
studies.
Commercial-Scale Manufacturing - Once a product has
been developed, manufactured on a pilot scale and clinically
tested, there are further risks in converting a pilot-scale
manufacturing process to commercial scale. Due to the complexity
of drug delivery technologies, this conversion can be
significantly more costly than for other pharmaceutical products.
Sometimes manufacturing processes must be modified in order to
achieve successful commercial manufacturing and to obtain a
reproducible, robust process. For products incorporating newer
ALZA technologies, this commercial manufacturing scale-up can
take several years and cost millions of dollars.
Regulatory Risks - Obtaining regulatory clearance to
market a product can take many years, and the process varies from
country to country. Pricing and reimbursement approvals are also
required in some countries, particularly in Europe. Any delay in
the regulatory process could adversely affect the commercial
potential of a product.
ALZA Technologies
ALZA was the pioneer, and is a recognized leader, in the
development of innovative drug delivery technologies. ALZA's
therapeutic systems are designed to provide controlled,
predetermined rates of drug release for extended time periods.
By administering drugs in preset patterns and by alternative
routes, ALZA's advanced dosage forms, called therapeutic systems,
can add to the medical and economic value of drug therapies by
minimizing their unpleasant or harmful side effects, optimizing
their beneficial actions, simplifying drug therapy, and
increasing patient compliance by decreasing the frequency with
which medication must be administered. ALZA's OROS and D-TRANS
drug delivery systems have been incorporated into more than 20
products currently marketed in many countries of the world.
D-TRANS Transdermal Systems. ALZA's D-TRANS transdermal
therapeutic systems provide for the controlled delivery of drugs
directly into the bloodstream through intact skin. Transdermal
systems are well suited for the delivery of potent drugs that are
poorly absorbed and/or extensively metabolized when administered
orally. ALZA's D-TRANS products are thin, multilayer systems, in
the form of small adhesive patches, that combine a drug reservoir
with a polymer membrane or other mechanism to control drug
release to the surface of intact skin, and then through the skin
into the bloodstream.
Oral Systems. ALZA has developed several therapeutic
systems for oral administration. ALZA's OROS systems include the
push-pull, push-stick and elementary osmotic pump systems.
ALZA's OROS products resemble conventional tablets or capsules in
appearance, but use an osmotic mechanism to provide pre-
programmed, controlled drug delivery to the gastrointestinal
tract. An OROS product comprises a polymer membrane with one or
more laser-drilled holes surrounding a core containing the drug
or drugs, with or without osmotic or other agents. Water from the
gastrointestinal tract diffuses through the membrane at a
controlled rate into the drug core, causing the drug to be
released in solution or suspension at a predetermined controlled
rate out of the laser-drilled hole(s). OROS systems are well
suited for delivering drug compounds throughout the
gastrointestinal tract in programmed delivery for local treatment
or systemic absorption.
ALZA's Chronset-registered trademark- therapeutic system,
which may be useful for the oral delivery of compounds including
proteins and peptides, provides a predetermined delay in the
release of active compounds from an orally administered capsule
in order to target the location or the timing of a bolus
delivery. ALZA is also developing a Liquid OROS system designed
for the delivery of highly insoluble liquid drug formulations or
polypeptides. A delivery orifice in the outer layers of a coated
capsule allows controlled release of drug, while an internal
osmotic layer pushes against the drug compartment, forcing the
liquid drug formulation from the system. ALZA has recently
developed its RingCap-trademark- technology, a new oral
controlled-release technology designed to have a low
manufacturing cost and broad applicability. By incorporating
several insoluble polymeric rings around a tablet, the erosion of
the tablet can be controlled, modulating the release of drug in
the gastrointestinal tract. RingCap systems can deliver the
total dose of the selected drug evenly over an extended period.
E-TRANS Systems. ALZA's E-TRANS electrotransport systems
are designed to deliver drugs across intact skin through the use
of an electrical potential gradient. ALZA's E-TRANS systems are
small, easy-to-apply devices consisting of an adhesive, a drug
reservoir, electrodes and a power source/controller. The systems
are designed to deliver large molecules (including proteins and
peptides) and potent drugs that are poorly absorbed or
extensively metabolized in the gastrointestinal tract.
DUROS Systems. ALZA's DUROS human implant technology is
designed to enable the delivery of peptides, proteins and other
bioactive macromolecules developed by the biotechnology industry.
Products incorporating DUROS implant technology have the
potential to deliver macromolecules to subcutaneous sites for
systemic therapy or to specific tissues; a single miniature
implant may be able to provide therapy for up to one year.
Macroflux. ALZA is conducting research on a new skin
interface technology designed to increase drug transport across
the skin and enable delivery of larger molecular weight
compounds, including proteins and peptides. This new technology
may be used to enhance ALZA's existing D-TRANS transdermal and
E-TRANS electrotransport technologies.
Dose Sipping Technology. ALZA has recently developed its
Dose Sipping Technology to provide a simple, convenient method of
oral drug delivery, particularly for pediatric and geriatric
patients. The simple straw-like systems can provide a pre-
measured dose of the desired compound without the difficulties of
swallowing a tablet or capsule.
Technology Development Risks
The development of ALZA's drug delivery systems requires
tens of millions of dollars and many years of research and
development activity. ALZA's systems can be quite complex, with
many different components. There can be no assurance that any
particular system will perform in the same manner when different
therapeutic agents are incorporated into it. Often special
materials must be fabricated for the first time for use in ALZA
drug delivery systems, or materials may be used in the systems in
a manner different from their customary commercial uses.
Precision and reproducibility of materials can be critical to the
performance of a drug delivery system, so a reliable source of a
consistent supply of materials can be critical. Materials needed
by ALZA may be difficult to obtain on commercially reasonable
terms, particularly when relatively small quantities are
required, or if the materials traditionally have not been used in
pharmaceutical products.
Therapeutic Discovery Corporation
In June 1993, ALZA distributed a special dividend of Units
to ALZA stockholders. Each Unit consisted of one share of TDC
Class A Common Stock and one warrant to purchase one-eighth of
one share of ALZA Common Stock. TDC was formed by ALZA for the
purpose of selecting and developing new human pharmaceutical
products combining ALZA's proprietary drug delivery technologies
with various drug compounds, and commercializing such products,
most likely through licensing to ALZA. ALZA and TDC had a
development agreement pursuant to which ALZA conducted research
and development activities on behalf of TDC. ALZA had an option
to license all of the products developed by TDC, on a product-by-
product and country-by-country basis.
ALZA also had an option, exercisable at ALZA's sole
discretion, to purchase, according to a predetermined formula,
all of the outstanding shares of TDC Class A Common Stock. In
September 1997, ALZA exercised its purchase option and paid $100
million in cash for all of the shares of Class A Common Stock of
TDC; TDC is now a wholly-owned subsidiary of ALZA. The ALZA
warrants issued as part of the Units remain outstanding and are
exercisable at a price of $65 per share until December 31, 1999.
Crescendo Pharmaceuticals Corporation
In September 1997, ALZA contributed $300 million to
Crescendo and distributed the shares of Class A Common Stock of
Crescendo (the "Crescendo Shares") to ALZA's stockholders and
debenture holders. Crescendo was formed by ALZA for the purpose
of selecting and developing human pharmaceutical products and
commercializing such products, most likely through licensing to
ALZA. The products may, but are not required to, incorporate
ALZA drug delivery technologies.
ALZA and Crescendo have entered into a Development Agreement
(the "Development Agreement") pursuant to which ALZA conducts
product development and related activities on behalf of Crescendo
under work plans and cost estimates which have been proposed by
ALZA and approved by Crescendo. Crescendo is required to spend
all of the funds contributed to Crescendo, plus interest earned
thereon, less Crescendo's reasonable administrative costs, the
Technology Fee (described below) paid to ALZA, and reserves of up
to $2 million (the "Available Funds"), to conduct activities
under the Development Agreement. Under the Development
Agreement, Crescendo agreed to fund the development of seven
products (the "Initial Products"), the development of which was
commenced by ALZA and TDC, from August 25, 1997, the date on
which TDC ceased funding such products, through October 31, 1997.
Continuation of development of the Initial Products after October
31, 1997 was subject to ALZA proposing, and Crescendo's Board of
Directors accepting, work plans and cost estimates for the
products. As of the date hereof, five of the seven Initial
Products are continuing in active development. The five Initial
Products currently in active development are:
- OROS oxybutynin (Ditropan XL)
- DUROS leuprolide
- OROS methylphenidate
- E-TRANS Macroflux insulin
- E-TRANS LHRH
Two of the Initial Products (the IUTS progesterone and D-TRANS
testosterone matrix products), are no longer under active
development. Crescendo ceased funding the development of these
products on ALZA's recommendation.
ALZA and Crescendo have entered into a Technology License
Agreement pursuant to which ALZA has granted to Crescendo a
worldwide license to use ALZA technology solely to select and
develop Crescendo products, to conduct related activities, and to
commercialize such products. In exchange for the license to use
existing ALZA technology relating to the Initial Products,
Crescendo pays ALZA a Technology Fee, payable monthly over a
period of three years, in the amount of $1 million per month for
the first 12 months following the distribution of Crescendo
Shares, $667,000 per month for the following 12 months and
$333,000 per month for the next 12 months. The Technology Fee
will no longer be payable at such time as fewer than two of the
Initial Products are being developed by Crescendo and/or have
been licensed by ALZA pursuant to the license option described
below.
In the License Option Agreement (the "License Option
Agreement") entered into by ALZA and Crescendo, Crescendo has
granted ALZA an option to acquire a license to each product
developed under the Development Agreement, including the Initial
Products. The license option for any such Crescendo product is
exercisable on a country-by-country basis at any time until (i)
with respect to the United States, 30 days after clearance by the
FDA to market such Crescendo product in the United States and
(ii) with respect to any other country, 90 days after the earlier
of (a) clearance by the appropriate regulatory agency to market
the Crescendo product in such country and (b) clearance by the
FDA to market the Crescendo product in the United States. The
license option will expire, to the extent not previously
exercised, 30 days after the expiration of ALZA's option to
purchase all of the outstanding Crescendo Shares, described
below. If and to the extent the license option is exercised as to
any Crescendo product, ALZA will acquire a perpetual, exclusive
license (with the right to sublicense) to develop, make, have
made and use the licensed product, and to sell and have sold the
licensed product in the country or countries as to which the
license option is exercised.
Under the License Agreement for each licensed product, a
form of which is attached to the License Option Agreement (a
"License Agreement"), ALZA will make payments to Crescendo with
respect to the licensed product equal to 1% of net sales of the
licensed product by ALZA and its sublicensees, distributors and
marketing partners, plus an additional 0.1% of such net sales for
each full $1 million of development costs of the licensed product
that have been paid by Crescendo, not to exceed 2.5% of net sales
in the first year a licensed product is sold in a major market
country, and not to exceed 3% for the following two years. ALZA
has the right to buy out Crescendo's right to receive payments
for licensed products on a country-by-country or global basis, in
accordance with a formula set forth in the License Agreement.
Pursuant to Crescendo's Restated Certificate of
Incorporation, ALZA has the right to purchase all (but not less
than all) of the Crescendo Shares (the "Purchase Option"). The
Purchase Option will be exercisable by written notice to
Crescendo at any time until January 31, 2002, provided that such
date will be extended for successive six month periods if, as of
any July 31 or January 31 beginning with July 31, 2001, Crescendo
has not paid (or accrued expenses for) at least 95% of Available
Funds pursuant to the Development Agreement. In any event, the
Purchase Option will terminate on the 60th day after Crescendo
provides ALZA with a statement that, as of the end of any
calendar month, there are less than $2.5 million of Available
Funds remaining, accompanied by a report of Crescendo's
independent auditors.
If the Purchase Option is exercised, the exercise price will
be the greatest of:
(a)(i) 25 times the actual payments made by or due from ALZA
to Crescendo under the Development Agreement and the License
Agreement with respect to any product (and, in addition, such
payments as would have been made by or due from ALZA to Crescendo
if ALZA had not previously exercised its payment buy-out option
with respect to any such payments) for the four calendar quarters
immediately preceding the quarter in which the Purchase Option is
exercised (provided, however, that for any product which has not
been commercially sold during each of such four calendar
quarters, the portion of the exercise price for such product will
be 100 times the average of the quarterly payments made by or due
from ALZA to Crescendo for each of such calendar quarters during
which such product was commercially sold) less (ii) any amounts
previously paid to exercise any payment buy-out option;
(b) the fair market value of one million shares of ALZA
Common Stock;
(c) $325 million less all amounts paid by or due from
Crescendo under the Development Agreement to the date the
Purchase Option is exercised; and
(d) $100 million.
In each case, the amount payable as the Purchase Option
exercise price will be reduced to the extent, if any, that
Crescendo's liabilities at the time of exercise (other than
liabilities under the Development Agreement, the Technology
License Agreement and the Services Agreement, described below)
exceed Crescendo's cash and cash equivalents and short-term and
long-term investments (excluding the amount of Available Funds
remaining at such time). ALZA may pay the exercise price in cash,
in ALZA Common Stock or in any combination of cash and ALZA
Common Stock.
ALZA and Crescendo have entered into a Services Agreement
pursuant to which ALZA has agreed to provide Crescendo with
administrative services, including accounting and legal services,
on a fully-burdened cost reimbursement basis. The Services
Agreement has a one year term and will be renewed automatically
for successive one year terms during the term of the Development
Agreement unless terminated by Crescendo at any time upon 60
days' written notice.
ALZA TTS Research Partners, Ltd.
ALZA developed the Duragesic product and the original
Testoderm product on behalf of ALZA TTS Research Partners, Ltd.
(the "Transdermal Partnership"), a limited partnership funded in
1983 from which ALZA licensed those products. The Transdermal
Partnership receives payments from ALZA equal to 4% of Janssen's
sales of Duragesic and 4% of ALZA's sales of Testoderm and
Testoderm with Adhesive. The Transdermal Partnership did not
fund the development of, and will not receive payments on sales
of, Testoderm TTS.
ALZA's license from the Transdermal Partnership for
Testoderm will become nonexclusive on July 26, 1998, and ALZA's
license from the Transdermal Partnership for Duragesic will
become nonexclusive on December 4, 1998. Once ALZA's licenses
become nonexclusive, the Transdermal Partnership will need to
determine whether to grant nonexclusive licenses to third
parties. Under ALZA's distribution agreement with Janssen for
the Duragesic product, if ALZA's license from the Transdermal
Partnership becomes nonexclusive, if the Transdermal Partnership
licenses the product to a third party and if the third party
introduces the product, Janssen's royalty payable to ALZA will
drop significantly; however, ALZA will continue to owe the
Transdermal Partnership 4% of Janssen's net sales. ALZA has an
option to purchase all of the interests in the Transdermal
Partnership for $120 million cash, less amounts paid by ALZA to
the Transdermal Partnership under its licenses prior to the date
the option is exercised. As of December 31, 1997, ALZA had paid
the Transdermal Partnership $27.3 million under these licenses.
Research and Development Expenditures
ALZA spent $126.3 million on client-sponsored product
development activities during 1997 ($114.8 million and $85.8
million in 1996 and 1995, respectively); such amounts exclude
reimbursable general and administrative costs. ALZA spent
$30.6 million on ALZA-sponsored research and development
activities during 1997 ($26.8 million and $17.6 million in 1996
and 1995, respectively), also excluding allocable general and
administrative costs. Research and development costs are
expensed as incurred. ALZA had research and development revenue
of $135.0 million during 1997, $131.2 million during 1996 and
$104.0 million during 1995, from clients with which ALZA has
joint product development agreements (including $67.8 million
from TDC and $29.7 million from Crescendo in 1997, and
$100.7 million and $70.1 million from TDC in 1996 and 1995,
respectively). ALZA's client-sponsored research and development
revenue generally represents clients' reimbursement of costs,
including a portion of general and administrative expenses.
Therefore, product development activities do not contribute
significantly to operating results.
Governmental Regulation
Under the United States Food, Drug and Cosmetic Act, "new
drugs" must obtain clearance from the FDA before they lawfully
can be marketed in the United States. Applications for marketing
clearance must be based on extensive clinical and other testing,
the cost of which is very substantial. Approvals (sometimes
including pricing approvals) are required from health regulatory
authorities in foreign countries before marketing of
pharmaceutical products may commence in those countries.
Requirements for approval may differ from country to country, and
can involve additional testing. There can be substantial delays
in obtaining required clearances from both the FDA and foreign
regulatory authorities after applications are filed. Even after
clearances are obtained, further delays may be encountered before
the products become commercially available in countries requiring
pricing approvals.
Product development generally involves all of the following
steps which are required by the regulatory process:
- preclinical development and testing, during which
laboratory development and in vitro and in vivo testing takes
place;
- submission to the FDA of an investigational new drug
application, which must become effective before human clinical
studies may begin;
- adequate and well-controlled human clinical trials (Phase
I, II and III studies) to establish the safety and efficacy of
the product;
- submission of an NDA to the FDA (and comparable filings
to regulatory agencies outside the United States) requesting
clearance to market the product; and
- the FDA (and foreign regulatory agencies) must clear the
product for marketing.
All of these steps can take several years and cost tens of
millions of dollars.
The products sold by ALZA and its client companies in the
United States, and/or exported to other countries, are subject to
extensive regulation by the FDA and comparable agencies in other
countries where the products are distributed. Regulations govern
a range of activities including manufacturing, quality assurance,
advertising and record-keeping. The continuing trend of stringent
FDA oversight in product clearance and enforcement has caused
more uncertainty, greater risks and higher costs of obtaining
clearance to market a product, and sometimes longer clearance
cycles. Failure to obtain, or delays in obtaining, regulatory
clearance to market new products, as well as other regulatory
actions and recalls, could adversely affect ALZA's financial
results.
The packaging, labeling and advertising of pharmaceutical
products are also subject to government regulation. The FDA
recommends preclearing advertising materials prior to the launch
of a product, and the launch materials for products receiving an
accelerated FDA clearance must be precleared by the FDA. With an
accelerated FDA clearance (such as was obtained by USB for
Ethyol), all labeling and advertising must be submitted to the
FDA 30 days prior to use, unless the FDA determines otherwise.
In addition, the FDA may require that additional clinical studies-
Phase IV studies-be completed after clearance to market a product
has been granted. If these studies are not completed, or if the
expected outcomes are not achieved, a product could be withdrawn
from the market.
Manufacturing
ALZA manufactures products marketed by its client companies,
and certain products marketed by ALZA, in ALZA's Vacaville,
California commercial manufacturing facility. The Vacaville
facility is the sole manufacturing site for several products,
although some lower-volume products are manufactured in ALZA's
Mountain View and Palo Alto, California research and development
facilities. These facilities were not designed for high volume
commercial manufacturing.
The products acquired and in-licensed by ALZA are
manufactured by the third parties from whom ALZA acquired or
in-licensed the products. Generally these products are also
manufactured at only one site. A shut down in one of these
facilities, or in ALZA's Vacaville facility, resulting in an
interruption in supply of one or more of the products, could have
an adverse impact on ALZA's financial results.
Some of the critical materials and components used in
ALZA's products are sourced from one single supplier. An
interruption in supply from a vendor of a key material could
significantly delay the manufacturing of one or more ALZA
products. Because the vendors of key components and materials
must be named in the NDA for the relevant product, significant
delays can occur if the qualification of a new vendor is
required. Significant delays or an interruption in product
supply could occur if a supplement to the NDA must be filed and
approved before materials obtained from the new vendor can be
used to manufacture a product.
The manufacturing process for pharmaceutical products is
highly regulated. Periodic inspections are conducted by the FDA
and regulatory agencies from other countries. The FDA's current
Good Manufacturing Practices are extensive regulations governing
the manufacturing process, stability testing, record-keeping and
quality standards. Similar, but not identical, regulations are
in effect in other countries. The cost of complying with these
regulations is substantial.
Environmental regulations may also affect the manufacturing
process. As a pharmaceutical company, ALZA uses chemicals and
materials which may be classified as hazardous or toxic, and
which require special handling and disposal. ALZA undertakes to
minimize releases to the environment and exposure of its
employees and the public to such materials. The costs of these
activities have increased substantially in recent years, and it
is possible that such costs may continue to increase
significantly in the future.
Patents and Patent Applications
As of December 31, 1997, ALZA held approximately 540 United
States patents and had approximately 200 pending United States
patent applications relating to its products and other
technologies. ALZA has in excess of 1,500 foreign patents and
770 pending foreign patent applications covering its various
technologies and products. Patents have been issued, or are
expected to be issued, covering ALZA's current technologies and
products, as well as technologies and products under development.
Patent protection generally has been important in the
pharmaceutical industry. ALZA believes that its current patents,
and patents that may be obtained in the future, are important to
current and future operations. ALZA technologies and products
are generally covered by multiple patents. However, there can be
no assurance that ALZA's existing patents will cover future
products, that additional patents will be issued, or that any
patents now or hereafter issued will be of commercial benefit.
In the United States, patents are granted for specified
periods of time. Some of ALZA's earlier patents covering various
aspects of certain OROS and D-TRANS dosage forms have expired, or
will expire, over the next several years.
In 2003, certain significant ALZA patents are due to expire
that relate to ALZA's OROS systems and the Procardia XL
(nifedipine) product developed by ALZA and marketed by Pfizer
(which uses the OROS delivery system). Other forms of sustained
release nifedipine using different delivery systems are reported
to be in various stages of development by other companies, and
two companies (Mylan Laboratories, Inc. and Biovail, Inc.) have
filed Abbreviated New Drug Applications ("ANDAs") with the FDA
requesting clearance to market generic sustained release
nifedipine products. Pfizer has filed suit against Mylan for
infringement of a patent relating to nifedipine particles, and is
also involved in litigation with the FDA and Mylan concerning the
regulatory status of Mylan's product. The Biovail application
was filed in late February 1998, and ALZA and Pfizer are
reviewing information concerning the Biovail product to determine
what actions may be taken. It is not possible to predict the
timing and amount of the negative impact on sales of Procardia XL
that will result from competition from these or other potential
generic sustained release nifedipine products.
ALZA commercializes several products it has acquired or
in-licensed from third parties. The extent to which such
products are protected by patent rights varies significantly from
product to product. Ditropan and Mycelex Troche have been sold
for many years and are not covered by patents. The chemical
compounds constituting the active ingredients of Ethyol and
Elmiron are not covered by patents. However, patents have issued
or are pending relating to significant developments in uses and
the formulation of Ethyol, and for certain uses of Elmiron. ALZA
anticipates that additional patents may issue relating to these
products; however, there can be no assurance that any such patent
coverage will be obtained, or if obtained will provide
significant proprietary protection for the products.
Although a patent has a statutory presumption of validity in
the United States, the issuance of a patent is not conclusive as
to such validity or as to the enforceable scope of the claims of
the patent. There can be no assurance that patents of ALZA will
not be successfully challenged in the future. In some cases,
third parties have initiated reexamination by the Patent and
Trademark Office of patents issued to ALZA, and have opposed ALZA
patents in other jurisdictions. The validity or enforceability
of ALZA patents after their issuance have also been challenged in
litigation. If the outcome of such litigation is adverse to
ALZA, third parties may then be able to use the invention covered
by the patent, in some cases without payment. There can be no
assurance that ALZA patents will not be infringed or successfully
avoided through design innovation.
It is also possible that third parties may obtain patent or
other proprietary rights that may be necessary or useful to ALZA.
With numerous other companies engaged in developing new chemical
entities and competitive drug delivery technologies, it can be
expected that other parties may in some circumstances file patent
applications or obtain patents that compete in priority with
ALZA's patent applications. Such competition may result in
adversarial proceedings such as patent interferences and
oppositions, which can increase the uncertainty of patent
coverage. In cases where third parties are first to invent a
particular product or technology, it is possible that those
parties will obtain patents that will be sufficiently broad so as
to prevent ALZA from using certain technology or from further
developing or commercializing certain products. As ALZA expands
its direct marketing of products, ALZA may attempt to in-license
additional products, or compounds or technologies for use in
products. In each of these cases, if licenses from third parties
are necessary but cannot be obtained, commercialization of the
products would be delayed or prevented.
In addition, ALZA utilizes significant unpatented
proprietary technology, and there can be no assurance that others
will not develop similar technology.
Competition
It can be expected that all or most of the products
commercialized by ALZA will face competition at the time of
introduction, or later in their life cycles, from different
chemical or other agents intended for treatment of the same
indications. All of ALZA's current and future drug delivery
products are likely to face competition both from traditional
forms of drug delivery and from advanced delivery systems being
developed by others. ALZA's competition potentially includes all
of the pharmaceutical companies in the world, including current
ALZA clients. Many of these pharmaceutical companies have
greater financial resources, technical staff and manufacturing
and marketing capabilities than ALZA. A large number of companies
are developing drug delivery technologies. To the extent that
ALZA develops or markets products incorporating drugs that are
off-patent, or are being developed by multiple companies, ALZA
will face competition from other companies developing and
marketing similar products.
As the pharmaceutical industry continues to consolidate, and
as pressures increase for cost-effective research and
development, some pharmaceutical companies have reduced, and may
continue to reduce, their funding of research and development.
Competition for limited client dollars may therefore increase,
and this competition could include the clients' internal research
and development programs, other drug delivery programs and other
technologies and products of third parties. Similarly, as
pharmaceutical companies search to fill gaps in their product
pipelines with in-licensed or acquired products, ALZA will be
competing for product in-licensing and acquisition opportunities
with companies with far greater financial and other resources
than ALZA.
Competition among pharmaceutical products is generally based
on performance characteristics and price. Acceptance by
hospitals, physicians and patients is crucial to the success of a
product. Health care reimbursement policies of managed care
organizations, insurers and government agencies will continue to
exert pressure on pricing, and various federal and state agencies
have enacted regulations requiring rebates of a portion of the
purchase price of many pharmaceutical products. Cost-
effectiveness, although often difficult to measure, is becoming
increasingly critical to the commercial success of a new product.
A major challenge faced by ALZA and other pharmaceutical
companies is competition from generic pharmaceutical
manufacturers. Generic competitors generally are able to obtain
regulatory approval for off-patent drugs without investing in
costly and time-consuming clinical trials, and need only
demonstrate bioequivalence to the drug they wish to copy.
Because of their substantially reduced development costs, generic
companies are often able to charge much lower prices for their
products than the originator of a new product. A number of ALZA-
developed products incorporate chemical entities that are not
covered by patents. These products therefore may be subject to
potential generic competition to the extent that competitors can
demonstrate bioequivalence without infringing ALZA patents
relating to its drug delivery technologies. Two companies have
filed ANDAs with the FDA requesting clearance to market generic
versions of Procardia XL (see "Patents and Patent Applications"
above).
The health care industry has continued to change rapidly as
the public, government, medical practitioners and the
pharmaceutical industry focus on ways to expand medical coverage
while controlling the growth in health care costs. The growth of
managed care organizations and the resulting pressures for
cost-containment in the United States health care system are
expected to continue to put pressures on the prices charged for
pharmaceutical products. Prescription drug reimbursement
practices and the growth of large managed care organizations, as
well as generic and therapeutic substitution (substitution of a
different product for the same indication), will significantly
affect ALZA's business. While ALZA believes the changing health
care environment may increase the value of ALZA's drug delivery
products over the long term, it is impossible to predict
accurately the impact these changes may have on ALZA.
Revenues
In 1997, ALZA received royalty revenue based on sales of
approximately 16 products. Sales of Procardia XL in the United
States by Pfizer accounted for approximately 29% of ALZA's
royalties and fees in 1997 (approximately 40% in 1996 and more
than 40% in 1995). ALZA's net sales in 1997 consisted of direct
sales of products in the marketplace and sales to client
companies of products manufactured by ALZA. ALZA's net sales of
ALZA-marketed products were approximately $52.9 million in 1997.
Research and development revenues consist of reimbursement by
client companies, including Crescendo (and previously, TDC), of
research and development expenses incurred by ALZA in developing
products on behalf of the client companies.
Information about ALZA's revenues is presented below:
(in millions) 1997 1996 1995
__________________________________________________________________
Royalties, fees and other $ 183.3 173.3 $ 143.7
Net sales 146.1 108.6 76.9
Research and development 135.0 131.2 104.0
__________________________________________________________________
Total revenues $ 464.4 $ 413.1 $ 324.6
==================================================================
Pfizer accounted for 17% of ALZA's total revenues in 1997,
22% in 1996, and 26% in 1995; TDC accounted for 15% of ALZA's
total revenues in 1997, 24% in 1996, and 22% in 1995; Janssen
accounted for 15% of ALZA's total revenues in 1997, 14% in 1996,
and 13% in 1995; and HMRI accounted for 10% of ALZA's total
revenues in 1997, and 11% in both 1996 and 1995. The loss of
revenues from one or more of these clients would have a material
adverse effect on ALZA's profitability.
Product Returns; Payment Terms
For products marketed by ALZA, payment terms are generally
net 30 days. From time to time, ALZA has extended its customary
payment terms, for example in the case of new product
introduction and in anticipation of a holiday shut down. ALZA
generally accepts returns of unopened product for full credit.
Industry Segments; Exports
ALZA's business comprises one industry segment. Export
sales were $31.5 million in 1997, $23.0 million in 1996, and
$20.1 million in 1995, principally to distributors and client
companies in Europe.
Employees
On December 31, 1997, ALZA had 1,532 employees, of whom
approximately 670 were engaged in research and development
activities, approximately 493 were engaged in manufacturing
activities, approximately 126 were engaged in sales and marketing
activities and the remainder were working in general and
administrative areas.
Item 2. Properties
ALZA's corporate offices are located in Palo Alto,
California, and its two primary research and development campuses
are in Palo Alto and Mountain View, California. Most of the
facilities in Palo Alto are held under prepaid ground leases from
Stanford University expiring in approximately 17 to 60 years.
One Palo Alto facility is subleased to ALZA; there are three
years remaining on the sublease and ALZA has an option for an
additional three years. ALZA owns all of its significant
Mountain View facilities, except as described below. ALZA also
occupies a research facility in Spring Lake Park, Minnesota which
is leased from a third party until the year 2000.
ALZA's large-scale commercial manufacturing facility, which
is owned by ALZA, is located in Vacaville, California. Some
smaller scale manufacturing also takes place in the Palo Alto and
Mountain View facilities. While ALZA believes that its facilities
and equipment are sufficient to meet its current operating
requirements, ALZA is actively planning to expand its facilities
and equipment to support its long-term requirements, in
particular in Mountain View, California.
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture, formed as a limited liability company, for the
development of a 13-acre parcel of land in Mountain View,
California. ALZA invested $36.2 million in the joint venture,
which will be applied to the construction of buildings on the
parcel. ALZA is also obligated to make improvements to the
buildings, the total cost of which is estimated to be between
$60.0 million and $100.0 million. The joint venture will lease
the buildings to ALZA upon completion of construction, currently
scheduled for mid-1999. The leases provide for an initial term
of 15 years, with options to extend for approximately 20
additional years, and with scheduled annual rent increases based
upon the Consumer Price Index. ALZA will receive 50% of the
joint venture's income.
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property.
Item 3. Legal Proceedings
Product liability suits have been filed against Janssen and
ALZA from time to time relating to the Duragesic product.
Janssen is managing the defense of these suits in consultation
with ALZA under an agreement between the parties.
ALZA has been named as a potentially responsible party in
connection with the cleanup and environmental remediation of the
Hillview-Porter Regional Site Project near ALZA's Palo Alto
facilities. ALZA believes that it did not discharge any of the
chemicals of concern at this site. ALZA does not believe that
its liability in this matter, if any, will be material. However,
because the action involves many parties and multiple regulatory
authorities, and the cleanup and allocation of financial
responsibility may not be resolved for several years, it is
impossible to predict the timing or amount of ALZA's potential
liability.
Historically, the cost of resolution of liability claims
against ALZA (including product liability claims) has not been
significant, and ALZA is not aware of any asserted or unasserted
claims pending against it, including the suits mentioned above,
the resolution of which would have a material adverse impact on
the operations or financial position of ALZA.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupations for
Name Age Past Five Years
Dr. Ernest Mario 59 Chairman of the Board and Chief
Executive Officer of ALZA (since
1993); Chief Executive of Glaxo
Holdings, p.l.c., a pharmaceutical
company (1989-1993).
Dr. Felix Theeuwes 60 President, New Ventures of ALZA
(since 1997) and Chief Scientist
(since 1982); President, Research
and Development (1995-1997);
President, ATI (1994-1995);
Executive Vice President, Research
and Development (1991-1994).
James Butler 57 Senior Vice President, Sales and
Marketing of ALZA (since 1997);
Vice President, Sales and Marketing
(1993-1996); Vice President and
General Manager of the corporate
division of Glaxo, Inc., a
pharmaceutical company (1987-1993).
Bruce C. Cozadd 34 Senior Vice President and Chief
Financial Officer of ALZA (since
1997); Vice President and Chief
Financial Officer (1994-1996); Vice
President, Corporate Planning and
Analysis (1993); Manager, Strategic
Projects (1991-1993).
Harold Fethe 53 Vice President, Human Resources
of ALZA (since 1991).
Dr. Gary V. Fulscher 54 Senior Vice President, Commercial
Services of ALZA (since 1998);
Senior Vice President, Operations
(1994-1997); Vice President,
Administration (1987-1994).
Dr. Samuel R. Saks 43 Senior Vice President, Medical
Affairs of ALZA (since 1994); Vice
President, Medical Affairs (1992-
1994); Vice President, Clinical
Research, Oncology, Schering Plough
Corporation, a pharmaceutical
company (1991-1992).
Peter D. Staple 46 Senior Vice President and General
Counsel of ALZA (since 1997); Vice
President and General Counsel (1994-
1996); Vice President and Associate
General Counsel of Chiron
Corporation, a biotechnology
company (1992-1994).
Janne Wissel 42 Senior Vice President, Operations
of ALZA (since 1998); Vice President
Regulatory and Quality Management
(1995 to 1997); Vice President,
Quality Management (1994 to 1995);
Senior Director, Regulatory
Affairs (1993 to 1994).
Dr. James W. Young 53 Senior Vice President, Research and
Development of ALZA (since 1997);
Senior Vice President, Commercial
Development (1995-1997); Vice
President and Managing Director of
ALZA Technology Institute (June
1995 - September 1995); President,
Pharmaceuticals Division, Affymax
N.V., a biotechnology company
(1992-1995).
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
ALZA incorporates by reference the information concerning
the market for its common stock and related stockholder matters
set forth at page 41 in the Annual Report to Stockholders (the
"Annual Report") attached as Exhibit 13.
Item 6. Selected Financial Data
ALZA incorporates by reference the selected consolidated
financial data set forth at page 41 in the Annual Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ALZA incorporates by reference Management's Discussion and
Analysis of Financial Condition and Results of Operations set
forth at pages 17 to 25 in the Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
This Item is not applicable to ALZA for this reporting
period.
Item 8. Financial Statements and Supplementary Data
ALZA incorporates by reference the consolidated financial
statements and notes thereto set forth at pages 26 to 39 in the
Annual Report and the Report of Ernst & Young LLP, Independent
Auditors, at page 40 in the Annual Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
ALZA incorporates by reference the information concerning
its directors set forth under the heading "Election of Directors"
on pages 1 to 4 in ALZA's definitive Proxy Statement dated March
27, 1998, for its Annual Meeting of Stockholders to be held on
May 7, 1998 (the "Proxy Statement") and the information under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance"
at page 7 in the Proxy Statement. Information concerning ALZA's
executive officers appears at the end of Part I of this report on
pages 28 to 30.
Item 11. Executive Compensation
ALZA incorporates by reference the information ("Summary
Compensation Table", "1997 Option Grants", "1997 Aggregated
Option Exercises and Fiscal Year-End Option Values" and "Certain
Executive Agreements") set forth under the heading "Executive
Compensation" on pages 5 to 7 in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
ALZA incorporates by reference the information set forth
under the heading "Beneficial Stock Ownership" on page 13 in the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
ALZA incorporates by reference the information set forth
under the heading "Certain Transactions" on page 14 in the Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: Incorporated by
reference to the Annual Report (see accompanying Index to
Consolidated Financial Statements).
2. Consolidated Financial Statement Schedule: (see
accompanying Index to Consolidated Financial Statement Schedule).
3. Exhibits:
3.1 Restated Certificate of Incorporation of
ALZA Corporation filed with the Delaware Secretary
of State on February 14, 1994(1)
3.2 Composite Bylaws of ALZA Corporation as
restated on February 10, 1994 and amended on
August 11, 1994, February 16, 1995, February 15,
1996, August 13, 1996 and February 10, 1998
4.1 Indenture dated July 7, 1994 between ALZA
Corporation and the Chase Manhattan Bank, N.A. as
Trustee, relating to ALZA's 5 1/4% Liquid Yield
Option-trademark- Notes(2)
4.2 Specimen of LYONs-trademark- Certificate
(included in Exhibit 4.1)
4.3 Form of Warrant Agreement between ALZA
Corporation and the Chase Manhattan Bank (with
attached Warrant Certificate)(3)
4.4 Indenture dated April 23, 1996 between ALZA
Corporation and the Chase Manhattan Bank, N.A., as
Trustee, relating to ALZA's 5% Convertible
Subordinated Debentures(4)
4.5 Specimen of 5% Convertible Subordinated
Debenture (included in Exhibit 4.4)
10.1Technology License Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
See footnotes on page 34.
10.2 Development Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
10.3 License Option Agreement between ALZA
Corporation and Crescendo Pharmaceuticals
Corporation(5)
10.4 Restated Certificate of Incorporation of
Crescendo Pharmaceuticals Corporation(5)
10.5 Amended and Restated Executive Deferral Plan II *
10.6 Executive Deferral Plan II for Chief
Executive Officer(6) *
10.7 Executive Deferral Plan Amendments(7) *
10.8 Amendment Number 2 to Executive Deferral
Plans II(8) *
10.9 ALZA Corporation Amended and Restated
Stock Plan(9) *
10.10 Form of Executive Agreement between
ALZA Corporation and Certain Executive
Officers(10) *
10.11 Lease Agreement between ALZA and
P/A Charleston Road LLC for Building One of
Charleston Road Development Project (a
substantially identical lease is in effect for
each of two other office buildings) **
10.12 Construction Agreement between ALZA
and P/A Charleston Road LLC relating to three
office building lease agreements **
10.13 Ground Lease between ALZA and the
Peery and Arrillaga Trusts relating to a seven-
acre parcel in Mountain View **
13 Portions of Annual Report to
Stockholders expressly incorporated by reference
herein
21 Subsidiaries
23 Consent of Ernst & Young LLP,
Independent Auditors
27.1 Financial Data Schedule for the year
ended December 31, 1997
27.2 Restated Financial Data Schedule for the
quarters ended March 31, 1997 and June 30, 1997
27.3 Restated Financial Data Schedule for the
quarters ended June 30, 1996 and September 30,
1996 and for the year ended December 31, 1996
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
______________________________________________________________
(1) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1993.
(2) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1994.
(3) Incorporated by reference to ALZA's Form 8-A Registration
Statement (Commission File No. 0-11234) dated March 31, 1993, as
amended.
(4) Incorporated by reference to ALZA's Form S-3 Registration
Statement (Commission File No. 333-2343) dated April 8, 1996, as
amended.
(5) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1997.
(6) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended September 30, 1993.
(7) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1992.
(8) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1994.
(9) Incorporated by reference to ALZA's Form 10-Q Quarterly Report
for the quarter ended June 30, 1995.
(10) Incorporated by reference to ALZA's Form 10-K Annual Report
for the year ended December 31, 1995.
* A management contract or compensatory plan or arrangement
required to be filed as an Exhibit pursuant to Item 14(c) of
Form 10-K.
** Certain portions of this document have been omitted pursuant to
a request for confidential treatment.
ALZA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, REPORT OF
ERNST & YOUNG LLP, INDEPENDENT AUDITORS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
Page Number Reference
Annual Report Form
to Stockholders 10-K
Consolidated statement of operations for
the years ended December 31, 1997, 1996,
1995 26
Consolidated balance sheet at
December 31, 1997 and 1996 27
Consolidated statement of stockholders'
equity for the years ended December 31, 1997,
1996 and 1995 28
Consolidated statement of cash flows for
the years ended December 31, 1997, 1996
and 1995 29
Notes to consolidated financial statements 30-39
Report of Ernst & Young LLP, Independent
Auditors 40
The following consolidated financial statement
schedule of ALZA Corporation is included:
II - Consolidated valuation and qualifying
accounts 36
All other schedules have been omitted because the required
information is not present or is not present in amounts sufficient
to require submission of the schedule, or because the information
required is included in the consolidated financial statements,
including the notes thereto.
SCHEDULE II
ALZA CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
Balance at Additions Deductions
Beginning Charged to and Balance at
of Year Income write-offs End of Year
____________________________________________________________________
(In millions)
Allowance for
doubtful
receivables:
1997 $ 0.6 $ 0.2 $ - $ 0.8
====================================================================
1996 $ 0.2 $ 0.4 $ - $ 0.6
====================================================================
1995 $ 0.3 $ - $ (0.1) $ 0.2
====================================================================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALZA CORPORATION
By /s/ Ernest Mario
Dr. Ernest Mario
Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ernest Mario /s/ Dean O. Morton
Dr. Ernest Mario Dean O. Morton
Chairman of the Board of Director
Directors, Director and Chief Date: March 30, 1998
Executive Officer
Date: March 30, 1998
/s/ Denise M. O'Leary
Denise M. O'Leary
/s/ William R. Brody Director
Dr. William R. Brody Date: March 30, 1998
Director
Date: March 30, 1998
/s/ Isaac Stein
Isaac Stein
/s/ William G. Davis Director
William G. Davis Date: March 30, 1998
Director
Date: March 30, 1998
/s/ Julian N. Stern
Julian N. Stern
/s/ Robert J. Glaser Director
Dr. Robert J. Glaser Date: March 30, 1998
Director
Date: March 30, 1998
/s/ Bruce C. Cozadd
Bruce C. Cozadd
Senior Vice President, Chief
Financial Officer and
Principal Accounting Officer
Date: March 30, 1998
EXHIBIT INDEX
Exhibit
3.2 Composite Bylaws
10.5 Amended and Restated Executive Deferral Plan II
10.11 Lease Agreement between ALZA and P/A Charleston Road LLC for
Building One of Charleston Road Development Project (a
substantially identical lease is in effect for each of two
other office buildings)*
10.12 Construction Agreement between ALZA and P/A Charleston Road
LLC relating to three office building lease agreements*
10.13 Ground Lease between ALZA and the Peery and Arrillaga Trusts
relating to a seven-acre parcel in Mountain View*
13 Portions of Annual Report to Stockholders expressly
incorporated by reference into Annual Report on Form 10-K
21 Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule for the year ended December 31, 1997
27.2 Restated Financial Data Schedule for the quarters ended
March 31, 1997 and June 30, 1997
27.3 Restated Financial Data Schedule for the quarters ended June
30, 1996 and September 30, 1996 and for the year ended
December 31, 1996
* Certain portions of this document have been omitted pursuant to a
request for confidential treatment.
_______________________________
EXHIBIT 3.2
COMPOSITE BYLAWS OF ALZA CORPORATION
REGISTERED OFFICE AND REGISTERED AGENT
1. REGISTERED OFFICE. The registered office of the
corporation shall be in the City of Wilmington County of New
Castle, State of Delaware.
2. OTHER OFFICES. The corporation may also have offices
at such other places, both within or without the State of
Delaware, as the Board of Directors may from time to time
determine or the business of the corporation may require.
MEETINGS OF STOCKHOLDERS
3. TIME AND PLACE OF MEETINGS. All meetings of the
stockholders shall be held at such time and place, either within
or without the State of Delaware, as shall be fixed by the Board
of Directors and stated in the notice or waiver of notice of the
meeting.
4. ANNUAL MEETING. An annual meeting of the stockholders
for the election of directors and for the transaction of such
other business as may properly come before the meeting shall be
held on such date and at such time and place as the Board of
Directors shall each year designate.
5. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes prescribed in the
notice of meeting, may be called only by the Board of Directors,
the Chairman of the Board or the President of the corporation.
6. NO ACTION WITHOUT MEETING. At any time when the
corporation has more than one stockholder of any class of capital
stock, no action required to be taken or which may be taken at
any annual or special meeting of the stockholders of such class
of capital stock of the corporation may be taken without a
meeting, and the power of stockholders to consent in writing
without a meeting, to the taking of any action is specifically
denied.
7. NOTICE.
(a) Written notice of the place, date, and time of all
meetings of the stockholders shall be given not less than ten nor
more than 60 days before the date on which the meeting is to be
held to each stockholder entitled to vote at such meeting,
except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the
Delaware General Corporation Law or the Certificate of
Incorporation of the corporation).
(b) When a meeting is adjourned to another place, date or
time, written notice need not be given of the adjourned meeting
if the place, date and time thereof are announced at the meeting
at which the adjournment is taken and the adjournment is for not
more than thirty days; provided, however, that if the date of
any adjourned meeting is more than thirty days after the date for
which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the
place, date and time of the adjourned meeting shall be given in
conformity herewith. At any adjourned meeting, any business may
be transacted which might have been transacted at the original
meeting.
8. NOMINATIONS AND PROPOSALS.
(a) The Board of Directors of the corporation may nominate
candidates for election as directors of the corporation and may
propose such other matters for approval of the stockholders as
the board deems necessary or appropriate.
(b) Any stockholder entitled to vote for directors may
nominate candidates for election as directors of the corporation;
provided, however, that so long as the corporation has more than
one stockholder, no nominations for director of the corporation
by any person other than the Board of Directors shall be
presented to any meeting of stockholders unless the person making
the nomination is a record stockholder and shall have delivered
a written notice to the Secretary of the corporation no later
than the close of business 60 days in advance of the stockholder
meeting or ten days after the date on which notice of the
meeting is first given to the stockholders, whichever is later.
Such notice shall (i) set forth the name and address of the
person advancing such nomination and the nominee, together with
such information concerning the person making the nomination and
the nominee as would be required by the appropriate Rules and
Regulations of the Securities and Exchange Commission to be
included in a proxy statement soliciting proxies for the
election of such nominee, and (ii) shall include the duly
executed written consent of such nominee to serve as director if
elected.
(c) No proposal by any person other than the Board of
Directors shall be submitted for the approval of the stockholders
at any regular or special meeting of the stockholders of the
corporation unless the person advancing such proposal shall have
delivered a written notice to the Secretary of the corporation no
later than the close of business 60 days in advance of the
stockholder meeting or ten days after the date on which notice
of the meeting is first given to the stockholders, whichever is
later. Such notice shall set forth the name and address of the
person advancing the proposal, any material interest of such
person in the proposal, and such other information concerning
the person making such proposal and the proposal itself as would
be required by the appropriate Rules and Regulations of the
Securities and Exchange Commission to be included in a proxy
statement soliciting proxies for the proposal.
9. QUORUM AND REQUIRED VOTE.
(a) At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote on
the subject matter at the meeting, present in person or by proxy
shall constitute a quorum, unless or except to the extent that
the presence of a larger number may be required by law. Except
as provided in Section 42 of these bylaws or as may be required
by law, the affirmative vote of a majority of shares present in
person or represented by proxy at the meeting and entitled to
vote on the subject matter shall be the act of the stockholders.
(b) If a quorum shall fail to attend any meeting, the
chairman of the meeting or the holders of a majority of the
shares of stock entitled to vote who are present, in person or
by proxy, may adjourn the meeting to another place, date or
time.
(c) If a notice of any adjourned special meeting of
stockholders is sent to all stockholders entitled to vote
thereat, stating that it will be held with those present
constituting a quorum, then, except as provided in Section 42 of
these bylaws or as otherwise required by law, those present at
such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at
such meeting.
10. VOTE REQUIRED FOR BUSINESS COMBINATION.
(a) In addition to any affirmative vote required by law or
this Certificate of Incorporation, and except as expressly
provided in Subparagraph (b) of this Section 10, any Business
Combination (as hereinafter defined) with a Related Person (as
hereinafter defined) shall require the affirmative vote of the
holders of at least eighty percent of the voting power of all of
the then outstanding shares of all classes of stock of the
corporation entitled to vote for the election of directors (the
"Voting Stock"), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that
no vote may be required, or that a lesser percentage may be
specified, by law or in any agreement.
(b) The provisions of this Section 10 shall not apply to
any Business Combination if:
(i) A majority of the Continuing Directors (as hereinafter
defined) of the corporation then in office has by resolution
approved the Business Combination either in advance of or
subsequent to such Related Person's having become a Related
Person;
(ii) The Business Combination is solely between the
corporation and another corporation, one hundred percent of the
Voting Stock of which is owned directly or indirectly by the
corporation; or
(iii) The Business Combination is a merger or consolidation
and the cash or fair market value (as determined by a majority of
the Continuing Directors) of the property, securities or other
consideration to be received per share by holders of stock of
the corporation in the Business Combination is not less than the
Highest Per Share Price or the Highest Equivalent Price (as these
terms are hereinafter defined) paid by the Related Person in
acquiring any of the corporation's stock.
(c) For the purpose of this Section 10:
(i) The term "Business Combination" shall mean (A) any
merger or consolidation of the corporation with or into a Related
Person, (B) any sale, lease, exchange, transfer or other
disposition, including, without limitation, a mortgage or any
other security device, of assets of the corporation or any
subsidiary of the corporation, to a Related Person if such assets
constitute a Substantial Part (as hereinafter defined), (C) any
merger or consolidation of a Related Person with or into the
corporation or a subsidiary of the corporation, (D) the issuance
of any securities of the corporation or a subsidiary of the
corporation to a Related Person, (E) any recapitalization that
would have the effect of increasing the voting power in the
corporation of a Related Person, and (F) any agreement, contract
or other arrangement providing for any of the transactions
described in this definition of Business Combination.
(ii) The term "Related Person" shall mean any individual,
corporation or other entity which, alone or together with (A) its
"Affiliates" and "Associates" (as defined in Rule 12b-2 of the
General Rules and Regulations under the Securities Exchange Act
of 1934 as in effect at the date of the adoption of this Section
10 by the stockholders of the corporation (collectively, and as
so in effect, the "Exchange Act")) or (B) members of a "group"
(as defined with reference to Section 13(d)(3) of the Exchange
Act) of which such individual, corporation or other entity is a
member, "beneficially owns" (as defined in Rule 13d-3 of the
Exchange Act) shares of the outstanding common stock of the
corporation which, in the aggregate, have (or, in the case of
convertible securities, would have, if such convertible
securities were, at the time the determination is being made,
convertible and had been converted) 20 percent or more of the
total combined power to elect directors of the corporation.
(iii) For the purposes of subparagraph (b)(iii) of this
Section 10, the term "other consideration to be received" shall
include, without limitation, common stock of the corporation
retained by its existing stockholders in the event of a Business
Combination in which the corporation is the surviving
corporation.
(iv) The term "Continuing Director" shall mean a director
who is unaffiliated with the Related Person and who was a member
of the Board of Directors of the corporation immediately prior
to the time that the Related Person involved in a Business
Combination became a Related Person.
(v) The term "Substantial Part" shall mean assets having a
book value in excess of 30 percent of the book value of the total
consolidated assets of the corporation and its subsidiaries
taken as a whole as of the end of its most recent fiscal year
ended prior to the time the determination is made.
(vi) The terms "Highest Per Share Price" and "Highest
Equivalent Price" shall mean the following: If there is only one
class of capital stock of the corporation issued and
outstanding, the Highest Per Share Price shall mean the highest
price that can be determined by a majority of the Continuing
Directors then in office to have been paid at any time by the
Related Person for any share or shares of that class of capital
stock. If there is more than one class of capital stock of the
corporation issued and outstanding, the Highest Equivalent Price
shall mean, with respect to each class of capital stock of the
corporation, the amount determined by a majority of the
Continuing Directors then in office, on whatever basis they
believe is appropriate, to be the highest per share price
equivalent to the highest per share price that can be determined
to have been paid at any time by the Related Person for any share
or shares of any class of capital stock of the corporation. In
determining the Highest Per Share Price and Highest Equivalent
Price, all purchases by the Related Person shall be taken into
account regardless of whether the shares were purchased before
or after the Related Person became a Related Person. Also, the
Highest Per Share Price and the Highest Equivalent Price shall
include any brokerage commissions, transfer taxes and soliciting
dealers' fees paid by the Related Person with respect to the
shares of capital stock of the corporation acquired by the
Related Person.
(d) A majority of the Continuing Directors of the
corporation then in office (including directors purporting, in
good faith, to be Continuing Directors) shall have the power and
duty to determine, for the purposes of this Section 10, on the
basis of information then known to them, whether any individual,
corporation or other entity is a Related Person. Any such
determination made in good faith shall be conclusive and binding
for all purposes of this Section 10.
(e) The provisions set forth in this Section 10 may not be
repealed or amended in any respect without:
(i) The affirmative vote of not less than 80 percent of the
Board of Directors and of a majority of the Continuing Directors
then in office, and
(ii) The affirmative vote of the holders of 80 percent or
more of the Voting Stock, voting together as a single class;
PROVIDED, HOWEVER, that the provisions of this paragraph (e)
shall not apply to any amendment or repeal of any provision of
this Section 10 that is recommended to the stockholders by a
resolution adopted by (A) a majority of the Board of Directors,
and (B) not less than 80 percent of the Continuing Directors then
in office, in which case any such amendment or repeal shall
require only the affirmative vote of a majority of the Voting
Stock.
11. ORGANIZATIONS. The Chairman of the Board or, in his or
her absence, the President of the corporation or, in the absence
of both, such person as may be designated by the Board of
Directors or, if there is no such designation, such person as may
be chosen by the holders of a majority of the shares entitled to
vote who are present, in person or by proxy, shall call to order
any meeting of the stockholders and act as chairman of the
meeting.
12. CONDUCT OF BUSINESS. The Chairman of any meeting of
stockholders shall determine the order of business and the
procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or
her in order.
13. PROXIES AND VOTING. At any meeting of the
stockholders, every stockholder entitled to vote may vote in
person or by proxy authorized by an instrument in writing filed
in accordance with the procedures established for the meeting.
14. STOCK LIST. A complete list of stockholders entitled
to vote at any meeting of stockholders, arranged in alphabetical
order and showing the address of each such stockholder and the
number of shares of each class registered in his or her name,
shall be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours
for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or,
if not so specified, at the place where the meeting is to be
held. The stock list shall also be kept at the place of the
meeting during the whole time thereof and shall be open to the
examination of any stockholder present.
BOARD OF DIRECTORS
15. POWERS. The business and affairs of the corporation
shall be managed by or under the direction of its Board of
Directors.
16. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number
of directors of the corporation who shall constitute the whole
board shall be eight but may be increased or decreased from time
to time either by a resolution or bylaw duly adopted by the Board
of Directors. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III, which shall
be as nearly equal in number as possible. Each director shall
serve for a term ending on the date of the third annual meeting
of stockholders following the annual meeting at which the
director was elected; provided, however, that each initial
director in Class I shall hold office until the annual meeting of
stockholders in 1988; each initial director in Class II shall
hold office until the annual meeting of stockholders in 1989;
and each initial director in Class III shall hold office until
the annual meeting of stockholders in 1990. Notwithstanding the
foregoing, each director shall serve until his successor is duly
elected and qualified or until his death, resignation or
removal.
17. REMOVAL. Any director may be removed from office, only
with cause, by the holders of a majority of the shares entitled
to vote in an election of directors.
18. RESIGNATIONS. A director may resign at any time by
giving written notice to the corporation. Such resignation shall
be effective when given unless the director specifies a later
time. The resignation shall be effective regardless of whether
it is accepted by the corporation.
19. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES. In the
event of any increase or decrease in the authorized number of
directors, any newly-created or eliminated directorships
resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors so as
to maintain such classes as nearly equal in number as possible.
No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Newly-created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or
other cause shall be filled by the affirmative vote of a
majority of the remaining directors then in office (and not by
stockholders), even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created
or the vacancy occurred and until such director's successor
shall have been elected and qualified.
20. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such place or places, on such date or
dates, and at such time or times as shall have been established
by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
21. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the
President or any two directors.
22. NOTICE OF MEETINGS.
(a) Special meetings, and regular meetings not fixed as
provided in these Bylaws, shall be held upon four days' notice by
mail or two days' notice delivered personally or by telephone or
telegraph to each director who does not waive such notice. The
notice shall state the place, date and time of the meeting.
Unless otherwise indicated in the notice, any and all business
may be transacted at a special meeting.
(b) Notice of a reconvened meeting need not be given if the
place, date and time of the reconvened meeting are announced at
the meeting at which the adjournment is taken and the
adjournment is not for more than 24 hours. If a meeting is
adjourned for more than 24 hours, notice of the reconvened
meeting shall be given prior to the time of that reconvened
meeting to the directors who were not present at the time of the
adjournment.
23. ACTION WITHOUT MEETING. Except as required by law, any
action required or permitted to be taken at any meeting of the
Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board of Directors or any
committee thereof, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes
of the Board of Directors or committee.
24. MEETING BY TELEPHONE. Except as required by law,
members of the Board of Directors or any committee thereof may
participate in the meeting of the Board of Directors or
committee by means of conference telephone or similar
communications equipment if all persons who participate in the
meeting can hear each other. Such participation in a meeting
shall constitute presence in person at such meeting.
25. QUORUM AND MANNER OF ACTING. At any meeting of the
Board of Directors, a majority of the directors then in office
shall constitute a quorum for all purposes. A meeting at which
a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors. If a quorum shall
fail to attend any meeting, a majority of those present may
adjourn the meeting to another place, date or time, without
further notice or waiver thereof. Except as provided herein,
the act of the majority of the directors present at any meeting
at which a quorum is present shall be the act of the Board of
Directors.
26. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of
Directors by a vote of a majority of the whole Board, may from
time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to
serve at the pleasure of the Board and shall for those
committees and any others provided for herein, elect a director
or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the
committee. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend or
to authorize the issuance of stock if the resolution which
designates the committee or a supplemental resolution of the
Board of Directors shall so provide. The principles set forth
in Sections 15 through 25 of these Bylaws shall apply to
committees of the Board of Directors and to actions taken by such
committees. All members of any Audit Committee of this Company
designated by the Board of Directors shall be directors who are
not also employees of the corporation.
27. COMPENSATION OF DIRECTORS. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, the Board of
Directors shall have the authority to fix the compensation of
directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors or a
committee thereof, and may receive fixed fees and other
compensation for their services as directors. No such payment
shall preclude any director from serving the corporation in any
other capacity and receiving compensation for such service.
OFFICERS
28. TITLES. The officers of the corporation shall be
chosen by the Board of Directors and shall include a Chairman of
the Board or a President or both, a Secretary and a Treasurer.
The Board of Directors may also appoint one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers or other
officers. Any number of offices may be held by the same person.
All officers shall perform their duties and exercise their
powers subject to the Board of Directors.
29. ELECTION, TERM OF OFFICE AND VACANCIES. The officers
shall be elected annually by the Board of Directors at its
regular meeting following the annual meeting of the
stockholders, and each officer shall hold office until the next
annual election of officers and until the officer's successor is
elected and qualified, or until the officer's death, resignation
or removal. Any officer may be removed at any time, with or
without cause, by the Board of Directors. Any vacancy occurring
in any office may be filled by the Board of Directors.
30. RESIGNATION. Any officer may resign at any time upon
notice to the corporation without prejudice to the rights, if
any, of the corporation under any contract to which the officer
is a party. The resignation of an officer shall be effective
when given unless the officer specifies a later time. The
resignation shall be effective regardless of whether it is
accepted by the corporation.
31. CHIEF EXECUTIVE OFFICER. The Board of Directors shall
designate either the Chairman of the Board or the President as
the chief executive officer and may prescribe the duties and
powers of the chief executive officer. In the absence of such a
designation, the Chairman of the Board shall be the chief
executive officer. If there is no Chairman of the Board, the
President shall be the chief executive officer. Subject to the
provisions of these Bylaws and to the direction of the Board of
Directors, the chief executive officer shall have the
responsibility for the general management and control of the
business and affairs of the corporation and shall perform all
duties and have all powers which are commonly incident to the
office of chief executive or which are delegated to him or her
by the Board of Directors. Either the Chairman of the Board or
the President and such other officers as may, from time to time,
be expressly designated by the Board of Directors shall have
power to sign all stock certificates, contracts and other
instruments of the corporation which are authorized.
32. SECRETARY AND ASSISTANT SECRETARIES. The Secretary
shall issue all authorized notices for, and shall keep minutes
of, all meetings of the stockholders and the Board of Directors.
He or she shall have charge of the corporate books and shall
perform such other duties as the Board of Directors may from
time to time prescribe. At the request of the Secretary, or in
the Secretary's absence or disability, any Assistant Secretary
shall perform any of the duties of the Secretary and when so
acting shall have all the powers of, and be subject to all the
restrictions upon, the Secretary.
33. TREASURER AND ASSISTANT TREASURERS. Unless the Board
of Directors designates another chief financial officer, the
Treasurer shall be the chief financial officer of the
corporation. Unless otherwise determined by the Board of
Directors or the chief executive officer, the Treasurer shall
have custody of the corporate funds and securities, shall keep
adequate and correct accounts of the corporation's properties
and business transactions, shall disburse such funds of the
corporation as may be ordered by the Board or the chief executive
officer (taking proper vouchers for such disbursements), and
shall render to the chief executive officer and the Board, at
regular meetings of the Board or whenever the Board may require,
an account of all transactions and the financial condition of
the corporation. At the request of the Treasurer, or in the
Treasurer's absence or disability, any Assistant Treasurer may
perform any of the duties of the Treasurer and when so acting,
shall have all the powers of, and be subject to all the
restrictions upon, the Treasurer.
34. OTHER OFFICERS. The other officers of the corporation,
if any, shall exercise such powers and perform such duties as the
Board of Directors or the chief executive officer shall
prescribe.
35. COMPENSATION. The Board of Directors shall fix the
compensation of the chief executive officer and may fix the
compensation of other employees of the corporation, including
the other officers. If the Board does not fix the compensation
of the other officers, the chief executive officer shall fix such
compensation.
36. ACTIONS WITH RESPECT TO SECURITIES OF OTHER
CORPORATIONS. Unless otherwise directed by the Board of
Directors, the Chairman of the Board, the President or any
officer of the corporation authorized by the Chairman of the
Board or the President, shall have power to vote and otherwise
act on behalf of the corporation, in person or by proxy, at any
meeting of stockholders of, or with respect to any action of
stockholders of, any other corporation in which the corporation
may hold securities and otherwise shall have power to exercise
any and all rights and powers which the corporation may possess
by reason of its ownership of securities in such other
corporation.
STOCK AND DIVIDENDS
37. CERTIFICATES OF STOCK. Each stockholder shall be
entitled to a certificate signed by, or in the name of, the
corporation by the Chairman, the President or a Vice President,
and by the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer, certifying the number of shares owned
by him or her. Any or all of the signatures on the certificates
may be facsimile.
38. TRANSFERS OF STOCK. Transfers of stock shall be made
only upon the transfer books of the corporation kept at an office
of the corporation or by transfer agents designated to transfer
shares of the stock of the corporation. Except where a
certificate is issued in accordance with the next sentence of
this Section, an outstanding certificate for the number of shares
involved shall be surrendered for cancellation before a new
certificate is issued therefor. In the event of the loss, theft
or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or
bonds of indemnity.
39. REGULATIONS. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such
other regulations as the Board of Directors may establish.
RECORD DATE
40. RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors
may fix in advance, a record date, which shall not be more than
60 nor less than ten days before the date of such meeting, nor
more than 60 days prior to any other action. If no record date
is fixed, the record date (1) for determining stockholders
entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the
close of business on the day next preceding the day on which the
meeting is held; and (2) for determining stockholders for any
other purpose shall be at the close of business on the day on
which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the
Board of Directors may fix a new record date for the reconvened
meeting.
WAIVER OF NOTICE
41. WAIVER OF NOTICE. Whenever notice is required to be
given by law or these Bylaws, a written waiver of notice, signed
by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Unless so required by the
Certificate of Incorporation or these Bylaws, neither the
business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of
notice.
AMENDMENTS
42. AMENDMENTS. These Bylaws may be amended or repealed or
new bylaws may be adopted by the stockholders or by the Board of
Directors. Notwithstanding the foregoing, no provision of
Section 10 may be amended or repealed except in accordance with
Section 10(e) and no provision of Sections 16 or 19 may be
amended or repealed except by a resolution adopted by the
affirmative vote of not less than 75% of the members of the
Board of Directors or by the affirmative vote of the holders of
at least 80% of the outstanding shares of capital stock entitled
to vote in an election of directors.
MISCELLANEOUS
43. FISCAL YEAR. The fiscal year of the corporation shall
be as fixed by the Board of Directors.
44. TIME PERIODS. In applying any provision of these
Bylaws which requires that an act be done or not done within a
specified number of days prior to an event or that an act be
done during a period of a specified number of days prior to an
event, calendar days shall be used, the day of the doing of the
act shall be excluded, and the day of the event shall be
included.
45. FACSIMILE SIGNATURES. In addition to the provisions
for use of facsimile signatures elsewhere specifically authorized
in these Bylaws, facsimile signatures of any officer or officers
of the corporation may be used whenever and as authorized by the
Board of Directors.
46. CORPORATE SEAL. The Board of Directors may provide a
suitable seal, containing the name of the corporation, which seal
shall be in the charge of the Secretary. Duplicates of the seal
may be kept and used by the Treasurer or by an Assistant
Secretary or Assistant Treasurer.
47. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each
director, each member of any committee designated by the Board of
Directors, and each officer of the corporation shall, in the
performance of his or her duties, be fully protected in relying
in good faith upon the books of account or other records of the
corporation, including reports made to the corporation by any of
its officers, by an independent certified public accountant or
by an appraiser.
48. INDEMNIFICATION OF EMPLOYEES. Each person who was or
is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("a proceeding"),
because he or she is or was an employee of the corporation or is
or was serving at the request of the corporation as a director,
officer, employee, agent or trustee of another corporation,
partnership, joint venture, trust or other enterprise (including
service with respect to employee benefit plans from the date of
plan adoption), shall be indemnified and held harmless by the
corporation against all expense, liability and loss (including
attorneys' fees, judgments, penalties, fines, Employee
Retirement Income Security Act of 1974 excise taxes or
penalties, and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith; provided in any event that such person acted in good
faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation; and
provided further that the corporation shall indemnify any such
person seeking indemnification in connection with a proceeding
(or part thereof) initiated by such person only if the
proceeding (or part thereof) was authorized by the Board of
Directors of the corporation. Such indemnification shall
continue as to a person who has ceased to be an employee and
shall inure to the benefit of his or her heirs, executors or
administrators.
EXHIBIT 10.5
AMENDED AND RESTATED
EXECUTIVE DEFERRAL PLAN II
(EDP II)
MASTER PLAN DOCUMENT
TABLE OF CONTENTS
Page
Article 1 Definitions 1
Article 2 Eligibility 5
2.1 Selection By Committee 5
2.2 Plan Agreement, Election Form and
Beneficiary Election Form 5
Article 3 Commitments, Interest and Participation 5
3.1 Participant Deferral Amount Commitment 5
3.2 Deferral Amounts 5
3.3 Pre-Distribution Crediting Rate 5
3.4 Distribution Rate 6
3.5 Termination of Participation 6
3.6 Unforeseeable Financial Emergency 6
3.7 Withdrawal Election 6
3.8 FICA and Other Taxes 6
Article 4 7th-Year Distribution 7
4.1 7th-Year Distribution 7
4.2 Timing of Election 7
4.3 Payment of Distribution 7
4.4 Secondary Account Balance 7
Article 5 Retirement Benefit 7
5.1 Retirement Benefit 7
5.2 Rate of Interest for Retirement Benefit;
Vesting 8
5.3 Commencement of Retirement Benefits 8
5.4 Death Prior to Completion of Retirement
Benefits 8
Article 6 Survivor Benefit 8
6.1 Survivor Benefit 8
6.2 Amount of Survivor Benefit 8
6.3 Benefit Period 8
6.4 Eligibility Requirements for Survivor Benefit 9
Article 7 Termination Benefit 9
7.1 Termination Benefit 9
7.2 Primary Account Balance 9
7.3 Secondary Account Balance 9
7.4 Payment of Benefit 9
Article 8 Disability Benefit 10
8.1 Amount of Disability Benefit 10
Article 9 Beneficiary Designation 10
9.1 Beneficiary Designation 10
9.2 Change of Beneficiary Designation 10
9.3 No Participant Designation 10
9.4 Effect of Payment 10
Article 10 Plan Termination, Amendment or
Modification 11
10.1 Plan Termination 11
10.2 Amendment or Modification 11
10.3 Change in Control 11
10.4 Effect of Payment 11
Article 11 Trust 12
11.1 Establishment of the Trust; Premiums 12
11.2 Interrelationship of the Plan and the Trust12
Article 12 Claims Procedures 12
12.1 Presentation of Claim 12
12.2 Notification of Decision 12
12.3 Review of a Denied Claim 13
12.4 Decision on Review 13
12.5 Legal Action 13
Article 13 Miscellaneous 13
13.1 Unsecured General Creditor 13
13.2 Nonassignability 14
13.3 Not a Contract of Employment 14
13.4 Protective Provisions 14
13.5 Terms 14
13.6 Captions 14
13.7 Governing Law 14
13.8 Validity 14
13.9 Notice 15
13.10 Successors 15
13.11 Spouse's Interest 15
13.12 Distribution in the Event of Taxation 15
13.13 Incompetent 16
Article 14 Administration 16
14.1 Committee Duties 16
14.2 Agents 16
14.3 Binding Effect of Decisions 16
14.4 Indemnity of Committee 16
14.5 Company Information 16
14.6 Change in Payments 16
ALZA CORPORATION
AMENDED AND RESTATED
EXECUTIVE DEFERRAL PLAN II
Purpose
The primary purpose of the Executive Deferral Plan II (the "EDP
II" or "Plan") of ALZA Corporation, a Delaware corporation
("ALZA"), is to help attract and maintain high caliber directors
and a select group of management and highly compensated employees
in senior-level management and scientific positions. It is the
intention of ALZA that the Plan be unfunded for tax purposes and
for purposes of Title I of the Employee Retirement Income
Security Act of 1974, as amended.
Article 1
Definitions
For purposes hereof, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following
indicated meanings:
"Affiliate" shall mean any corporation or entity in which ALZA
has at least twenty-five percent (25%) of the voting control
through ownership of equity securities or otherwise.
"Base Rate" shall be, for the 1998 Plan Year, ten percent (10%).
The Base Rate for each Plan Year thereafter shall be the greater
of ten percent (10%) or Moody's Seasoned Corporate Bond Rate,
measured on the November 1 prior to that Plan Year.
"Beneficiary" shall mean the person or persons, or the entity
designated by a Participant to receive any benefits payable under
this Plan upon the death of such Participant.
"Beneficiary Designation Form" shall mean the form established
from time to time by the Committee that a Participant completes,
signs and returns to the Committee to designate one or more
Beneficiaries.
"Bonus Award" shall mean any cash bonus, other than any Sales
Incentive Plan bonus, awarded to the Participant under the
provisions of any of the Company's bonus plans relating to the
calendar year prior to the Plan Year. Such Bonus Award shall be
credited to the Participant's EDP II account as of January 1 of
the Plan Year.
"Change in Control" shall mean the first to occur of the
following events:
Any "person" (as that term is used in Section 13 and 14(d)(2) of
the Securities Exchange Act of 1934 ("Exchange Act")) is or
becomes the beneficial owner (as that term is used in
Section 13(d) of the Exchange Act), directly or indirectly, of
50% or more of ALZA's capital stock entitled to vote in the
election of directors;
During any period of two consecutive years, individuals who at
the beginning of such period constitute the board of directors of
ALZA cease for any reason to constitute at least a majority
thereof, unless the election or the nomination for election by
ALZA's stockholders of each new director was approved by a vote
of at least three-quarters of the directors still in office of
ALZA who were directors at the beginning of the period;
Any consolidation or merger of ALZA, other than a merger of ALZA
in which the holders of the common stock of ALZA immediately
prior to the merger hold more than 50% of the common stock of the
surviving corporation immediately after the merger;
The stockholders of ALZA approve any plan or proposal for the
liquidation or dissolution of ALZA; or
Substantially all of the assets of ALZA are sold or otherwise
transferred to parties that are not within a "controlled group of
corporations" (as defined in Section 1563 of the Internal Revenue
Code of 1986, as amended) in which ALZA is a member.
"Committee" shall mean the administrative committee appointed to
manage and administer the Plan in accordance with its provisions
pursuant to Article 14.
"Company" shall mean ALZA Corporation, a Delaware corporation,
and each subsidiary and Affiliate thereof.
"Deferral Amounts" shall mean the amount of Salary and Bonus
Award for a calendar year deferred by a Participant pursuant to
the election made on the Election Form. The Committee reserves
the right, solely at its discretion, to decrease pro rata the
total amount of deferral elections for all Participants.
"Directors Fees" shall mean the annual fees paid by the Company,
including retainer fees and meeting fees, as compensation for
serving on the board of directors of the Company or any committee
of the board of directors.
"Disability" shall mean a period of disability during which a
Participant qualifies for benefits under the Company's group long-
term disability plan or, if a Participant does not participate in
such plan, a period of disability during which the Participant
would have qualified for benefits under such plan had the
Participant been a participant in such plan, as determined in the
sole discretion of the Committee.
"EDP II Account" shall mean the account comprised of the
Participant's Deferral Amounts and interest credited thereon,
which shall be equal to the sum of the Primary Account Balance
and the Secondary Account Balance. EDP II Accounts shall be
maintained for each Participant. A Participant's EDP II Account
shall be utilized solely as a device for the measurement and
determination of the amounts to be paid to the Participant
pursuant to this Plan. A Participant's EDP II Account shall not
constitute or be treated as a trust fund.
"Election Form" shall mean the form established from time to time
by the Committee that a Participant completes, signs and returns
to the Committee to make an election under the Plan.
"Moody's Seasoned Corporate Bond Rate" shall mean the applicable
"Seasoned Corporate Bond" rate, which is an arithmetic average of
yields of representative bonds, including industrials, public
utilities, Aaa, Aa, A and Baa bonds as published by Moody's
Investors Service, Inc. or any successor to that service.
"Participant" shall mean directors of the Company and those
senior level management and scientific staff who are selected for
participation in the Plan by the Committee and who elect to
participate by executing and delivering to the Committee the Plan
Agreement, the Election Form and the Beneficiary Designation
Form.
"Plan" shall mean the Executive Deferral Plan II of the Company,
which shall be defined by this instrument and by the Plan
Agreement, as may be amended from time to time.
"Plan Agreement" shall mean a written agreement, as may be
amended from time to time, which is entered into by and between
the Company and a Participant. Each Plan Agreement executed by a
Participant shall provide for the entire benefit to which such
Participant is entitled to under the Plan, and the Plan Agreement
bearing the latest date of acceptance by the Committee shall
govern such entitlement.
"Plan Year" shall mean calendar year 1993 and subsequent calendar
years thereafter.
"Preferred Rate" shall mean 125% of the Base Rate. The Preferred
Rate for the 1998 Plan Year shall be twelve and one half
percent (12.5%).
"Primary Account Balance" shall equal the Participant's Deferral
Amounts, plus compounded interest credited yearly thereon at the
Standard Rate, all as determined in accordance with Section 3.3
below.
"Retirement" and "Retire" shall mean termination of employment or
severance of directorship with the Company (i) on or after the
attainment of age sixty-five (65), (ii) at a time when Years of
Service are equal to or greater than 20 or (iii) at a time when
the sum of age at last birthday plus Years of Service equal 70 or
more ("Rule of 70").
"Salary" shall mean for any Participant, annual salary and wages
from the Company before 401(k) and other qualified plan
reductions and amounts deferred pursuant to this Plan, but
excluding, (i) moving allowances, (ii) income arising from
participation in clinical studies or stock option plans, (iii)
imputed income due to fringe benefits, and (iv) Bonus Awards and
similar items paid to the Participant.
"Secondary Account Balance" shall equal that portion of the
cumulative interest on the EDP II Account, determined in
accordance with Section 3.3 below, that is equal to the sum of
(i) the difference between the interest on the Primary Account
accrued at the Preferred Rate and the interest on the Primary
Account accrued at the Standard Rate, and (ii) the yearly
interest at the Preferred Rate on the Secondary Account itself.
"Standard Rate" shall mean fifty percent (50%) of the Preferred
Rate. The Standard Rate for the 1998 Plan Year shall be six and
one quarter percent (6.25%).
"Termination of Employment" shall mean the ceasing of employment
or directorship with the Company, voluntarily or involuntarily,
for any reason other than Retirement, Disability, or death. If a
Participant is both an employee and a director of the Company, a
Termination of Employment shall occur only upon ceasing to be in
the last of such positions held.
"Trust" shall mean any trust established by the Company, in its
sole discretion, to which assets may be transferred to for the
purpose of paying benefits under this Plan.
"Unforeseeable Financial Emergency" shall mean an unanticipated
emergency that is caused by an event beyond the control of the
Participant that would result in severe financial hardship to the
Participant resulting from (i) a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant,
(ii) a loss of the Participant's property due to casualty, or
(iii) such other extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the
Participant, all as determined in the sole discretion of the
Committee."
"Years of Service" shall mean the total number of years in which
the Participant has been employed by the Company and has
completed in each of those years 1,000 hours of service. For
purposes of this definition only, a year of employment shall be a
365 day period (or 366 day period in the case of a leap year)
that, for the first year of employment commences on the
employee's date of fire and that, for any subsequent year,
commences on an anniversary date. For a non-employee Director
Participant, "Years of Service" shall mean service as a Director
during any part of a calendar year.
Article 2
Eligibility
Selection By Committee. For each Plan Year, the Committee shall
have the sole discretion to determine the individuals who, in
accordance with the purpose of the Plan, will be eligible to
become Participants.
Plan Agreement, Election Form and Beneficiary Election Form. As
a condition of participation, each Participant shall complete,
execute and return to the Committee prior to the commencement of
the Plan Year for which the Participant is to commence
participation in the Plan, a Plan Agreement, an Election Form and
a Beneficiary Designation Form. In subsequent Plan Years, a
Participant shall complete, execute and return to the Committee
an Election Form.
Article 3
Commitments, Interest and Participation
Participant Deferral Amount Commitment. Pursuant to the Election
Form delivered to the Committee prior to the commencement of a
Plan Year, the Participant may elect for each Plan Year to defer,
in full percentage points, up to fifty percent (50%) of his/her
Salary, and up to one hundred percent (100%) (in full percentage
points) of his/her Bonus Award, subject to the limitations of
Section 3.2 below.
Deferral Amounts. If Salary or Directors Fees are deferred by a
Participant, the minimum rate of deferral shall be $200 per month
($2,400/calendar year). Deferral Amounts must be in increments
of one hundred dollars ($100). Bonus Awards may be deferred
independently of salary deferrals.
Pre-Distribution Crediting Rate. Subject to the provisions and
limitations of the Plan, interest shall be credited at the
Preferred Rate on the EDP II Account balance annually on the last
day of each Plan Year as though all Deferral Amounts, if any, for
that Plan Year were made on July 1 of the Plan Year. Despite the
foregoing, in the event of a Participants death, Retirement or
Termination of Employment prior to the last day of a Plan Year,
interest for that Plan Year shall be credited on the EDP II
Account balance up to the day prior to the Participant's death,
Retirement or Termination of Employment as though all Deferral
Amounts, if any, for that Plan Year were made on January 1 of the
Plan Year.
Distribution Rate. If pursuant to the terms of the Plan, a
Participant or Beneficiary is entitled to receive his or her
benefit (other than the 7th-Year Distribution) in installments,
the crediting rate on the undistributed portion of the benefits
for all periods following the last day of the month prior to the
date upon which the Participant is no longer an employee or
Director shall be one of two fixed rates as specified in the
Plan. The "Preferred Distribution Rate" shall be composed of the
average Preferred Rate for the last five (5) Plan Years prior to
the commencement of the installment payments, including the Plan
Year in which the Participant terminates employment, or if the
Participant has participated in the Plan for less than five (5)
Plan Years, the average of such rates for the number of Plan
Years that the Participant has participated in the Plan. The
"Standard Distribution Rate" shall be composed of the average
Standard Rate for the last five (5) Plan Years prior to the
commencement of the installment payments, including the Plan Year
in which the Participant terminates employment, or if the
Participant has participated in the Plan for less than five (5)
Plan Years, the average of such rates for the number of Plan
Years that the Participant has participated in the Plan.
Termination of Participation. A Participant who remains an
employee or director of the Company may not terminate
participation in the Plan for any reason other than those
outlined in Section 3.6, Article 5, Article 6, Article 7, Article
8 or Section 10.1.
Unforeseeable Financial Emergency. In the case of Unforeseeable
Financial Emergency, the Committee may, at its discretion, allow
the Participant to discontinue deferrals, terminate participation
or receive a payout from the Plan or any combination thereof.
The amount of such payout shall be at the discretion of the
Committee, provided that such payout shall not exceed the lesser
of (i) the Participant's EDP II Account balance, or (ii) the
amount reasonably needed to satisfy the Unforeseeable Financial
Emergency.
Withdrawal Election. A Participant who is eligible to and is
receiving his or her benefits under the Plan in installments may
elect, at any time, to withdraw the then remaining unpaid portion
of his or her EDP II Account balance less a 10% withdrawal
penalty (the net amount shall be referred to as the "Withdrawal
Amount"). No partial withdrawals of that balance shall be
allowed. The Participant shall make this election by giving the
Committee advance written notice of the election in a form
determined from time to time by the Committee. The penalty shall
be equal to 10% of the Participant's remaining EDP II Account
Balance determined immediately prior to the withdrawal. The
Participant shall be paid the Withdrawal Amount within 60 days of
his or her election. Once the Withdrawal Amount is paid, the
Participant's participation in the Plan shall terminate and the
Participant shall not be eligible to participate in the Plan in
the future.
FICA and Other Taxes. The Company may withhold from any payments
made to a Participant under this Plan all federal, state and
local income and other taxes required to be withheld by the
Company in connection with such payments, in amounts and in a
manner to be determined in the sole discretion of the Company.
Article 4
7th Year Distribution
7th Year Distribution. Except as provided in this Article 4, no
distribution shall be made to a Participant or his or her
Beneficiary under the Plan until death, Retirement, Disability,
Termination of Employment, or Unforeseeable Financial Emergency.
In connection with each election to defer an annual Deferral
Amount (as provided in Section 4.2 below), a Participant may
elect to receive a future "7th-Year Distribution" from the Plan
with respect to that annual Deferral Amount.
Timing of Election. Prior to December 31 of the Plan Year
immediately preceding the Plan Year for which a deferral election
is being made, the Participant shall elect to:
receive that Deferral Amount plus interest (as specified below)
as a 7th-Year Distribution, or
leave that Deferral Amount in the EDP II Account until such time
as distributions are required by the other provisions of the
Plan.
Such election shall be made on the Election Form. If the
Participant chooses to receive the 7th-Year Distribution relative
to any Plan Year's Deferral amount, he/she shall receive from the
EDP II Account an amount equal to the Primary Account Balance
related to such Plan Year as of the last day of the Plan Year
that is seven years after the last day of the calendar year prior
to the Plan Year in which such Deferral amount was deferred.
Payment of Distribution. The payment shall be made in a lump sum
within 90 days of the last day of the Primary Account Balance
measurement date provided in Section 4.2 above.
Secondary Account Balance. If the Primary Account Balance with
respect to a Plan Year is fully distributed in accordance with
this Article 4, the Secondary Account Balance shall constitute
the entire EDP II Account with respect to such Plan Year and
shall be paid in accordance with the terms and provisions of this
Plan.
Article 5
Retirement Benefit
Retirement Benefit. A Participant who Retires shall become
eligible to receive, in accordance with this Article, his or her
EDP II Account (the "Retirement Benefit").
Rate of Interest for Retirement Benefit; Vesting. Upon a
Participant's Retirement, the interest on his/her unpaid EDP II
Account will be based on the Preferred Distribution Rate. If it
has not already done so, a Participant's Secondary Account
Balance shall vest upon his or her Retirement.
Commencement of Retirement Benefits. Retirement Benefits shall
be paid over a fifteen (15) year period, payable annually unless
the Participant makes an election to receive benefits in a lump
sum or over a five (5) year period or over a ten (10) year
period, payable annually. Such an election must be made on the
Election Form at least one full Plan Year prior to the date of
Retirement. If no such election is made, or if the election is
made less than one full Plan Year before the date of Retirement,
the benefit shall be paid over a fifteen-year period, payable
annually. Other methods of payment shall be at the sole
discretion of the Committee. The initial annual Retirement
Benefit payment shall commence within thirty (30) days of actual
Retirement. All subsequent annual payments shall be made prior
to February 28 of each calendar year thereafter until the
Participant's EDP II Account balance is paid in full.
Death Prior to Completion of Retirement Benefits. If a retired
Participant dies before the applicable Retirement Benefit is paid
in full, the Participant's unpaid Retirement Benefit payments
shall continue on the same schedule and be paid to that
Participant's Beneficiary.
Article 6
Survivor Benefit
Survivor Benefit. If a Participant dies before Retirement,
Termination of Employment or a Disability, or if a terminated or
disabled Participant dies before the applicable Termination
Benefit or Disability Benefit has been paid in full, the Company
will pay the benefit described in this Article (the "Survivor's
Benefit") to the designated Beneficiary of the Participant.
Amount of Survivor Benefit. The Survivor Benefit shall equal the
existing EDP II Account Balance (including the Secondary Account
Balance) at the time of death.
Benefit Period. The Survivor Benefit shall be paid according to
the following schedule:
EDP II Account Balance Distribution Period
Up to $100,000 Lump Sum
$100,001 to $250,000 5 Years
$250,001 to $500,000 10 Years
$500,001 or More 15 Years
Interest shall be credited on the unpaid balance at the Standard
Distribution Rate. The lump sum payment, or the initial
installment payment, of the Survivor Benefit shall commence
within ninety (90) days of the delivery to the Company of proof
of death, in such form as determined acceptable by the Committee.
Any subsequent annual installment payments shall be made prior to
February 28 of each calendar year thereafter until the
Participant's EDP II Account balance is paid in full.
Eligibility Requirements for Survivor Benefit. The obligation of
the Company to pay the Survivor Benefit to any Beneficiary shall
exist only if at the time of death, the Participant (i) was
employed by the Company or was a director of the Company,
(ii) was on an authorized leave of absence, or (iii) was absent
from employment due to Disability, and, in each such case, had
not yet begun receiving the Retirement Benefit.
Article 7
Termination Benefit
Termination Benefit. The Participant who for any reason
experiences a Termination of Employment prior to his or her
Retirement, death or Disability shall be entitled to a
Termination Benefit in accordance with this Article.
Primary Account Balance. The Participant terminating at any time
shall be entitled to his or her Primary Account Balance.
Secondary Account Balance. A Participant's Secondary Account
Balance shall be 100% vested on the fifth anniversary of the date
such Participant was offered the opportunity to participate in
any of the Company's non-qualified deferred compensation plans,
provided such Participant has been employed by the Company during
such five-year period and has completed 1,000 hours of service in
each of those years or, in the case of a non-employee director
Participant, has served as a director of the Company in each of
those five years. Unvested Secondary Account Balances are
forfeited at the date of Termination of Employment.
Payment of Benefit. Payment of the Primary Account Balance, and
the vested Secondary Account Balance, if any, shall be made in a
lump sum, unless the Participant makes an election to receive
benefits over a five (5) year period or a ten (10) year period,
payable annually. Such election must be made on the Election
Form at least one full Plan Year prior to the date of
Termination of Employment. If no such election is made, or if
the election is made less than one Plan Year before the date of
Termination, the benefit shall be paid in a lump sum. Other
methods of payment shall be at the sole discretion of the
Committee. The lump sum payment shall be made, or annual
installment payments shall commence, within ninety (90) days of
the Participant's Termination of Employment. In the event of
installment payments, the unpaid balance shall be credited with
interest at the Standard Distribution Rate from the date of the
Termination of Employment through the date of the last
installment payment.
Article 8
Disability Benefit
Amount of Disability Benefit. In the case of the Disability of
the Participant, the Committee may, at anytime during the
Disability period and in its sole discretion, allow the
Participant to discontinue deferrals and to continue to be
eligible for benefits under Articles 4, 5, 6 or 7 (in accordance
with those Articles), or terminate participation and receive a
"Disability Benefit" in accordance with this Article 8. The
amount of the Disability Benefit shall be equal to the
Participant's existing EDP II Account balance (including the
Secondary Account Balance), as of the date the Committee makes a
determination to terminate the Participant's participation in the
Plan pursuant to this Section 8.1. The Disability Benefit payout
shall be at the discretion of the Committee, provided that such
payout shall begin within ninety (90) days of such determination
and shall not exceed 15 years in total. The unpaid balance shall
be credited with interest at the Standard Distribution Rate from
the date of the determination through date of payment of last
installment.
Article 9
Beneficiary Designation
Beneficiary Designation. Each Participant shall have the right,
at any time, to designate any person or persons as Beneficiary or
Beneficiaries (both principal as well as contingent) to whom
benefits under this Plan shall be paid in the event of the
Participant's death prior to complete distribution of the
benefits due under this Plan.
Change of Beneficiary Designation. Any Beneficiary designation
may be changed by a Participant at any time by filing a new
Beneficiary Designation Form with the Committee and shall become
effective only when received, accepted and acknowledged by the
Company in writing. The filing and acceptance of a new
Beneficiary Designation Form will cancel all Beneficiary
Designations previously filed. The Committee shall be entitled
to rely on the last designation filed by the Participant prior to
death. Despite the foregoing, if the Participant names someone
other than his or her spouse as a Beneficiary, such beneficiary
designation shall not be valid unless and until a spousal
consent, in the form designated by the Committee, must be signed
by that Participant's spouse and returned to the Committee.
No Participant Designation. If a Participant fails to designate
a Beneficiary as provided above, or if all designated
Beneficiaries predecease the Participant, or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be the
surviving spouse. If the Participant has no surviving spouse,
the benefits remaining under the Plan shall be payable to the
Participant's estate.
Effect of Payment. The payment of benefits under the Plan to the
deemed Beneficiary shall completely discharge the Company's
obligations under this Plan.
Article 10
Plan Termination, Amendment or Modification
Plan Termination. The Company reserves the right to terminate
the Plan at any time. Upon termination of the Plan, the
Participants' then existing EDP II Accounts, including the
Secondary Account Balance and all interest earned through the
date of such termination, shall be paid out as if each
Participant Retired on the date of termination. If the Plan is
terminated prior to a Change in Control, the Company reserves the
right, at its sole discretion and notwithstanding any elections
made by the Participant, to pay such benefits in a lump sum or in
annual installments for up to 15 years, with interest credited on
the unpaid balance at the Preferred Distribution Rate. If the
Plan is terminated after a Change in Control, the Company shall
be required to pay such benefits in a lump sum. The termination
of the Plan shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of any
benefits under the Plan as of the date of termination; provided,
however, that the Company shall have the right to pay any
remaining EDP II Account balance in a lump sum, without interest
that would have accrued if installment payments had continued.
Amendment or Modification. The Company may, at any time, amend
or modify the Plan in whole or in part; provided, however, that
no amendment or modification shall have the effect of decreasing
or restricting any EDP II Account balance, calculated as if the
Participant experienced a Termination of Employment as of the
effective date of the amendment or modification, or if the
Participant was eligible to Retire on the effective date of the
amendment or modification, the Participant had Retired as of the
effective date of the amendment or modification. The amendment
or modification of the Plan shall have no effect on any
Participant or Beneficiary who has become entitled to the payment
of benefits under the Plan as of the date of the amendment or
modification, provided that the Committee has the right to make a
lump sum payment of all remaining balances.
Change in Control. If a Change in Control occurs, a Participant
shall immediately become vested in his or her Secondary Account
Balance.
Effect of Payment. The full payment of the applicable benefit
under Articles 5, 6, 7 or 8 of the Plan shall completely
discharge all obligations to a Participant and his or her
Beneficiaries under this Plan and the Participant's Plan
Agreement shall terminate.
Article 11
Trust
Establishment of a Trust; Premium. The Company may establish, in
its sole discretion, a Trust and, if so established, shall at
least annually transfer over to the Trust such assets as the
Committee determines, in its sole discretion, are necessary to
provide for some or all of the Company's future liabilities under
the Plan.
Interrelationship of the Plan and the Trust. The provisions of
the Plan and a Participant's Plan Agreement shall govern the
rights of the Participant to receive distributions pursuant to
the Plan. The provisions of the Trust, if a Trust is
established, shall govern the rights of the Company, a
Participant, a Participants' Beneficiary and the Company's
creditors as to the assets of the Trust. The Company shall at all
times remain liable to carry out its obligations under the Plan.
The Company's obligations under the Plan may be satisfied with
Trust assets distributed pursuant to the terms of the Trust.
Article 12
Claims Procedures
Presentation of Claim. Any Participant or Beneficiary of a
deceased Participant (such Participant or Beneficiary being
referred to below as a "Claimant") may deliver to the Committee a
written claim for a determination with respect to the amounts
distributable to such Claimant from the Plan. If such a claim
relates to the contents of a notice received by the Claimant, the
claim must be made within 60 days after such notice was received
by the Claimant. All other claims must be made within 180 days
of the date on which the event that caused the claim to arise
occurred. The claim must state with particularity the
determination desired by the Claimant.
Notification of Decision. The Committee shall consider a
Claimant's claim within 60 days of receipt of that claim, and
shall notify the Claimant in writing:
that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or that the Committee
has reached a conclusion contrary, in whole or in part, to the
Claimant's requested determination, and such notice must set
forth in a manner calculated to be understood by the Claimant:
the specific reason(s) for the denial of the claim, or any part
of it;
the specific reference(s) to pertinent provisions of the Plan
upon which such denial was based;
a description of any additional material or information necessary
for the Claimant to perfect the claim, and an explanation of why
such material or information is necessary; and
an explanation of the claim review procedure set forth in
Section 12.3 below.
Review of a Denied Claim. Within 60 days after receiving a
notice from the Committee that a claim has been denied, in whole
or in part, a Claimant (or the Claimant's duly authorized
representative) may file with the Committee a written request for
a review of the denial of the claim. Thereafter, but not later
than 30 days after the review procedure began, the Claimant (or
the Claimant's duly authorized representative):
may review pertinent documents;
may submit written comments or other documents; and/or
may request a hearing, which the Committee, in its sole
discretion, may grant.
Decision on Review. The Committee shall render its decision on
review promptly, and not later than 60 days after the filing of a
written request for review of the denial, unless a hearing is
held or other special circumstances require additional time, in
which case the Committee's decision must be rendered within
120 days after such date. Such decision must be written in a
manner calculated to be understood by the Claimant, and it must
contain:
specific reasons for the decision;
specific reference(s) to the pertinent Plan provisions upon which
the decision was based; and
such other matters as the Committee deems relevant.
Legal Action. A Claimant's compliance with the foregoing
provisions of this Article 12 is a mandatory prerequisite to a
Claimant's right to commence any legal action with respect to any
claim for benefits under this Plan.
Article 13
Miscellaneous
Unsecured General Creditor. Participants and their
Beneficiaries, heirs and successors shall have the status of
general unsecured creditors of the Company, and the Plan
constitutes a mere promise by the Company to make benefit
payments in the future.
Nonassignability. Neither a Participant nor any other person
shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer,
hypothecate, alienate, or convey in advance of actual receipt,
the amounts, if any, payable hereunder, or any part thereof,
which are, and all rights to which are, expressly declared to be
unassignable and non-transferable. No part of the amounts
payable shall, prior to actual payment, be subject to seizure,
attachment, garnishment or sequestration for the payment of any
debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation
of law in the event of a Participant's or any other person's
bankruptcy or insolvency.
Not a Contract of Employment. The terms and conditions of this
Plan shall not be deemed to constitute a contract of employment
between the Company and the Participant, and the Participant (or
Beneficiary) shall have no rights against the Company except as
may otherwise be specifically provided herein. Such employment
is acknowledged to be an "at will" employment relationship that
can be terminated at any time for any reason, with or without
cause, unless expressly provided in a written employment
agreement. Moreover, nothing in this Plan shall be deemed to
give a Participant the right to be retained in the service of the
Company or to interfere with the right of the Company to
discipline or discharge him at any time.
Protective Provisions. A Participant will cooperate with the
Company by furnishing any and all information requested by the
Company in order to facilitate the payment of benefits hereunder,
and by taking such physical examinations as the Company may deem
necessary, and taking such other action as may be requested by
the Company.
Terms. Whenever any words are used herein in the masculine, they
shall be construed as though they were used in the feminine in
all cases where they would so apply; and wherever any words are
used herein in the singular or in the plural, they shall be
construed as though they were used in the plural or in the
singular, as the case may be, in all cases where they would so
apply.
Captions. The captions of the articles, sections and paragraphs
of this Plan are for convenience only and shall not control or
affect the meaning or construction of any of its provisions.
Governing Law. The provisions of this Plan shall be construed
and interpreted according to the laws of the State of California.
Validity. In case any provision of this Plan shall be illegal or
invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be
construed and enforced as if such illegal and invalid provision
had never been inserted herein.
Notice. Any notice or filing required or permitted to be given
to the Committee under this Plan shall be sufficient if in
writing and hand-delivered, or sent by registered or certified
mail or facsimile transmission, to:
ALZA
Executive Deferral Plan Committee
950 Page Mill Road
P.O. Box 10950
Palo Alto, CA 94303-0802
Attn: Treasurer
Such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark
on the receipt for registration or certification.
Successors. The provisions of this Plan shall bind and inure to
the benefit of the Company and its successors and assigns. The
term successors as used herein shall include any corporate or
other business entity which shall, whether by merger,
consolidation, purchase or otherwise, acquire all, or
substantially all, of the business and assets of the Company, and
successors or any such corporation or other business entity.
Spouse's Interest. The interest in the benefits hereunder of a
spouse of a Participant who has predeceased the Participant shall
automatically pass to the Participant and shall not be
transferable by such spouse in any manner, including but not
limited to such spouse's will, nor shall such interest pass under
the laws of intestate succession.
Distribution in the Event of Taxation. If, for any reason, all
or any portion of a Participant's benefit under this Plan becomes
taxable to the Participant prior to receipt, a Participant may
petition the Committee for a distribution of assets sufficient to
meet the Participant's tax liability (including additions to tax,
penalties and interest). Upon the grant of such a petition,
which grant shall not be unreasonably withheld, the Company shall
distribute to the Participant immediately available funds in an
amount equal to that Participant's federal, state and local tax
liability associated with such taxation (which amount shall not
exceed a Participant's accrued benefit under the Plan), which
liability shall be measured by using that Participant's then
current highest federal, state and local marginal tax rate, plus
the rates or amounts for the applicable additions to tax,
penalties and interest. If the petition is granted, the tax
liability distribution shall be made within 90 days of the date
when the Participant's petition is granted. Such a distribution
shall affect and reduce the benefits to be paid under this Plan.
Incompetent. In the event that it shall be found upon evidence
satisfactory to the Committee that any Participant or Beneficiary
to whom a benefit is payable under this Plan is unable to care
for his or her affairs because of illness or accident, any
payment due (unless prior claim had been made by a duly
authorized guardian or other legal representative) may be paid,
upon appropriate indemnification of the Committee, to the spouse
of such person or any other person deemed by the Committee to
have incurred expense for such Participant. Any such payment
shall be a payment out of the account of the Participant and
shall be a complete discharge of any liability of the Plan for
such payment amount.
Article 14
Administration
Committee Duties. This Plan shall be administered by a Committee
which shall consist of persons appointed by the Board of
Directors of ALZA. Members of the Committee may be Participants
under this Plan. The Committee shall also have the authority to
make, amend, interpret, and enforce all appropriate rules and
regulations for the administration of this Plan and decide or
resolve any and all questions including interpretations of this
Plan, as may arise in connection with the Plan.
Agents. In the administration of this Plan, the Committee may,
from time to time, employ agents and delegate to them such
administrative duties as it sees fit and may from time to time
consult with counsel who may be counsel to the Company.
Binding Effect of Decisions. The decision or action of the
Committee with respect to any question arising out of or in
connection with the administration, interpretation, and
application of the Plan, and the rules and regulations
promulgated hereunder, shall be final and conclusive, and binding
upon all persons having any interest in the Plan.
Indemnity of Committee. The Company shall indemnify and hold
harmless the members of the Committee against any and all claims,
loss, damage, expense or liability arising from any action or
failure to act with respect to this Plan, except in the case of
willful misconduct by the Committee or any of its members.
Company Information. To enable the Committee to perform its
functions, the Company shall supply full and timely information
to the Committee on all matters relating to the salary of all
Participants, the date and circumstances of the retirement
disability, death, or termination of employment of all
Participants, and such other pertinent information as the
Committee may reasonably require.
Change in Payments. The Committee shall have the power, at its
sole discretion, to change the manner and timing of payments to
be made to a Participant or Beneficiary from that which would be
otherwise payable, if requested to do so by such Participant or
Beneficiary.
ALZA Plaza
Building One
EXHIBIT 10.11
THE SYMBOL "**" IS USED TO INDICATE
THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION
ALZA CORPORATION
LEASE AGREEMENT DATED SEPTEMBER 1, 1997
(BUILDING ONE)
THIS LEASE, made this 1st day of September, 1997, between
P/A CHARLESTON ROAD LLC, a California limited liability company,
("Landlord"), and ALZA CORPORATION, a Delaware corporation,
("Tenant", with Landlord and Tenant sometimes collectively
referred to herein as the "Parties").
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and
takes from Landlord those certain premises (the "Premises") as so
identified on Exhibit A, attached hereto and incorporated herein
by this reference thereto more particularly described as follows:
All of that certain building (hereinafter sometimes referred
to as the "Building" or "Building One") to be constructed in
accordance with the Construction Agreement between Landlord
and Tenant dated as of September 1, 1997 (the "Construction
Agreement") and the land exclusively associated with
Building One as so identified on Exhibit A to be located at
Amphitheatre Parkway and Charleston Road, Mountain View,
California, 94043. The entire single unsubdivided parcel of
land (the "Parcel"), of which the Premises is a part, is so
identified on Exhibit A. The on and off-site improvements,
building shell and interior improvements shall be
constructed by Tenant in accordance with the shell
specifications, site improvement specifications, and
interior improvement specifications as are now or hereafter
set forth in, attached to, or approved in accordance with
the terms of the Construction Agreement. Upon completion of
the "Shell Improvements" associated with the Premises (as
defined in the Construction Agreement), the Architect for
the Shell Improvements shall measure said Building in
accordance with the applicable provisions of the
Construction Agreement and the square footage shall be shown
on the lease commencement letter in the general form of
Exhibit D to be executed by the parties hereto on or prior
to the Commencement Date of this Lease (the "Lease
Commencement Letter"). Upon construction of the "Interior
Improvements" of the Premises (as defined in the
Construction Agreement), a plan reflecting the configuration
of the same shall be attached as Exhibit B hereto and
incorporated herein by this reference.
It is understood that the formal address for the Building
will be assigned by the City of Mountain View (the "City") some
time after issuance of a building permit for the Building. The
address for the Building as so assigned by the City, shall be
reflected in the Lease Commencement Letter.
As used herein the "Complex" shall mean and include all of
the Parcel as so identified on Exhibit A, attached hereto, and
all of the buildings, improvements, fixtures and equipment now or
hereafter situated on the Parcel. It is currently envisioned by
the Parties that there will be three occupiable multi-story
buildings constructed on the Parcel, which are currently
anticipated to be in the aggregate a minimum of approximately
300,000 square feet and a maximum of approximately 360,000 square
feet (collectively referred to herein as the "Three Buildings"
and individually as "Building One", "Building Two" and "Building
Three"). As neither the specific design or size of any or all of
the Three Buildings has been approved by the City, any
description of the location, size or design of the Building or of
the Three Buildings is necessarily only an approximation, and the
Parties agree to amend this Lease if necessary or appropriate to
reflect the final description of the location, size or design of
the Three Buildings as ultimately approved by the Parties and the
City. Tenant, as provided in the Construction Agreement, is
obligated to exercise due diligence to seek to obtain the
approval by the City for the development of an aggregate of at
least 300,000 square feet for all three Buildings.
Said letting and hiring is upon and subject to the terms,
covenants and conditions hereinafter set forth and as set forth
in the Construction Agreement, and Tenant covenants as a material
part of the consideration for this Lease to perform and observe
each and all of said terms, covenants and conditions. This Lease
is made upon the conditions of such performance and observance.
For convenience, attached hereto is an Index of Defined
Terms which identifies the Paragraph or other location where
various defined terms are defined in this Lease, with all such
defined terms being initially capitalized.
1. USE. ALZA Corporation("ALZA"), or an affiliate of ALZA
("ALZA Affiliate" as further defined in Paragraph 47C hereof), as
Tenant, under this Lease shall have the right to use the Premises
for any lawful use; in the event this Lease is assigned to any
person other than an ALZA Affiliate (an "Unaffiliated Assignee"),
such Unaffiliated Assignee, as Tenant, may use the Premises for
any or all of the following uses: office uses (including
executive, administrative or professional offices), research and
development uses (including laboratories and pilot production),
and any particular uses associated with companies engaged in
biotechnology research or production (including bio-research and
pharmaceutical uses), companies engaged in the design, research
or development (including pilot manufacturing) of computer or
electronics hardware, and companies engaged in the design,
research or development or manufacturing of computer or
electronics software, provided such purpose and/or use is in
conformance with applicable governmental laws, regulations, rules
and ordinances. Landlord will not unreasonably withhold its
approval to any other use requested by Tenant, provided such use
is not inappropriate as a use in the Complex. Tenant shall not
do or permit to be done in or about the Premises (or to the
extent within Tenant's control, the Complex) nor bring or keep or
permit to be brought or kept in or about the Premises (or to the
extent within Tenant's control, the Complex) anything which is
prohibited by or will in any way increase the existing rate of
(or otherwise adversely affect) fire or any insurance covering
the Complex or any part thereof, or any of its contents, or will
cause a cancellation of any insurance covering the Complex or any
part thereof, or any of its contents, except to the extent that
Landlord or Tenant, upon notice thereof, is able to arrange for
the continuation or replacement of such insurance coverage, with
any increased costs of such continued or replacement insurance to
be paid exclusively by Tenant. Tenant shall not do or permit to
be done anything in, on or about the Premises or the Complex
which will in any way unreasonably obstruct or interfere with the
rights of other tenants or occupants of the Complex or injure or
unreasonably annoy them, or use or allow the Premises to be used
for any improper, immoral, or unlawful purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the
Premises or the Complex. No sale by auction shall be permitted
on the Premises. Tenant shall not place any loads upon any
floors, walls, or ceilings of the Building which endanger the
structure, or place any harmful fluids or other materials in the
drainage system of the Building or the Common Area, or overload
the Building's electrical or other mechanical systems without
first obtaining Landlord's consent and, at Tenant's sole cost and
expense, upgrading such electrical and/or mechanical systems to
accommodate such enhanced uses. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the
Building or on any portion of the Common Area of the Complex,
except in trash containers placed inside exterior enclosures
approved by Landlord (which approval is waived if ALZA and/or any
ALZA Affiliates is then the Tenant under each of the Three
Leases) for that purpose or inside of the Building proper in
areas designated for such purpose. No materials, supplies,
equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or
permitted to remain outside the Building, except in screened
storage areas approved by Landlord (which approval is waived if
ALZA and/or any ALZA Affiliates is then the Tenant under each of
the Three Leases). Tenant may install antennas, satellite
dishes, supplemental air conditioning, emergency generators, and
other equipment on the roof of the Building (or Landlord approved
screened area adjacent to the Building or in the Common Area),
provided (i) if on the roof, Tenant obtains a written statement
from a structural engineer approving the location of such
equipment and stating that the weight of such equipment will not
damage the roof and/or structural aspects of the Building and
(ii) said equipment is properly screened from view and provided
Tenant first obtains, at its expense, all required governmental
approvals for the same and provided Tenant, immediately upon such
installation, repairs any and all such damage resulting from said
installation. Tenant shall not place anything or allow anything
to be placed near the glass of any window, door, partition or
wall which may appear unsightly from outside the Premises. No
loudspeaker or other device, system or apparatus which can be
heard outside the Premises shall be used in or at the Premises
without the prior consent of Landlord (which approval is waived
if ALZA and/or any ALZA Affiliates is then the Tenant under each
of the Three Leases). Tenant shall not commit or suffer to be
committed any waste in or upon the Premises. Tenant shall
indemnify, defend and hold Landlord harmless against any loss,
expense, damage, reasonable attorneys' fees, or liability arising
out of failure of Tenant to comply with any applicable law
relating to Tenant's use of the Premises or with which Tenant is
otherwise obligated to comply under the terms of this Lease.
Tenant shall comply with any covenant, condition, or restriction
("CC&R's") affecting the Premises (if any), with the parties
acknowledging that currently there are no CC&R's, and if Landlord
in the future seeks to adopt any CC&R's, such adoption of CC&R's
shall be subject to the same standards as apply herein to the
adoption by Landlord of Rules and Regulations pursuant to
Paragraph 5 hereof. The provisions of this Paragraph are for the
benefit of Landlord only and shall not be construed to be for the
benefit of any tenant or occupant of the Premises or the Complex.
2. TERM.
A. Initial Term. The initial Term ("Initial Term") of this
Lease shall be for a period of FIFTEEN (15) years (unless
commenced early or sooner terminated or extended as hereinafter
provided) and, as provided in Paragraphs 2B and 2C, shall
commence on the Lease Commencement Date as defined in Paragraph
2B below and terminate fifteen (15) years later following the
Rent Commencement Date as defined in Paragraph 2B below. The
Initial Term, as it may be extended by the subsequent exercise of
the First Option to Extend or the Second Option to Extend as
provided herein, is referred to herein as the "Lease Term".
B. Lease Commencement Date and Rent Commencement Date.
Subject to Paragraph 2C below relating to any Early Occupancy
Period (which may result in the acceleration of the Lease
Commencement Date so as to precede the Rent Commencement Date),
possession of the Premises shall be deemed tendered and the
Initial Term of this Lease shall commence (the "Lease
Commencement Date") on the Rent Commencement Date. The "Rent
Commencement Date" is defined in Section 1.K of the Construction
Agreement and is to be the earlier of:
(i) eighteen (18) months (the "Agreed Construction
Period") following the earlier of the following dates
(regardless of whether or not Tenant has completed the Shell
Improvements or Interior Improvements as set forth in the
Construction Agreement):
(a) the date that Tenant obtains from the City of
Mountain View a Planned Community Permit (the "PCP
Permit") permitting Tenant to proceed generally
thereafter with seeking the issuance of building
permits for the construction of Buildings One, Two and
Three (but the issuance of a building permit is not a
condition to the commencement of the Agreed
Construction Period), or
(b) the date of October 31, 1997 (the "Outside
Date") subject to the right of Landlord to extend such
Outside Date pursuant to Section 2.C of the
Construction Agreement; or
(ii) the Substantial Completion (as defined in Section
1.J of the Construction Agreement) of the Shell Improvements
and Interior Improvements for the Building.
The Agreed Construction Period shall be subject to extension as
provided in the Construction Agreement only for (x) Damage Delays
as defined in Section 1.M of the Construction Agreement (with
Damage Delays being confined therein to delays in construction of
the Shell Improvements or Interior Improvements occasioned by any
damage or destruction occurring during the course of construction
where the estimated cost of repair or restoration equals or
exceeds One Million Dollars per occurrence), (y) Landlord Delays
as defined in Section 1.N of the Construction Agreement (with
Landlord Delays being confined therein to delays in construction
of the Shell Improvements or Interior Improvements caused by the
failure of Landlord either to timely make any payment of the
Improvement Allowance (as defined in the Construction Agreement),
or to timely approve or execute any reasonably appropriate plans
and specifications, working drawings, permits, utility easements
or other related documents which Landlord is responsible for
approving or executing under the provisions of the Construction
Agreement) or (z) Weather Delays as defined in Section 1.O of the
Construction Agreement (with Weather Delays being confined
therein to delays in construction of the Shell Improvements or
Interior Improvements caused by abnormally adverse weather
conditions (compared to the average seasonal weather conditions
experienced in Mountain View, California during the relevant
period of construction) in the nature of abnormal rains (and any
resultant flooding) such as might occur due to an el nino,
provided that there shall not be considered to be any Weather
Delay unless the aggregate affect of all Weather Delays
(excluding average seasonal weather conditions) are reasonably
estimated to have delayed the completion of construction of the
Shell Improvements or Interior Improvements by a period in excess
of thirty (30) calendar days), but the Agreed Construction Period
shall not otherwise be subject to extension regardless of the
status of the completion of the Shell Improvements or Interior
Improvements at the end of the Agreed Construction Period and
regardless of whether the actual construction period exceeded the
Agreed Construction Period. As provided in Section 2.C of the
Construction Agreement, either Landlord or Tenant shall have
certain rights as set forth in the Construction Agreement to
terminate this Lease upon written notice to the other within five
(5) business days after the Outside Date (as such date may be
extended by Landlord pursuant to Section 2.C of the Construction
Agreement), if the City Council of the City of Mountain View,
California fails to finally approve and cause the issuance by the
City of Mountain View of the PCP Permit in satisfaction of the
requirements set forth in Section 1.K of the Construction
Agreement (which Section 1.K sets forth the standards for
acceptability of the PCP Permit) on or before the Outside Date
(as such Outside Date may have been extended by Landlord). The
Lease Commencement Date shall be the earlier of (i) the Rent
Commencement Date or (ii) the date of commencement of any Early
Occupancy Period as provided in Paragraph 2C below. The Rent
Commencement Date for this Lease is scheduled to be the same as
the respective rent commencement date of the lease for Building
Two (the "Building Two Lease") and the lease for Building Three
(the "Building Three Lease", with this Lease and the Building Two
Lease and the Building Three Lease sometimes referred to herein
as the "Three Leases"). The Rent Commencement Date (and Tenant's
obligation to pay Rent beginning on the Rent Commencement Date)
shall not be extended due to any delay beyond the Outside Date
(as such date may be extended by Landlord pursuant to Section 2.C
of the Construction Agreement), related to the issuance of the
PCP Permit (or any delay in construction emanating therefrom) or
the status of completion of construction as of the Rent
Commencement Date, but the Rent Commencement Date shall in any
instance only remain subject to possible delay as provided in
Section 9 of the Construction Agreement for Damage Delays,
Landlord Delays or Weather Delays. If this Lease is terminated
as provided in the Construction Agreement, Tenant shall have no
further right to the Premises leased hereunder and Landlord shall
be free to lease the Premises to a third party without any
obligation, of any type whatsoever, to Tenant under this Lease.
It is agreed in the event this Lease commences on a date other
than the first day of any calendar month, the Lease Term will be
extended to account for the number of days in the partial month.
The Basic Rent during the resulting partial month will be pro-
rated (for the number of days in the partial month) at the Basic
Rent rate scheduled for the projected first month of the term of
the Lease.
C. Early Occupancy Period. In the event a portion of the
Premises are available for Tenant's occupancy prior to the Rent
Commencement Date, Tenant may occupy such portion of the Premises
and in such event, (i) subject to the terms of this Paragraph,
the Premises shall instead be deemed tendered and the term of the
Lease shall instead begin on such early occupancy date (with such
early occupancy date thereupon becoming the Lease Commencement
Date and the period between such early occupancy date and the
Rent Commencement Date being referred to as the "Early Occupancy
Period"), (ii) Tenant shall be responsible for paying all
Additional Rent expenses for the entire Premises and otherwise
complying with the terms of this Lease during the Early Occupancy
Period, (iii) Tenant shall be responsible for the prorata share
of Basic Rent reasonably allocable on a useable square footage
basis to such portion of the Premises during the Early Occupancy
Period, but the Rent Commencement Date as to the entire Premises
shall remain unchanged, and (iv) the maximum term of the Second
Option to Extend shall be reduced by the number of days of such
Early Occupancy Period. Notwithstanding clause (iii) above, if
Tenant so occupies more than fifty percent of the useable square
footage area of the Building prior to what would otherwise be the
Rent Commencement Date hereunder, then the Rent Commencement Date
shall be deemed to have occurred as to the entire Premises on the
date that Tenant so occupies more than fifty percent of the
useable square footage area of the Building.
3. POSSESSION - NOT APPLICABLE DUE TO FIXED LEASE COMMENCEMENT
DATE
4. RENT. The term Rent or Rental, as either may be used
hereunder, shall consist of (i) Basic Rent, as defined within
Paragraph 4A below, (ii) Additional Rent, as defined within
Paragraph 4E below and (iii) any Management Fee to the extent
then applicable hereunder, as defined within Paragraph 4D below.
In any instance where "Rent" or "Rental" is used in place of
"Basic Rent" or "Additional Rent", it shall be understood that
"Rent" or "Rental" includes "Basic Rent", "Additional Rent" and
"Management Fee".
A. Basic Rent. It is understood that Tenant, as of the
Lease Commencement Date, is leasing from Landlord, under three
separate lease agreements, the Three Buildings which are
currently anticipated to be in the aggregate a minimum of
approximately 300,000 square feet and a maximum of approximately
360,000 square foot, but with the exact size of each of the Three
Buildings being undetermined as of this date. The scheduled
monthly Basic Rent during the first year of the Initial Term for
this Lease following the Rent Commencement Date shall be a number
equal to ** percent (**%) per annum of the total agreed Land
Value of $** and the Improvement Allowance (as provided for in
Section 3.F of the Construction Agreement, which provides for an
initial Improvement Allowance of $** and an additional
Improvement Allowance of up to $**, collectively referred to
herein as the "Total Improvement Allowance"), divided by the
total square footage of all Three Buildings (calculated in the
manner provided in the Construction Agreement), multiplied by the
total square footage of the Building leased hereunder (calculated
in the manner provided in the Construction Agreement), divided by
twelve. For example: If the Total Improvement Allowance is $**
(the initial Improvement Allowance of $** plus the entire
additional Improvement Allowance of $** as provided in the
Construction Agreement) and the total square footage of all Three
Buildings is 360,000 square feet and the Building under this
Lease is 120,000 square feet, the monthly Basic Rent during the
first twelve months of the Initial Term following the Rent
Commencement Date shall be $ **. The initial Basic Rent
for this Lease shall be established once the following is
determined: (i) exact size of each of the Three Buildings; and
(ii) the exact amount of the Total Improvement Allowance used by
Tenant. After the information identified in (i) and (ii) above
is known and agreed to by the Parties hereto, the initial Basic
Rent for this Lease shall be memorialized in the Lease
Commencement Letter. Notwithstanding anything to the contrary
herein, if the square footages of the Building or of Building
Two or Building Three is not reasonably determinable as of the
Rent Commencement Date, then in such instance Tenant shall be
obligated with respect to the period from the Rent Commencement
Date to the date that such square footages of the Building and of
Building Two and Building Three are reasonably determinable, to
pay estimated Base Rent under this Lease based on an amount equal
to one-third of the aggregate Base Rent that would become due
upon the respective Rent Commencement Date under all Three
Leases, with the Base Rent to be retroactively recalculated under
this Lease once the respective square footages of the Building
and of Building Two and Building Three are so determined (with
any amount of overpayment or underpayment of Base Rent to be
credited by Landlord to Tenant or paid by Tenant to Landlord
promptly thereafter).
On each anniversary of the Rent Commencement Date during the
Initial Term, the monthly Basic Rent shall increase by the amount
of $** per square foot per month and said increase shall be shown
in the Lease Commencement Letter.
Tenant agrees to pay to Landlord at such place as Landlord
may designate without deduction, offset, prior notice, or demand,
and Landlord agrees to accept as "Basic Rent" for the Lease
Premises the total sum due under the Lease.
B. Time for Payment. Full monthly Basic Rent, Management
Fee and Additional Rent (as scheduled by Landlord) is due in
advance on the first day of each calendar month. In the event
that the Lease Commencement Date occurs on a date other than the
first day of a calendar month, on the Lease Commencement Date
Tenant shall pay to Landlord Management Fee and Additional Rent
for the period from such Lease Commencement Date to the first day
of the next succeeding calendar month that proportion of the
monthly Management Fee and Additional Rent hereunder for the
number of days between the Lease Commencement Date and the first
day of the next succeeding calendar month. In the event that the
Rent Commencement Date occurs on a date other than the first day
of a calendar month, on the Rent Commencement Date Tenant shall
pay to Landlord Basic Rent for the period from such Rent
Commencement Date to the first day of the next succeeding
calendar month that proportion of the monthly Basic Rent
hereunder for the number of days between the Rent Commencement
Date and the first day of the next succeeding calendar month. In
the event that the Lease Term for any reason ends on a date other
than the last day of a calendar month, on the first day of the
last calendar month of the Lease Term, Tenant shall pay to
Landlord as Basic Rent, Management Fee and Additional Rent for
the period from said first day of said last calendar month to and
including the last day of the Lease Term that proportion of the
monthly Basic Rent, Management Fee and Additional Rent hereunder
for the number of days between said first day of said last
calendar month and the last day of the Lease Term.
C. Late Charge and Interest on Rent in Default.
Notwithstanding any other provision of this Lease, if any
installment of Basic Rent, Management Fee and/or Additional Rent
(collectively "Rent") is not received by Landlord from Tenant
within nine (9) calendar days after the same becomes due, Tenant
shall immediately pay to Landlord a late charge in an amount
equal to ten percent (10%) of the amounts due and not so paid.
In no event shall this provision for a late charge be deemed to
grant Tenant a grace period or extension of time within which to
pay any Rent installment as set forth in this Paragraph 4 or to
prevent Landlord from exercising any right or remedy available to
Landlord upon Tenant's failure to pay each Rent installment due
under this Lease when due. If any Rent remains delinquent for a
period in excess of nine (9) calendar days, then, in addition to
such late charge, Tenant shall pay to Landlord interest on any
Rent that is not so paid from said ninth day at the rate of Bank
of America's Prime Rate (or equivalent rate) plus five percent
(5%) per annum on the unpaid amount, but in no event greater then
the maximum rate of interest permitted by applicable law, until
paid in full.
D. Management Fee. Subject to the provisions of this
Paragraph 4D and Paragraph 19, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a management fee
("Management Fee") on a monthly basis equal to three percent (3%)
of the Basic Rent and any scheduled Additional Rent payable to
Landlord for such month, with such Management Fee to be payable
throughout the Lease Term (including during either the First
Extension Term or the Second Extension Term (collectively
referred to as the "Extended Term(s)")).
The above requirement for a Management Fee is waived during
the time ALZA or an ALZA Affiliate is the Tenant under this
Lease, provided, however, that in the event a portion or all of
the Premises is sublet by ALZA or an ALZA Affiliate to an
unaffiliated third party, Tenant as sublandlord shall require the
subtenant to pay to Tenant a Management Fee equal to three
percent (3%) of the rental payable by the subtenant under the
sublease with respect to the sublet Premises (which Management
Fee shall be considered in the calculation of any Excess Rent
payable by Tenant to Landlord pursuant to Paragraph 19 hereof) .
If the Lease is assigned (voluntarily or involuntarily) to any
Unaffiliated Assignee, said Unaffiliated Assignee, as Tenant,
shall be liable for the payment of the Management Fee as noted
above. The Management Fee following an assignment to an
Unaffiliated Assignee shall be calculated as stated in the
preceding paragraph.
E. Additional Rent. Except as provided in the
Construction Agreement relating to the period prior to the Lease
Commencement Date, beginning on the Lease Commencement Date and
continuing throughout the Lease Term, Tenant shall pay to
Landlord or to Landlord's designated agent or, if so directed by
Landlord, to the governmental agency, public utility, or other
third party entitled to receive such payment, in addition to the
Basic Rent and Management Fee and as Additional Rent the
following:
(a) Tenant's proportionate share of all Taxes relating
to the Complex as set forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance
premiums relating to the Complex, as set forth in
Paragraph 15, and
(c) Tenant's proportionate share (or as otherwise
reasonably determined by Landlord) to the extent applicable, of
expenses for the operation, maintenance and repair of the
Building, and as set forth in Paragraph 10, of the Common Area of
the Complex (including, if this Lease relates to less than all of
the Building, the common areas of the Building), and
(d) All charges, costs and expenses which Tenant is
required to pay hereunder, together with all interest and
penalties, costs and expenses, including reasonable attorneys'
fees and legal expenses, that may accrue thereon in the event of
Tenant's failure to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason of default
of Tenant (pursuant to Paragraph 22 of this Lease, i.e. Tenant
has received notice of a default under this Lease and the
applicable cure period has expired and Tenant has not then cured
such default) or failure on Tenant's part to comply with the
terms and conditions of this Lease.
In the event of nonpayment by Tenant of Additional Rent,
Landlord shall have all the rights and remedies with respect
thereto as Landlord has for nonpayment of Basic Rent.
Notwithstanding anything to the contrary in the definition
of Additional Rent as set forth in this Paragraph 4E or Paragraph
10, Additional Rent shall not include any of the following:
(1) Any ground or underlying lease rental;
(2) Bad debt expenses and interest, principal, points
and fees on debts, bad debt expenses or amortization on any
mortgage or other debt instrument encumbering the Building or the
Complex;
(3) Costs incurred by Landlord for repair of damage to
the Complex to the extent Landlord is reimbursed by insurance
proceeds or by third parties (including third party tenants);
(4) Depreciation on the Premises, amortization and
interest (on loans Landlord may have against the Premises),
except on equipment, materials, tools, supplies and vendor-type
equipment purchased by any party to enable that party to supply
services that party might otherwise contract for with a third
party where such depreciation, amortization and interest payments
would otherwise have been included in the charge for such third
party's services, all as determined in accordance with generally
accepted accounting principles;
(5) Subject to Landlord's rights under Paragraph 21,
advertising and promotional expenditures, and costs of signs in
or on the Complex identifying other third party tenants, unless
such expenditure is related to damage caused by Tenant or a
default by Tenant;
(6) Except as otherwise provided in this Lease,
marketing costs, including leasing commissions, attorneys' fees,
space planning costs, and other costs and expenses incurred in
connection with lease negotiations;
(7) Except as otherwise provided in this Lease, costs,
including permit, license and inspection costs, incurred with
respect to the installation of tenant improvements made for other
third party tenants or incurred in renovating or otherwise
improving, decorating, painting or redecorating vacant space for
other third party tenants;
(8) Costs incurred due to the violation by Landlord or
other third party tenants of the terms and conditions of any
lease of space in the Complex which lease is not related to this
Building and which costs incurred are not related to Tenant
hereunder.
The Additional Rent due hereunder shall be paid to Landlord
or Landlord's agent (i) within ten (10) days for Taxes and
Property Insurance (to the extent such Taxes or Property
Insurance shall be payable to the applicable taxing authority
within thirty (30) days after the date of presentation of such
invoice) and within thirty (30) days for all other Additional
Rent items, after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii)
at the option of Landlord (except with respect to Taxes and
Property Insurance), Tenant shall pay to Landlord monthly, in
advance, Tenant's pro rata share of an amount estimated by
Landlord to be Landlord's approximate average monthly expenditure
for such Additional Rent items, which estimated amount shall be
reconciled within one hundred twenty (120) days after the end of
each calendar year, or more frequently if Landlord elects to do
so at Landlord's sole and absolute discretion, as compared to
Landlord's actual expenditure for said Additional Rent items,
with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount,
or Landlord refunding to Tenant (provided Tenant is not in
default in the performance of any of the terms, covenants and
conditions of this Lease) any amount of estimated payments made
by Tenant in excess of Landlord's actual expenditures for said
Additional Rent items. Within sixty (60) days after receipt of
Landlord's written reconciliation together with supporting
documentation, Tenant shall have the right, at Tenant's sole
expense, to commence a review and/or audit, at a mutually
convenient time at Landlord's office, of Landlord's records
relating to the foregoing expenses. Any audit must be conducted
by Tenant or an independent nationally recognized accounting firm
that is not being compensated by Tenant or other third party on a
contingency fee basis. If an audit (not a review) reveals that
Landlord has overcharged Tenant, the amount overcharged shall be
credited to Tenant's account within sixty (60) days after the
audit is concluded.
The respective obligations of Landlord and Tenant under this
Paragraph 4 shall survive the expiration or other termination of
the Lease Term, and if the Lease Term shall expire or shall
otherwise terminate on a day other than the last day of a
calendar year, the actual Additional Rent incurred for the
calendar year in which the Lease Term expires or otherwise
terminates shall be determined and settled on the basis of the
statement of actual Additional Rent for such calendar year and
shall be prorated in the proportion which the number of days in
such calendar year preceding such expiration or termination bears
to 365.
F. Place of Payment of Basic Rent, Management Fee and
Additional Rent. All Rent hereunder and all payments hereunder
for Additional Rent which are to be paid to Landlord shall be
paid to Landlord at a Bank of America Lock Box address to be
designated by written notice from Landlord to Tenant prior to the
Lease Commencement Date (and which address shall be confirmed in
the Lease Commencement Letter) or to such other person or to such
other place as Landlord may from time to time designate in
writing.
G. Security Deposit. Subject to the provisions herein, as
long as ALZA or an ALZA Affiliate is the Tenant under this Lease,
Tenant shall not be required to deposit with Landlord a security
deposit ("Security Deposit") under this Lease; however, Landlord
shall require a Security Deposit in an amount equal to two times
the last month's Basic Rent in this Lease in the event this Lease
is assigned to an Unaffiliated Assignee and ALZA is released from
liability for said Lease, in which case, said sum shall be held
by Landlord as a Security Deposit for the faithful performance by
Tenant of all of the terms, covenants, and conditions of this
Lease to be kept and performed by Tenant during the Lease Term.
If Tenant defaults with respect to any provision of this Lease
and such default is not cured within any applicable cure period,
including, but not limited to, the provisions relating to the
payment of Rent or any other monetary sums due hereunder,
Landlord may (but shall not be required to) use, apply or retain
all or any part of this Security Deposit for the payment of such
amount in default, or any other amount which Landlord may spend
by reason of Tenant's default or to compensate Landlord for any
other loss or damage which Landlord may suffer by reason of
Tenant's default. If any portion of the Security Deposit is so
used or applied, Tenant shall, within ten (10) days after written
demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original
amount. Tenant's failure to do so shall be a material breach of
this Lease. Landlord shall not be required to keep this Security
Deposit separate from its general funds, and Tenant shall not be
entitled to interest on such Deposit. If Tenant fully and
faithfully performs every provision of this Lease to be performed
by it, the Security Deposit or any balance thereof shall be
returned to the last party recognized by Landlord as Tenant
hereunder (or at Landlord's option, to the last assignee of
Tenant's interest hereunder) at the expiration of the Lease Term
and after Tenant has vacated the Premises. In the event of
termination of Landlord's interest in this Lease, Landlord shall
transfer the Security Deposit to Landlord's successor in interest
whereupon Tenant agrees to release Landlord from liability for
the return of such Deposit or the accounting therefor.
Notwithstanding the above, Tenant shall have the right, at
Tenant's sole election, to substitute for one-half of the cash
Security Deposit to be held by Landlord, an irrevocable letter of
credit, drawn upon an institutional lender reasonably acceptable
and accessible to Landlord in form and content reasonably
satisfactory to Landlord and for a term equal to at least one
year (with the letter of credit required to be renewed or
replaced by Tenant so as to be available to be drawn on at any
time during the Lease Term plus a period of sixty (60) days).
Said financial institution must agree that the presentment for
demand may be made in at least one of the following locations:
San Jose, Santa Clara, San Francisco or Palo Alto, California.
Such irrevocable letter of credit shall be renewed by the issuer
(or replaced with a similarly qualifying letter of credit
reasonably acceptable to Landlord) at least twenty (20) days
prior to the expiration date thereof from time to time during the
Lease Term, and shall be held by Landlord as security for the
faithful performance by Tenant of all the terms, covenants and
conditions of this Lease to be kept and performed by Tenant. If,
for any reason, Tenant fails to cause the irrevocable letter of
credit to be so renewed or replaced at least twenty (20) days
prior to its expiration date, Landlord shall have the right to
immediately draw upon the letter of credit in full and hold the
proceeds thereof as a cash Security Deposit hereunder. If Tenant
has theretofore funded the Security Deposit entirely in cash, one
half of the cash Security Deposit held by Landlord shall be
refunded to Tenant upon Landlord's receipt of an acceptable
irrevocable letter of credit. If Tenant defaults with respect
to any provisions of this Lease and such default is not cured
within any applicable cure period, including but not limited to
provisions relating to the payment of Rent, Landlord may (but
shall not be required to) draw down on the irrevocable letter of
credit for payment of any sum which Landlord may spend or become
obligated to spend by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may
suffer by reason of Tenant's default. Landlord and Tenant
acknowledge that such irrevocable letter of credit will be
treated as if it were a cash Security Deposit, and such
irrevocable letter of credit may be drawn down upon by Landlord
in the amount then due to Landlord upon demand and presentation
of evidence of the identity of Landlord to the issuing bank, in
the event that Tenant defaults with respect to any provision of
this Lease and such default is not cured within any applicable
cure period. Landlord acknowledges that it is not entitled to
and shall not draw down such irrevocable letter of credit unless
Landlord would have been entitled to draw upon a cash Security
Deposit pursuant to the terms of this Paragraph 4G. Concurrently
with the delivery of the required information to the issuing
bank, Landlord shall deliver to Tenant written evidence of the
default upon which the draw down was based, together with
evidence that Landlord has provided to Tenant the written notice
of such default which was required under the applicable provision
of the Lease, and evidence of the failure of Tenant to cure such
default within the applicable grace period following receipt of
such notice of default. If any portion of the irrevocable letter
of credit is used or applied pursuant hereto, Tenant shall,
within ten (10) days after receipt of a written demand therefor
from Landlord, restore and replace the value of such security by
either (i) depositing cash with Landlord in the amount equal to
the sum drawn down under the irrevocable letter of credit, or
(ii) increasing the irrevocable letter of credit to its value
immediately prior to such application. Tenant's failure to
replace the value of the security as provided in the preceding
sentence shall be a material breach of its obligation under this
Lease. The letter of credit shall further provide to the effect:
(i) that it shall automatically renew for additional periods of
one (1) year each from the expiry date or future expiry date,
unless at least twenty (20) days prior to any expiry date the
issuer notifies Landlord by registered mail of the issuer's
election not to renew the letter of credit and (ii) if the issuer
is unable or unwilling to so renew the letter of credit, the
issuer shall deem such to automatically constitute a draw request
from Landlord upon the letter of credit without further demand,
and with the issuer on or before the expiration of such letter of
credit to deposit for Landlord's account an amount equal to the
amount remaining committed but undrawn under the letter of credit
(unless issuer has sought and obtained from Landlord prior
thereto a written acknowledgment by Landlord of the termination
of the requirement of this Lease for such letter of credit to be
so renewed, in which event issuer shall not be required to make
such a deposit for Landlord's account).
5. RULES AND REGULATIONS AND COMMON AREA. At any time during
the Lease Term that ALZA (and/or any ALZA Affiliates) or an
Unaffiliated Assignee is the tenant under all Three Leases,
Tenant shall have the exclusive right to use all of the Common
Area without any right of Landlord to adopt any rules or
regulations relating to the Common Area. The remainder of this
Paragraph shall only apply to the leasing of the Premises if at
any time during the Lease Term ALZA (and/or any ALZA Affiliates)
or an Unaffiliated Assignee is not the tenant under all Three
Leases. Subject to the terms and conditions of this Lease and
such rules and regulations ("Rules and Regulations") as Landlord
may from time to time prescribe, Tenant and Tenant's employees,
invitees and customers shall, in common with other occupants of
the Complex in which the Premises are located, and their
respective employees, invitees and customers, and others entitled
to the use thereof, have the non-exclusive right to use the
access roads, parking areas, and facilities provided and
designated by Landlord for the general use and convenience of the
occupants of the Complex in which the Premises are located, which
areas and facilities are referred to herein as "Common Area".
This right shall terminate upon the termination of this Lease.
Landlord reserves the right from time to time to make reasonable
changes in the shape, size, location, amount and extent of Common
Area. Landlord further reserves the right to promulgate such
reasonable Rules and Regulations relating to the use of the
Common Area, and any part or parts thereof, as Landlord may deem
appropriate for the best interests of the occupants of the
Complex. The Rules and Regulations shall be binding upon Tenant
upon delivery of a copy of them to Tenant, and Tenant shall abide
by them and cooperate in their observance. Such Rules and
Regulations may be reasonably amended by Landlord from time to
time, with ten (10) days advance notice, and all amendments shall
be effective ten days after delivery of a copy to Tenant.
Landlord shall not be responsible to Tenant for the non-
performance by any other tenant or occupant of the Complex of any
of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area
in conformity with a good standard of maintenance and repair, or
replacement, and in good and sanitary condition.
6. PARKING: If at any time during the Lease Term ALZA (and/or
any ALZA Affiliates) or an Unaffiliated Assignee is not the
tenant under all Three Leases, this Paragraph shall apply. Once
the ratio of the square footage size of the Building leased
hereunder is determined in relation to the aggregate square
footage of all Three Buildings, a specific number of non-
exclusive parking spaces shall be assigned to Tenant equating to
such ratio multiplied by all of the parking spaces in the
Complex. Tenant shall have the right to use with the other
tenants or other occupants of the Complex parking spaces so
assigned in the common parking area of the Complex. Tenant
agrees that Tenant, Tenant's employees, agents, representatives,
and/or invitees shall not use parking spaces in excess of said
assigned parking spaces allocated to Tenant hereunder. Landlord
shall have the right, at Landlord's reasonable discretion, to
specifically designate the location of Tenant's parking spaces
within the common parking area of the Complex in the event of a
dispute among the tenants occupying the Building and/or Complex
referred to herein, in which event Tenant agrees that Tenant,
Tenant's employees, agents, representatives and/or invitees shall
not use any parking spaces other than those parking spaces
specifically designated by Landlord for Tenant's use. Said
parking spaces, if specifically designated by Landlord to Tenant,
may be relocated by Landlord at any time, and from time to time.
Landlord reserves the right, at Landlord's reasonable discretion,
to rescind any specific designation of parking spaces, thereby
returning Tenant's parking spaces to the common parking area.
Landlord shall give Tenant written notice of any change in
Tenant's parking spaces. Tenant shall not, at any time, park, or
permit to be parked, any trucks or vehicles adjacent to the
loading area so as to interfere in any way with the use of such
areas, nor shall Tenant, at any time, park or permit the parking
of Tenant's trucks and other vehicles or the trucks and vehicles
of Tenant's suppliers or others, in any portion of the common
areas not designated by Landlord for such use by Tenant. Tenant
shall not park nor permit to be parked, any inoperative vehicles
or equipment on any portion of the common parking area or other
common areas of the building. Tenant agrees to assume
responsibility for compliance by its employees with the parking
provision contained herein. If Tenant or its employees park in
other than designated parking areas, then Landlord may charge
Tenant, as an additional charge, and Tenant agrees to pay Ten
Dollars ($10.00) per day for each day or partial day each such
vehicle is parking in any area other than that designated.
Tenant hereby authorizes Landlord, at Tenant's sole expense, to
tow away from the Complex any vehicle belonging to Tenant or
Tenant's employees parked in violation of these provisions, or to
attach violation stickers or notices to such vehicles. Tenant
shall use the parking area for vehicle parking only and shall not
use the parking areas for storage. During the time ALZA (and/or
any ALZA Affiliates) or an Unaffiliated Assignee is the tenant
under all Three Leases, the tenant under all Three Leases shall
have the right to park in any area designated for parking in the
Common Area and the above terms and conditions shall not apply.
7. ACCEPTANCE AND SURRENDER OF PREMISES. Upon the Lease
Commencement Date, Tenant, as to Landlord (but not necessarily as
to any architect or contractor), accepts the Building and
improvements included in the Premises and the Common Area(s) as
being in good and sanitary order, condition and repair to the
extent of the then status as to construction and accepts the
Building and improvements included in the Premises in their then
present condition and without representation or warranty by
Landlord as to the condition of the Building or as to the use or
occupancy which may be made thereof. Any exceptions to the
foregoing must be by written agreement executed by Landlord and
Tenant. Landlord and Tenant shall cause an appropriate
description of the Interior Improvements as originally installed
by Tenant, once completed, to be attached as Exhibit B to this
Lease. If Tenant desires to make or has made any material
alterations to the initial design of the Interior Improvements
which Tenant would wish not to be required, pursuant to the
provisions of this Paragraph, to remove upon surrender of the
Premises to Landlord, Tenant may request Landlord's approval to
the modification of Exhibit B to reflect such alterations, with
Landlord to have the right in its reasonable discretion to grant
or withhold such approval. Tenant agrees on the last day of the
Lease Term, or on the sooner termination of this Lease, to
surrender the Premises promptly and peaceably to Landlord in good
condition and repair (damage by Acts of God, fire or other causes
for which Tenant is not obligated to repair pursuant to Paragraph
25 ("Destruction"), and normal wear and tear excepted), with all
interior walls painted, or cleaned, and repaired or replaced, if
damaged; all floors cleaned and waxed; all carpets cleaned and
shampooed; all broken, marred or nonconforming acoustical ceiling
tiles replaced; all interior and exterior windows washed; the air
conditioning and heating systems serviced by a reputable and
licensed service firm or by Tenant's in-house maintenance staff
(if approved by Landlord) and in good operating condition and
repair; the plumbing and electrical systems and lighting in good
order and repair, including replacement of any burned out or
broken light bulbs or ballasts; the roof membrane inspected and
any required repairs or replacements completed by a licensed roof
contractor and in good condition and repair; and to the extent
reasonably allocable on an exclusive basis to the Premises: the
lawn and shrubs in good condition including the replacement of
any dead or damaged plantings; the sidewalk, driveways and
parking areas in good order, condition and repair, including the
sealing and striping of the parking lot and asphalt areas (and to
the extent not so allocated on an exclusive basis to the Premises
to instead be the subject of Tenant's obligations under either
Paragraph 9C (Common Area Maintenance) or Paragraph 10 (Expenses
of Operation, Management, and Maintenance of the Common Areas of
the Complex), as applicable); together with all alterations,
additions, and improvements which may have been made, in, to, or
on the Premises (except moveable trade fixtures installed at the
expense of Tenant and such other items that Tenant, under this
Lease, is allowed to remove, if any) except that Tenant shall
ascertain from Landlord within thirty (30) days before the end of
the Lease Term, as to any portion of the Premises which does not
conform to the configuration reflected on Exhibit B, whether
Landlord desires to have such portion of the Premises or any part
or parts thereof restored to their configuration as then
reflected on Exhibit B, and if Landlord shall so desire, then
Tenant shall restore said portion of the Premises or such part or
parts thereof before the end of this Lease at Tenant's sole cost
and expense to the configuration as reflected on Exhibit B.
Notwithstanding the above, Tenant, in lieu of reconfiguring the
Premises to the configuration shown on Exhibit B, may instead
modify any non-conforming areas of such portion of the Premises
to provide an Open Office Area, as defined below. Tenant, on or
before the end of the Lease Term or sooner termination of this
Lease, shall remove all of Tenant's personal property and trade
fixtures from the Premises, and all property not so removed on or
before the end of the Lease Term or sooner termination of this
Lease shall be deemed abandoned by Tenant and title to same shall
thereupon pass to Landlord without compensation to Tenant.
Landlord, may, upon termination of this Lease, remove all
moveable furniture and equipment so abandoned by Tenant, at
Tenant's sole cost, and repair any damage caused by such removal
at Tenant's sole cost. If the Premises be not surrendered at the
end of the Lease Term or sooner termination of this Lease, Tenant
shall indemnify Landlord against loss or liability resulting from
the delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding Tenant
founded on such delay. Nothing contained herein shall be
construed as an extension of the Lease Term or as a consent of
Landlord to any holding over by Tenant. The voluntary or other
surrender of this Lease or the Premises by Tenant or a mutual
cancellation of this Lease shall not work as a merger and, at the
option of Landlord, shall either terminate all or any existing
subleases or subtenancies or operate as an assignment to Landlord
of all or any such subleases or subtenancies.
Notwithstanding the above, in the event Tenant installs any
permanently attached lab fixtures and equipment in the Building
or on the roof of the Building, including any electrical,
plumbing, ventilation or air conditioning equipment associated
with supporting the specific requirements of any other lab
equipment (collectively "Lab Equipment"), (i) Landlord shall have
the right to require Tenant to remove any or all Lab Equipment
prior to the end of the Lease Term and (ii) provided ALZA or an
ALZA Affiliate is the Tenant at the time of intended removal at
or near the end of the Lease Term, Tenant shall have the right to
elect to remove any or all Lab Equipment (despite its having been
permanently attached to the Premises), prior to the termination
date of this Lease. Lab Equipment as used herein shall not
include any supplemental HVAC equipment which is installed to
provide general supplemental air-conditioning or ventilation to
any occupied space in the Building. Subject to the terms of this
Paragraph 7, Tenant, in removing any such Lab Equipment, shall be
responsible and liable for (i) complying with all permit and
other governmental regulations related to the installation and/or
removal of the Lab Equipment, and (ii) immediately restoring any
and all damage to the Premises resulting from the installation
and/or removal of the Lab Equipment. In the event Tenant elects
or is required by Landlord to remove any of the Lab Equipment
prior to the termination date of this Lease, Tenant shall be
responsible and liable for (i) removing all lab related equipment
and cabinets in the former lab location where such Lab Equipment
is to be removed and (ii) creating an "Open Office Area" in such
former lab location as provided in the following sentence. If
Tenant is obligated to create an "Open Office Area" as provided
above, then Tenant shall, at Landlord's election made prior to
the termination date of this Lease, either (i) cause the
following items to be installed by Tenant at Tenant's sole cost
or (ii) be obligated to reimburse Landlord for any subsequent
cost reasonably incurred by Landlord after expiration of the
Lease in installing any of the following items in conjunction
with Landlord's preparing such portion of the Premises for the
immediately succeeding tenant, with such items being the
following: (a) a dropped ceiling using the same type of ceiling
tiles used throughout the Building in the office areas, (b)
Landlord's standard grade carpet and base board (as used in the
carpeted areas of the Premises), and (c) such re-configuration of
the electrical and HVAC systems and controls and lighting and may
be reasonably required to make it appropriate for open office
use.
8. ALTERATIONS AND ADDITIONS. After the completion of
construction of the Shell Improvements and Interior Improvements
in accordance with the provisions of the Construction Agreement,
Tenant shall not make, or suffer to be made, any alteration or
addition to the Premises, or any part thereof, without the
written consent of Landlord first had and obtained by Tenant
(such consent not to be unreasonably withheld), but at the cost
of Tenant, and (except as otherwise consented to in writing by
Landlord) any addition to, or alteration of, the Premises, except
moveable furniture, trade fixtures and any Lab Equipment which
Tenant is entitled to remove pursuant to Paragraph 7 above,
shall, upon Lease termination, become a part of the Premises and
belong to Landlord. Landlord reserves the right to approve all
contractors and mechanics proposed by Tenant to make such
alterations and additions, which approval shall not be
unreasonably withheld. Tenant shall retain title to all moveable
furniture and trade fixtures placed in the Premises. All office
heating, lighting, electrical, air conditioning, floor to ceiling
partitioning, drapery, carpeting, and floor installations made by
Tenant (but excluding any Lab Equipment installed by ALZA or any
ALZA Affiliate), together with all property that has become an
integral part of the Premises, shall not be deemed trade
fixtures. Tenant agrees that it will not proceed to make any
such alteration or addition, without having obtained consent from
Landlord to do so, and until five (5) days from the receipt of
such consent, in order that Landlord may post appropriate notices
to avoid any liability to contractors or material suppliers for
payment for Tenant's alteration or addition. Tenant will at all
times permit such notices to be posted and to remain posted until
the completion of work. Tenant shall, if required by Landlord,
secure at Tenant's own cost and expense, a completion and lien
indemnity bond, satisfactory to Landlord, for such work. Tenant
further covenants and agrees that any mechanic's lien filed
against the Premises or the Complex for work claimed to have been
done for, or materials claimed to have been furnished to Tenant,
will be discharged by Tenant, by bond or otherwise, within ten
(10) days after notice to Tenant of filing thereof, at the cost
and expense of Tenant. Any exceptions to the foregoing must be
made in writing and executed by both Landlord and Tenant.
Notwithstanding the above and provided ALZA or an ALZA
Affiliate is then the Tenant under this Lease, it is agreed that
Tenant may make alterations or additions to the non-structural
portions of the Building without obtaining the prior consent of
Landlord or providing any other notices to Landlord or securing
any bonds as otherwise provided above, provided Tenant (i) gives
Landlord a minimum of five (5) business days written notice of
its intent to make any material modifications to the Building;
(ii) designs any alterations or additions to comply with
Landlord's interior build out specifications as shown on Exhibit
C attached hereto; and (iii) as to any material alteration,
provides to Landlord, upon completion of said construction, a
1/8 inch scale sepia "as built" plan reflecting said alterations
and/or additions. All other terms and conditions of this
Paragraph 8 shall apply.
9. TENANT MAINTENANCE.
A. Tenant's Responsibilities: Subject to Paragraph 25
("Destruction"), Tenant shall, at its sole cost and expense, keep
and maintain the interior and exterior of the Building (including
structural portions and appurtenances thereto) and every part
thereof in a good standard of maintenance and repair, or
replacement, and in good and sanitary condition (collectively
"Tenant's Responsibilities"). Tenant's Responsibilities include,
but are not limited to, janitorization, all windows (interior and
exterior), window frames, plate glass and glazing (destroyed by
accident or act of third parties), truck doors, plumbing systems
(such as water and drain lines, sinks, toilets, faucets, drains,
showers and water fountains), electrical systems (such as panels,
conduits, outlets, lighting fixtures, lamps, bulbs, tubes and
ballasts), heating and air conditioning systems (such as
compressors, fans, air handlers, ducts, mixing boxes,
thermostats, time clocks, boilers, heaters, supply and return
grills), structural elements and exterior surfaces of the
Building (including repainting), store fronts, roofs, downspouts,
all interior improvements within the Building including but not
limited to wall coverings, window coverings, carpet, floor
coverings, partitioning, ceilings, doors (both interior and
exterior), including closing mechanisms, latches, locks,
skylights (if any), automatic fire extinguishing systems, and
elevators and all other interior improvements of any nature
whatsoever, and all exterior improvements to the Building. Areas
of excessive wear shall be replaced at Tenant's sole expense upon
Lease termination. Tenant hereby waives all rights under, and
benefits of, Subsection 1 of Section 1932 and Section 1941 and
1942 of the California Civil Code and under any similar law,
statute or ordinance now or hereafter in effect. In the event
any of the above Tenant's Responsibilities apply to any other
third party tenant(s) of Landlord where there is common usage
with other third party tenant(s), such maintenance
responsibilities shall be undertaken by Landlord and the related
charges shall be allocated to the Premises by square footage or
other equitable basis as reasonably calculated and determined by
Landlord.
B. Interior Common Area Maintenance. If at any time the
Lease has been amended so that Tenant is leasing less than the
entire Building (which amendment Landlord is under no obligation
to agree to or make) and said Building becomes a multi-tenant
building and said multi-tenants are third party tenants, then
Landlord shall maintain the interior portions of the Building
that are considered by Landlord to be common areas to two or more
tenants in the same manner that Tenant would have been obligated
to maintain them under the provisions of Paragraph 9A hereof (had
Tenant continued to lease the entire Building). All costs and
expenses incurred by Landlord in so maintaining said common areas
of the Building shall be allocated among Tenant and each space
that is either unleased or is leased to other third party tenants
in the Building based upon the square footage of the respective
tenants' premises or such other equitable manner as Landlord
reasonably determines.
C. Common Area Maintenance: At all times during the Lease
Term that ALZA (and/or any ALZA Affiliates) or an Unaffiliated
Assignee is the tenant under all Three Leases, the provisions of
this Paragraph 9C shall apply. Tenant shall, at its sole cost
and expense, keep, maintain, repair and replace as required, the
Common Area of the Complex (including appurtenances) and every
part thereof in a good standard of maintenance, repair and
replacement as required, and in good and sanitary condition.
Tenant's maintenance, repair and replacement responsibilities
herein referred to include, but are not limited to,
janitorization, landscaping, sidewalks, driveways, underground
and above ground parking areas, including striping and sealing,
irrigation sprinkler systems, parking lot and exterior Building
lighting, ponds, fountains, waterways, drains, lawns, shrubbery
and other planted areas, plumbing and utility systems within the
Common Area, and electrical systems within the Common Area. If
all Three Leases are terminating substantially simultaneously,
the surrender obligations of Tenant under Paragraph 7 of this
Lease shall extend to the surrender of all of the Common Area of
the Complex.
10. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE
COMMON AREAS OF THE COMPLEX. At all times during the Lease Term
that ALZA (and/or any ALZA Affiliates) or an Unaffiliated
Assignee is not the tenant under all Three Leases, this Paragraph
shall apply. As Additional Rent and in accordance with the
requirements and limitations of Paragraphs 4E of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share
(calculated on a square footage or other equitable basis as
reasonably determined by Landlord) of all expenses of operation,
maintenance and repair of the Common Area of the Complex
including, but not limited to, license, permit, and inspection
fees; security; utility charges associated with exterior
landscaping and lighting (including water and sewer charges); all
charges incurred in the maintenance and replacement of landscaped
areas, lakes, parking lots, sidewalks, driveways, maintenance,
repair and replacement of all fixtures and electrical, mechanical
and plumbing systems; structural elements and exterior surfaces
of the Building and any improvements (but excluding any
structural elements or exterior surfaces of the Building to the
extent the maintenance thereof is the obligation of Tenant under
this Lease); salaries and employee benefits of personnel and
payroll taxes applicable thereto; supplies, materials, equipment
and tools; the cost of capital expenditures which have the effect
of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may
amortize its investment in said improvements (together with
interest at the rate of Bank of America's Prime Rate (or
equivalent rate) plus five percent (5%) per annum on the
unamortized balance) as an operating expense in accordance with
standard accounting practices, provided, that such amortization
is not at a rate greater than the anticipated savings in the
operating expenses.
"Additional Rent" as used herein shall not include
Landlord's debt repayments; interest on charges, expenses
directly or indirectly incurred by Landlord for the benefit of
any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants;
depreciation; interest; or executive salaries.
11. UTILITIES
A. This Paragraph is applicable so long as this Lease
pertains to the entire Building. Tenant shall pay promptly, as
the same become due, all charges for water, gas, electricity,
telephone, telex and other electronic communication service,
sewer service, waste pick-up and any other utilities, materials
or services furnished directly to or used by Tenant on or about
the Building and/or the Premises (including the Common Area
allocated to Tenant) during the Lease Term, including, without
limitation, any temporary or permanent utility surcharge or other
exactions whether now or hereafter imposed. In the event the
above charges apply to any other third party tenants of Landlord
where there is common usage with such other third party tenants,
such charges shall be allocated to the Building or Premises by
square footage or other equitable basis as reasonably calculated
and determined by Landlord.
Landlord shall not be liable for and Tenant shall not be
entitled to any abatement or reduction of Rent by reason of any
interruption or failure of utility services to the Premises when
such interruption or failure is caused by accident, breakage,
repair, strikes, lockouts, or other labor disturbances or labor
disputes of any nature, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord.
B. This Paragraph 11B is applicable only if and at such
time as the Lease is amended not to include the entire Building
(which amendment Landlord is under no obligation to agree to or
make). As Additional Rent and in accordance with Paragraph 4E of
this Lease, Tenant shall pay its proportionate share (calculated
on a square footage or other equitable basis as reasonably
determined by Landlord) of the cost of all utility charges such
as water, gas, electricity, telephone, telex and other electronic
communications service, if applicable, sewer service, waste pick-
up and any other utilities, materials or services furnished
directly to the Building in which the Premises are located,
including, without limitation, any temporary or permanent utility
surcharge or other exactions whether now or hereafter imposed.
Landlord shall not be liable for and Tenant shall not be
entitled to any abatement or reduction of Rent by reason of any
interruption or failure of utility services to the Premises when
such interruption or failure is caused by accident, breakage,
repair, strikes, lockouts, or other labor disturbances or labor
disputes of any nature, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord.
Landlord shall be responsible for causing to be furnished to
the Premises and subject to the Rules and Regulations of the
Common Area hereinbefore referred to, (i) water, gas and
electricity suitable for the permitted use of the Premises and
(ii) between the hours of 8:00 am and 6:00 p.m., Mondays through
Fridays (holidays excepted) heat and air-conditioning required
for the comfortable use and occupation of the Premises for the
uses permitted under this Lease. Tenant agrees that at all times
it will cooperate fully with Landlord and abide by all reasonable
regulations and requirements that Landlord may prescribe for the
proper functioning and protection of the Building heating,
ventilating and air-conditioning systems. Whenever heat
generating machines, equipment, or any other devices (including
exhaust fans) are used in the Premises by Tenant which affect the
temperature maintained by the air-conditioning system beyond the
reasonable handling capacity of the existing system, Landlord
shall have the right to install or require Tenant to install
supplementary air-conditioning units in the Premises and the cost
of installation, operation and maintenance thereof, shall be paid
by Tenant to Landlord upon demand by Landlord. If Tenant uses
any apparatus or device in the Premises (including, without
limitation, electronic data processing machines or machines using
current in excess of 110 Volts) which increase the amount of
electricity, gas, water or air-conditioning consumed in the
Premises on an average per square foot basis above that which
would be furnished or supplied to any other portion of the
Building on an average per square foot basis for general office
use, Landlord shall be entitled to reasonably allocate to Tenant
the cost of any utilities supplied by Landlord to the Building
which are disproportionately consumed by Tenant provided that
Landlord shall correspondingly reasonably allocate any similar
disproportionate consumption by any other tenant(s) in the
Building to such other tenant(s). If Tenant shall require water,
gas, or electric current in excess of that usually furnished or
supplied to any similar sized space in the Building, Landlord may
cause an electric current, gas or water meter to be installed in
the Premises in order to measure the amount of electric current,
gas or water consumed for any such excess use. The cost of any
such meter and of the installation, maintenance and repair
thereof, all charges for such excess water, gas and electric
current consumed (as shown by such meters and at the rates then
charged by the furnishing public utility); and any additional
expense incurred by Landlord in keeping account of electric
current, gas, or water so consumed shall be paid by Tenant, and
Tenant agrees to pay Landlord such amount within ten (10) days
after receipt of a reasonably detailed invoice for the same from
Landlord.
12. TAXES
A. Real Property Taxes. As Additional Rent and in
accordance with Paragraph 4E of this Lease, Tenant shall pay to
Landlord, or if Landlord so directs, directly to the applicable
tax collector ("Tax Collector"), all Real Property Taxes
relating to the Premises accruing with respect to the Premises
commencing on the Lease Commencement Date and throughout the
Lease Term, including any Extended Term. In the event the
Premises leased hereunder consist of only a portion of the entire
tax parcel, Tenant shall pay to Landlord as they become due,
pursuant to statements submitted to Tenant by Landlord, Tenant's
proportionate share of such Real Property Taxes allocated to the
Premises by square footage or other reasonable basis as
calculated and determined by Landlord. If the tax billing
pertains 100% to the Premises, and Landlord chooses to have
Tenant pay said Real Property Taxes directly to the Tax
Collector, then in such event it shall be the responsibility of
Tenant to obtain the bills and pay, prior to delinquency, the
applicable Real Property Taxes pertaining to the Premises, and
failure to receive a bill for taxes and/or assessments shall not
provide a basis for cancellation of or non-responsibility for
payment of penalties for nonpayment or late payment by Tenant.
The term "Real Property Taxes", as used herein, shall mean (i)
all taxes, assessments, levies and other charges of any kind or
nature whatsoever, general and special, foreseen and unforeseen
(including all installments of principal and interest required to
pay any general or special assessments for public improvements
and any increases resulting from reassessments caused by any
change in ownership of the Complex) now or hereafter imposed by
any governmental or quasi-governmental authority or special
district having the direct or indirect power to tax or levy
assessments, which are levied or assessed against, or with
respect to the value, occupancy or use of, all or any portion of
the Complex (as now constructed or as may at any time hereafter
be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Complex
(regardless of ownership); the fixtures, equipment and other
property of Landlord, real or personal, that are an integral part
of and located in the Complex; or parking areas, public
utilities, or energy within the Complex; (ii) all area wide
taxes, charges, levies or fees imposed by reason of environmental
regulation or other governmental control, including, but not
limited to, any taxes, charges, levies or fees related to on-site
originated Hazardous Materials contamination caused or
contributed to by Tenant's Hazardous Materials Activities; and
(iii) all costs and fees (including reasonable attorneys' fees)
incurred by Landlord in reasonably contesting any Real Property
Tax and in negotiating with public authorities as to any Real
Property Tax. If at any time during the Lease Term the taxation
or assessment of the Complex prevailing as of the Lease
Commencement Date shall be altered so that in lieu of or in
addition to any Real Property Tax described above there shall be
levied, assessed or imposed (whether by reason of a change in the
method of taxation or assessment, creation of a new tax or
charge, or any other cause) an alternate or additional tax or
charge (i) on the value, use or occupancy of the Complex or
Landlord's interest therein or (ii) on or measured by the gross
receipts, income or rentals from the Complex, on Landlord's
business of leasing the Complex, or computed in any manner with
respect to the operation of the Complex, then any such tax or
charge, however designated, shall be included within the meaning
of the term "Real Property Taxes" for purposes of this Lease. If
any Real Property Tax is based upon property or rents unrelated
to the Complex, then only that part of such Real Property Tax
that is fairly allocable to the Complex shall be included within
the meaning of the term "Real Property Taxes." Notwithstanding
the foregoing, the term "Real Property Taxes" shall not include
estate, inheritance, gift or franchise taxes of Landlord or the
federal or state net income tax imposed on Landlord's income from
all sources or penalties incurred as a result of Landlord's
negligence, inability or unwillingness to make payments of,
and/or to file any tax or informational returns with respect to
any Real Property Taxes when due.
Notwithstanding anything within this Paragraph 12, it is
agreed that if any special assessments for capital improvements
are assessed, and if Landlord has the option to either pay the
entire assessment in cash or go to bond, and if Landlord elects
to pay the entire assessment in cash in lieu of going to bond,
the entire portion of the assessment assigned to Tenant's
Premises will be prorated over the same period that the
assessment would have been prorated had the assessment gone to
bond. It is additionally agreed that Tenant shall have the
right, at Tenant's sole cost and expense, to contest with any
taxing authority or appellate body the imposition or amount of
any Real Property Tax, but any such contest shall not excuse
Tenant from any of its obligations hereunder as to paying any
such Real Property Tax when payable hereunder.
Notwithstanding anything to the contrary in this Lease, in
the event prior to the Lease Commencement Date there is an
interim or supplemental reassessment of the Premises based upon
the added value of the Shell Improvements or Interior
Improvements leased hereunder, then Tenant shall pay no later
than five days prior to its delinquency date, any and all such
interim or supplemental taxes (but no penalties or interest in
connection therewith provided Tenant has prior thereto paid the
applicable Real Property Taxes when required by the terms of this
Lease) that have been levied against the Premises and are
attributable to the added value of the Shell Improvements and
Interior Improvements (as defined in the Construction Agreement)
during the period prior to said Lease Commencement Date.
B. Taxes on Tenant's Property.
(a) Tenant shall be liable for and shall pay five
business days before delinquency, taxes levied against any
personal property or trade fixtures placed by Tenant in or about
the Premises. If any such taxes on Tenant's personal property or
trade fixtures are levied against Landlord or Landlord's property
or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property
or trade fixtures of Tenant and if Landlord, after written notice
to Tenant, pays the taxes based on such increased assessment,
which Landlord shall have the right to do regardless of the
validity thereof, but only under proper protest if requested by
Tenant, Tenant shall within ten (10) business days after demand,
as the case may be, repay to Landlord the taxes so levied against
Landlord, or the portion of such taxes resulting from such
increase in the assessment; provided that in any such event
Tenant shall have the right, in the name of Landlord and with
Landlord's full cooperation, but at no cost or responsibility or
liability of any type whatsoever to Landlord, to bring suit in
any court of competent jurisdiction to recover the amount of such
taxes on Tenant's personal property and trade fixtures so paid
under protest, and any net amount so recovered shall belong to
Tenant.
(b) If the Tenant improvements in the Premises,
whether installed, and/or paid for by Landlord or Tenant and
whether or not affixed to the Building so as to become a part
thereof, are assessed for Real Property Tax purposes at a
valuation higher than the valuation at which standard office
improvements in other space in the Complex are assessed, then the
Real Property Taxes levied against Landlord or the Complex by
reason of such excess assessed valuation shall be deemed to be
taxes levied against personal property of Tenant and shall be
governed by the provisions of Paragraph 12B(a) above. If the
records of the County Assessor are available and sufficiently
detailed to serve as a basis for determining whether said Tenant
improvements are assessed at a higher valuation that standard
office improvements in other space in the Complex, such records
shall be binding on both the Landlord and the Tenant. If the
records of the County Assessor are not available or sufficiently
detailed to serve as a basis for making said determination, the
actual cost of construction shall be used. Landlord agrees to
exercise good faith efforts to apply such standards on an
equivalent basis to any other tenants of the Complex whose tenant
improvements may be assessed for Real Property Tax purposes at a
valuation higher than the valuation at which standard office
improvements in other space in the Complex are assessed. As long
as ALZA or any ALZA Affiliate is the Tenant hereunder, Landlord
agrees to consult with Tenant in advance of any contemplated
change in ownership of the Premises or the Complex so as to have
the benefit of Tenant's recommendations, if any, as to any
possible way to avoid any reassessment of the Premises or the
Complex, but regardless of any such consultation Landlord shall
have no obligation to Tenant to follow, or any liability to
Tenant for failing to follow, any recommendations of Tenant.
13. LIABILITY INSURANCE. Tenant, at Tenant's expense, agrees to
keep in force during the Lease Term a policy of commercial
general liability insurance with combined single limit coverage
of not less than Five Million Dollars ($5,000,000) (which amount
may be obtained through primary or umbrella coverage or a
combination of both) per occurrence for bodily injury and
property damage occurring in, on or about the Premises or the
Complex, including parking and landscaped areas. Such insurance
shall be primary and noncontributory as respects any insurance
carried by Landlord, but may be provided under any blanket policy
maintained by Tenant. The policy or polices effecting such
insurance shall name Landlord as an additional insured, and shall
insure any liability of Landlord, contingent or otherwise, as
respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise arising out of any conduct or transactions
of any of said persons in or about or concerning the Premises,
including any failure of Tenant to observe or perform any of its
obligations hereunder; shall be issued by an insurance company
admitted to transact business in the State of California; and
shall provide that the insurance effected thereby shall not be
canceled, except upon thirty (30) days' prior written notice to
Landlord. A certificate of insurance as to said policy shall be
delivered to Landlord. If, during the Lease Term, in the
considered opinion of Landlord's Lender, insurance advisor, or
counsel, the amount of insurance described in this Paragraph 13
is not adequate, Tenant agrees to increase said coverage to such
reasonable amount as Landlord's Lender, insurance advisor, or
counsel shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S
COMPENSATION INSURANCE. Tenant shall maintain a policy or
policies of fire and property damage insurance in "all risk" form
with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and special equipment
installed and paid for by Tenant within the Premises for the full
replacement value thereof. The proceeds from any of such
policies shall be used for the repair or replacement of such
items so insured.
Tenant shall also maintain a policy or policies of workman's
compensation insurance and any other employee benefit insurance
sufficient to comply with all laws.
15. REAL PROPERTY INSURANCE. Landlord shall purchase and keep
in force, and as Additional Rent and in accordance with
provisions of Paragraph 4E of this Lease, Tenant shall pay to
Landlord (or Landlord's agent if so directed by Landlord),
Tenant's proportionate share (allocated to the Premises by square
footage or other equitable basis as calculated and determined by
Landlord) of the deductibles (as provided in such insurance
policies to the extent allocable to damage occurring to the
Premises or the Common Area and subject to the provisions of
Paragraph 25) on insurance claims and the annual cost of the
policy or policies of insurance covering loss or damage to the
Premises and Complex (excluding routine maintenance and repairs
and incidental damage or destruction caused by accidents or
vandalism for which Tenant is responsible under Paragraph 9) in
the amount of the full replacement value thereof, providing
protection against those perils included within the
classification of "all risks" insurance and flood and/or
earthquake insurance, if available, plus a policy of rental
income insurance in the amount of one hundred (100%) percent of
twelve (12) months' (i) Basic Rent and (ii) Additional Rent
(collectively "Insurance Cost"). Tenant understands that (i) the
annual Insurance Cost is subject to change each year (or more
frequently if new policies are added or existing policies are
replaced), and (ii) Tenant shall be responsible for paying its
proportionate share of said total Insurance Cost, including any
such increased rates relating thereto as a result of any Excess
Insurance Cost (as defined below) resulting from Tenant's
particular use of the Premises of Complex. If the Insurance Cost
increases due to Tenant's particular use and/or some other
tenant's particular use of the Premises or Complex ("Excess
Insurance Cost"), (i) Tenant shall be obligated to pay one
hundred percent (100%) of said Excess Insurance Cost related to
Tenant's particular use, (ii) Tenant shall not be obligated to
pay any portion of said Excess Insurance Cost related to some
other tenant's particular use, and (iii) Tenant shall be
obligated to pay its proportionate share of the total Insurance
Cost (excluding any Excess Insurance Cost to be paid by Tenant or
any other tenant(s) pursuant to clauses (i) or (ii) above.
Landlord agrees to exercise good faith efforts to apply such
standards on an equivalent basis to any other tenants of the
Complex whose use causes the total Insurance Cost to be
disproportionately increased. Except as otherwise expressly
provided in this Lease, Tenant shall have no interest in nor any
right to the proceeds of any insurance procured by Landlord for
the Premises. The insurance covering the Premises or the Complex
shall include the Interior Improvements (and any subsequent
alterations, additions or improvements thereto, but excluding any
Lab Equipment or any alterations, additions or improvements that
are particular to using any portion of the Premises as a lab as
distinguished from using it as an office) made to the Building
which are a part of the Building.
Landlord and Tenant do each hereby respectively release the
other, to the extent of insurance coverage of the releasing
party, from any liability for loss or damage caused by fire or
any of the extended coverage casualties included in the releasing
party's insurance policies, irrespective of the cause of such
fire or casualty; provided, however, that if the insurance policy
of either releasing party prohibits such waiver, then this waiver
shall not take effect until consent to such waiver is obtained.
If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof. For so long as ALZA or
any ALZA Affiliate is the Tenant, Landlord agrees to consult with
Tenant at the time of any insurance coverage renewal as to the
insurance coverage (including deductibles) to be carried by
Landlord with respect to the Premises and the Complex so as to
have the benefit of Tenant's recommendations, if any, as to any
possible way to reduce the cost of such insurance coverage, but
regardless of any such consultation Landlord shall have no
obligation to Tenant to follow, or any liability to Tenant for
failing to follow, any recommendations of Tenant.
16. INDEMNIFICATION. Landlord shall not be liable to Tenant and
Tenant hereby waives all claims against Landlord for any injury
to or death of any person or damage to or destruction of property
in or about the Premises by or from any cause whatsoever,
including, without limitation, gas, fire, oil electricity or
leakage of any character from the roof, walls, basement or other
portion of the Premises except to the extent that the same
results primarily from the willful misconduct or active
negligence of Landlord, its agents, servants, employees, invitees
or contractors of which negligence Landlord has knowledge and
reasonable time to correct. Except as to injury to persons or
damage to property to the extent arising from the willful
misconduct or the active negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold
Landlord harmless from and defend Landlord against any and all
expenses, including reasonable attorneys' fees, in connection
therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about
the Premises, or any part thereof, from any cause whatsoever,
occurring during the Lease Term.
17. COMPLIANCE. Tenant, at its sole cost and expense, shall
promptly comply with all laws, statutes, ordinances and
governmental rules, regulations or requirements now or hereafter
in effect relating to the Premises; with the requirements of any
board of fire underwriters or other similar body now or hereafter
constituted; and with any direction or occupancy certificate
issued pursuant to law by any public officer; provided, however,
that no such failure shall be deemed a breach of the provisions
of this Lease if Tenant, immediately upon notification, commences
to remedy or rectify said failure. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action
against Tenant, whether Landlord be a party thereto or not, that
Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or
provision, shall be conclusive of that fact as between Landlord
and Tenant. Tenant shall, at its sole cost and expense, comply
with any and all requirements pertaining to said Premises, of any
insurance organization or company, necessary for the maintenance
of reasonable fire and public liability insurance covering the
Premises.
18. LIENS. Tenant shall keep the Premises and the Complex free
from any liens arising out of any work performed, materials
furnished or obligations incurred by Tenant. In the event that
Tenant shall not, within ten (10) days following notice of the
imposition of any such lien, cause the same to be released of
record, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to
cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien.
All sums paid by Landlord for such purpose, and all expenses
incurred by it in connection therewith, shall be payable to
Landlord by Tenant on demand with interest at the Bank of America
Prime Rate (or equivalent thereof) of interest plus five percent
(5%) per annum, but in no event greater then the maximum rate of
interest permitted by applicable law. Notwithstanding anything
to the contrary in this Paragraph 18, Tenant shall have the right
to provide Landlord with a bond in the amount of the Lien in a
form satisfactory to Landlord and to contest the Lien, in which
event Landlord shall not be entitled to pay or discharge the
Lien, provided the Lien is removed within ninety (90) days from
the date the Lien is filed.
19. ASSIGNMENT AND SUBLETTING.
A. Subject only to the provisions of Paragraph D below,
provided that as of the effective date of any proposed assignment
or sublease as described below (i) ALZA or any ALZA Affiliate is
the Tenant under this Lease and (ii) Tenant is not then in
default under this Lease (i.e. Tenant has received notice of a
default under this Lease and the applicable cure period has
expired and Tenant has not then cured such default), Landlord
agrees to the following:
(a) Landlord waives any right hereunder (i) to consent
to any sublease of all or any portion of the Premises (but
Landlord shall have the right to approve any permitted use of the
Premises by any sublessee (other than an ALZA Affiliate) if such
use is beyond that permitted by any Unaffiliated Assignee
pursuant to Paragraph 1 hereof, and Tenant agrees to consult with
Landlord as to Tenant's subleasing activities and to allow
Landlord a ten (10) day period to review the principal terms of
any proposed sublease (other than a sublease to an ALZA
Affiliate) before Tenant enters into such sublease), (ii) to
consent to or to elect to terminate the Lease in the event of any
assignment to an Unaffiliated Assignee if ALZA or any ALZA
Affiliate is to remain liable under this Lease for the
performance by such Unaffiliated Assignee of the obligations of
Tenant under this Lease (but Landlord shall have the right to
approve or disapprove any permitted use of the Premises by any
Unaffiliated Assignee if such use is beyond that permitted by any
Unaffiliated Assignee pursuant to Paragraph 1 hereof and Tenant
agrees to consult with Landlord as to Tenant's assignment
activities and to allow Landlord a ten (10) day period to review
the principal terms of any proposed assignment before Tenant
enters into such assignment); and (iii) to consent to or to elect
to terminate the Lease in the event of any sublease or assignment
to any ALZA Affiliate or to share in any Excess Rent (as defined
below) related to any sublease or assignment to any ALZA
Affiliate. No assignment either to an ALZA Affiliate or to an
Unaffiliated Assignee shall result in the right of ALZA (or any
ALZA Affiliate which succeeds to ALZA's interest as Tenant
hereunder) to be released from any continuing liability for the
performance by such assignee of the obligations of Tenant under
this Lease, unless such assignee (whether an ALZA Affiliate or an
Unaffiliated Assignee) at the time of such assignment satisfies
the financial requirements of Paragraph C below and ALZA (or
such ALZA Affiliate) at the time of such assignment requests that
it be released from any such continuing liability in accordance
with the provisions of Paragraph C below.
(b) Landlord agrees that Tenant may deduct and retain
from any Excess Rent (including any Management Fee) received from
(1) any sublessee (which is not an ALZA Affiliate) or (2) any
Unaffiliated Assignee, the following: (i) if applicable, a third
party brokerage commission not to exceed $100,000 per
transaction, and (ii) with respect to (x) any sublease with a
sublessee which is not an ALZA Affiliate, and (y) any assignment
to an Unaffiliated Assignee if ALZA or any ALZA Affiliate is to
remain liable under this Lease for the performance by such
Unaffiliated Assignee of the obligations of Tenant under this
Lease, an amount equal to twelve percent (12%) per annum on the
portion of the initial improvement costs paid by Tenant for the
Shell Improvements and Interior Improvements made to the Complex,
including all Three Buildings (but excluding any additional cost
attributable to the installation by Tenant of any laboratory
space in any of the Three Buildings), to the extent such amount
exceeds the Improvement Allowance provided by Landlord under the
Construction Agreement (hereinafter referred to as "Tenant's
Excess Costs") to the extent allocable on a pro rata square
footage basis to the space being subleased or assigned. After
any such deductions as provided herein, any Excess Rent shall be
payable when received on a monthly basis by Tenant to Landlord.
For Example:
Example 1 - Excess Costs Allowance due Tenant Under
Sublease. If Tenant subleases 50,000 square feet of this
Building at $3.00 per square foot for a two year period; the
commission fee is $100,000; and Tenant's Excess Costs total
$8,000,000 for the Complex; and the total square feet of all
Three Buildings is 360,000; Tenant's Excess Costs allowance
per square foot would be $0.22 ($8,000,000 x 12% = $960,000
/ 360,000 s.f. = $2.67 per square foot / 12 months = $0.22);
therefore, Tenant would be entitled to deduct from the
monthly Excess Rent as received: (i) the $100,000 commission
fee which would be deducted in full prior to any Excess Rent
being paid to Landlord, and (ii) Tenant's Excess Costs of
$0.22 per square foot per month during the entire term of
said Sublease, prior to paying to Landlord when received on
a monthly basis the balance of the Excess Rent.
Example 2 - Third Party Assignment of this Lease with Three
Years Remaining in the Lease Term with ALZA or any ALZA
Affiliate Remaining Obligated on the Lease: Assume: (i) a
broker fee of $100,000; (ii) Tenant's Excess Costs allowance
as stated above of $0.22 per square foot per month; and
(iii) $5,000,000 consideration received by Tenant for the
assignment of this Lease; Tenant would be entitled to deduct
from the excess consideration a total of $1,050,400 (120,000
s.f. x $0.22 x 36 months + $100,000) prior to paying
Landlord the balance of the Excess Rent, and Landlord would
not be entitled to elect to terminate the Lease.
B. Except as otherwise provided in this Paragraph 19,
Tenant shall not assign, transfer, or hypothecate the leasehold
estate under this Lease, or any interest therein, and shall not
sublet the Premises, or any part thereof, or any right or
privilege appurtenant thereto, or suffer any other person or
entity to occupy or use the Premises, or any portion thereof,
without, in each case, the prior written consent of Landlord
which consent will not be unreasonably withheld. As a condition
for Landlord granting its consent to any assignment, transfer, or
subletting and except as otherwise expressly provided herein,
Landlord shall require Tenant to pay when received to Landlord,
as Additional Rent, one hundred percent (100%) of all excess
rents and/or additional consideration (including any Management
Fee) as and when collected by Tenant from its assignees,
transferees, or subtenants to the extent in excess of the Rent
payable by Tenant to Landlord as allocable to the portion of the
Premises being subleased or assigned (collectively "Excess Rent",
with Excess Rent to be calculated after deducting any Additional
Rent or other payments or expenses being reasonably incurred by
Tenant under this Lease or any items of additional rent payable
by any subtenants under any sublease (and if a gross sublease,
after deducting the reasonable cost of such additional rent items
to the extent included in the base rent under any such sublease),
including by way of example, any payments by Tenant or any
subtenants relating to utility services, janitorial services,
security services and the costs of taxes, insurance, maintenance
and repair); provided, however, that before paying to Landlord
the remainder of such Excess Rent, Tenant shall first be entitled
to recover from such Excess Rent the amount of any reasonable
leasing commissions (not to exceed $100,000 as to any
transaction) paid by Tenant to third parties not affiliated with
Tenant. Tenant shall, by not less than ten (10) days written
notice, advise Landlord of its intent to assign or transfer
Tenant's interest in the Lease or to sublet the Premises or any
portion thereof for all or any part of the Lease Term. Within
ten (10) days after receipt of said written notice, Landlord may,
if an assignment to an Unaffiliated Assignee where neither ALZA
nor any ALZA Affiliate will remain liable for the obligations of
Tenant under this Lease accruing on and after the date of such
assignment, elect to terminate this Lease on the date specified
in Tenant's notice by giving written notice of such election to
terminate. Landlord shall respond to any request for its consent
to any assignment or sublease within ten (10) days following
written request therefore. In the event any proposed assignment
or sublease is approved by Landlord, no such permitted assignee
or sublessee shall assign or transfer this Lease, either in whole
or in part, or sublet the whole or any part of the Premises,
without also having obtained the prior written consent of
Landlord. A consent of Landlord to one assignment, transfer,
hypothecation, subletting, occupation or use by any other person
shall not release Tenant from any of Tenant's obligations
hereunder or be deemed to be a consent to any subsequent similar
or dissimilar assignment, transfer, hypothecation, subletting,
occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without
such consent shall be void and shall constitute a breach of this
Lease by Tenant. Except as otherwise expressly provided to the
contrary in this Lease, the leasehold estate under this Lease
shall not, nor shall any interest therein, be assignable for any
purpose by operation of law without the written consent of
Landlord. As a condition to its consent, Landlord shall require
Tenant to pay all reasonable expenses incurred by Landlord in
connection with the assignment, and Landlord shall require
Tenant's assignee or transferee to assume in writing all of the
obligations under this Lease thereafter accruing and, except as
otherwise expressly provided herein, for Tenant to remain liable
to Landlord under the Lease. Any subtenant from Tenant shall
only have the right to enter into a sub-sublease with Landlord's
written approval.
C. Notwithstanding anything to the contrary herein but
subject to the provisions of Paragraph D below, after the later
of the effective date of the proposed assignment or the Rent
Commencement Date, and provided that as of the effective date of
the proposed assignment (i) ALZA or an ALZA Affiliate is the
Tenant under this Lease and (ii) Tenant is not in default under
this Lease (i.e. Tenant has received notice of a default under
this Lease and the applicable cure period has expired and Tenant
has not then cured said default), Landlord agrees that ALZA and
any ALZA Affiliate shall, upon its request, be released from all
thereafter accruing liability under this Lease (except for
Tenant's compliance obligations under Paragraph 17 of this Lease
and Tenant's indemnity obligations to Landlord under Paragraphs
16 and 24 of this Lease, which compliance and indemnity
obligations shall continue in effect in favor of Landlord with
respect to any events or matters which occurred or accrued
thereunder prior to the date of the assignment, and which
compliance and indemnity obligations shall survive the assignment
of this Lease whether the event or matter giving rise to such
compliance obligation or right of indemnification is asserted or
discovered by Landlord before or after such assignment), upon the
assignment of all of its interest as Tenant under this Lease to
any entity which has (i) a net worth at the time of such
assignment (applying generally accepted accounting principles,
consistently applied) equal to or greater than Five Hundred
Million Dollars ($500,000,000) as adjusted as provided below as
reflected on the most recent quarterly or annual audited
financial statements of the assignee preceding the date of such
assignment and (ii) not experienced any known material adverse
changes as of the date of said assignment in said assignee's
financial condition which reasonably calls into question whether
the foregoing net worth standard is then satisfied. The
foregoing net worth standard for release of liability shall apply
with respect to any assignment to an ALZA Affiliate as well as to
an Unaffiliated Assignee. Tenant shall provide Landlord at least
ten (10) days prior to the effective date of any assignment
(whether or not Tenant is seeking to be released of liability as
a result of such assignment) with written notice of said
assignment, which notice shall include the form of written
assignment and assumption to be entered into between Tenant and
the assignee, wherein such assignee shall agree in favor of
Landlord to assume all of the obligations and liabilities of
Tenant under this Lease accruing from and after the Commencement
Date of this Lease. Tenant and assignee shall further execute a
Consent to Assignment substantially in the form of Exhibit G
attached hereto completed as appropriate with respect to the
applicable assignment. Prior to or concurrently with the
assignment occurring, Tenant shall cause such assignment and
assumption agreement so earlier provided to Landlord and the
Consent to Assignment to be duly executed by Tenant and the
assignee and an original of each to be delivered to Landlord.
Landlord shall, within ten days after receipt of any such duly
executed assignment and assumption agreement which fully
satisfies all of the applicable conditions of this Paragraph 19
for obtaining the consent of Landlord thereto (or which otherwise
satisfies the conditions of this Paragraph 19 for the agreed
waiver of any requirement for obtaining the consent of Landlord),
cause the Consent to Assignment to be duly executed by Landlord
and returned to Tenant. Notwithstanding the above, Landlord
shall have the right to elect, by written notice to Tenant within
such ten day period, to terminate this Lease effective as of the
scheduled effective date of such assignment where Tenant is
seeking to be released of continuing liability under this Lease
in conjunction with a proposed assignment to an Unaffiliated
Assignee. The Five Hundred Million Dollars ($500,000,000)
standard set forth above for release of liability shall be
adjusted from on and after the Rent Commencement Date by the
percentage increase in the CPI with respect to the period from
the calendar month preceding the Rent Commencement Date to the
calendar month preceding the effective date of the assignment.
D. Notwithstanding anything to the contrary in this
Paragraph 19, Tenant may not assign its interest as Tenant
hereunder to any Unaffiliated Assignee until the cross default
condition set forth in Section 5.A of the Construction Agreement
relating to the construction of the Shell Improvements and
Interior Improvements for the Complex have been satisfied
pursuant to the terms and conditions of the Construction
Agreement.
20. SUBORDINATION AND MORTGAGES.
A. In the event Landlord's title or leasehold interest is
hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings upon which the Premises are
located, to secure a loan from a lender (hereinafter referred to
as "Lender") to Landlord, Tenant shall, at the request of
Landlord or Lender, execute in writing an agreement (in form
reasonably acceptable to Tenant), subordinating its rights under
this Lease (subject to customary nondisturbance protection in
favor of Tenant) to the lien of such deed of trust, or, if so
requested, agreeing that the lien of Lender's deed of trust shall
be or remain subject and subordinate to the rights of Tenant
under this Lease. Notwithstanding any such subordination,
Tenant's possession under this Lease shall not be disturbed if
Tenant is not in default beyond any applicable cure period and so
long as Tenant shall pay all Rent and observe and perform all of
the provisions set forth in this Lease, and any subordination
agreement shall reflect the agreement of the Lender to the same
and the Lender's agreement upon any foreclosure to recognize this
Lease. Landlord represents to Tenant that, as of the date of
this Lease, the Premises are not presently encumbered by any
mortgage, deed of trust or other security device in favor of any
Lender.
B. Tenant hereby agrees that during the Initial Term and
the Extended Term(s) of this Lease (if any), Tenant shall not
encumber or pledge (in any manner whatsoever) its leasehold
interest in the Premises, including the Interior Improvements
and/or Tenant's equipment.
21. ENTRY BY LANDLORD. Landlord reserves, and shall at all
reasonable times after at least twenty four (24) hours notice
(except in emergencies) have, the right to enter the Premises to
inspect them; to perform any services to be provided by Landlord
hereunder; to make repairs or provide any services to a
contiguous tenant(s) (if any); to submit the Premises to
prospective purchasers, mortgagees or tenants; to post notices of
non-responsibility; and to alter, improve or repair the Premises
or other parts of the Building and any portion of the Complex,
all without abatement of Rent, and may erect scaffolding and
other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed;
provided, however that the business of Tenant shall be interfered
with to the least extent that is reasonably practical. Any entry
to the Premises by Landlord for the purposes provided for herein
shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises
or any portion thereof.
22. BANKRUPTCY AND DEFAULT.
A. Default: The commencement of a bankruptcy action or
liquidation action or reorganization in bankruptcy action or
insolvency action or an assignment of or by Tenant for the
benefit of creditors, or any similar action undertaken by Tenant,
or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or
receiver appointed to serve during a bankruptcy, liquidation,
reorganization, insolvency or similar action elects to reject
Tenant's unexpired Lease, the trustee or receiver shall notify
Landlord in writing of its election within thirty (30) days after
any order for relief in any liquidation action or within thirty
(30) days after the commencement of any action.
Within thirty (30) days after the court approval of the
assumption of this Lease, the trustee or receiver shall cure (or
provide adequate assurance to the reasonable satisfaction of
Landlord that the trustee or receiver shall cure) any and all
previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate
assurance of future performance under said Lease to the
reasonable satisfaction of Landlord. Adequate assurance of
future performance, as used herein, includes, but shall not be
limited to: (i) assurance of source and payment of Rent, and
other consideration due under this Lease; and (ii) assurance that
the assumption or assignment of this Lease will not breach any
provision in any agreement relating to the above described
Premises.
Nothing contained in this Paragraph shall affect the
exercising of any right of Landlord to refuse to accept an
assignment upon commencement or in connection with a bankruptcy,
liquidation, reorganization or insolvency action or an assignment
of Tenant for the benefit of creditors or other similar act.
Nothing contained in this Lease shall be construed as giving or
granting or creating an equity in the Premises to Tenant. In no
event shall the leasehold estate under this Lease, or any
interest therein, be assigned by voluntary or involuntary
bankruptcy proceeding without the prior written consent of
Landlord. In no event shall this Lease or any rights or
privileges hereunder be an asset of Tenant under any bankruptcy,
insolvency or reorganization proceedings.
The failure of Tenant to perform or honor any covenant,
condition or representation made under this Lease shall
constitute a default hereunder by Tenant upon expiration of the
appropriate grace period hereinafter provided. Tenant shall have
a period of ten (10) days following the date of written notice
from Landlord within which to cure any default in the payment of
Rent when otherwise due hereunder. Tenant shall have a period of
thirty (30) days following the date of written notice from
Landlord within which to cure any other default by Tenant under
this Lease; provided, however, that if the nature of Tenant's
failure is such that more than thirty (30) days is reasonably
required to cure the same, Tenant shall not be in default so long
as Tenant commences performance within such thirty (30) day
period and thereafter prosecutes the same to completion. Upon an
uncured default of this Lease by Tenant, Landlord shall have the
following rights and remedies in addition to any other rights or
remedies available to Landlord at law or in equity:
(a) The rights and remedies provided for by California
Civil Code Section 1951.2 including but not limited to, recovery
of the worth at the time of award of the amount by which the
unpaid Rent for the balance of the Lease Term after the time of
award exceeds the amount of rental loss for the same period that
Tenant proves could be reasonably avoided, as computed pursuant
to subsection (b) of said Section 1951.2.
(b) The rights and remedies provided by California
Civil Code Section 1951.4 which allows Landlord to continue the
Lease in effect and to enforce all of its rights and remedies
under this Lease, including the right to recover Rent as it
becomes due, for so long as Landlord does not terminate Tenant's
right to possession; acts of maintenance or preservation, efforts
to relet the Premises, or the appointment of a receiver upon
Landlord's initiative to protect its interest under this Lease
shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice
to Tenant in accordance with applicable law.
(d) To the extent provided by law, the right and power
to enter the Premises and remove therefrom all persons and
property, to store such property in a public warehouse or
elsewhere at the cost of and for the account of Tenant, and to
sell such property and apply such proceeds therefrom pursuant to
applicable California law. Landlord may from time to time sublet
the Premises or any part thereof for such term or terms (which
may extend beyond the Lease Term) and at such Rent and such other
terms as Landlord in its reasonable sole discretion may deem
advisable, with the right to make alterations and repairs to the
Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to any other indebtedness
other than Rent due from Tenant to Landlord hereunder, the
reasonable cost of such subletting (to the extent allocable to
the remaining Lease Term), including, but not limited to,
reasonable attorneys' fees, and any real estate commissions
actually paid, and the cost of such reasonable alterations and
repairs incurred by Landlord and the amount, if any, by which the
Rent hereunder allocable to the subleased premises for the period
of such subletting (to the extent such period does not exceed the
Lease Term) exceeds the amount to be paid as Rent by the
subtenant for the subleased premises for such period or (ii) at
the option of Landlord, rents received from such subletting shall
be applied first to payment of indebtedness other than Rent due
hereunder from Tenant to Landlord; second, to the payment of any
costs of such subletting and of such alterations and repairs;
third, to payment of Rent due and unpaid hereunder; and the
residue, if any, shall be held by Landlord and applied in payment
of future Rent as the same becomes due hereunder. If Tenant has
been credited with any Rent to be received by such subletting
under option (i) and such Rent shall not be promptly paid to
Landlord by the subtenant(s), or if such rentals received from
such subletting under option (ii) during any month be less than
that to be paid during the month by Tenant hereunder, Tenant
shall pay any such deficiency to Landlord. Such deficiency shall
be calculated and paid monthly. No taking possession of the
Premises by Landlord shall be construed as an election on its
part to terminate this Lease unless a written notice of such
intention be given to Tenant. Notwithstanding any such
subletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such then uncured
previous default.
(e) The right to have a receiver appointed for Tenant
upon application by Landlord in accordance with applicable laws,
to take possession of the Premises and to apply any rental
collected from the Premises and to exercise all other rights and
remedies granted to Landlord pursuant to this Paragraph 22.
B. Cross Default: As provided in Section 5.A of the
Construction Agreement, any uncured default by Tenant under the
Construction Agreement in the construction of the Shell
Improvements and Interior Improvements for Building One, Building
Two and Building Three occurring prior to the satisfaction of the
requirements of such Section, shall entitle Landlord in
accordance with the applicable provisions of the Construction
Agreement to terminate all Three Leases (but in no event shall
Landlord be required to exercise such remedy).
23. ABANDONMENT. Tenant shall not vacate or abandon the
Building at any time during the Lease Term (except that Tenant
may vacate so long as it pays Rent, provides a security service
to check the Premises during normal business hours from Monday to
Friday, and otherwise performs its obligations hereunder) and if
Tenant shall abandon, vacate or surrender said Premises, or be
dispossessed by the process of law, or otherwise, any personal
property belonging to Tenant and left on the Premises shall be
deemed to be abandoned, at the option of Landlord.
24. HAZARDOUS MATERIALS. Landlord and Tenant agree as follows
with respect to the existence or use of "Hazardous Materials" (as
defined herein) on, in, under or about the Premises and the real
property located beneath said Premises and the Common Area
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall
mean any material, waste, chemical, mixture or byproduct which is
or hereafter is defined, listed or designated under Environmental
Laws (defined below) as a pollutant, or as a contaminant, or as a
toxic or hazardous substance, waste or material, or any other
hazardous, toxic, biohazardous, or radioactive material, waste,
chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without
limitation, petroleum hydrocarbons or any distillates or
derivatives or fractions thereof, polychlorinated biphenyls, or
asbestos). As used herein, the term "Environmental Laws" shall
mean any applicable Federal, State of California or local
government law (including common law), statute, regulation, rule,
ordinance, permit, license, order, requirement, agreement, or
approval, or any determination, judgment, directive, or order of
any executive or judicial authority at any level of Federal,
State of California or local government (whether now existing or
subsequently adopted or promulgated) relating to pollution or the
protection of the environment, ecology, natural resources, or
public health and safety.
B. Tenant shall obtain Landlord's written consent, which
shall not be unreasonably withheld, prior to the occurrence of
any Tenant's Hazardous Materials Activities (defined below);
provided, however, that Landlord's consent shall not be required
for normal use in compliance with applicable Environmental Laws
of customary landscaping, cleaning, household and office
supplies, such as mild cleaners and other common janitorial
supplies, lubricants and copier toner and personal use items,
such as cigarettes and/or medicines. As used herein, the term
"Tenant's Hazardous Materials Activities" shall mean any and all
use, handling, generation, storage, disposal, treatment,
transportation, discharge, or emission of any Hazardous Materials
on, in, beneath, to, from, at or about the Property, in
connection with Tenant's use of the Property, or by Tenant or by
any of Tenant's agents, employees, contractors, vendors,
invitees, visitors or its future subtenants or assignees (unless
Tenant is released hereunder as to such assignee, in which event
Tenant shall not be liable for activities of such assignee unless
otherwise stated in any related Consent to Assignment agreement
executed by Landlord and Tenant). Tenant agrees that any and all
Tenant's Hazardous Materials Activities shall be conducted in
strict, full compliance with applicable Environmental Laws at
Tenant's expense, and shall not result in any contamination of
the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of
Hazardous Materials at the Property during the term of the Lease
of which Tenant becomes aware, and further agrees to provide
Landlord with prompt written notice of any material violation of
Environmental Laws in connection with Tenant's Hazardous
Materials Activities of which Tenant becomes aware. If Tenant's
Hazardous Materials Activities involve Hazardous Materials other
than normal use of customary landscaping, cleaning, household and
office supplies and personal use items, Tenant also agrees at
Tenant's expense: (i) to install such Hazardous Materials
monitoring, storage and containment devices as required by the
governing agencies associated with any Tenant's Hazardous
Materials Activities or otherwise specifically required by any
governing agency of Tenant; (ii) provide Landlord with a written
inventory of such Hazardous Materials (other than customary
landscaping, cleaning, household and office supplies and personal
use items), including an update of same each year upon the
anniversary date of the Lease Commencement Date ("Anniversary
Date"); and (iii) at any time that an Unaffiliated Assignee is
the Tenant hereunder, Tenant shall every five (5) years
thereafter on the respective anniversary of the Lease
Commencement Date, retain a qualified environmental consultant,
reasonably acceptable to Landlord, to evaluate whether Tenant is
in compliance with all applicable Environmental Laws with respect
to Tenant's Hazardous Materials Activities (with Tenant, at its
expense, to submit to Landlord a report from such environmental
consultant which discusses the environmental consultant's
findings within two (2) months following the respective Lease
Commencement Date). Tenant, at its expense, shall promptly
undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct
any and all problems or deficiencies identified by the
environmental consultant relating to Tenant's Hazardous Materials
Activities, and promptly provide Landlord with documentation of
all such corrections.
C. Prior to termination or expiration of the Lease,
Tenant, at its expense, shall (i) properly remove from the
Property all Hazardous Materials which came to be located at the
Property as a result of Tenant's Hazardous Materials Activities,
and (ii) fully comply with and complete all facility closure
requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x)
properly restoring and repairing the Property to the extent
damaged by such closure activities, and (y) if applicable,
obtaining from the local Fire Department or other appropriate
governmental authority with jurisdiction a written concurrence
that closure has been completed in compliance with applicable
Environmental Laws. Tenant shall promptly provide Landlord with
copies of all claims, notices, work plans, data and reports
prepared, received or submitted in connection with any such
closure activities.
D. If Landlord, in its reasonable discretion, believes
that the Property has become contaminated as a result of Tenant's
Hazardous Materials Activities, Landlord in addition to any other
rights it may have under this Lease or under Environmental Laws
or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to
obtaining and analyzing samples of soil and groundwater, for the
purpose of determining the nature and extent of such
contamination. Tenant shall promptly reimburse Landlord for the
costs of such an investigation, including but not limited to
reasonable attorneys' fees, Landlord incurs with respect to any
such investigation that discloses Hazardous Materials
contamination for which Tenant is liable under this Lease.
Except as may be required of Tenant by applicable Environmental
Laws, Tenant shall not perform any invasive sampling, testing, or
drilling to identify the presence of any Hazardous Materials at
the Property, without Landlord's prior written consent which
shall not be unreasonably withheld. Tenant shall promptly
provide Landlord with copies of any claims, notices, work plans,
data and reports prepared, received or submitted in connection
with any sampling, testing or drilling performed pursuant to the
preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel
acceptable to Landlord, whose consent shall not unreasonably be
withheld) and hold harmless Landlord, its employees, assigns,
successors, members, and agents from and against any and all
claims (including, but not limited to, third party claims from a
private party or a government authority), liabilities,
obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs
(including but not limited to reasonable attorneys', consultants'
and other experts' fees and costs), and damages, which arise from
or relate to: (i) Tenant's Hazardous Materials Activities; (ii)
releases or discharges of Hazardous Materials at the Property
during the time ALZA or an ALZA Affiliate is the Tenant under all
Three Leases; (and during the time ALZA or an ALZA Affiliate is
not the Tenant under all Three Leases, the reference to
"Property" within this item (ii) shall be deemed changed to
"Premises"); however, Tenant shall continue to be responsible for
any Hazardous Materials contamination of the Common Area caused
by Tenant's Hazardous Materials Activities), which occur during
the Lease Term; (iii) any Hazardous Materials contamination
caused by Tenant prior to the Lease Commencement Date; or (iv)
the breach of any obligation of Tenant under this Paragraph 24
(collectively, "Tenant's Environmental Indemnification").
Tenant's Environmental Indemnification shall include but is not
limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and
diminution in fair market value of the Property caused by or
resulting from any such indemnified matter. Tenant's
Environmental Indemnification shall further include but is not
limited to the obligation to diligently and properly implement to
completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting,
closure activities, or other environmental response action
(collectively, "Response Actions") associated with any such
indemnified matter. Tenant shall promptly provide Landlord with
copies of any claims, notices, work plans, data and reports
prepared, received or submitted in connection with any Response
Actions.
F. It is agreed that the Tenant's responsibilities related
to Hazardous Materials will survive the expiration or termination
of this Lease and that Landlord may obtain specific performance
of Tenant's responsibilities under this Paragraph 24. It is
further acknowledged by the Parties that Exhibit E attached
hereto reflects certain Hazardous Materials that Tenant and its
environmental consultants, during their earlier analysis,
inspection and testing of the Complex and certain adjacent
property, determined existed on or about the Complex ("Existing
Contamination"). The Parties agree that notwithstanding anything
to the contrary in this Lease, Tenant's Environmental
Indemnification shall not extend to, and Tenant shall have no
responsibility, liability or indemnification obligation to
Landlord under this Lease or at law for, any Hazardous Materials
present in, on, under or about the Complex or any adjacent
property as of the date of this Lease Agreement or for any
Hazardous Materials in groundwater that may hereafter migrate to
or under the Complex, including any such Existing Contamination
(including, but not limited to, in the event of any release of
any such Existing Contamination or any migration of any such
Existing Contamination onto or off of the Complex), except to the
extent, and then only to the extent, to which Tenant may
contribute to any such Existing Contamination or may cause any
such Existing Contamination to be released or migrate.
25. DESTRUCTION. In the event the Premises and/or Common Area
is destroyed in whole or in part from any cause, except for
routine maintenance and repairs and incidental damage and from
destruction caused from vandalism and accidents for which Tenant
is responsible under Paragraph 9, neither Landlord nor Tenant
shall have the right to terminate this Lease except upon the
occurrence of limited circumstances provided hereinbelow, and
Landlord shall be obligated to rebuild or restore the Premises
and/or Common Area so damaged or destroyed to its condition prior
to the damage or destruction at Landlord's sole cost and expense,
with the exception that Tenant shall be solely responsible for
all or such portion of the deductible amount of any insurance
coverage as is then reasonably allocable to the rebuilding or
restoration of the Premises under the insurance policies then
being carried by Landlord pursuant to Paragraph 15 hereof. In
the event any other portion of the Complex is damaged or
destroyed (such as either of the other two buildings in the
Complex), Landlord shall not be obligated hereunder to rebuild or
restore the same, but shall be obligated to cause such other
portion of the Complex to be restored to a safe and aesthetically
pleasing condition.
Tenant shall be entitled to a reduction in Rent after the
occurrence of such damage and while such rebuilding or
restoration is being made in the proportion that the area of the
Building rendered untenantable by such damage or destruction
bears to the total area of the Building. Landlord shall within
thirty (30) days after the occurrence of such damage or
destruction, provide Tenant with Landlord's contractor's estimate
of the time required to complete the rebuilding or restoration of
the Premises or the Common Area. If it is reasonably estimated
by Landlord's contractor that the rebuilding or restoration will
exceed thirteen (13) months following the date of the occurrence
of such damage or destruction, then Tenant shall have the right
to terminate this Lease by giving written notice to Landlord
within fifteen (15) days following receipt of Landlord's
estimated time to rebuild or restore the Premises and/or Common
Area. Notwithstanding anything herein to the contrary,
Landlord's obligation to rebuild or restore the Building shall be
limited to the Building and Interior Improvements (and any
subsequent alterations, additions or improvements thereto) as
they existed as of the date of such damage or destruction, but
excluding (i) any Lab Equipment or any alterations, additions or
improvements that are particular to using any portion of the
Premises as a lab as distinguished from using it as an office,
and (ii) any restoration of Tenant's trade fixtures, equipment,
inventory or merchandise (with the items reflected in clauses (i)
and (ii) collectively referred to as the "Excluded Items"). If
Landlord does not complete the rebuilding or restoration within
thirteen (13) months following the date of destruction (such
period of time to be extended for delays caused by the fault or
neglect of Tenant or because of Acts of God, acts of public
agencies, labor disputes, strikes, fires, freight embargoes,
rainy or stormy weather, inability to obtain materials, supplies
or fuels, or other such delays beyond the reasonable control of
Landlord or its contractors or subcontractors), then Tenant shall
have the right to terminate this Lease by giving written notice
to Landlord within fifteen (15) days after the expiration of said
thirteen (13) month period (as such period may be extended by any
of the foregoing enumerated excused delays). Landlord shall,
within twenty (20) days after the occurrence of any matter which
Landlord considers to constitute the basis for an excused delay,
advise Tenant of such occurrence and the estimated excused delay
that has been or will be occasioned thereby.
Notwithstanding anything to the contrary in this Paragraph
25, if the Premises and/or Common Area is to be rebuilt and/or
restored as provided for herein, and ALZA or an ALZA Affiliate is
the Tenant under all Three Leases at the time of said destruction
or damage, then Landlord and Tenant agree that: (a) Tenant shall
(i) enter into contracts with the general contractor(s) for the
restoration or rebuilding and (ii) oversee the construction; (b)
Landlord shall notify Tenant of the amount of the net insurance
proceeds ("Net Insurance Proceeds") available to be applied to
such restoration or rebuilding and provide adequate assurances to
Tenant as to the future availability from Landlord of Landlord's
Share (as hereinafter defined) of any additional amount, if any,
which is required to fund the cost of such restoration or
rebuilding (net of the Excluded Items) to the extent such cost
exceeds the aggregate of such net insurance proceeds and any
insurance deductible to be borne by Tenant (the "Non-Insured
Cost"); (c) Tenant shall provide adequate assurances to Landlord
as to the future availability for payment by Tenant of any
insurance deductible to be borne by Tenant and of Tenant's Share
(as hereinafter defined) of the Non-Insured Cost; (d) the Net
Insurance Proceeds and Landlord's Share of the Non-Insured Cost
shall be funded by Landlord during the course of such restoration
or rebuilding by Tenant on a pro rata basis with Tenant's funding
of any insurance deductible to be borne by Tenant and Tenant's
Share (as hereinafter defined) of the Non-Insured Cost in the
manner set forth below in this Paragraph 25 (with Landlord's
Disbursement Share as used in this Paragraph to equate to the
ratio of (i) the aggregate of the Net Insurance Proceeds and
Landlord's Share of the estimated Non-Insured Cost to (ii) the
aggregate of the Net Insurance Proceeds, the estimated Non-
Insured Cost (both Landlord's Share and Tenant's Share) and the
insurance deductible to be borne by Tenant (which should in all
events equal the total estimated cost of such rebuilding or
restoration); and (e) Tenant's right to terminate this Lease as a
result of subsequent delays in construction shall be
inapplicable. The Net Insurance Proceeds and Landlord's Share of
any estimated Non-Insured Cost shall be disbursed to, or for the
benefit of, Tenant in the following manner. Landlord shall be
obligated, but not more than one time per month, within ten (10)
business days after receipt of (i) an invoice from Tenant for any
amounts then due and payable to Tenant's design and construction
professionals or material suppliers for costs of such rebuilding
or restoration, together with (ii) a detailed accounting
reflecting the full expenditure of said amounts and all other
amounts since paid and to be paid with the current disbursement
from Landlord, to pay Landlord's Disbursement Share of any
amounts properly shown on such invoice. Unless otherwise agreed
by Landlord and Tenant, Landlord shall make its payment jointly
to Tenant and the general contractor (or, if applicable, to the
respective vendor) except in those instances where it is clearly
demonstrated to Landlord that Tenant has already paid the amount
in full for which reimbursement is then being sought (and any
potentially applicable mechanic's liens, if any, have been
released as respects the work to which such reimbursement is
sought), in which event such payment shall be made directly to
Tenant. Upon the completion of the rebuilding or restoration and
determination of the final cost of such rebuilding or
restoration, the amount of the Non-Insured Cost, if any,
respectively funded by Landlord and Tenant shall be adjusted so
as to cause (i) Tenant to fund the entirety of, but no more than,
the amount of any applicable insurance deductible allocable to
such rebuilding or restoration and Tenant's Share of the actual
Non-Insured Cost, (ii) Landlord to fund the entirety of, but no
more than, the amount of the Net Insurance Proceeds and
Landlord's Share of the actual Non-Insured Cost and (iii)
Landlord or Tenant, as applicable, to reimburse the other for any
excess amount funded by the other. As used in this Paragraph,
(i) "Landlord's Share" shall mean a fraction where (a) the
numerator is the Total Improvement Allowance ultimately funded by
Landlord under the Construction Agreement for the design and
construction of the Shell Improvements and Interior Improvements
for the Complex and (b) the denominator is the sum of such Total
Improvement Allowance so funded and Tenant's Excess Costs (as
defined and used in Paragraph 19(A)(b) above) for the design and
construction of the Shell Improvements and Interior Improvements
(net of the Excluded Items) for the Complex, and (ii) "Tenant's
Share" shall mean a fraction where (a) the numerator is Tenant's
Excess Costs (as defined and used in Paragraph 19(A)(b) above)
for the design and construction of the Shell Improvements and
Interior Improvements (net of the Excluded Items) for the Complex
and (b) the denominator is the sum of the Total Improvement
Allowance so funded and Tenant's Excess Costs for the design and
construction of the Shell Improvements and Interior Improvements
(net of the Excluded Items) for the Complex. By way of example
of the foregoing, assume that: (i) the total estimated cost of
repairing the damage to the Improvements is $21,000,000, of which
$1,000,000 relates to the estimated cost of repairing the damage
to the Excluded Items; (ii) the insurance deductible is
$5,000,000; (iii) the Net Insurance Proceeds are $12,000,000;
(iv) the Total Improvement Allowance funded by Landlord for the
Complex was $35,000,000; and (v) the Tenant's Excess Costs for
the design and construction of the Shell Improvements and
Interior Improvements (net of the Excluded Items) was
$17,500,000; then: (a) the Non-Insured Cost would be $3,000,000
(= $21,000,000 -$1,000,000 - $5,000,000 - $12,000,000); (b)
Landlord's Share would be 66.67 % (= $35,000,000 / ($35,000,000 +
$17,500,000)), and Landlord's Share of the Non-Insured Cost would
be $2,000,100; (c) Tenant's Share would be 33.33 % (= $17,500,000
/ ($35,000,000 + $17,500,000)), and Tenant's Share of the Non-
Insured Cost would be $999,900; and (d) Tenant would also be
responsible for funding the insurance deductible of $5,000,000
and the $1,000,000 cost of repairing the Excluded Items.
Notwithstanding anything to the contrary herein, if Landlord
elects to terminate the Lease as provided hereinbelow versus
rebuilding and/or restoring said damage or destruction as
provided for herein and Tenant does not exercise its right to
require Landlord to rebuild or restore as provided for herein,
Tenant shall not be liable for paying any insurance deductible
related to such damage or destruction provided Tenant did not
cause such damage or destruction; if Tenant elects to terminate
the Lease as provided hereinbelow, Tenant shall be obligated to
pay the insurance deductible; and if this Lease is not
terminated, Tenant shall be obligated to pay the insurance
deductible.
Unless this Lease is terminated pursuant to the foregoing
provisions, this Lease shall remain in full force and effect.
The Parties hereby expressly waive the provision of Section 1932,
Subdivision 2, and Section 1933, Subdivision 4 of the California
Civil Code.
Notwithstanding the foregoing, (a) in the event that all or
any portion of the Premises and/or Common Area is damaged or
destroyed (i) within the final twenty four (24) months of the
Initial Term of this Lease, or (ii) within the final twenty four
(24) months of any Extended Term of this Lease, to such an extent
that Tenant cannot reasonably use the Premises for its intended
purpose, then either Landlord or Tenant shall have the right to
terminate this Lease, to be exercised by written notice to the
other, delivered, if at all, within thirty (30) days following
the date of such damage or destruction, provided that if there
then remains any unexercised Option to Extend, Tenant may, within
twenty (20) days following receipt of Landlord's notice of
termination, give notice of its exercise of its Option to Extend
the Lease Term, in which event such termination election by
Landlord shall be rendered null and void, and (b) in the event
that all or any portion of the Premises and/or Common Area is
damaged or destroyed on or after the commencement of the Second
Extended Term of this Lease under circumstances that are
reasonably expected to result in a Non-Insured Cost that would
under the provisions of this Paragraph 25 result in a requirement
of Tenant to fund Tenant's Share of such Non-Insured Cost, then
Tenant shall have the right to terminate this Lease, to be
exercised by written notice to Landlord, delivered, if at all,
prior to or within thirty (30) days following the date of
Landlord's delivery to Tenant of notice of the amount of Net
Insurance Proceeds available for rebuilding, provided that,
Landlord may, within twenty (20) days following receipt of
Tenant's notice of termination, give notice of Landlord's
election to waive any requirement for there to be a Tenant's
Share of such Non-Insured Cost, in which event such termination
election by Tenant shall be rendered null and void and Landlord
shall fund the entirety of the Non-Insured Cost (both Tenant's
Share and Landlord's Share) and Tenant shall fund the amount of
any applicable insurance deductible. Any notice of any election
to terminate under this Paragraph shall be effective ninety (90)
days after the date of the giving of such notice.
26. EMINENT DOMAIN. If all or any part of the Premises shall be
taken by any public or quasi-public authority under the power of
eminent domain or conveyance in lieu thereof, this Lease shall
terminate as to any portion of the Premises so taken or conveyed
on the date when title vests in the condemner, and Landlord shall
be entitled to any and all payment, income, rent, award, or any
interest therein whatsoever which may be paid or made in
connection with such taking or conveyance, and Tenant shall have
no claim against Landlord or otherwise for the value of any
unexpired Lease Term. Notwithstanding the foregoing sentence,
any compensation specifically awarded Tenant for loss of business
(including severance damages associated with Tenant's other
business activities), Tenant's Lab Equipment, trade fixtures,
personal property, moving costs or loss of goodwill, shall be and
remain the property of Tenant.
If (A) (i) any action or proceeding is commenced for the
taking of the Premises or any material part thereof, or if
Landlord is advised in writing by any entity or body having the
right or power of condemnation of its intention to condemn the
Premises or any material part thereof, or (ii) any of the
foregoing events occur with respect to the taking of any material
portion of the Common Area which make it impractical for Landlord
to continue to lease the Building to Tenant with reasonable
Common Area amenities, and (B) Landlord shall decide to
discontinue the use and operation of the Complex, or decide to
demolish or materially redesign and rebuild the Complex, then, in
any of such events Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof and this Lease
shall then terminate on the date preceding the date of
conveyance.
In the event of such a partial taking or conveyance of the
Premises, if the portion of the Premises taken or conveyed is so
substantial that the Tenant can no longer reasonably conduct its
business, Tenant shall have the privilege of terminating this
Lease within sixty (60) days following the date of such taking or
conveyance, upon written notice to the Landlord of its intention
so to do, and upon giving of such notice this Lease shall
terminate on the last day of the calendar month next following
the month in which such notice is given, upon payment by Tenant
of the Rent (apportioned in such manner as provided in the
following paragraph) from the date of such taking or conveyance
to the date of termination.
If a portion of the Premises and/or Complex be taken by
condemnation or conveyance in lieu thereof and neither Landlord
nor Tenant shall terminate this Lease as provided herein, this
Lease shall continue in full force and effect as to the part of
the Premises not so taken or conveyed and the recipient of the
award shall restore the Premises and/or Complex to the extent
reasonably practicable, and the Rent herein shall be apportioned
as of the date of such taking or conveyance so that thereafter
the Rent to be paid by Tenant shall be in the ratio that the area
of the portion of the Premises not so taken or conveyed bears to
the total area of the Premises prior to such taking.
27. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or
conveyance of the Premises or the Complex or any interest therein
by any owner of the reversion then constituting Landlord, upon
written assumption by the successor in interest of the
obligations and liabilities under this Lease, the transferor
shall thereby be released from any then current and any further
liability upon any of the terms, covenants or conditions (express
or implied) herein contained in favor of Tenant, and in such
event, insofar as such transfer is concerned, Tenant agrees to
look solely to the responsibility of the successor in interest of
such transferor in and to the Premises and this Lease. This
Lease shall not be affected by any such sale or conveyance, and
Tenant agrees to attorn to the successor in interest of such
transferor. Notwithstanding anything to the contrary above, if
Landlord sells or otherwise conveys its interest in the Premises
or Complex, Landlord shall not be relieved of its obligations
under the Lease, unless Landlord's successor in interest assumes,
in writing, Landlord's obligations under the Lease.
28. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the
interest of Landlord in the Premises and/or Complex is encumbered
by deed of trust, and such interest is acquired by the Lender or
any third party through judicial foreclosure or by exercise of a
power of sale at private trustee's foreclosure sale, Tenant
hereby agrees to attorn to the purchaser at any such judicial
foreclosure or foreclosure sale and to recognize such purchaser
as the Landlord under this Lease. In the event the lien of the
deed of trust securing the loan from a Lender to Landlord is
prior and paramount to this Lease, this Lease shall nonetheless
continue in full force and effect for the remainder of the
unexpired Term, at the same Rental herein reserved and upon all
the other terms, conditions and covenants herein contained.
29. HOLDING OVER. Any holding over by Tenant after expiration
or other termination of the Lease Term with the written consent
of Landlord delivered to Tenant shall not constitute a renewal or
extension of the Lease or give Tenant any rights in or to the
Premises except as expressly provided in this Lease. Any holding
over after the expiration or other termination of the Lease Term,
with the consent of Landlord, shall be construed to be a tenancy
from month to month, on the same terms and conditions herein
specified insofar as applicable except that the monthly Basic
Rent shall be increased to an amount equal to one hundred fifty
(150%) percent of the monthly Basic Rent required during the last
month of the Lease Term.
30. CERTIFICATE OF ESTOPPEL. Tenant and/or Landlord shall at
any time upon not less than ten (10) days prior written notice
from the other party execute, acknowledge and deliver to the
requesting party a statement in writing (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 date to which the Rent and other charges are paid in advance,
if any, and (ii) acknowledging that there are not, to the party's
knowledge, any uncured defaults on the part of the requesting
party hereunder, or specifying such defaults, if any, are
claimed. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Premises, or any
assignee or subtenant of the Premises. A requested party's
failure to deliver such statement within such time shall be
conclusive upon the requested party that this Lease is in full
force and effect, without modification except as may be
represented by the requesting party; that there are no uncured
defaults in the requesting party's performance, and that not more
than one month's Rent has been paid in advance. Landlord and
Tenant further agree to appropriately and timely respond to the
respective reasonable inquiries of the auditors of the other
party, but such response shall be limited to the respective
knowledge of the responding party.
31. CONSTRUCTION CHANGES - NOT APPLICABLE
32. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and
conditions of this Lease to be performed or observed by Tenant
shall be performed or observed by Tenant at Tenant's sole cost
and expense and without any reduction of Rent. If Tenant shall
fail to pay any sum of money, or other Rent, required to be paid
by it hereunder or shall fail to perform any other term of
covenant hereunder on its part to be performed, and such failure
shall continue for twenty (20) days after written notice thereof
by Landlord, Landlord, without waiving or releasing Tenant from
any obligation of Tenant hereunder, may, but shall not be obliged
to, make any such payment or perform any such other term or
covenant on Tenant's part to be performed. All sums so paid by
Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of Bank of America's
Prime Rate (or equivalent rate thereof) of interest plus five
percent (5%) per annum, but in no event greater then the maximum
rate of interest permitted by applicable law, from the date of
such payment or performance by Landlord, shall be paid (and
Tenant covenants to make such payment) to Landlord within ten
(10) business days after demand by Landlord, and Landlord shall
have (in addition to any other right or remedy of Landlord) the
same rights and remedies in the event of nonpayment by Tenant as
in the case of failure by Tenant in the payment of Rent
hereunder.
33. ATTORNEYS' FEES.
A. In the event that either Landlord or Tenant should
bring suit for the possession of the Premises, for the recovery
of any sum due under this Lease, or because of the breach of any
provision of this Lease, or for any other relief against the
other party hereunder, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party
therein shall be paid by the other party, which obligation on the
part of the other party shall be deemed to have accrued on the
date of the commencement of such action and shall be enforceable
whether or not the action is prosecuted to judgment.
B. In addition to any other rights of Landlord under this
Lease to defense or indemnification by Tenant, should Landlord be
named by a third party as a defendant in any suit brought by such
third party principally against Tenant in connection with or
arising out of Tenant's alleged improper or tortious conduct
associated with the Premises or the Complex, Tenant shall pay to
Landlord Landlord's reasonable costs and expenses incurred in
such suit, including reasonable attorney's fees (but Landlord
agrees to cooperate with Tenant in Tenant's efforts to provide a
joint defense to such suit or otherwise to minimize the costs of
such defense or the settlement of such suit.)
34. WAIVER. The waiver by either party of the other party's
failure to perform or observe any term, covenant or condition
herein contained to be performed or observed by such waiving
party shall not be deemed to be a waiver of such term, covenant
or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or
condition therein contained, and no custom or practice which may
develop between the parties hereto during the Lease Term shall be
deemed a waiver of, or in any way affect, the right of either
party to insist upon performance and observance by the other
party in strict accordance with the terms hereof.
35. NOTICES. All notices, demands, requests, advices or
designations which may be or are required to be given by either
party to the other hereunder shall be in writing. All notices,
demands, requests, advices or designations by Landlord to Tenant
shall be sufficiently given, made or delivered if personally
delivered to or sent to Tenant by United States certified or
registered mail, postage prepaid or by a reputable same day or
overnight courier service addressed to Tenant at 950 Page Mill
Road, Palo Alto, CA 94303, Attn: Manager Corporate Real Estate (
and if such notice constitutes a notice of default under this
Lease, then an additional copy shall be sent to Tenant at 950
Page Mill Road, Palo Alto, CA 94303, Attn: General Counsel, Legal
Department). All notices, demands, requests, advices or
designations by Tenant to Landlord shall be sufficiently given,
made or delivered if personally delivered to or sent to Landlord
by United States certified or registered mail, postage prepaid,
or by a reputable same day or overnight courier service addressed
to Landlord at its offices at c/o Peery/Arrillaga, 2560 Mission
College Blvd., Suite 101, Santa Clara, CA 95054 Attn: Richard T.
Peery. Each notice, request, demand, advice or designation
referred to in this Paragraph shall be deemed received on the
date of receipt or refusal to accept receipt at the address so
provided for notices if sent in the manner herein provided, as
the case may be. Either party shall have the right, upon ten
(10) days written notice to the other, to change its address for
notices as provided herein; however, Landlord shall send Tenant
notices to only one address (provided that in the event of a
notice of default, Landlord will provide an additional copy of
such notice of default to such one additional addressee as may be
duly notified by Tenant to Landlord in accordance with the
provisions of this Lease).
36. EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by either Tenant or Landlord does not
constitute a reservation of or option for a Lease, and this
instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
37. DEFAULT BY LANDLORD. Landlord shall not be in default
unless Landlord fails to perform obligations required of Landlord
within a reasonable time, but in no event earlier than (30) days
after written notice by Tenant to Landlord and to the holder of
any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Tenant
in writing, specifying wherein Landlord has failed to perform
such obligations; provided, however, that if the nature of
Landlord's obligations is such that more than thirty (30) days
are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30)
day period and thereafter diligently prosecutes the same to
completion.
38. CORPORATE AUTHORITY. If Tenant is a corporation (or a
partnership), each individual executing this Lease on behalf of
said corporation (or partnership) represents and warrants that he
or she is duly authorized to execute and deliver this Lease on
behalf of said corporation (or partnership) in accordance with
the by-laws of said corporation (or partnership in accordance
with the partnership agreement) and that this Lease is binding
upon said corporation (or partnership) in accordance with its
terms. If Tenant is a corporation, Tenant shall, within thirty
(30) days after execution of this Lease, deliver to Landlord a
certified copy of the resolution of the Board of Directors of
said corporation authorizing or ratifying the specific execution
of this Lease by the individual executing said Lease. In lieu of
said corporate resolution, Tenant may provide Landlord with an
outside legal opinion stating that the parties executing this
Lease on behalf of Tenant are authorized to do so by the Board of
Directors.
39. LIMITATION OF LIABILITY. In consideration of the benefits
accruing hereunder, Tenant and all successors and assigns to
Tenant as respects Tenant's interest under this Lease, covenant
and agree that, in the event of any actual or alleged failure,
breach or default hereunder by Landlord:
(A) the sole and exclusive remedy shall be against
Landlord's interest in the Premises leased herein;
(B) no constituent member and/or no partner of Landlord
shall be sued or named as a party in any suit or action (except
as may be necessary to secure jurisdiction of the limited
liability company or partnership);
(C) no service of process shall be made against any
constituent member or partner of Landlord (except as may be
necessary to secure jurisdiction of the limited liability company
or partnership);
(D) no constituent member or partner of Landlord shall be
required to answer or otherwise plead to any service of process;
(E) no judgment will be taken against any constituent
member or partner of Landlord;
(F) any judgment taken against any constituent member or
partner of Landlord may be vacated and set aside at any time
without hearing;
(G) no writ of execution will ever be levied against the
assets of any constituent member or any partner of Landlord; and
(H) these covenants and agreements are enforceable both by
Landlord and also by any constituent member or any partner of
Landlord.
Tenant agrees that each of the foregoing covenants and
agreements shall be applicable to any covenant or agreement
either expressly contained in this Lease or imposed by statute or
at common law with respect to this Lease or the Construction
Agreement.
40. SIGNS. No sign, placard, picture, advertisement, name or
notice shall be inscribed, displayed or printed or affixed on or
to any part of the outside of the Premises or any exterior
windows of the Premises without the written consent of Landlord
first had and obtained and Landlord shall have the right, if
Tenant shall fail to have obtained such consent, to remove any
such sign, placard, picture, advertisement, name or notice to and
at the expense of Tenant. If Tenant is allowed to print or affix
or in any way place a sign in, on, or about the Premises, upon
expiration or other sooner termination of this Lease, Tenant at
Tenant's sole cost and expense shall both remove such sign and
repair all damage in such a manner as to restore all aspects of
the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on any outside doors or
walls of the Building shall be printed, painted, affixed or
inscribed at the expense of Tenant by a person approved of by
Landlord (provided that such approval shall not be required if
ALZA or an ALZA Affiliate is then the Tenant).
Tenant shall not place anything or allow anything to be
placed near the glass of any window, door partition or wall which
may appear unsightly from outside the Premises.
Notwithstanding anything to the contrary above, at any time
during the Lease Term that ALZA (and/or any ALZA Affiliates) is
the tenant under all Three Leases, Landlord's approval shall not
be required; provided Tenant complies with all governing agency
requirements for said signage.
In addition to the foregoing, at any time during the Lease
Term that ALZA (and/or any ALZA Affiliates) is the tenant under
at least two of the Three Leases, Tenant shall have the exclusive
right, subject to obtaining the prior approval of Landlord
thereto, which approval shall not be unreasonably withheld, to
name the Complex after Tenant's corporate identity or the name or
nature of any business conducted on the Complex (as the name or
nature of its business may change from time to time), such as,
but not limited to, "ALZA Plaza", which name is hereby approved
by Landlord, and Tenant shall have the right to construct an
appropriately sized and tastefully designed monument signage
("Complex Sign") at such location or locations on the Complex
adjoining the dedicated streets as may be reasonably approved by
Landlord and otherwise in compliance with the City's
requirements. Neither Landlord nor Tenant shall cause the
Complex Sign to be named after any business which is then
reasonably considered to be a business competitor of Landlord or
any of its constituent members. In addition, the tenant of each
of the Three Buildings shall be entitled to erect a monument sign
identifying its business conducted in such building ("Building
Sign"), which Building Sign shall be in a location approved by
Landlord and in close proximity to such building. In all events,
any Building Sign shall be smaller in size and in a subservient
location to that of the Complex Sign.
41. CONSENT. Whenever the consent of one party to the other is
required hereunder, such consent shall not be unreasonably
withheld.
42. AUTHORITY TO EXECUTE. The parties executing this Lease
hereby warrant and represent that they are properly authorized to
execute this Lease and bind the parties on behalf of whom they
execute this Lease and to all of the terms, covenants and
conditions of this Lease as they relate to the respective parties
hereto.
43. BROKERS. Upon the Lease Commencement Date and after
Landlord shall have received from Tenant (i) payment in full of
the first month's Rent, (ii) an insurance certificate evidencing
Tenant's liability insurance coverage as required under Paragraph
13, (iii) an acceptable corporate authority as provided in
Paragraph 38, (iv) a copy of the Occupancy Permit for the
Premises and (v) a full, unconditional lien release for the
complete construction of the Premises, Landlord shall pay a
brokerage commission to Catalyst Real Estate Group in the amount
of $100,000.00 respecting Tenant's leasing of the Premises under
the terms of this Lease, pursuant to a separate written agreement
between Landlord and Catalyst Real Estate Group. Nothing herein
shall preclude Tenant from agreeing to pay any supplemental
compensation to Catalyst Real Estate Group for its services
rendered to or on behalf of Tenant. Except as provided above,
each of Landlord and Tenant represents and warrants to the other
that no party is entitled to any real estate brokerage or
salesperson commission or any finders' fee as a result of such
party's action in connection with the leasing of the Premises to
Tenant. Each of Landlord and Tenant shall save, protect, defend,
indemnify and hold the other harmless from and against any claim
to the contrary by any salesperson, broker or finder based upon
such salesperson's, broker's or finder's relationship with such
party.
44. FIRST OPTION TO EXTEND: Landlord hereby grants to Tenant an
Option to Extend ("First Option to Extend") this Lease for an
additional ten (10) year period upon the following terms and
conditions;
A. Tenant shall give Landlord written notice of Tenant's
exercise of this First Option to Extend not later than twelve
months prior to the expiration date of the Initial Term, in which
event this Lease shall be extended for an additional ten (10)
years ("First Extended Term") on all of the terms and conditions
of this Lease except that the Basic Rent shall be adjusted as set
forth below and this Paragraph 44 shall be of no further force
and effect and deemed deleted thereby. In the event that Tenant
fails to timely exercise Tenant's option as set forth herein in
writing, Tenant shall have no further Option to Extend this
Lease, and this Lease shall continue in full force and effect for
the full remaining Term, absent this Paragraph 44 and Paragraph
45 below.
B. It is hereby agreed that (i) the monthly Basic Rent for
the first year of the First Extended Term shall increase by $**
per square foot per month over the monthly Basic Rent for the
last month in the Initial Term (i.e. if said Building is 120,000
square feet and the monthly Basic Rent for the last month in the
Initial Term is $** per square foot per month); 120,000 x ** =
$**), and (ii) commencing on the anniversary following the date
of commencement of the First Extended Term, and on each
successive anniversary thereafter, the monthly Basic Rent (as
provided for in Paragraph 4A) for each succeeding one (1) year
period of the First Extended Term, shall be increased over the
monthly Basic Rent in effect immediately prior to such
anniversary by a percentage amount thereof equivalent to the
percentage increase in the CPI (as defined below) with respect to
the period from the calendar month preceding the date of
commencement of the respective one (1) year period of the Lease
Term (including the month preceding the date of commencement of
the First Extended Term) to the calendar month immediately
preceding the date of expiration of the respective one (1) year
period of the Lease Term; For example: if the Rent Commencement
Date is November 1, 1999, then the Basic Rent adjustment would be
based on the increase in the Index from October 2014 to October
2015; from October 2015 to October 2016; from October 2016 to
October 2017; from October 2017 to October 2018; from October
2018 to October 2019; from October 2019 to October 2020; from
October 2020 to October 2021; from October 2021 to October 2022;
and from October 2022 to October 2023; provided, however, that
(i) in no event shall the monthly Basic Rent for any one (1) year
period of the First Extended Term, after adjustment, be less than
the monthly Basic Rent in effect at the expiration of the one (1)
year period of the Lease Term immediately preceding, and (ii) in
the event the CPI declines in one year from the immediately
preceding year CPI and then escalates the following year, the
following year's CPI increase shall be the net increase over the
prior two year period (or such longer period if the CPI had
fallen below its prior level for a period of two years or more).
For Example; if the CPI Index for October 2013 is 152.1 and the
CPI Index for October 2014 is 147.5, the change in the CPI Index
is 147.5 / 152.1 = -3%; therefore no increase shall be due for
the year commencing November 2014; if the CPI index for October
2015 is 154.9, the net CPI increase from October 2013 to October
2015 shall be 1.84%.
Subject to the terms stated herein, the monthly Basic Rent
shall be subject to a CPI adjustment on the following dates
(assuming a November 1, 1999 Rent Commencement Date): 11/01/15,
11/01/16, 11/01/17, 11/01/18, 11/01/19, 11/01/20, 11/01/21,
11/01/22 and 11/01/23.
The First Extended Term's monthly Basic Rent, as stated
above, shall be adjusted, commencing on the first anniversary
following the date of commencement of the First Extended Term, in
accordance with the following formula based on the Consumer Price
Index for all Urban Consumers, subgroup "All Items", San
Francisco-Oakland-San Jose, California Metropolitan Area (1982-84
= 100) published by the Bureau of Labor Statistics, U.S.
Department of Labor (the "CPI" or "Index") which is published
for the calendar month which most nearly precedes each and every
adjustment date (the "Beginning Index") and the Index which is
published for the calendar month which most nearly precedes each
and every anniversary of the adjustment date (the "Adjustment
Index"). The initial "CPI" adjusted Basic Rent shall be
calculated by adding to the monthly Basic Rent due for the first
year of the First Extended Term an amount calculated by
multiplying the monthly Basic Rent due for the first year of the
First Extended Term by the percent increase in the Index (to wit:
the percent increase from Beginning Index for the calendar month
which immediately precedes the date of commencement of the First
Extended Term to the Adjustment Index for the calendar month
which immediately precedes the first anniversary of the date of
commencement of the First Extended Term). The Basic Rent for
each succeeding one-year period will be determined by using the
same formula applied to the prior year's adjusted monthly Basic
Rent.
Landlord will as soon as practicable, notify Tenant in
writing of each CPI increase and the adjusted Basic Rent, and
Tenant will make any Basic Rent payments falling due more than
ten (10) days after the receipt of notice of such adjusted Basic
Rent in the adjusted amount (and if such notice shall be delayed
so that Tenant shall have theretofore underpaid the Basic Rent
applicable to the period since the last anniversary of the date
of commencement of the First Extended Term, Tenant shall, within
ten (10) days following receipt from Landlord of notice of the
amount of such underpayment, pay such previously underpaid
amount. If the Index is changed so that the Base Year of the
Index differs from that used as of the month immediately
preceding the month in which the term commences, the Index shall
be converted in accordance with the conversion factor published
by the United States Department of Labor, Bureau of Labor
Statistics. If the Index is discontinued or revised during the
term, such other government index or other computation with which
it is replaced or if not replaced, which most closely resembles
it, shall be used in order to obtain substantially the same
result as would be obtained if the Index had not been
discontinued or revised. If the Index is no longer published on
a monthly basis, and it is no longer published for the respective
calendar month immediately preceding the date of commencement of
the First Extended Term, then the Index for such calendar month
for which the Index is published which most nearly precedes the
date of commencement of the First Extended Term shall instead be
used. Each annual increase in the Basic Rent will be calculated
as shown below in the example displayed (based on the below
reflected Basic Rent and CPI adjustment assumptions):
CPI Calculation Example
CPI ANNUAL
EXAMPLE CPI CHANGE INCREASE %
CPI increase 156.0 * 11/15 2.56%
152.1 * 11/14
(*factors used
for example only)
Basic Rent @ 10/15 $**
Increase of 2.56% $**
New Adjusted Basic Rent
commencing the second year
of the First Extended Term $**
C. Increased Security Deposit: Subject to the terms of
Paragraph 4G, in the event the term of Tenant's Lease is extended
pursuant to this Paragraph 44, Tenant's Security Deposit, if then
required under Paragraph 4G, shall be increased to equal twice
the anticipated Basic Rental due for the last month of the First
Extended Term.
45. SECOND OPTION TO EXTEND. Provided Tenant has extended the
Lease for an additional ten (10) year period as set forth in
Paragraph 44 above, Landlord hereby grants to Tenant an Option to
Extend ("Second Option to Extend") this Lease for an additional
term equal to nine (9) years and eleven (11) months reduced day
for day by (i) any Early Occupancy Period as provided in
Paragraph 2C above, and (ii) the period between the date of
execution of this Lease and the Lease Commencement Date (the
"Build-Out Period") except to the extent that legal counsel for
Tenant delivers to Landlord and Tenant prior to the exercise of
the Second Option to Extend, a legal opinion to the effect that
all or some portion of such Build-Out Period is not includible
for Proposition 13 reassessment purposes in the calculation of
the overall maximum term of this Lease (which term was to be in
all events less than 35 years in duration as of the date of
execution of this Lease), in which event such portion of the
Build-Out Period which has been so determined not to be
includible for Proposition 13 purposes shall not be deducted from
such nine year and eleven month term (as so calculated, the
"Second Extended Term") on the following terms and conditions;
A. Tenant shall give Landlord written notice of Tenant's
exercise of this Second Option to Extend not later than twelve
months prior to the expiration date of the First Extended Term,
in which event this Lease shall be extended for the Second
Extended Term on all of the terms and conditions of this Lease,
except that the Basic Rent shall be adjusted as set forth below
and this Paragraph 45 shall be of no further force and effect and
deemed deleted thereby. In the event that Tenant fails to timely
exercise Tenant's option as set forth herein in writing, Tenant
shall have no further Option to Extend this Lease, and this Lease
shall continue in full force and effect for the full remaining
Lease Term, absent this Paragraph 45.
B. The Second Extended Term's monthly Basic Rent shall be
adjusted based on annual adjustments in the CPI in an identical
manner to that provided in Paragraph 44 above with respect to the
First Extended Term, with the first adjustment during the Second
Extended Term to be effective as of the date of commencement of
the Second Extended Term. The initial "CPI" adjusted Basic Rent
for the Second Extended Term shall be calculated by adding to the
monthly Basic Rent during the last month of the First Extended
Term an amount calculated by multiplying the monthly Basic Rent
during the last month of the First Extended Term by the percent
increase in the Index over the last year of the First Extended
Term (to wit: the percent increase from Beginning Index for the
calendar month which immediately preceded the date of
commencement of the last year of the First Extended Term to the
Adjustment Index for the calendar month which immediately
preceded the date of commencement of the Second Extended Term).
The Basic Rent for each succeeding one-year period will be
determined by using the same formula applied to the prior year's
adjusted monthly Basic Rent. Assuming the Initial Term commences
on November 1, 1999, the Second Extended Term would commence on
November 1, 2024 and such CPI adjustments would be determined
with respect to the following annual periods: from October 2023
to October 2024; from October 2024 to October 2025; from October
2025 to October 2026; from October 2026 to October 2027; from
October 2027 to October 2028; from October 2028 to October 2029;
from October 2029 to October 2030; from October 2030 to October
2031; from October 2031 to October 2032 and from October 2032 to
October 2033 provided, however, that (i) in no event shall the
monthly Basic Rent for any one (1) year period of the Second
Extended Term, after adjustment, be less than the monthly Basic
Rent in effect at the expiration of the prior one (1) year
period, and (ii) in the event the CPI declines in one year from
the immediately preceding year CPI and then escalates the
following year, the following year's CPI increase shall be the
net increase over the prior two year period (or such longer
period if the CPI had fallen below its prior level for a period
of two years or more).
Subject to the terms stated herein, the monthly Basic Rent
shall be subject to a CPI adjustment on the following dates
(assuming the Initial Term commences on November 1, 1999):
11/01/24, 11/01/25, 11/01/26, 11/01/27, 11/01/28, 11/01/29,
11/01/30, 11/01/31, 11/01/32 and 11/01/33.
The respective obligations of Landlord and Tenant as to
notice of and payment of any CPI adjustments to Basic Rent shall
be as provided in Paragraph 44 above as to the First Extended
Term, and the provisions thereof relating to any change in the
manner of calculation or publishing of the CPI shall similarly
apply during the Second Extended Term.
C. Increased Security Deposit: Subject to Paragraph 4G, in
the event the term of Tenant's Lease is extended pursuant to this
Paragraph 45, Tenant's Security Deposit shall if then required
under Paragraph 4G, be increased to equal twice the anticipated
Basic Rental due for the last month of the Second Extended Term.
46. FIRST RIGHT OF REFUSAL EXCLUSIVE TO ALZA OR AN ALZA
AFFILIATE. In the event (i) ALZA or an ALZA Affiliate is the
Tenant under this Lease or this Lease has expired and ALZA or an
ALZA Affiliate was the Tenant under this Lease at the time of
such expiration (but the First Right of Refusal granted herein
shall in no event extend to any Unaffiliated Assignee) and (ii)
provided Tenant is not in default pursuant to Paragraph 22
("Bankruptcy and Default") of this Lease (i.e. Tenant has
received notice of a default under this Lease and the applicable
cure period has expired and Tenant has not then cured such
default), in any of the terms, covenants, and conditions of this
Lease (or if this Lease has then terminated, that this Lease was
not terminated as a result of any default of Tenant), and (iii)
the net worth of ALZA or such ALZA Affiliate at such time equals
or exceeds the amount provided in Paragraph 19C related to an
assignment of this Lease, then Tenant, during and after the
expiration of the Lease Term and subject to the provisions
hereinafter contained, shall have the First Right of Refusal to
lease this Building, or any portion of the Building then being
separately offered by Landlord for lease (hereinafter referred to
as "First Right Space") upon the following terms and conditions
(provided that if Landlord is offering this Building for lease
together with all or any portion of Building Two and/or Building
Three, the First Right Space shall include all of the space in
the Complex so offered for lease, but shall not include any space
outside of the Complex, and Tenant, if it exercises such First
Right of Refusal, shall be required to exercise it with respect
to the entirety of the First Right Space):
A. Landlord agrees that in the event Landlord receives an
offer from a third party(s) to lease all or any portion of this
Building at a rental and upon terms and conditions which are
satisfactory to Landlord, Landlord shall, prior to executing a
lease agreement with a third party for said First Right Space,
offer said First Right Space to Tenant at the same rental and
other economic terms and conditions upon which Landlord is
willing to lease said First Right Space to the third party.
Tenant shall have ten days after receipt of written notice of
said rental and other economic terms and conditions in which to
accept said rental and other economic terms and conditions in
writing; provided, however, that if such proposal contains any
unusually restrictive provision (such as a use clause that would
restrict Tenant from the uses permitted by any assignee
hereunder) such provision shall be inapplicable to Tenant in the
event of the acceptance of the rental and other economic terms
and conditions so offered. In the event Tenant rejects or fails
to accept said rental and other economic terms and conditions so
presented by Landlord within such ten day period, and Landlord
proceeds within one hundred eighty days thereafter to lease such
First Right Space to such third party upon terms no more
favorable to the third party than the rental and other economic
terms as presented to Tenant, then Tenant shall have no further
first right of refusal for such First Right Space (but if
Landlord does not so lease the First Right Space, then such first
right of refusal shall be reinstated as to such First Right
Space). In the event Tenant so accepts said rental and other
economic terms and conditions, Tenant must execute a lease
agreement for said First Right Space within twenty (20) days from
receipt of a lease agreement from Landlord which conforms to such
accepted terms and which embodies the terms and conditions which
are then customarily acceptable to landlords in the local
geographic area for leased premises and tenants of the size and
nature of the First Right Space and the then Tenant. Landlord
and Tenant shall act reasonably in considering and deciding
whether and how to incorporate any comments of Landlord or Tenant
as to the terms and conditions of the proposed lease agreement.
If Tenant fails to execute such a lease agreement within such
twenty day period, Tenant shall have no further first right of
refusal for said First Right Space, and Landlord shall be free to
execute a lease with a third party without further obligation to
Tenant with respect to said First Right Space so offered to
Tenant.
B. The first right of refusal of Tenant under this
Paragraph 46 are granted for the benefit of ALZA and any ALZA
Affiliate, and may not be otherwise assigned or transferred by
Tenant. The rights and obligations of Tenant and Landlord under
this Paragraph 46 shall survive the expiration of the Lease Term.
47. MISCELLANEOUS AND GENERAL PROVISIONS.
A. Use of Building Name. Tenant shall not, without the
written consent of Landlord, use the name of the Building for any
purpose other than as the address of the business conducted by
Tenant in the Premises, provided that for so long as the Building
or Complex is bearing the name designated by ALZA or any ALZA
Affiliate pursuant to Paragraph 40 hereof, ALZA or any ALZA
Affiliate may use such name as it considers appropriate.
Conversely, for so long as the Building or Complex is bearing the
name designated by ALZA or any ALZA Affiliate, Landlord shall not
use the name except as a reference to the Building or Complex.
B. Choice of Law; Severability. This Lease shall in all
respects be governed by and construed in accordance with the laws
of the State of California in the jurisdiction of Santa Clara
County. If any provision of this Lease shall be invalid,
unenforceable or ineffective for any reason whatsoever, all other
provisions hereof shall be and remain in full force and effect.
C. Definition of Terms. The term "Premises" includes the
space leased hereby and any improvements now or hereinafter
installed therein or attached thereto. The term "Landlord" or
any pronoun used in place thereof includes the plural as well as
the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the
plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each
of their respective heirs, executors, administrators, successors
and permitted assigns, according to the context hereof, and the
provisions of this Lease shall inure to the benefit of and bind
such heirs, executors, administrators, successors and permitted
assigns. The term "ALZA Affiliate" shall mean any person or
entity that at such time as it may become the tenant under any of
the Three Leases meets one or more of the following requirements:
(i) is directly, or indirectly through one or more
intermediaries, in control of, or controlled by or under common
control with ALZA; (ii) is the successor to ALZA or any other
ALZA Affiliate by merger, including an acquisition of all or
substantially all of the assets of any such entity or any
division operated by such entity; or (iii) is a corporation,
joint venture, partnership, limited liability company, trust or
other entity in which at least fifty percent of the beneficial
ownership is then held by ALZA or an ALZA Affiliate. As used in
the preceding sentence, the term "control" means holding 50% or
more of (i) the voting stock or (ii) both profits and capital
interests, as applicable, of any entity.
The term "person" includes the plural as well as the
singular and individuals, firms, associations, partnerships and
corporations. The term "including" means including, but not
limited to. Words used in any gender include other genders. If
there be more than one Tenant the obligations of Tenant hereunder
are joint and several. The paragraph headings of this Lease are
for convenience of reference only and shall have no effect upon
the construction or interpretation of any provisions hereof.
D. Time Of Essence. Time is of the essence of this Lease
and of each and all of its provisions.
E. Quitclaim. At the expiration or earlier termination of
this Lease, Tenant shall execute, acknowledge and deliver to
Landlord, within ten (10) days after written demand from Landlord
to Tenant, any quitclaim deed or other document reasonably
required by any reputable title company, licensed to operate in
the State of California, to remove the cloud or encumbrance
created by this Lease on the Property and/or Complex of which
Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This
Lease along with any exhibits and attachments hereto and the
related Construction Agreement constitutes the entire agreement
between Landlord and Tenant relative to the leasing by Tenant
from Landlord of the Premises and this Lease and the exhibits and
attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant.
Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves and
their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this Lease.
G. Recording. Landlord and Tenant shall record a short
form memorandum hereof in the form attached hereto as Exhibit F.
H. Diminution of Light, Air or View. Tenant covenants and
agrees that no diminution or shutting off of light, air or view
by any structure which may be hereafter erected (whether or not
by Landlord) shall in any way affect this Lease, entitle Tenant
to any reduction of Rent hereunder or result in any liability of
Landlord to Tenant.
48. AGREEMENT NOT TO CAPITALIZE REPAIRS AND/OR REPLACEMENTS TO
PREMISES, ETC. Landlord's willingness to enter into this Lease
with Tenant under the terms stated herein and for the benefit of
Tenant and for valuable consideration, which is hereby
acknowledged, the following agreement between the parties affects
the interpretation of the foregoing provisions of this Lease or
any rights that might otherwise exist in favor of Tenant at law
with respect to the leasing of the Premises from Landlord.
Tenant understands and acknowledges that this Lease shall be
deemed and construed to be a "net lease" and during the Initial
Term, and any Extended Term(s), of this Lease that Tenant shall
pay Landlord, the Rent and other payments due hereunder, free of
any charges, assessments, impositions, expenses or deductions of
any kind and without abatement, deduction or setoff unless
otherwise expressly provided in this Lease, and Landlord shall
not be expected or required as a result of the relationship
between Landlord and Tenant created by this Lease, to be
obligated to make any payment to or on behalf of Tenant or be
under any other obligation to Tenant hereunder except to the
extent specifically provided in this Lease, and Tenant agrees to
pay all costs and expenses of every kind which may arise or
become due from Tenant under the provisions of this Lease during
the Initial Term and any Extended Term(s). Except as expressly
provided in this Lease or the Construction Agreement, Landlord
shall not be liable and/or responsible under the provisions of
this Lease for contributing any money for any maintenance,
repairs and/or replacement of the Premises or any part thereof
and as to the maintenance, repairs or replacement obligations of
Tenant under this Lease, Tenant waives any and all rights it
might otherwise have to assert that such expenditure is more
appropriately a Landlord expenditure which should be treated as a
capital expenditure and/or to be amortized as an item of
Additional Rent hereunder. For example, if during the Lease Term
(including any Extended Term(s)), a portion or the entire roof
membrane and/or HVAC system needs to be repaired or replaced,
such expenditure shall not be treated as a capital expenditure to
be borne by Landlord, but rather Tenant shall be responsible,
upon such occurrence, for bearing the entire cost for such repair
and/or replacement. Nothing herein shall be deemed to relieve
Landlord from its express obligations under this Lease or the
Construction Agreement, including, but not limited to, Landlord's
obligations under Paragraph 25 hereof in the event of damage or
destruction, or under the various provisions herein applicable to
Landlord's maintenance and repair obligations with respect to the
Common Area if the Tenant hereunder is not then the tenant under
all Three Leases or with respect to the Building in the event
this Lease is amended so as not to apply to all of the Premises.
By placing their initials below, both parties acknowledge
their understanding and their agreement with the provisions of
this Paragraph 48.
Initials: __________ Initials:__________
Tenant Landlord
IN WITNESS WHEREOF, Landlord and Tenant have executed and
delivered this Lease as of the day and year last written below.
LANDLORD: TENANT:
P/A CHARLESTON ROAD LLC, ALZA CORPORATION
a California limited liability company a Delaware corporation
By: /s/ John Arrillaga By: /s/ Gary V. Fulscher
John Arrillaga, Trustee, UTA dated 7/20/77
(John Arrillaga Survivor's Trust, formerly
known as the Arrillaga Family Trust),
as amended
Date: September 12, 1997 Date: September 12, 1997
By /s/Richard T. Peery
Richard T. Peery, Trustee, UTA dated
7/20/77 (Richard T. Peery Separate
Property Trust), as amended
Date: September 12, 1997
By ALZA Land Management, Inc.
a Delaware corporation
By: /s/Gary V. Fulscher
Title: President
Gary V. Fulscher
Type or Print Name
Date: September 12, 1997
Initial: ______
EXHIBIT 10.12
THE SYMBOL "**" IS USED TO INDICATE
THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION
CONSTRUCTION AGREEMENT RELATED TO LEASE AGREEMENTS DATED SEPTEMBER 1, 1997,
BY AND BETWEEN P/A CHARLESTON ROAD LLC, A CALIFORNIA LIMITED
LIABILITY CORPORATION, AS LANDLORD, AND ALZA CORPORATION, A
DELAWARE CORPORATION, AS TENANT, FOR ALL OF THOSE THREE CERTAIN
BUILDINGS TO BE CONSTRUCTED BY TENANT AND ASSOCIATED SITE
IMPROVEMENTS, LOCATED AT AMPHITHEATRE PARKWAY AND CHARLESTON
ROAD, IN MOUNTAIN VIEW, CALIFORNIA
THIS AGREEMENT ("Construction Agreement") sets forth the
agreement of P/A Charleston Road LLC, a California limited
liability company ("Landlord"), and ALZA Corporation, a Delaware
corporation ("Tenant", with Landlord and Tenant sometimes
hereinafter collectively referred to as the "Parties"), relative
to the design and construction of the Site Work (which includes
the Common Areas), Cold Shell Improvements, Warm Shell
Improvements (with Cold Shell Improvements, Warm Shell
Improvements and Site Work hereinafter collectively referred to
as "Shell Improvements") and Interior Improvements for three
buildings (collectively referred to as the "Buildings" and
individually as a "Building" (and as to a respective Building as
"Building One", "Building Two" and "Building Three")) suitable
for office and for research and development use to be constructed
pursuant to the terms and conditions of this Construction
Agreement at that certain undeveloped real property owned by
Landlord and consisting of approximately 13.48 acres located at
Amphitheatre Parkway and Charleston Road, in Mountain View,
California (the "Property"). Each of the Buildings is separately
the subject of a separate Lease each dated as of the date of this
Construction Agreement by and between Landlord and Tenant and
respectively referred to as the Building One Lease, the Building
Two Lease and the Building Three Lease (each a "Lease" and
collectively the "Leases"). The aggregate square footage of all
three Buildings is currently anticipated to be in the range of
approximately 300,000 to 360,000 square feet, dependent upon what
square footage is ultimately approved by the City of Mountain
View during the Planned Community Permit process, and ultimately
subject to final measurement as provided in Section 7 below. As
provided in Section 2.A below, Tenant is obligated to exercise
due diligence to maximize the size of the permitted development.
1. DEFINITIONS: In addition to the defined terms set
forth above, as used in this Construction Agreement, the
following terms shall have the following meanings, and any
initially capitalized terms used in this Construction Agreement
which are not defined in this Construction Agreement, but which
are defined in the form of the Leases, shall have the meanings
ascribed to them by the form of the Leases:
A. Approved Specifications: The term "Approved
Specifications" means those certain plans and specifications for
the Shell Improvements and Interior Improvements to be
constructed by Tenant, which are from time to time referenced or
described on Schedule "A-1" to this Construction Agreement. The
Parties acknowledge that as of the date of this Construction
Agreement, the plans and specifications have not been completed
and accordingly will not be attached until agreed to by the
Parties in accordance with the terms of this Construction
Agreement (and despite the fact that such plans and
specifications are not yet completed, that except for Damage
Delays (as defined in Section 1.M), Landlord Delays (as defined
in Section 1.N), and Weather Delays (as defined in Section 1.O),
neither any delay in completing or failure to complete such plans
and specifications nor any delay in completing or failure to
complete the construction of the Improvements shall affect
Tenant's obligation to pay Rent in accordance with the terms of
the respective Lease on the Rent Commencement Date (as defined in
Section 1.K)).
B. Shell Improvements: The term "Shell Improvements"
shall mean the combination of the Cold Shell Improvements, Warm
Shell Improvements and Site Work which are to be constructed by
Tenant and paid for by the Parties as set forth in Section 3.F.
C. Cold Shell Improvements: The term "Cold Shell
Improvements" shall mean the following: (i) the shell of each of
the three (3) Buildings, consisting of a pile or spread footing
foundation, the exterior walls (including the architectural skin
of each Building), the floor slab for each story, the floor deck
for each story, the load bearing walls, the roof system, the roof
membrane with insulation, two standard width interior stairways,
exterior doors and exterior door hardware, duct shafts and the
shafts (but not equipment) for the elevators, (ii) the
underground parking that will serve all three Buildings,
including any lighting for such underground area, and (iii) all
paving and other parking areas, striping, sidewalks, loading
docks, monument sign for the Complex and each Building, parking
curbs, ramps, dumpsters, gutters, irrigation system, landscaping,
storm sewer, 4,000 amp electrical service per Building at 480
volts with primary transmitter, bus duct, pull section, switch,
main utility service conduits (excluding electrical panel) from
the street to each Building's perimeter, transformer pad, the
main plumbing line into each Building, water, gas and sewer
connection fees including cost to hook up to Mountain View sewer
system, any building permit fees, school fees, or other building
mitigation fees, premiums for any insurance required to be
carried hereunder (whether by Tenant or any Prime Contractors)
during the course of construction of the Cold Shell Improvements,
and any contractor's fees, architect's fees and engineer's fees,
applicable to the design or construction of any Cold Shell
Improvements, but excluding (w) roof screens, (x) building
connectors, (y) outside parking lot lighting, and (z) utility
pads (including exterior walls and all other construction
elements of any such utility pads and electrical panels).
D. Warm Shell Improvements: The term "Warm Shell
Improvements" shall mean the following for each of the three
Buildings: the core electrical systems (including distribution
panels, HVAC, main electrical power risers and energized
electrical power panels located in an electrical room (one on
each floor) as required by code, and similar items), the core
mechanical systems (including package units and shafts), fire
protection and life safety systems and equipment as required by
code to obtain a temporary occupancy permit (for shell
distribution, including master fire sprinkler grid system), main
plumbing and HVAC risers in the Building's core, main telephone
risers connected to telephone backboards located in a telephone
room/closet (one on each floor) as required by code, janitorial
closet (one on each floor), perimeter exterior and building core
walls finished with gypsum wall board (taped), core toilets (one
pair of toilet rooms per floor), building connectors (open on all
building levels, to the extent counterpart floors exist in the
other Buildings), elevators for passengers and freight in each
Building (with elevator cabs finished), exposed ceiling
structure, painting of the garage interior, loading docks, roof
screens, parking lot lighting (other than lighting in the
basement parking area that services all three Buildings), utility
pads (including all construction elements of utility pads such as
any exterior walls), any governmental or utility charges or fees
for connection to utilities (other than water, gas and sewer
connection fees), any building permit fees, school fees, or other
building mitigation fees associated with the Warm Shell
Improvements, premiums for any additional amount or period of
coverage of insurance required to be carried hereunder (whether
by Tenant or any Prime Contractors) with respect to the
construction of the Warm Shell Improvements, and any contractor's
fees, architect's fees and engineer's fees, applicable to the
design or construction of any Warm Shell Improvements.
E. Site Work: The term "Site Work", which includes Common
Area, shall mean onsite and offsite work to be constructed by
Tenant and paid for by the Parties as set forth in Section 3.F as
reasonably required to prepare the Property for development as
contemplated in this Construction Agreement (including any
additional onsite or offsite work that may be required in order
to obtain any required governmental approvals (including, but not
limited to, the Planned Community Permit and any building
permits) or to obtain approval for any increased size of
development on the Property), including, without limitation,
construction and improvement of the Common Areas of the Complex,
grading, any required street improvements, any required onsite or
offsite extension of utilities, any required onsite or offsite
landscaping, any required levee reinforcement, and the Property's
share (which is equal to 66% of the total) of any required onsite
or offsite burrowing owl mitigation. Tenant's legal fees and
consultant's fees associated with Tenant's due diligence review
of the Property and any costs related thereto (including, but not
limited to, any fees or costs related to the drafting and
negotiating of this Construction Agreement, the Leases, the
Ground Lease being entered into by Tenant and certain members of
Landlord, or the limited liability company formation documents
related to Landlord), shall not be included in the cost of the
Site Work but Tenant's legal fees and consultant's fees
associated with seeking or obtaining any governmental approvals
or permits associated with (or imposed as a condition to)
developing the Complex shall be included in the cost of the Site
Work (including by way of example, 66% of the legal fees and
consultant's fees associated with the negotiation, preparation
and review of the applications, reports, license agreements and
memorandums of understanding relating to the burrowing owl
mitigation plan).
F. Interior Improvements: The term "Interior
Improvements" shall mean all improvements to be constructed by
Tenant and paid for by Tenant, both within the Building shell of
each Building and any additional improvements which Tenant may,
with the approval of Landlord, desire to make to the Property, to
the extent not included in the definition of Shell Improvements
as set forth above. By way of example, Interior Improvements
shall include, but not be limited to, what are customarily
considered tenant space improvements as applicable to the use
being made of any interior portion of the Building, such as
carpeting, vinyl floor covering, drop ceilings, interior
plumbing, heating and air conditioning distribution systems,
electrical distribution systems, painting, interior walls, floor
to ceiling partitioning, the installation or distribution within
any tenant spaces of any fire sprinkler, fire protection and life
safety systems and equipment, any clean room modules, any
monument signs for a particular Building (to the extent not
constructed or completed as part of the Shell Improvements), any
building permit fees, school fees, or other building mitigation
fees associated with any Interior Improvements, premiums for any
additional amount or period of coverage of insurance required to
be carried hereunder (whether by Tenant or any Prime Contractors)
with respect to the construction of any Interior Improvements and
any contractor's fees, architect's fees and engineer's fees,
applicable to the design or construction of any Interior
Improvements. Interior Improvements as used herein shall include
only the initial full buildout of any portion of the Building
sufficient to obtain a certificate of occupancy or its equivalent
for the use of such portion of the Building (and shall not
include any subsequent alterations or additions to the initial
buildout of such portion of the Building). Section 4.A of this
Construction Agreement sets forth the obligation of Tenant as to
causing Interior Improvements to be constructed in each of the
Buildings.
G. Improvements: The term "Improvements" shall mean the
Shell Improvements and the Interior Improvements.
H. Architect: The term "Architect" shall mean such
licensed architect(s) as (i) are selected by Tenant and approved
by Landlord for the design of the Shell Improvements, with the
approval of Landlord not to be unreasonably withheld or delayed,
and with Hoover & Associates and EDAW Inc. being hereby approved
by Landlord as the building architect and landscape architect,
respectively, but without any obligation of Tenant to continue to
use either of such architects in the future, but in the event
either or both are to be replaced by Tenant, Tenant shall obtain
the approval of Landlord to the replacement Architect. While
Tenant has not committed to use any particular Architect for the
design of any of the Interior Improvements, and Tenant may use
different Architects for different portions of a Building,
Landlord hereby preapproves the use of each of Hoover &
Associates, RMW, Inc., MBI Inc., and Ken Kornberg & Associates,
Inc. as an interior architect for all or any portion of the
Interior Improvements
I. Prime Contractor(s): The term "Prime Contractor" shall
mean such licensed general contractor(s) (i) as is jointly
selected by Landlord and Tenant after consideration of a number
of potential candidates (which candidates shall include Vance
Brown, DPR Construction Inc., South Bay Construction Company,
Swinerton and Walberg and Rudolph & Sletten ), each of whose
approval shall not be unreasonably withheld, for the construction
of the Shell Improvements and (ii) as selected by Tenant, and
approved by Landlord, with respect to the construction of all or
any portion of the Interior Improvements. Vance Brown is
approved by Landlord and conditionally approved by Tenant as the
Prime Contractor for the Shell Improvements, but without any
obligation of Tenant to continue to use Vance Brown as the Prime
Contractor in the future. In the event Vance Brown is to be
replaced by Tenant, Landlord's approval of the replacement Prime
Contractor for the Shell Improvements shall be obtained. While
Tenant has not committed to use any particular Prime Contractor
for the construction of any of the Interior Improvements, and
Tenant may use different Prime Contractors for different portions
of a Building, Landlord hereby preapproves the use of any of the
following contractors: Vance Brown, DPR Construction Inc., South
Bay Construction Company, Swinerton and Walberg and Rudolph &
Sletten.
J. Substantial Completion: The term "Substantial
Completion" and "Substantially Completed", shall mean separately
as to each of the three (3) Buildings:
(1) As to the Shell Improvements, the date when all of
the following have occurred with respect to the Shell
Improvements with respect to each such Building, on a Building by
Building basis: (i) the construction of the Shell Improvements in
question have been substantially completed in accordance with the
approved plans therefor and with all applicable laws, statutes,
codes, rules and regulations (collectively, "Laws") except for
minor punch list items which do not prevent Tenant from
reasonably proceeding with the construction of the Interior
Improvements; (ii) the Architect has executed a certificate or
statement representing that, to its knowledge, such Shell
Improvements have been substantially completed in accordance with
the plans and specifications therefor and all applicable Laws,
except for minor punch list items which do not prevent Tenant
from reasonably proceeding with the construction of the Interior
Improvements; (iii) the Building Department of the City of
Mountain View has completed its final inspection of such Shell
Improvements and has "signed off" the building inspection card
approving such work as complete, except for minor punch list
items which do not prevent Tenant from reasonably proceeding with
the construction of the Interior Improvements; (iv) a Certificate
of Occupancy or other approval as to the Shell Improvements is
issued by the City of Mountain View (provided, however, that such
Certificate of Occupancy or other approval as to the Shell
Improvements may be issued subject to the condition that the
Interior Improvements be likewise approved); (v) Landlord has
received unconditional lien releases in form sufficient to
satisfy the applicable requirements of California Civil Code
Section 3262 from all contractors, subcontractors and materialmen
that have provided services or materials for the applicable Shell
Improvements, together with such other evidence of lien-free
completion of such Shell Improvements as Landlord may reasonably
request; and (vi) all Site Work improvements have been
sufficiently concluded and completed so as not unreasonably to
interfere with access to the applicable Building and the use of
the parking area and other outside areas (including the
elimination of any outside storage of construction materials and
the removal of any construction trailers from the Property); and
(2) As to all or any portion of the Interior
Improvements, the date when all of the following have occurred
with respect to such Interior Improvements, on a space by space
basis: (i) the construction of the Interior Improvements in
question have been substantially completed in accordance with the
approved plans therefor and with all applicable Laws except for
minor punch list items which do not prevent Tenant from occupying
the applicable portion of the Building for the purposes of
conducting business therein; (ii) the Architect has executed a
certificate or statement representing that, to its knowledge,
such Interior Improvements have been substantially completed in
accordance with the plans and specifications therefor and all
applicable Laws, except for minor punch list items which do not
prevent Tenant from occupying the applicable portion of the
Building for the purposes of conducting business therein; (iii)
the Building Department of the City of Mountain View has
completed its final inspection of such Interior Improvements and
has "signed off" the building inspection card approving such work
as complete, except for minor punch list items which do not
prevent Tenant from occupying the applicable portion of the
Building for the purposes of conducting business therein; (iv) a
Certificate of Occupancy or other approval as to the Interior
Improvements is issued by the City of Mountain View; and (v)
Landlord has received unconditional lien releases in form
sufficient to satisfy the applicable requirements of California
Civil Code Section 3262 from all contractors, subcontractors and
materialmen that have provided services or materials for the
applicable Interior Improvements, together with such other
evidence of lien-free completion of such Interior Improvements as
Landlord may reasonably request.
The Parties acknowledge that the Rent Commencement Date
of each respective Lease is fixed so as to be the earlier of:
(i) the Scheduled Rent Commencement Date (as defined in
Section 1.K) subject only to any extension arising from any
Landlord Delay (as defined in Section 1.N), any Damage Delay
(as defined in Section 1.M) or any Weather Delay (as defined
in Section 1.O) pursuant to Section 9 below, regardless of
the status of the completion of the Shell Improvements
and/or Interior Improvements as of the Scheduled Rent
Commencement Date, or
(ii) the applicable Substantial Completion Date (as
defined in Section 1.K) of the Building Shell and Tenant
Improvements as to the applicable Building.
K. Rent Commencement Date: The term "Rent Commencement
Date" for each of the three (3) Buildings shall mean the earlier
of:
(i) eighteen (18) months (the "Agreed Construction
Period") following the earlier of the following dates
(regardless of whether or not Tenant has completed the
Improvements as set forth in this Construction Agreement):
(a) the date that Tenant obtains from the City of
Mountain View a Planned Community Permit (the "PCP
Permit") permitting Tenant to proceed generally
thereafter with seeking the issuance of building
permits for the construction of the three (3) Buildings
(but the issuance of a building permit is not a
condition to the commencement of the Agreed
Construction Period), or
(b) the date of October 31, 1997 (the "Outside
Date") subject to the right of Landlord to extend such
Outside Date pursuant to Section 2.C below (with the
date as so determined pursuant to clause (i) hereof,
including as affected by any extension of the Outside
Date by Landlord pursuant to Section 2.C below, herein
referred to as the "Scheduled Rent Commencement Date");
or
(ii) the Substantial Completion of the Shell
Improvements and Interior Improvements on a Building by
Building basis (the "Substantial Completion Date").
Subject to the following sentence, the Agreed Construction
Period shall be subject to an automatic extension on a day for
day basis in the event and to the extent of the aggregate of (i)
any Landlord Delay, (ii) any Damage Delay, and (iii) any Weather
Delay, but shall not otherwise be subject to extension regardless
of the status of the completion of the Shell Improvements or
Interior Improvements and regardless of whether the actual
construction period exceeded the Agreed Construction Period. Any
delay in Substantial Completion of the Improvements caused by any
combination of Landlord Delay, Damage Delay and Weather Delay
shall not be double counted, to the effect that each single day
of delay in Substantial Completion of the Improvements occasioned
by more than one cause shall nevertheless be allocated to a
single category of delay (i.e. either Landlord Delay, Damage
Delay or Weather Delay). Subject to the right of Landlord to
extend such Outside Date pursuant to Section 2.C below, either
Landlord or Tenant shall have the right, as provided in Section
2.C below, to terminate this Construction Agreement and the
Leases upon written notice to the other within five (5) business
days after the Outside Date if the City Council of the City of
Mountain View, California fails to finally approve and cause the
issuance by the City of Mountain View of a PCP Permit on or
before the Outside Date, where the PCP Permit is consistent with
the application for such PCP Permit submitted by Tenant to the
City of Mountain View on August 21, 1997 (or which PCP is
otherwise reasonably acceptable to Landlord and Tenant
considering the standards for acceptability set forth in the
following sentence). Any conditions which may be imposed by the
City Council of the City of Mountain View, California in
otherwise approving the issuance of the PCP Permit shall not be
grounds for either Landlord or Tenant to elect, pursuant to
Section 2.C below, to terminate this Construction Agreement and
the Leases, unless one or more of such conditions would result in
any of the following: (i) any major change in the footprint of
any of the buildings to be located on the Complex or on the
Adjoining Property (as defined in Section 2.A below), (ii) any
major change in the conceptual architectural design of any of the
buildings to be located on the Complex or on the Adjoining
Property (where, for example, any requirement to redesign the
Buildings to be of a more avant-garde design (such as the nearby
Silicon Graphics building), or to adopt a stairstep indentation
design to the building floors, or to reduce the Three Buildings
to less than an aggregate of 300,000 square feet, or the like
would be a major change, whereas any required changes to on-site
landscaping, columns, window moulins or the like would not be
considered major changes), (iii) any major restriction imposed
on any use currently permitted by the applicable zoning for the
Complex or the Adjoining Property, or (iv) any requirements which
collectively are reasonably estimated to increase the cost to
Tenant (a) of designing or constructing the Complex or (b) of
contributing to or constructing any significant offsite
improvements (such as a fire or police station) where the cost
thereof is not being shared with all future developments in the
general area, by an aggregate amount for (a) and (b) above in
excess of Four Million Dollars.
L. Lease Commencement Date: The term "Lease Commencement
Date" for each of the three (3) Buildings shall be the earlier of
(i) the Rent Commencement Date or (ii) the date of commencement
of any "Early Occupancy Period" of a portion of the Building as
defined and provided in Paragraph 2C of the respective Lease.
Absent any early occupancy by Tenant of a portion of the
respective Building, the Lease Commencement Date shall be the
same as the Rent Commencement Date.
M. Damage Delay: The term "Damage Delay" shall mean, as
to the Complex and respectively as to each Building, as
applicable, the period of delay in the Substantial Completion of
construction of the applicable Improvements occasioned by any
damage to or destruction of the Improvements occurring during the
course of construction which results in damage or destruction to
the Improvements having an estimated cost of repair or
restoration equal to or in excess of One Million Dollars
($1,000,000) per occurrence.
N. Landlord Delay: The term "Landlord Delay" shall mean,
as to the Complex and respectively as to each Building, as
applicable, any material delay in the Substantial Completion of
the construction of the Improvements to the Complex or to any
particular Building caused solely by one or more of the following
reasons: (i) the failure of Landlord to timely make any payment
of the Improvement Allowance or (ii) the failure of Landlord to
timely or reasonably approve or execute any reasonably
appropriate plans and specifications, working drawings, permits,
utility easements or other related documents which Landlord is
responsible for approving or executing under the provisions of
this Construction Agreement, in each case, provided that Tenant,
after the observation or occurrence of any matter constituting an
event which will cause or likely cause a Landlord Delay, within
ten (10) days thereafter notifies Landlord in writing of the
observation or occurrence of such event and the then estimated
amount of any Landlord Delay that will be experienced as a result
thereof.
O. Weather Delay: The term "Weather Delay" shall mean, as
to the Complex and respectively as to each Building, as
applicable, the period of delay in the Substantial Completion of
construction of the applicable Improvements occasioned by any
abnormally adverse weather conditions (compared to the average
seasonal weather conditions experienced in Mountain View,
California during the relevant period of construction) in the
nature of abnormal rains (and any resultant flooding) such as
might occur due to an el nino, provided that there shall not be
considered to be any Weather Delay unless the aggregate affect of
all Weather Delays (excluding average seasonal weather
conditions) are reasonably estimated to have delayed the
Substantial Completion of the respective Improvements by a period
in excess of thirty (30) calendar days where such days of delay
are attributable solely to a Weather Delay.
2. PERFORMANCE: Landlord and Tenant shall each be
obligated to use commercially reasonable efforts to perform their
respective obligations under this Construction Agreement. The
Parties acknowledge that the failure of either Party to
accomplish any matter set forth in this Construction Agreement
within any particular time period shall not constitute a default
(sometimes referred to herein as an "Event of Default") by either
Party unless such failure constitutes a breach of the obligation
of a Party to use commercially reasonable efforts to perform such
obligation and appropriate written notice has been given and a
reasonable cure period has expired (which shall in any event be
not less than thirty (30) days) without such breach being cured.
Upon the occurrence and during the continuance of an Event of
Default by Tenant under this Construction Agreement, such shall
constitute a default under the respective Lease or Leases to
which such obligation hereunder relates (and if the cross-default
provision of Section 5.A hereof then remains in effect, such
Event of Default under this Construction Agreement with respect
to any Lease shall constitute a default under all Three Leases),
and Landlord may, at its option, exercise the right to terminate
such Lease or Leases at any time thereafter that such Event of
Default remains uncured, in accordance with the respective terms
of such Lease or Leases as a result of such Event of Default,
upon written notice by Landlord to Tenant in accordance with the
provisions of each such Lease, and Landlord shall have any and
all other rights and remedies thereunder against Tenant for
breach of such Lease.
A. Planned Community Permit: Tenant shall exercise due
diligence and commercially reasonable efforts to seek and obtain
approval of the City of Mountain View to the issuance of the PCP
Permit by October 31, 1997, which PCP Permit is required for
Tenant to proceed with the completion of the detailed design of
the Shell Improvements and, thereafter, to obtain building
permits for the construction of the Shell Improvements. Tenant
shall exercise due diligence to have the City of Mountain View
issue a PCP Permit which permits the maximum square footage of
improvements to be developed at the Property and Landlord agrees,
upon request of Tenant, to cooperate with and assist Tenant in
Tenant's efforts to obtain the PCP Permit for the maximum square
footage of Improvements, including seeking any available bonus
density that may be obtainable with respect to the Property
including assigning to the Property any bonus density that may be
obtainable with respect to the adjoining approximately 6.925 acre
undeveloped parcel of land (the "Adjoining Property") owned
jointly by the Richard T. Peery Separate Property Trust and John
Arrillaga Survivor's Trust, formerly known as the Arrillaga
Family Trust (which are members of Landlord hereunder), which
Adjoining Property is separately the subject of a Ground Lease
between such members as landlord and Tenant as tenant, and which
Adjoining Property is required by the City of Mountain View to be
considered at the time of issuance of the PCP Permit. Tenant
acknowledges that pursuant to the terms of the Ground Lease for
the Adjoining Property, Tenant is prohibited from seeking any
approval for more than 120,000 square feet of occupiable space
(as defined by the City of Mountain View for PCP Permit purposes)
to be constructed on the Adjoining Property under the PCP Permit.
B. Landlord's Termination Rights in the Event of Tenant's
Default: In the event (i) Tenant defaults in the performance of
any of its material obligations under this Construction Agreement
beyond the applicable cure period provided herein and (ii) the
cross-default condition set forth in Section 5.A hereof remains
in effect, then Landlord shall have the right to elect to
terminate all Three Leases as provided in Section 5.A, and if all
Three Leases are so terminated, then pursuant to the terms of
Section 2.7 of that certain LLC Operating Agreement of P/A
Charleston Road LLC among Peery and Arrillaga Trusts and ALZA
Land Management, Inc. ("ALM"), dated as of the date of this
Construction Agreement (the "LLC Operating Agreement"), the Peery
and Arrillaga Trusts may elect to repurchase the interest of ALM
in the LLC Operating Agreement in accordance with the terms set
forth therein.
C. Landlord's and Tenant's Termination Rights in the Event
of Delay in the Approval of the PCP Permit: In the event a PCP
Permit satisfying the requirements of Section 1.K is not approved
and issued by the Outside Date (as defined in Section 1.K),
either Landlord or Tenant shall have the right by written notice
to the other within five (5) business days after the Outside Date
to elect to cause all, but not less than all, of the following to
occur: (i) terminate this Construction Agreement effective as of
the Outside Date, (ii) terminate all Three Leases effective as of
the Outside Date, (iii) pursuant to the terms of Section 2.8 of
the LLC Operating Agreement, to have the LLC reacquire the
interest of ALM in the LLC Operating Agreement in accordance with
the terms set forth therein and (iv) pursuant to the terms of
Paragraph 3.3 of the Ground Lease for the Adjoining Property, to
rescind the Ground Lease effective as of the stated commencement
date of the Ground Lease in accordance with the terms set forth
therein. Landlord shall have the right upon written notice to
Tenant at any time prior to the occurrence of the Outside Date,
to extend the Outside Date from time to time for reasonable
additional periods of time based upon Landlord's good faith
belief that within the respective additional period established
by such extended Outside Date, Tenant will be able to obtain the
approval and issuance of a PCP Permit satisfying the requirements
of Section 1.K. The respective termination and extension rights
of Tenant and Landlord as provided in this Section 2.C shall
again apply if a PCP Permit satisfying the requirements of
Section 1.K is not approved and issued by such extended Outside
Date.
3. DESIGN AND CONSTRUCTION OF SITE WORK AND SHELL
IMPROVEMENTS: Subject to obtaining all required governmental
approvals, Tenant shall exercise due diligence to cause the Shell
Improvements to be expeditiously constructed in the approximate
locations shown on the Site Plan attached hereto and incorporated
herein as Schedule A-2 (as such Schedule may be amended by the
Parties in response to any changes, conditions or limitations
imposed by any governmental authorities or applicable Laws), in
accordance with the following:
A. Development and Approval of Approved Specifications:
Tenant shall exercise due diligence (i) to expedite the
processing of the PCP Permit and (ii) to expeditiously prepare
and deliver to Landlord for its review and approval
specifications for the Shell Improvements (the "Specifications").
Within ten (10) business days after presentation to Landlord,
Landlord shall either approve such Specifications or notify
Tenant in writing of its specific objections to such
Specifications, with Landlord's approval not to be unreasonably
withheld. If Landlord reasonably objects to such Specifications,
the Parties shall meet and confer to develop Specifications that
are acceptable to both Landlord and Tenant within five (5)
business days after Landlord has notified Tenant of its
objections. The Parties agree to act reasonably to finalize the
Specifications, and once finalized, the Specifications shall be
referenced or described on Schedule "A-1" to this Construction
Agreement as the "Approved Specifications". The Approved
Specifications shall be revised by the Parties as necessary to
respond to any changes, conditions or limitations imposed by any
governmental authorities or applicable Laws.
B. Development and Approval of Preliminary Site Work and
Cold Shell Improvement Plans: Tenant shall exercise due
diligence to expeditiously prepare and deliver to Landlord for
its review and approval preliminary plans for the Site Work and
Cold Shell Improvements that are consistent with and conform to
the Approved Specifications, together with a detailed, line item
budget for the construction of the Site Work and Cold Shell
Improvements (collectively, the "Preliminary Cold Shell
Improvement Plans"). Within ten (10) business days after
presentation to Landlord, Landlord shall either approve such
Preliminary Cold Shell Improvement Plans or notify Tenant in
writing of its specific objections to the Preliminary Cold Shell
Improvement Plans, with Landlord's approval not to be
unreasonably withheld. If Landlord reasonably so objects to the
Preliminary Cold Shell Improvement Plans, the Parties shall meet
and confer to develop Preliminary Cold Shell Improvement Plans
that are acceptable to both Landlord and Tenant within five (5)
business days after Landlord has notified Tenant of its
objections. The Parties agree to act reasonably to finalize the
Preliminary Cold Shell Improvement Plans.
C. Development and Approval of Final Shell Improvement
Plans: Once the Preliminary Cold Shell Improvement Plans have
been approved by Landlord and Tenant, Tenant shall informally
consult with the staff of the City of Mountain View to obtain
comfort that the Preliminary Cold Shell Improvement Plans do not
incorporate any design element that would likely preclude the
future issuance of any required permits and approvals for the
construction of the Site Work and the Cold Shell Improvements.
Thereafter, Tenant shall exercise due diligence to expeditiously
complete and submit to Landlord for its approval final working
drawings for the Shell Improvements (i.e. for the Site Work, the
Cold Shell Improvements and the Warm Shell Improvements). Within
ten (10) business days after presentation to Landlord, Landlord
shall approve the final working drawings for the Shell
Improvements or notify Tenant in writing of its specific
objections, which approval shall not be unreasonably withheld.
If Landlord reasonably so objects, the Parties shall confer and
reach agreement upon final working drawings for the Shell
Improvements within five (5) business days after Landlord has
notified Tenant of its objections. The Parties agree to act
reasonably so as to promptly finalize the plans for the Shell
Improvements ("Final Shell Improvement Plans").
D. Governmental Approvals: Tenant shall exercise due
diligence to expeditiously obtain all required permits and
approvals from the City of Mountain View of the Final Shell
Improvement Plans, or which may otherwise be required under
applicable Laws for the construction of the Shell Improvements,
with copies of all such permits and approvals to be delivered to
Landlord, by Tenant, at no cost to Landlord. Landlord shall
cooperate with Tenant in such approval process. Tenant shall
diligently prosecute to completion such approval process.
Landlord agrees, upon Tenant's request, at no cost or liability
to Landlord, to reasonably assist Tenant in accordance with the
provisions of Section 13 hereof, to obtain all required permits
and approvals.
E. Commencement of Construction: Promptly after all
building permits (and any other required permits or approvals)
for the construction of the Shell Improvements are issued, Tenant
shall instruct the Prime Contractor to commence construction of
the Shell Improvements and to diligently prosecute such
construction to completion in accordance with the Final Shell
Improvement Plans, including the detailed, line item budget for
the Shell Improvements (the "Shell Budget"), and all applicable
Laws, using commercially reasonable efforts to achieve
Substantial Completion of the Shell Improvements as soon as
reasonably practicable, consistent with the orderly construction
of the Shell Improvements and any Interior Improvements then
being constructed.
F. Payment of Cost of Design and Construction of Shell
Improvements: The cost of the design and construction of the
Shell Improvements shall be paid as provided in this Section 3.F.
It is acknowledged that Tenant has advanced (i) costs of design
of the Shell Improvements, (ii) costs associated with the
planning for, obtaining governmental approval of, and
implementing mitigation measures associated with the relocation
of the burrowing owls located near the Property (only 66% of
which are allocable to the Property), and (iii) costs of seeking
design review approval for the issuance of the PCP Permit prior
to the date of this Construction Agreement (collectively "Prior
Expenditure"), with the amount of any Prior Expenditure to be
included as amounts paid by Tenant towards the cost of the Cold
Shell Improvements and Site Improvements as provided in this
Section 3.F. Except as provided herein, Landlord shall be
responsible for the payment of all costs incurred in connection
with the design and construction of the Shell Improvements, up to
the total amount of $** (the "Improvement Allowance"). In
addition, if the cost of the Cold Shell Improvements and Site
Work exceed an aggregate amount equal to $** per occupiable
square foot based upon the square footage of the three Buildings,
(as measured by the City for purposes of approval of the PCP
Permit), then Landlord shall, at the request of Tenant, increase
the Improvement Allowance by an additional amount equal to the
lesser of (i) the difference between $** and the total cost of
the Cold Shell Improvements and Site Work, and (ii) $**, to pay
(or assist in paying) the excess costs of the Cold Shell
Improvements and Site Work. All costs of designing and
constructing the Shell Improvements in excess of the Improvement
Allowance of $**(plus the additional amount of up to $**, if
applicable) shall be the obligation of Tenant, as provided in the
balance of this Section 3.F, with the portion to be so borne by
Tenant referred to herein as "Tenant's Share". Landlord shall
not be obligated to reimburse Tenant for any Prior Expenditure,
but such Prior Expenditure shall be deemed part of the cost of
the Cold Shell Improvements and Site Work as applicable, and
shall be deemed amounts paid by Tenant which shall be credited
against Tenant's Share. Such Prior Expenditure shall be credited
dollar for dollar against Tenant's Share of the first installment
or installments of progress payments until Tenant's Prior
Expenditure is fully credited against Tenant's Share and such
Prior Expenditure shall be considered part of the cost of the
Shell Improvements which are included in the first installment or
installments of progress payments until such point as Tenant has
received full credit for its Prior Expenditure, but in no event
shall Landlord be obligated to directly reimburse Tenant for any
Prior Expenditure. Landlord shall have no obligation to fund and
Tenant shall have no right to request any payments by Landlord of
any portion of the Improvement Allowance prior to the later of
(i) the approval and issuance of a PCP Permit and associated
lapse of the respective termination rights of Landlord and Tenant
as provided in Section 2.C above and (ii) the funding of P/A
Charleston Road LLC by the required contribution by ALZA Land
Management, Inc. of the amount required by Paragraph 2.1.A of the
First Amended and Restated Operating Agreement for P/A Charleston
Road LLC dated September 1, 1997 (which funding amount exceeds
the amount provided herein as the maximum amount of the
Improvement Allowance).
Any such amounts to be paid by Landlord to Tenant shall be
paid as follows: For purposes of illustration only, if the total
cost of constructing the Shell Improvements is $** (including any
Prior Expenditure) then Tenant's Share thereof would be $**), or
10.7325% of the total cost. If the first progress payment amount
is $1,000,000 (with the amount due the Prime Contractor being
$950,000 and the remaining $50,000 being the credit to Tenant for
its Prior Expenditure), then Tenant's Share of such progress
payment would be $107,325.00 (or 10.7325% of such progress
payment) against which would be credited Tenant's Prior
Expenditure of $50,000, to the end that Tenant would pay to the
Prime Contractor the sum of $57,325.00 and Landlord would be
responsible to pay to the Prime Contractor from the Improvement
Allowance the sum of $892,675.00. For each succeeding progress
payment, Tenant would likewise be obligated for 10.7325% thereof
(and Landlord would be obligated for 89.2675%, but in no event in
the aggregate more than the Improvement Allowance). Assuming the
same facts, but instead the Prime Contractor is currently owed
$880,000 and Tenant's Prior Expenditure was $120,000, then (i) a
portion of Tenant's Prior Expenditure would instead offset all of
the Tenant's Share of the first progress payment, (ii) Landlord
would be responsible to pay to the Prime Contractor from the
Improvement Allowance the sum of $880,000, (iii) the total amount
of the first progress payment would instead be deemed to be
$985,801 (calculated by treating Landlord's payment of $880,000
as equating to Landlord's pro rata share of 89. 2675% of the
first progress payment), (iv) Tenant would be deemed to have had
$105,801 of its Prior Expenditure offset by such first progress
payment by Landlord ($985,801 - $880,000), and (v) Landlord would
not be obligated to directly reimburse Tenant for its excess
uncredited Prior Expenditure of $14,199 ($120,000 - $105,801) but
such amount would be available to be applied as a remaining
credit for Tenant's Prior Expenditure to the next occurring
progress payment.
Landlord shall be obligated, but not more than one time per
month, within ten (10) business days after receipt of (i) an
invoice from Tenant for any amounts then due and payable to
Tenant's design and construction professionals or material
suppliers for costs of design and construction of the Shell
Improvements, together with (ii) a detailed accounting reflecting
the full expenditure of said amounts and all other amounts since
paid and to be paid with the current disbursement from Landlord,
to pay Landlord's pro rata share of any amounts properly shown on
such invoice. Unless otherwise agreed by Landlord and Tenant,
Landlord shall make its payment jointly to Tenant and the General
Contractor (or, if applicable, to the respective vendor) except
in those instances where it is clearly demonstrated to Landlord
that Tenant has already paid the amount in full for which
reimbursement is then being sought (and any potentially
applicable mechanic's liens, if any, have been released as
respects the work to which such reimbursement is sought), in
which event such payment shall be made directly to Tenant. Any
portion of the Improvement Allowance which is not applied to the
payment of the cost of constructing the Shell Improvements, may
thereafter be used by Tenant to pay the cost of any Interior
Improvements. Absent the occurrence and continuance of any Event
of Default by Tenant hereunder, Landlord shall not incur any
costs on Tenant's behalf with respect to the design or
construction of the Shell Improvements without Tenant's prior
written consent. As provided in Section 5.C hereof, any
contracts with any Prime Contractor(s) shall provide for the
Prime Contractor to acknowledge the limitation on Landlord's
liability for any costs incurred thereunder in the manner
provided in Section 5.C.
G. Audit Rights: Landlord shall have the right to audit
the books, records and supporting documents of Tenant or, if
Landlord requests, of Tenant's design and construction
professionals and material suppliers, to the extent reasonably
necessary to determine the accuracy of Tenant's statements of the
costs of design and construction of the Shell Improvements,
during normal business hours, after giving Tenant at least five
(5) business days prior notice. Landlord shall bear the cost of
such audit unless such audit discloses a discrepancy whereby
Landlord has on an overall basis paid at least Ten Thousand
Dollars as an Improvement Allowance in excess of the total cost
of the Improvements which would have otherwise been payable or
reimbursable from the Improvement Allowance in accordance with
the provisions of this Construction Agreement. Any such audit of
the Shell Improvements shall be conducted, if at all, within one
(1) year following the date of Substantial Completion of the
Shell Improvements.
4. CONSTRUCTION OF INTERIOR IMPROVEMENTS:
A. Development and Construction Requirements Related to
Interior Improvements: Tenant shall have the right to take such
time as Tenant considers desirable under all the circumstances to
plan for and construct the Interior Improvements and to obtain
all required permits for such Interior Improvements, but in any
event, Tenant shall cause the Interior Improvements to be
constructed as to each Building prior to the expiration or
termination of the term of the respective Lease for such
Building. The Interior Improvements or any portion thereof, as
applicable, which are to be constructed and paid for at Tenant's
sole expense (except to the extent, if any, the Improvement
Allowance is not fully expended in constructing the Shell
Improvements), shall be designed by one or more Architects
approved by Landlord as provided in this Construction Agreement
and in a manner to comply with the Interior Build-Out
Specifications attached as Exhibit C to the Leases. The plans for
the Interior Improvements or any portion thereof, as applicable
(the "Interior Improvement Plans"), shall be subject to the
reasonable approval of Landlord, provided that Landlord's
approval shall be confined to matters which may adversely affect
any structural elements of the Building or which are inconsistent
with the Interior Build-Out Specifications. Any approval by
Landlord of Interior Improvement Plans which do not provide for
baseboards, drop ceilings or standard HVAC for office use in any
portion of the Building which would otherwise be suitable for
office use, shall not affect Tenant's surrender obligations under
Paragraph 7 of any Lease which may require Tenant to install such
improvements in such portion of the Building prior to the
surrender of the Building by Tenant to Landlord upon termination
of the respective Lease. The Interior Improvements or any
portion thereof, as applicable, shall be constructed by one or
more Prime Contractors approved by Landlord as provided in this
Construction Agreement. Copies of all permits and approvals
relating to any Interior Improvements, shall, once obtained by
Tenant, be delivered to Landlord, at no cost to Landlord.
Subsequent to obtaining all such permits and approvals and
Landlord's approval of the Interior Improvement Plans, Tenant
shall be authorized to instruct the applicable Prime Contractor
to construct the Interior Improvements substantially in
accordance with the Interior Improvement Plans.
B. Payment of Interior Improvements Costs: Tenant shall
be responsible for the payment of all costs of design and
construction of the Interior Improvements, including any costs of
the applicable Prime Contractor(s) and Architects in the design
and construction of the Interior Improvements (excepting any
amount thereof which may be payable from any portion of the
Improvement Allowance which is not applied to the cost of
constructing the Shell Improvements). Absent the occurrence and
continuance of any Event of Default by Tenant hereunder, Landlord
shall not incur any costs on Tenant's behalf with respect to the
design or construction of the Interior Improvements without
Tenant's prior written consent.
C. Audit Rights: Landlord shall have the right to audit
the books, records and supporting documents of Tenant or, if
Landlord requests, of Tenant's design and construction
professionals and material suppliers, to the extent reasonably
necessary to determine the accuracy of Tenant's statements of the
costs of design and construction of the Interior Improvements,
during normal business hours, after giving Tenant at least five
(5) business days prior notice. Landlord shall bear the cost of
such audit unless such audit discloses a discrepancy whereby
Landlord has on an overall basis paid at least Ten Thousand
Dollars as an Improvement Allowance in excess of the total cost
of the Improvements which would have otherwise been payable or
reimbursable from the Improvement Allowance in accordance with
the provisions of this Construction Agreement. Any such audit of
the Interior Improvements shall be conducted, if at all, within
one (1) year following the date of Substantial Completion of the
Interior Improvements.
5. GENERAL OBLIGATIONS OF TENANT:
A. Cross Default Remedy: As provided in Section 2 above,
if Tenant commits an uncured Event of Default under this
Construction Agreement, such shall constitute a default under
each of the three Leases until such time as (i) the Shell
Improvements have been Substantially Completed and (ii) either
(a) the Interior Improvements have been Substantially Completed
or (b) Tenant has instead satisfied the provisions of Section 5.B
below as to the posting of either a Letter of Credit or an
Account. Any Event of Default with respect to the construction
of any Interior Improvements as to any particular Building shall
at all times constitute a default with respect to the respective
Lease of that Building that includes such Interior Improvements
(but upon satisfaction of the Letter of Credit Substitution
Condition pursuant to Section 5.B below, shall not constitute a
default as to the respective Lease of any other Building).
B. Letter of Credit Substitute for Interior Improvement
Construction Obligation: If Tenant desires to eliminate the
cross-default remedy provided in Section 5.A hereof as a result
of the Interior Improvements not then being Substantially
Completed, Tenant may elect to deliver to Landlord an irrevocable
unconditional Letter of Credit issued for a period of at least
one year (the "Letter of Credit") in an amount representing
Twenty Five Dollars ($25) per square foot of such square footage
usable area in the Building as to which the Interior Improvements
are not then Substantially Completed. Said Letter of Credit must
be issued by an institutional lender reasonably acceptable to
Landlord and shall be unconditionally payable upon demand by
Landlord, and Landlord shall be entitled to draw upon the Letter
of Credit, without proof, for the purpose of completing
construction of the Interior Improvements or repayment of any
amounts owed with respect to such construction upon ten (10) days
notice to Tenant, in the event of the occurrence of any of the
following which is not cured within such ten (10) day period: (i)
Tenant fails to pay any sums when due under any construction
contract for the Interior Improvements (unless Tenant is in good
faith contesting such sum and has paid all amounts which Tenant
is not so contesting and bonds any liens that arise therefrom in
accordance with the requirements of Section 5.C hereof) or (ii)
Tenant fails to complete the construction of the Interior
Improvements as to any Building prior to the expiration or
termination of the respective Lease as to such Building or (iii)
Tenant allows any liens to be filed against the Property
associated with such Interior Improvements which are not removed
within the period provided in Section 5.C hereof. Any amount
drawn on the Letter of Credit which is not so applied by Landlord
shall be returned to Tenant. Tenant shall be obligated to cause
the Letter of Credit to be renewed at least twenty (20) days
prior to its expiration in the event that all of the Interior
Improvements are not then Substantially Completed, but the amount
of such Letter of Credit may then be reduced by an amount
representing Twenty Five Dollars ($25) per square foot of such
square footage usable area in the Building as to which the
Interior Improvements have been Substantially Completed since the
date of issuance of the Letter of Credit. In the event the
Letter of Credit is not so renewed as required above, Tenant
shall promptly establish and deposit into the Account (as defined
below) the dollar amount then required hereunder to be so
deposited. In lieu of the foregoing Letter of Credit, Tenant may
instead cause to be deposited in a restricted interest bearing
bank account, at the San Francisco Bay Area office of a major
bank reasonably acceptable to Landlord (the "Account"), an amount
in cash equating to the dollar amount provided for above. The
Account shall permit Landlord to draw upon it from time to time
upon ten (10) days notice to Tenant, solely upon Landlord's
certification to the bank that the amount of such drawing is to
pay the cost of completion of the construction of the Interior
Improvements (if applicable) or to pay the amount of any liens
filed against the Property associated with the construction of
the Interior Improvements (if applicable). The Account shall be
considered a restricted account and the funds contained therein
shall not be reduced by Tenant for any reason, except to pay the
contractor(s) directly for Tenant's Share of the cost of the
Interior Improvements. Upon Substantial Completion of the
Interior Improvements, Tenant shall request from Landlord that
any such Letter of Credit or the Account, as applicable, reduced
by any amount duly drawn thereon by Landlord, be returned to
Tenant, and Landlord shall within ten (10) business days
thereafter return such Letter of Credit or the Account to Tenant.
C. No Liens: During the construction of the Shell
Improvements and the Interior Improvements (including the
installation of any trade fixtures by Tenant), Tenant shall keep
the Property and each Building free from any liens arising out of
any work performed, materials furnished or obligation incurred by
Tenant, except to the extent any lien may arise from the breach
by Landlord of its obligations under this Construction Agreement
as to the making of payments from the Improvement Allowance. In
the event that Tenant shall not, within fifteen (15) days
following notice of the imposition of any such lien, cause the
same to be released of record, Landlord shall have, in addition
to all other remedies provided herein and by law, the right, but
not the obligation, to cause the same to be released by such
reasonable means as Landlord shall deem proper, including payment
of the claim giving rise to such lien, except to the extent that
Tenant is diligently contesting any such lien, in which event
Tenant may allow such lien to continue in existence during the
period of such contest, provided that (i) Landlord is satisfied,
in Landlord's reasonable discretion, that such contest will not
result in a foreclosure of all or any portion of the Property or
any Building as a result of such lien and (ii) Tenant bonds said
lien with a bonding company reasonably acceptable to Landlord and
in a form reasonably satisfactory to Landlord with said bond in
the amount of the lien, in which event Landlord shall not be
entitled to pay or discharge the lien, provided the lien is
removed within sixty (60) days from the date the lien is filed.
All sums paid by Landlord for such purpose, and all expenses
incurred by Landlord in connection therewith, shall be payable to
Landlord by Tenant within ten (10) days after written demand with
interest at the rate of Bank of America's Prime Rate (or
equivalent rate) plus five percent (5%), but in no event greater
then the maximum rate of interest permitted by applicable law.
Any construction contract with a Prime Contractor shall provide
therein (or by means of a separate agreement with the Prime
Contractor) that such Prime Contractor acknowledges and agrees
that (i) Landlord's obligations and liability under such
construction contract (and any associated contracts) is limited
to Landlord's payment of the Improvement Allowance as provided
herein, (ii) that Landlord shall have no liability or
responsibility to the Prime Contractor or any third parties for
the payment of any monies in excess thereof, and (iii) it shall
look solely to Tenant for any payment for which Landlord is not
obligated to pay from the Improvement Allowance hereunder.
D. Tenant Delivery: Tenant hereby assigns to Landlord,
effective upon either (i) the date of termination of this
Construction Agreement pursuant to Section 2.C above or (ii) an
Event of Default by Tenant hereunder (following written notice
from Landlord of the occurrence of a default and the expiration
of a reasonable period of time for Tenant to cure such alleged
default without such default having been cured) all of its
interest in and to the plans and specifications prepared for the
Improvements and Interior Improvements, all studies, data and
drawings with respect thereto (excluding any confidential
programming) prepared by or for Tenant, and the contracts and
agreements relating to such plans and specifications or studies,
data and drawings, or to the construction of the Shell
Improvements and Interior Improvements, including but not limited
to the general contracts therefor, in each case, to the extent
assignable and without any representation or warranty. Landlord
shall not have any obligation under any of the contracts unless
Landlord expressly agrees to assume such obligations in writing.
Subject to the requirement for any third party consents to the
foregoing assignment, Landlord shall have the right to exercise
any rights of Tenant under the contracts at any time following
the occurrence of such assignment. Following the completion of
the Improvements and Interior Improvements, Tenant shall, at
Tenant's sole cost, (i) deliver to Landlord a final as-built set
of plans on mylar sepia drawn to 1/8" scale, prepared by a
licensed engineer or architect, of the Final Shell Improvement
Plans and Interior Improvement Plans and (ii) file or cause to be
filed a Notice of Completion in accordance with all applicable
laws, and deliver a copy of said Notice of Completion to
Landlord.
E. Five Day Notice Requirement: Notwithstanding that
Landlord has approved plans as aforesaid, the first Prime
Contractor (or any subcontractor under such Prime Contractor),
shall not enter upon the Property to commence the construction of
the Shell Improvements until at least five (5) days' prior
written notice has been given to Landlord specifying the
construction of the Shell Improvements is about to commence. No
prior notice shall be required as to any subsequent contractors
or subcontractors once the construction of the Shell Improvements
has commenced.
F. Tenant's Indemnification Related to the Shell
Improvements and the Interior Improvements: Except as to the
obligations of Landlord hereunder as to the funding of the
Improvement Allowance, Tenant shall be liable to Landlord for,
and shall fully and completely indemnify and hold Landlord and
its members harmless from, any cost, expense, claim, damage,
loss, obligation or liability of any kind or nature whatsoever
(including Landlord's attorneys' fees) which occurs or accrues
during the course of construction of the Improvements as set
forth herein, including, but not limited to any loss, damage,
injury or death related to the construction of the Shell
Improvements and/or Interior Improvements occurring during the
course of construction of the Shell Improvements and/or Interior
Improvements. This indemnity shall also extend to any claims of
third parties asserting any breach of any license agreements,
memorandums of understanding or other agreements of Tenant (or of
Landlord entered into by Landlord at Tenant's request) related to
any burrowing owl mitigation plan associated with the relocation
of the former burrowing owls located near the Property, whether
any such claim may arise before or after the completion of
construction of the Improvements. In the event any claim is
asserted which is covered by the foregoing indemnity, Tenant
shall defend Landlord with legal counsel reasonably acceptable to
Landlord.
G. Insurance Requirements: Tenant shall in its
construction contract with any Prime Contractor, require such
contractor to carry and maintain with insurance companies having
"A.M. Best's" rating of "A" "VII" or better (unless a different
rating is expressly approved in writing by Landlord as to any
particular insurance coverage), the insurance coverage indicated
below as a minimum requirement:
Type of Coverage Limits of Liability
Worker's Compensation * Statutory per State of California
Employer's Liability $2,000,000.00
Commercial General Liability ** $2,000,000.00
Occurrence Form
Broad Form Contractual Liability
Automobile Liability $2,000,000.00
* Tenant shall cause the Prime Contractor to furnish an
endorsement from its insurer waiving rights of subrogation
against Landlord and its insurers under such insurance
coverage.
** Tenant shall cause the Prime Contractor to have its
insurer or insurance agency furnish Landlord with an
appropriate certificate of insurance reflecting Landlord and
its members named as "Additional Insureds".
Tenant shall cause appropriate Builder's Risk insurance
(covering "all risks", including earthquake and flood) in form
and content reasonably acceptable to Landlord to be carried
during the course of construction of the Shell Improvements and
the Interior Improvements. Landlord and Tenant shall consult as
to any insurance coverage programs which either Landlord or
Tenant may propose with regard to seeking to provide appropriate
insurance coverage at the least expense during the course of
construction of the Improvements. Tenant or its Prime Contractor
shall bear the sole responsibility for the payment of the
premiums for the foregoing insurance policies (but such shall not
preclude Tenant from subsequently including any such premium
costs in any requests for any disbursements of the Improvement
Allowance pursuant to Paragraphs 3 and 4 above to the extent any
such insurance is included within the category of expenses which
are subject to payment from such Improvement Allowance)
H. Application of Lease Terms During Construction Period:
All of the terms of the Lease shall apply to any entry by Tenant
pursuant to this Construction Agreement (including provisions of
said Lease regarding indemnification and insurance) with the
exceptions related to the payment of monthly Basic Rent and
Additional Rent (except as otherwise noted in said Lease or this
Construction Agreement). The obligations of Tenant contained in
this Section 5.H shall survive the expiration of this
Construction Agreement.
I. Ownership and Encumbering of Shell Improvements and
Interior Improvements: Except as otherwise provided in the
respective Lease as to Interior Improvements, all of the
Improvements shall become and remain a part of the Property upon
installation or construction and shall be the property of
Landlord. Tenant shall have only a leasehold interest therein,
subject to all of the terms and conditions of the Lease. None of
the Shell Improvements and/or Interior Improvements shall be
encumbered, liened or pledged, transferred, removed or materially
altered, except as otherwise provided in the Lease.
J. Inspection Following Completion of Shell Improvements
and Interior Improvements: Within ninety (90) days after the
Shell Improvements and Interior Improvements are respectively
Substantially Completed (as that term is defined herein),
Landlord (or Landlord's representative) and Tenant shall conduct
a joint walk-through of the Property, and inspect such Shell
Improvements and Interior Improvements, using due diligence to
discover all incomplete or defective construction. After such
inspection has been completed, Landlord or its representative
shall prepare, and both Parties shall sign, a list of all "punch
list" items which the Parties agree are to be corrected by
Tenant. Tenant shall use reasonable efforts to complete and/or
repair such "punch list" items within thirty (30) days after
executing such list, it being agreed however, that the existence
of any "punch list" items will not result in any delay of the
respective Rent Commencement Date as provided in Section 1.K
above.
6. GENERAL DESIGN AND CONSTRUCTION OBLIGATIONS:
A. Design Requirements: Tenant shall cause all plans,
drawings and specifications for the Shell Improvements and
Interior Improvements, whether preliminary or final, to be
prepared by licensed architects and, where appropriate, licensed
mechanical, electrical and structural engineers. Tenant shall
require the Architect to prepare all plans, drawings and
specifications for the Shell Improvements and Interior
Improvements in strict compliance with the requirements of all
applicable Laws. The review and approval of any plans, drawings
and specifications by Landlord shall not alter or diminish
Tenant's or the Architect's obligations under this Section 6.A.
Landlord's approval of such plans shall not be construed as
approval of any construction detail with respect to conformance
to any applicable City or governmental ordinance or code, and by
approving such plans, Landlord assumes no liability or
responsibility therefor, or for any defect in said plans and/or
the related construction by Tenant.
B. Changes to Approved Final Improvement Plans: Once the
Final Improvement Plans have been approved by Landlord and
Tenant, neither shall have the right to order extra work or
change orders with respect to the construction of the Shell
Improvements (including any Site Work) without the prior written
consent of the other Party, which consent shall not be
unreasonably withheld, provided there is a reasonable basis for
such change or such change is required by any errors or omissions
in the Final Improvement Plans or any requirements of any
applicable Laws.
C. Good Faith: Landlord and Tenant shall act reasonably
and in good faith in considering whether to approve any plans and
specifications contemplated in this Construction Agreement.
D. Contracts with Design and Construction Professionals:
Any Architect or Prime Contractor for the Shell Improvements or
the Interior Improvements shall be selected in the manner
provided in Sections 1.H and 1.I respectively. Tenant shall
enter into the agreements for the design and construction of the
Shell Improvements with the Architect and Prime Contractor so
selected in Tenant's name, but each of such agreements shall be
subject to Landlord's prior review and written approval, and each
shall expressly name Landlord as a third party beneficiary
thereof.
7. DELIVERY OF POSSESSION, PUNCH LIST AND ACCEPTANCE
AGREEMENT: Promptly following the construction of the Shell
Improvements for each Building, the gross leaseable square
footage contained within the applicable building shell shall be
measured by the Prime Contractor for the Shell Improvements; such
measurement shall be from the outside of the exterior walls and
shall include any fully enclosed atriums, and to the extent any
such areas constitute an indentation into the prevailing outside
wall line of any Building, any covered entrance or egress areas
or covered loading areas. The square footage of each of the
three Buildings as so determined shall be used as the square
footage of each respective Building and the total of all three
Buildings for all purposes under the respective Lease; provided,
however, that none of the following areas shall be included when
determining such square footage calculation: enclosed
ground-level or elevated walkways that are not for occupancy
between Buildings, any building tower for connecting or accessing
any elevated walkways, external unoccupied equipment areas
(whether below ground, on the roof, in a roof penthouse or
otherwise), provided that such areas are not considered by the
City of Mountain View to count against the approved maximum
square footage which Tenant may develop pursuant to the
provisions of the PCP Permit. As provided in Section 5.J, within
ninety (90) days after the Shell Improvements and Interior
Improvements are respectively Substantially Completed (as to each
Building), Landlord and Tenant and/or their respective employees
and agents, shall together inspect the Shell Improvements and
Interior Improvements so completed and prepare a punch list.
After such inspection has been completed, each Party shall sign
an acceptance agreement which shall include a list of all punch
list items which are to be corrected by Tenant. Such acceptance
agreement shall neither preclude Landlord or Tenant from later
discovering any additional punch list items or latent defects and
requiring the Prime Contractor or any subcontractors to complete
and/or repair any such additional punch list items or latent
defects which were not readily apparent at the time of such
inspection, nor affect any of Landlord's or Tenant's rights under
any contractor's or subcontractor's warranties.
8. STANDARD OF CONSTRUCTION AND ENFORCEMENT OF WARRANTIES:
Tenant shall cause the architect contract with the respective
Architect for the Building Shell and for any Interior
Improvements to require the Architect to cause the Improvements
being designed by it to be designed in compliance with all
requirements of applicable Laws. Tenant shall cause the
construction contract with the Prime Contractor to require the
Prime Contractor to cause the Improvements being constructed by
it to be constructed (i) in a good and workmanlike manner, (ii)
in material compliance with all requirements of applicable Laws,
(iii) substantially in accordance with the Final Shell
Improvement Plans and Final Interior Improvement Plans as
modified by change orders approved in accordance with the
provisions of this Construction Agreement, and (iv) with all
materials and equipment to be furnished to be new, of good
quality and installed in accordance with the vendor's or
manufacturer's specifications, instructions and requirements.
Tenant shall cause copies of any contractor's, manufacturer's or
installer's warranties received by Tenant to be delivered to
Landlord. Each of the Parties agree that it shall, upon the
other Party's request, cooperate with the other Party in
enforcing any third party warranties with respect to the
construction of any Improvements.
9. EXTENSION OF AGREED CONSTRUCTION PERIOD CAUSED BY
LANDLORD, DAMAGE OR WEATHER DELAYS: If because of any Landlord
Delay, Damage Delay or Weather Delay, Tenant is delayed in
completing any Shell Improvements or Interior Improvements, then
the Agreed Construction Period shall be extended one (1) day for
each day that the substantial completion of such Shell
Improvements and/or Interior Improvements is delayed because of
either a Landlord Delay (as defined in Section 1.N above), a
Damage Delay (as defined in Section 1.M above) or a Weather Delay
(as defined in Section 1.O), which extension of the Agreed
Construction Period may result in a delay in the Rent
Commencement Date (provided that as provided in Section 1.K
above, there shall be no double counting of any delay where the
delay is caused by more than one cause). Absent a willful breach
by Landlord, the remedy provided to Tenant under this Section 9
shall be Tenant's sole and exclusive remedy for any Landlord
Delay, and Landlord shall not be subject to any other liability
of any type whatsoever for any delay in the Substantial
Completion of the Shell Improvements or Interior Improvements.
10. DELIVERY OF DOCUMENTS: Tenant shall, within thirty
(30) days after the same is obtained by Tenant, deliver to
Landlord (i) a copy of any temporary or permanent certificate of
occupancy issued by the City of Mountain View with respect to any
of the Shell Improvements and Interior Improvements, (ii) a
recorded Notice of Completion, (iii) all final lien releases and
(iv) as-built drawings with respect to the Shell Improvements and
Interior Improvements as respectively completed.
11. LANDLORD DISCLAIMER: Except as expressly otherwise
provided in this Construction Agreement or in any Lease, (i)
Landlord shall have no responsibility for the design, engineering
or construction of the Improvements or the maintenance or repair
thereof, and (ii) Landlord makes no representation or warranty
regarding the suitability or quality of the Improvements or any
land entitlements.
12. TAX INCREASES DURING CONSTRUCTION PERIOD:
Notwithstanding anything to the contrary in this Construction
Agreement or the related Leases, in the event prior to the
respective Lease Commencement Date there is an interim or
supplemental reassessment of the Property based upon the added
value of the Shell Improvements and/or Interior Improvements,
then within ten (10) days after Tenant's receipt of the
applicable tax bill from Landlord, Tenant shall pay any interim
or supplemental taxes (but no penalties or interest in connection
therewith) that have been levied against the Property and are
attributable to the added value of the Shell Improvements and/or
Interior Improvements during the period prior to the Lease
Commencement Date. As of the Lease Commencement Date, the
provisions of the Lease shall control as to the payment of Real
Property Taxes accruing thereafter.
13. LANDLORD COOPERATION AND COORDINATION: Landlord shall
cooperate with Tenant to the extent reasonably necessary, at no
cost or liability to Landlord, in Tenant's processing of all
necessary building permits for the construction of the
Improvements. Provided there is no cost or liability to Landlord
with respect to the same, upon the request of Tenant and at no
cost to Tenant, Landlord shall reasonably assist Tenant with the
negotiation of any construction contracts or architect contracts
pertaining to any Shell Improvements and/or Interior Improvements
to be constructed. Landlord shall not be entitled to any fee
for its involvement therein. Notwithstanding any implication
herein to the contrary, other than the failure of Landlord to
approve or execute any documents required to be approved or
executed by Landlord as provided herein, any failure of Landlord
to assist Tenant in the obtaining of any governmental approvals
or in negotiating any contracts shall not form the basis for any
Landlord Delay as defined herein or any Event of Default by
Landlord.
Landlord shall cooperate with Tenant, at no cost to
Landlord, to assist Tenant in obtaining the PCP Permit, any
required building permits and any other permits and approvals
which are required or are desirable from the City of Mountain
View or any other governmental authority for the construction of
any of the Improvements, as well as any other required approval
under any applicable Laws. Landlord's cooperation shall extend
to executing any reasonably appropriate applications for permits,
grants of easements to public utilities or other documents as may
be reasonably required or appropriate for obtaining all required
approvals for the construction of the Improvements or for
satisfying any conditions that may be imposed by the City of
Mountain View or any other governmental authority as a condition
to the PCP Permit, as a condition to any building permit, or as a
condition to any other governmental or public utility approval or
permit to the development of the Property in the manner
contemplated by this Construction Agreement, provided such
conditions do not directly and adversely affect any other real
property (other than the Adjoining Property) owned by any of the
members of Landlord, or any affiliate of any such member.
Landlord shall not be entitled to any fee for management or
coordination of any design or construction professionals engaged
by Tenant in the construction of any Improvements, nor shall
Landlord be entitled to reimbursement for any overhead or
administrative costs associated with its cooperation with Tenant
as provided for in this Construction Agreement. Notwithstanding
any implication herein to the contrary, other than the failure of
Landlord to approve or execute any documents required to be
approved or executed by Landlord as provided herein, any failure
of Landlord to assist Tenant in the obtaining of any governmental
approvals or in negotiating any contracts shall not form the
basis for any Landlord Delay as defined herein or any Event of
Default by Landlord.
It is acknowledged that Landlord and Tenant are
required to cooperate in an effort to obtain City of Mountain
View approval of the PCP Permit and City of Mountain View and the
State of California approval of various agreements associated
with the Burrowing Owl Mitigation Plan (including associated
license agreements with the City of Mountain View and Memorandums
of Understandings with the State of California, Department of
Fish and Game) which are considered necessary or desirable for
obtaining approval for the design or construction of the
Improvements. Landlord agrees that it shall upon the request of
Tenant join in executing any reasonable agreements with such
governmental authorities as are appropriate for the purposes of
obtaining or implementing such approvals if such execution by
Landlord is required by the applicable governmental authority,
with it being further agreed between Landlord and Tenant that for
so long as any Lease shall continue in effect, Tenant shall be
solely responsible for performing any obligations of Landlord
under any such agreements and shall hold Landlord harmless from
any costs, expenses and liabilities relating to the performance
of any such obligations under such agreements (including any
attorneys' fees and costs reasonably incurred by Landlord in
defending against any attempt to require Landlord (as opposed to
Tenant) to perform any such obligations under any such
agreements).
14. CHOICE OF LAW; SEVERABILITY: This Agreement shall in
all respects be governed by and construed in accordance with the
laws in the State of California and the jurisdiction of Santa
Clara County. If any provisions of this Construction Agreement
shall be invalid, unenforceable, or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in
full force and effect.
15. AUTHORITY TO EXECUTE: The Parties executing this
Construction Agreement hereby warrant and represent that they are
properly authorized to execute this Construction Agreement and
bind the Parties on behalf of whom they execute this Construction
Agreement as to all of the terms, covenants and conditions of
this Construction Agreement as they relate to the respective
Parties hereto.
16. MISCELLANEOUS MATTERS:
A. Representatives of the Parties: Each of Landlord and
Tenant shall designate to the other in writing the name of one
individual representative who will work with the other's
representative throughout the respective period of construction
of the Shell Improvements and Interior Improvements upon the
Property and within each Building. At any time, either Landlord
or Tenant may change the identity of its representative by
delivering written notice to the other of the identity of a
replacement representative.
B. No Fee to Landlord or Tenant: Neither Landlord nor
Tenant nor any affiliate of either shall receive any fee for its
involvement as stated in this Construction Agreement in
connection with the design, review, approval or construction of
the Improvements.
C. Cleanup Expenses: In conjunction with the Substantial
Completion of all of the Improvements for each Building, Tenant
shall thoroughly clean the adjoining portion of the Property and
the applicable Building, including, without limitation, removal
of all rubbish and debris.
D. No Miscellaneous Charges: Neither Tenant nor its
design and construction professionals shall be charged for
parking or the use of parking during the construction of any of
the Shell Improvements and/or the Interior Improvements. Any
utilities consumed during construction of the Shell Improvements
and/or Interior Improvements shall be appropriately allocated as
either a cost of the Shell Improvement or a cost of the Interior
Improvements.
E. Bonding: Notwithstanding anything to the contrary set
forth in the Lease, Tenant shall not be required to obtain or
provide any completion or performance bond in connection with any
construction, alteration or improvement work performed by or on
behalf of Tenant in the design and construction of the Shell
Improvements or the Interior Improvements (other than that Tenant
shall be obligated, in accordance with the requirements of
Section 5.C hereof, to bond against any liens that may be filed
against the Property arising out of any work performed, materials
furnished or obligation incurred by Tenant).
F. Consent: Whenever the consent or approval of one Party
to the other Party's requests, actions or submittals is required
hereunder, such consent or approval shall not be unreasonably
withheld.
IN WITNESS WHEREOF, Landlord and Tenant have executed and
delivered this Construction Agreement as of the day and year
first stated above.
LANDLORD: TENANT:
P/A CHARLESTON ROAD LLC, ALZA CORPORATION,
a California limited liability company a Delaware corporation
By: /s/ John Arrillaga By: /s/ Gary V. Fulscher
John Arrillaga, Trustee, UTA
dated 7/20/77 (John Arrillaga Title:Senior Vice President,
Survivor's Trust, formerly known Commercial Services
as Arrillaga Family Trust), as
amended Gary V. Fulscher
Type or Print Name
By: /s/ Richard T. Perry
Richard T. Peery, Trustee, UTA
dated 7/20/77 (Richard T. Peery
Separate Property Trust), as
amended
By: ALZA Land Management, Inc.,
a Delaware corporation
By: /s/ Gary V. Fulscher
Title: President
Gary V. Fulscher
Type or Print Name
ALZA
Ground Lease
Initial:__________
EXHIBIT 10.13
THE SYMBOL "**" IS USED TO INDICATE
THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION
GROUND LEASE
THIS GROUND LEASE (this "Lease"), dated this first day of
September, 1997 is made and entered into by and between Richard T.
Peery, Trustee, or his Successor Trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended, and John
Arrillaga, Trustee, or his Successor Trustee, UTA dated July 20, 1977
(John Arrillaga Survivor's Trust, formerly known as the Arrillaga
Family Trust), as amended (collectively, "Landlord"), and ALZA
Corporation, a Delaware corporation ("Tenant").
Landlord and Tenant (sometimes referred to collectively as the
"Parties") agree to the terms, covenants and conditions of this Lease,
as follows:
1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord that certain unimproved parcel of land consisting
of approximately 6.925 acres, located at Amphitheatre Parkway and
Garcia Avenue in Mountain View, California. The 6.925 acres of land
("Premises") leased hereunder is leased strictly on an "as is" basis
and subject to all assessments, covenants, conditions, liens,
encumbrances and title matters and is more particularly described in
Exhibit A attached hereto and by reference made a part hereof. The
Premises together with all buildings ("Buildings") and other
improvements to be located thereon from time to time shall hereafter
be referred to as the "Project".
2. USE.
2.1. Permitted Uses. Subject to all of the terms and provisions of
this Lease, Tenant shall be entitled to use the Project for any lawful
purpose.
2.2. Compliance. Tenant, at its sole cost and expense, shall promptly
comply with all laws, statutes, ordinances and governmental rules,
regulations or requirements now or hereafter in effect relating to the
Project; with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted; and with any
direction or occupancy certificate issued pursuant to law by any
public officer; provided, however, that no such failure shall be
deemed a breach of the provisions of this Lease if Tenant, immediately
upon notification, commences to remedy or rectify said failure. The
judgment of any court of competent jurisdiction, following the
expiration of any appeal period, or the admission of Tenant in any
action against Tenant, whether Landlord be a party thereto or not,
that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision,
shall be conclusive of that fact as between Landlord and Tenant.
2.3. Restriction on Use. Tenant shall not do or permit to be done in
or about the Project nor bring or keep or permit to be brought or kept
in or about the Project anything which is prohibited by or will in any
way increase the existing rate of (or otherwise adversely affect) fire
or any insurance covering the Project or any part thereof, or any of
its contents, or will cause a cancellation of any insurance covering
the Project or any part thereof, or any of its contents, except to the
extent that Tenant, upon notice thereof, is able to arrange for the
continuation or replacement of such insurance coverage, with any
increased costs of such continued or replacement insurance to be paid
exclusively by Tenant. No materials, supplies, equipment, finished
products or semi-finished products, raw materials or articles of any
nature shall be stored upon or permitted to remain outside any
Building, except in screened storage areas. Tenant shall not commit
or suffer to be committed any waste in or upon the Project. Tenant
shall indemnify, defend and hold Landlord harmless against any loss,
expense, damage, reasonable attorneys' fees, or liability arising out
of failure of Tenant to comply with any applicable law relating to
Tenant's use of the Project or with which Tenant is otherwise
obligated to comply under the terms of this Lease. The provisions of
this Paragraph are for the benefit of Landlord only and shall not be
construed to be for the benefit of any tenant or occupant of the
Project.
2.4. Hazardous Materials. Landlord and Tenant agree as follows with
respect to the existence or use of "Hazardous Materials" (as defined
herein) on, in, under or about the Project and the real property
located beneath said Project (hereinafter collectively referred to as
the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter
is defined, listed or designated under Environmental Laws (defined
below) as a pollutant, or as a contaminant, or as a toxic or hazardous
substance, waste or material, or any other hazardous, toxic,
biohazardous, or radioactive material, waste, chemical, mixture or
byproduct, or which is listed, regulated or restricted by any
Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term
"Environmental Laws" shall mean any applicable Federal, State of
California or local government law (including common law), statute,
regulation, rule, ordinance, permit, license, order, requirement,
agreement, or approval, or any determination, judgment, directive, or
order of any executive or judicial authority at any level of Federal,
State of California or local government (whether now existing or
subsequently adopted or promulgated) relating to pollution or the
protection of the environment, ecology, natural resources, or public
health and safety.
B. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage,
disposal, treatment, transportation, discharge, or emission of any
Hazardous Materials on, in, beneath, to, from, at or about the
Property, in connection with Tenant's use of the Property, or by
Tenant or by any of Tenant's agents, employees, contractors, vendors,
invitees, visitors or its future subtenants or assignees. Tenant
agrees that any and all Tenant's Hazardous Materials Activities shall
be conducted in strict, full compliance with applicable Environmental
Laws at Tenant's expense, and shall not result in any contamination of
the Property or the environment. Tenant agrees to provide Landlord
with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant
becomes aware, and further agrees to provide Landlord with prompt
written notice of any material violation of Environmental Laws in
connection with Tenant's Hazardous Materials Activities of which
Tenant becomes aware. If Tenant's Hazardous Materials Activities
involve Hazardous Materials other than normal use of customary
landscaping, cleaning, household and office supplies and personal use
items, Tenant also agrees at Tenant's expense: (i) to install such
Hazardous Materials monitoring, storage and containment devices as
required by the governing agencies associated with any Tenant's
Hazardous Materials Activities or otherwise specifically required by
any governing agency of Tenant and (ii) provide Landlord annually with
copy of the Hazardous Materials Business Plan that Tenant is required
to file with the Certified Unified Program Agency ("CUPA") that
exercises jurisdiction over the Property at the same time each year
that Tenant files such plan with the CUPA, as contemplated in the
California Health and Safety Code. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in
full compliance with applicable Environmental Laws, to fully correct
any and all problems or deficiencies relating to Tenant's Hazardous
Materials Activities, and promptly provide Landlord with documentation
of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at
its expense, shall (i) properly remove from the Property all Hazardous
Materials which came to be located at the Property as a result of
Tenant's Hazardous Materials Activities, and (ii) fully comply with
and complete all facility closure requirements of applicable
Environmental Laws regarding Tenant's Hazardous Materials Activities,
including but not limited to (x) properly restoring and repairing the
Property to the extent damaged by such closure activities, and (y) if
applicable, obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written
concurrence that closure has been completed in compliance with
applicable Environmental Laws. Tenant shall promptly provide Landlord
with copies of all claims, notices, work plans, data and reports
prepared, received or submitted in connection with any such closure
activities.
D. If Landlord, in its reasonable discretion, believes that the
Property has become contaminated as a result of Tenant's Hazardous
Materials Activities, Landlord in addition to any other rights it may
have under this Lease or under Environmental Laws or other laws, may
enter upon the Property and conduct inspection, sampling and analysis,
including but not limited to obtaining and analyzing samples of soil
and groundwater, for the purpose of determining the nature and extent
of such contamination. Tenant shall promptly reimburse Landlord for
the costs of such an investigation, including but not limited to
reasonable attorneys' fees, Landlord incurs with respect to any such
investigation that discloses Hazardous Materials contamination for
which Tenant is liable under this Lease. Except as may be required of
Tenant by applicable Environmental Laws, Tenant shall not perform any
invasive sampling, testing, or drilling to identify the presence of
any Hazardous Materials at the Property, without Landlord's prior
written consent which shall not be unreasonably withheld. Tenant
shall promptly provide Landlord with copies of any claims, notices,
work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant
to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel
acceptable to Landlord, whose consent shall not unreasonably be
withheld) and hold harmless Landlord, its employees, assigns,
successors, members, and agents from and against any and all claims
(including, but not limited to, third party claims from a private
party or a government authority), liabilities, obligations, losses,
causes of action, demands, governmental proceedings or directives,
fines, penalties, expenses, costs (including but not limited to
reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's
Hazardous Materials Activities which occur during the Lease Term; (ii)
any Hazardous Materials contamination caused by Tenant prior to the
Lease Commencement Date; or (iii) the breach of any obligation of
Tenant under this Paragraph 2 (collectively, "Tenant's Environmental
Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully
reimburse Landlord for losses in or reductions to rental income, and
diminution in fair market value of the Property caused by or resulting
from any such indemnified matter. Tenant's Environmental
Indemnification shall further include but is not limited to the
obligation to diligently and properly implement to completion, at
Tenant's expense, any and all environmental investigation, removal,
remediation, monitoring, reporting, closure activities, or other
environmental response action (collectively, "Response Actions")
associated with any such indemnified matter. Tenant shall promptly
provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any
Response Actions.
F. It is agreed that the Tenant's responsibilities related to
Hazardous Materials will survive the expiration or termination of this
Lease and that Landlord may obtain specific performance of Tenant's
responsibilities under this Paragraph 2. It is further acknowledged
by the Parties that Exhibit B attached hereto reflects certain
Hazardous Materials that Tenant and its environmental consultants,
during their earlier analysis, inspection and testing of the Property,
determined existed on or about the Property ("Existing
Contamination"). The Parties agree that notwithstanding anything to
the contrary in this Lease, Tenant's Environmental Indemnification
shall not extend to, and Tenant shall have no responsibility,
liability or indemnification obligation to Landlord under this Lease
or at law for, any Hazardous Materials present in, on, under or about
the Property as of the date of this Lease or for any Hazardous
Materials in groundwater that may hereafter migrate to or under the
Property, including any such Existing Contamination (including, but
not limited to, in the event of any release of any such Existing
Contamination or any migration of any such Existing Contamination onto
or off of the Property), except to the extent, and then only to the
extent, to which Tenant may contribute to any such Existing
Contamination or may cause any such Existing Contamination to be
released or migrate.
3. TERM.
3.1. Commencement Date. The term of this Lease shall commence as of
November 1, 1997 (the "Commencement Date") and shall continue for a
period of thirty-three (33) years and nine (9) months thereafter,
expiring on July 31, 2031 (the "Lease Term"), unless sooner terminated
as provided herein. Prior to the Commencement Date, Tenant shall pay
to Landlord an amount equal to $** as a lease commitment fee ("Lease
Commitment Fee") in consideration for Landlord's holding the Premises
off of the market during the period of negotiation of this Lease.
Tenant's failure to pay such amount to Landlord prior to the
Commencement Date shall create the same rights and remedies in favor
of Landlord as Tenant's failure to pay Rent under this Lease.
3.2. Proration. In the event that the Lease Term for any reason ends
on a date other than the last day of a calendar month, on the first
day of the last calendar month of the Lease Term, Tenant shall pay to
Landlord as rent for the period from the first day of said last
calendar month to and including the last day of the term hereof that
proportion of the rent then due hereunder which the number of days
between the first day of said last calendar month and the last day of
the term hereof bears to thirty (30).
3.3. Rescission Right. Tenant submitted on August 21, 1997 to the
City of Mountain View, California an application for a Planned
Community Permit (the "PCP Permit") seeking approval for Tenant to
proceed generally thereafter with seeking the issuance of building
permits for the construction of two (2) Buildings on the Premises
together with three other buildings on certain adjacent property
(constituting 13.48 acres located at Amphitheatre Parkway and
Charleston Road in Mountain View) which adjacent property is the
subject of a certain Construction Agreement between Tenant and P/A
Charleston Road LLC dated September 1, 1997 (the "Construction
Agreement"). As provided in Section 2C of the Construction Agreement,
either P/A Charleston Road LLC or Tenant shall have the right to
terminate the Construction Agreement and certain other agreements
pursuant to the provisions of the Construction Agreement upon written
notice to the other within five (5) business days after the "Outside
Date", if the City Council of the City of Mountain View, California
fails to finally approve and cause the issuance by the City of
Mountain View of the PCP Permit in satisfaction of the requirements
set forth in Section 1.K of the Construction Agreement (which Section
1.K sets forth the standards for acceptability of the PCP Permit) on
or before the Outside Date (as such Outside Date may have been
extended by Landlord). As provided in the Construction Agreement, the
Outside Date is initially agreed to be the date of October 31, 1997,
but is subject to certain rights of P/A Charleston Road LLC as set
forth in the Construction Agreement to extend the Outside Date. As
respects this Lease, Landlord and Tenant agree that if either P/A
Charleston Road LLC or Tenant validly exercise their right under
Section 2C of the Construction Agreement to terminate the Construction
Agreement, then in such event (i) this Ground Lease shall be deemed
automatically rescinded, (ii) if Tenant has theretofore paid to or
for the benefit of Landlord the Lease Commitment Fee, any Base Rent or
any Additional Rent hereunder, any and all such amounts shall be
promptly repaid by to Tenant by Landlord, (iii) Landlord and Tenant
shall acknowledge in writing the formal rescission of this Lease, and
(iv) Landlord shall thereupon be free to lease the Premises to anyone
without regard to Tenant.
4. RENT.
4.1. Base Rent. Commencing as of the Commencement Date, Tenant
shall pay monthly base rent ("Base Rent") as hereinafter set forth to
Landlord without deduction, offset, prior notice, or demand, in
advance on the first day of each calendar month of the Lease Term and
in lawful money of the United States. On November 1, 1997, the sum of
** Dollars ($**) shall be due, and a like sum due on the first day of
each month thereafter, through and including August 1, 2001. The Base
Rent shall be increased pursuant to Paragraph 4.2 below. Base Rent
shall be absolutely net to Landlord. Tenant shall pay directly to the
charging entity or authority all other costs, expenses, charges or
required payments of any nature whatsoever related to the Property,
and shall reimburse Landlord for any such charges incurred by Landlord
as provided in Paragraph 4.3 below.
4.2. Base Rent Increases. The Base Rent provided for in Paragraph 4.1
above shall be subject to adjustment on September 1, 2001 (the "First
Adjustment Date"), and annually thereafter on every subsequent
September 1st occurring during the Lease Term (each of which dates is
an "Adjustment Date") as follows:
A. Index. The base for computing the adjustment shall be the
Consumer Price Index for All Urban Consumers (base year 1982-84 = 100)
for the San Francisco/Oakland/ San Jose Metropolitan Area, published
by the United States Department of Labor, Bureau of Labor Statistics
(the "Index"). The "Beginning Index" for an Adjustment Date shall be
(i) with respect to the first Adjustment Date (i.e. September 1,
2001), the Index in effect for the month of September 1996, and (ii)
with respect to each subsequent Adjustment Date, the Index for the
month in which the immediately preceding Adjustment Date occurred
(i.e. September of each year beginning with September 2001). The
"Adjustment Index" for an Adjustment Date shall be the Index for the
month in which the Adjustment Date occurs.
B. Calculation of Increase. If the Adjustment Index as of any
Adjustment Date has increased over the Beginning Index, the monthly
Base Rent for the following twelve (12) months (until the next
Adjustment Date) shall be determined by multiplying the Base Rent in
effect on the day prior to said Adjustment Date by a fraction, the
numerator of which is the Adjustment Index and the denominator of
which is the Beginning Index. In no event, however, shall the Base
Rent be reduced from the Base Rate, as previously adjusted. For
Example; if the CPI Index for September 1996 is 147.5 and the CPI
Index for September 2001 is 152.1, the ratio of the CPI Index is 152.1
/ 147.5= 103.119%; therefore the Base Rent in effect for the year
commencing September 1, 2001 shall be $** x 103.119% = $**; then if
the CPI Index for September 2002 is 151.9, the change in the CPI Index
is 151.9 / 152.1 = .9987%; therefore the monthly Base Rent for the
year commencing September 1, 2002 would remain at $**.
C. Change in Index. If the Index is changed so that the base year
differs from that in effect on the Commencement Date, the Index shall
be converted in accordance with the conversion factor published by the
United States Department of Labor, Bureau of Labor Statistics. If the
Index remains in effect but is not published for the specific calendar
month which includes the Adjustment Date, then the index which is
published for the most immediately preceding calendar month to the
Adjustment Date shall instead be used. If the Index is discontinued
or revised during the term of the Lease, such other government index
or computation with which it is replaced, as determined by Landlord,
shall be used in order to obtain substantially the same result as
would have been obtained if the Index had not been discontinued or
revised. If no governmental agency publishes a replacement for the
Index, Landlord shall be entitled to use such private index or
computation as most closely approximates the Index, as determined by
Landlord.
D. Acknowledgment of Adjusted Rent. Upon adjustment of the Base
Rent as provided above, the parties shall immediately execute a
written acknowledgment of the new monthly Base Rent. In the event the
Adjustment Index will not be available until after the applicable
Adjustment Date, Tenant shall continue to pay monthly Base Rent at the
rate in effect on the day immediately preceding the applicable
Adjustment Date until such time as the Adjustment Index becomes
available and notice of the adjusted monthly Base Rent is given by
Landlord to Tenant, at which time the adjustment provided in this
Paragraph 4.2 shall be made retroactively to the Adjustment Date, and
Tenant shall promptly pay to Landlord the aggregate amount, if any, by
which the new Base Rent thus determined exceeds the Base Rent actually
paid by Tenant for the period from and after the Adjustment Date. The
monthly Base Rent shall be subject to a CPI adjustment on the
following dates: September 1, 2001; September 1, 2002; September 1,
2003; September 1, 2004; September 1, 2005; September 1, 2006;
September 1, 2007; September 1, 2008; and September 1, 2009; September
1, 2010; September 1, 2011; September 1, 2012; September 1, 2013;
September 1, 2014; September 1, 2015; September 1, 2016; September 1,
2017; September 1, 2018; September 1, 2019; September 1, 2020;
September 1, 2021; September 1, 2022; September 1, 2023; September 1,
2024; September 1, 2025; September 1, 2026; September 1, 2027;
September 1, 2028; September 1, 2029; and September 1, 2030.
4.3. Additional Rent.
A. Tenant shall pay directly to the charging authority or, to the
extent Landlord incurs any of the below-described expenses or charges,
to Landlord, in addition to Base Rent during the Lease Term,
additional rent ("Additional Rent") equal to the sum of the following:
1. All Real Property Taxes relating to the Project as set forth in
Paragraph 10;
2. All Operating Expenses relating to the Project as set forth in
Paragraph 6; and
3. All charges, costs and expenses which Tenant is required to pay
hereunder, together with all interest and penalties, costs and
expenses, including reasonable attorneys' fees and legal expenses,
that may accrue thereon in the event of Tenant's failure to pay such
amounts, and all damages, reasonable costs and expenses which Landlord
may incur by reason of default of Tenant (pursuant to Paragraph 15 of
this Lease, i.e. Tenant has received notice of a default under this
Lease and the applicable cure period has expired and Tenant has not
then cured such default) or failure on Tenant's part to comply with
the terms and conditions of this Lease.
4. Tenant shall be solely responsible and liable for the
Project's share (which is equal to 34% of the total) for the design,
implementation and maintenance (and 34% of all reasonable costs and
expenses related thereto) of the burrowing owl mitigation program as
related to this Project and to the adjacent 13.48 acres located at
Amphitheatre Parkway and Charleston Road in Mountain View. It is
agreed that if the Lease is terminated as set forth in Paragraph 3.3
above, that all such costs for the design, implementation and
maintenance of the burrowing owl mitigation program incurred prior to
the Lease commencement or accrued through the date of such termination
shall be borne by Tenant.
5. It is the intention of the parties hereto that this Lease
shall be deemed and construed to be a "net lease" and that Tenant
shall pay to Landlord, absolutely net, throughout the Term of this
Lease, the Base Rent and other payments due hereunder free of any
charges, assessments, impositions, or expenses or deductions of any
kind and without abatement, deduction or offset, and under no
circumstances or conditions, whether now existing or hereafter
arising, or whether within or beyond the present contemplation of the
parties, shall Landlord bear any such costs.
B. In the event of nonpayment by Tenant of Additional Rent, Landlord
shall have all the rights and remedies with respect thereto as
Landlord has for nonpayment of Base Rent. Notwithstanding anything to
the contrary in the definition of Additional Rent as set forth in
Paragraph 4.3A or Paragraph 10, Additional Rent shall not include any
of the following:
1. Any ground or underlying lease rental;
2. Bad debt expenses and interest, principal, points and fees on
debts, bad debt expenses or amortization on any mortgage or other debt
instrument encumbering all or any portion of the Project;
3. Depreciation on the Project, amortization and interest (on loans
Landlord may have against the Project);
4. Except as otherwise provided in this Lease, marketing costs,
including leasing commissions, attorneys' fees, space planning costs,
and other costs and expenses incurred in connection with lease
negotiations; and
5. Costs incurred due to the violation by Landlord of the terms and
conditions of this Lease.
The Additional Rent due hereunder shall be paid to Landlord or
Landlord's agent (i) within ten (10) days for Real Property Taxes (to
the extent such Real Property Taxes shall be payable to the applicable
taxing authority within thirty (30) days after the date of
presentation of such invoice) and within thirty (30) days for all
other Additional Rent items (if any), after presentation of invoice
from Landlord or Landlord's agent setting forth such Additional Rent
and/or (ii) at the option of Landlord (except with respect to Real
Property Taxes), Tenant shall pay to Landlord monthly, in advance,
Tenant's pro rata share of an amount estimated by Landlord to be
Landlord's approximate average monthly expenditure for such Additional
Rent items, which estimated amount shall be reconciled within one
hundred twenty (120) days after the end of each calendar year, or more
frequently if Landlord elects to do so at Landlord's sole and absolute
discretion, as compared to Landlord's actual expenditure for said
Additional Rent items, with Tenant paying to Landlord, upon demand,
any amount of actual expenses expended by Landlord in excess of said
estimated amount, or Landlord refunding to Tenant (provided Tenant is
not in default in the performance of any of the terms, covenants and
conditions of this Lease pursuant to Paragraph 15 of this Lease, i.e.
Tenant has received notice of a default under this Lease and the
applicable cure period has expired and Tenant has not then cured such
default) any amount of estimated payments made by Tenant in excess of
Landlord's actual expenditures for said Additional Rent items.
4.4. Late Charge and Interest. Notwithstanding any other provision of
this Lease, if any installment of Base Rent and/or Additional Rent
(collectively "Rent") is not received by Landlord from Tenant within
nine (9) calendar days after the same becomes due, Tenant shall
immediately pay to Landlord a late charge in an amount equal to ten
percent (10%) of the amounts due and not so paid. In no event shall
this provision for a late charge be deemed to grant Tenant a grace
period or extension of time within which to pay any Rent installment
as set forth in this Paragraph 4 or to prevent Landlord from
exercising any right or remedy available to Landlord upon Tenant's
failure to pay each Rent installment due under this Lease when due.
If any Rent remains delinquent for a period in excess of nine (9)
calendar days, then, in addition to such late charge, Tenant shall pay
to Landlord interest on any Rent that is not so paid from said ninth
day at the rate of Bank of America's Prime Rate (or equivalent rate)
plus five percent (5%) per annum on the unpaid amount, but in no event
greater then the maximum rate of interest permitted by applicable law,
until paid in full.
4.5. Triple Net Lease. It is intended by the parties (i) that the
Rent provided for in this Paragraph 4 shall be absolutely net to
Landlord throughout the Term of this Lease, free of any expenses,
charge or deduction whatsoever, and that payment of all charges or
expenses, including without limitation, property taxes and
assessments, parking surcharges, rent taxes, environmental
investigations, responses, abatement, amelioration and remediation,
insurance, repair and maintenance, utilities, repairs, constructions,
reconstruction, shall be the responsibility of Tenant and at Tenant's
sole cost and expense and (ii) that the Rent is due as stated in this
Lease regardless of the status of any Buildings or other improvements
that may be constructed by Tenant on the Premises (collectively
"Improvements").
4.6. Place of Payment. All Base Rent hereunder and all payments
hereunder for Additional Rent shall be paid to Landlord at: File 1504,
Box 60000, San Francisco, California 94160, or to such other person or
to such other place as Landlord may from time to time designate in
writing.
4.7. Audit Rights. Within sixty (60) days after receipt of Landlord's
written reconciliation together with supporting documentation, Tenant
shall have the right, at Tenant's sole expense, to commence a review
and/or audit, at a mutually convenient time at Landlord's office, of
Landlord's records relating to the foregoing expenses. Any audit must
be conducted by Tenant or an independent nationally recognized
accounting firm that is not being compensated by Tenant or other third
party on a contingency fee basis. If an audit (not a review) reveals
that Landlord has overcharged Tenant, the amount overcharged shall be
credited to Tenant's account within thirty (30) days after the audit
is concluded.
4.8. Survival. The respective obligations of Landlord and Tenant
under this Paragraph 4 shall survive the expiration or other
termination of the Lease Term.
5. MAINTENANCE AND REPAIRS.
5.1. Tenant's Obligations. Following Tenant's construction of any
Improvements, Tenant shall, at Tenant's sole cost, keep such
Improvements in good and safe condition, order and repair. Tenant
hereby waives the benefit of any statute now or hereinafter in effect
which would otherwise afford Tenant the right to make repairs at
Landlord's expense or to terminate this Lease because of Landlord's
failure to keep the Project in good condition, order and repair.
Tenant specifically waives all rights it may have under Sections
1932(1), 1941, and 1942 of the California Civil Code, and any similar
or successor statute or law.
5.2. No Obligations or Liability for Landlord. Landlord shall not be
obligated to make any repairs or replacements of any kind, nature or
description whatsoever to the Project or any portion thereof.
Landlord shall not be liable for any loss, damage or injury of any
kind, nature or character to any person or property arising from any
use of the Project, or caused by any defect in any Building or other
improvements to be constructed thereon or in any equipment or other
facility therein, or caused by or arising from any act or omission of
Tenant or any of its agents, employees, licensees, or invitees or by
or from any accident on the Project or any fire or other casualty
thereon, or occasioned by the failure of Tenant to maintain the
Project or any Improvements constructed thereon in a safe condition;
and Tenant, as a material part of the consideration of this Lease,
waives on its behalf all claims and demands against Landlord for any
such loss, damage, or injury of Tenant or other third parties.
6. OPERATING EXPENSES. In addition to the Rent to be paid by Tenant
under Paragraph 4, Tenant shall at its sole expense, pay for any and
all costs of every kind and nature related to the construction,
maintenance, operation or repair of the Project and/or to Tenant's use
thereof during the term of this Lease.
7. ACCEPTANCE AND SURRENDER OF PREMISES.
7.1. Tenant acknowledges that Tenant is accepting the Premises "as-is"
and has inspected the Premises hereunder and observed its physical
characteristics and conditions and hereby waives any and all
objections to the Premises. Tenant acknowledges that neither Landlord
nor any of Landlord's employees, agents, or representatives has made
any representations, warranties, or agreements concerning the present
use thereof, or the suitability of Tenant's intended use of the
Premises.
7.2. Tenant further acknowledges and agrees that no patent or latent
physical condition of the Premises, whether known or unknown, or
discovered, shall affect the rights or obligations of either party
hereto. All costs, fees, studies, reports, approvals, plans, surveys,
permits, and expenses whatsoever necessary or desirable in connection
with Tenant leasing, using and/or operating the Project shall be
obtained and paid for by and shall be the sole responsibility of
Tenant. Tenant has investigated and has knowledge of operative or
proposed governmental laws and regulations (including, but not limited
to, zoning, environmental (including the Environmental Protection
Agency and the Bay Area Pollution Control District), and land use laws
and regulations and obligations) to which the Project may be subject,
and is leasing the Premises upon the basis of its review and
determination of the applicability and effect of such laws and
regulations. Tenant has neither received nor relied upon any
representations concerning such laws and regulations made by Landlord,
Landlord's employees, agents, or any other person acting on or in
behalf of Landlord.
7.3. Tenant has obtained a Preliminary Title Report (the "Title
Report") on the Premises showing the present state of title, a copy of
which is attached hereto as Exhibit C. Tenant agrees to accept its
leasehold of the Premises in its present state based on its own
investigation and examination and the Title Report and other studies
and investigations Tenant has conducted. Except as expressly provided
in this Lease or in the Purchase Agreement attached hereto as Exhibit
D, Landlord makes no warranty and shall not be liable to Tenant with
respect to this Lease (or title to the Project if Tenant exercises its
Option to Purchase the Premises as set forth in Paragraph 33) or with
respect to the Preliminary Title Report or conditions of title to the
Premises or any unrecorded easements or easements by use or other
conditions or defect of title, if any. Tenant shall be obligated to
make its own investigation as to the state of title to the Premises
and to obtain prior to execution of this Lease any title insurance
that Tenant may desire. Notwithstanding the foregoing, Landlord
agrees that other than any financing which may be permitted by the
terms of this Lease, it shall take no action after the date of this
Lease which would create any lien or other encumbrance upon the
Premises without the prior written consent of Tenant, which consent
Tenant may withhold in its reasonable discretion.
7.4. Tenant agrees on the last day of the Lease Term, or on the sooner
termination of this Lease, to surrender the Project and every portion
thereof promptly to Landlord in good condition and repair (damages by
acts of God, fire, normal wear and tear excepted). Any Improvements
which may have been made in, to, or on the Project and which exist as
of such date shall be surrendered in good condition and repair,
provided that Tenant shall have the right to remove any trade fixtures
and any permanently attached lab fixtures and equipment in any
Building or on the roof of any Building, including any electrical,
plumbing, ventilation or air conditioning equipment associated with
supporting the specific requirements of any other lab equipment
(collectively "Trade Fixtures"). On or before the end of the Lease
Term or sooner termination of this Lease, Tenant shall remove all of
Tenant's personal property and Trade Fixtures from the Project, and
all property not so removed shall be deemed abandoned by Tenant and
title to same shall thereupon pass to Landlord without compensation to
Tenant. Upon termination of this Lease, Landlord may remove all
moveable furniture and equipment so abandoned by Tenant, at Tenant's
sole cost, and repair any damage caused by such removal.
Notwithstanding anything to the contrary herein or in this Lease,
Landlord may, at its sole and absolute discretion, require Tenant (at
Tenant's sole cost and expense) to remove any and/or all of the
Improvements and Alterations to the Project upon Lease Termination.
8. IMPROVEMENTS AND ALTERATIONS.
8.1. Initial Improvements. It is currently contemplated that Tenant
will construct prior to September 1, 2003, at Tenant's sole cost and
expense, one or more Buildings, and all on and off site work,
including landscaping (collectively referred to as "Initial
Improvements"). The Initial Improvements, if constructed, shall in
all events comply with the requirements of the PCP Permit ultimately
issued by the City of Mountain View ("PCP"). Landlord hereby
approves, subject to the terms and conditions of this Lease, Tenant's
construction of the Initial Improvements so long as the exterior
components thereof are generally in conformity with the PCP as such
PCP is ultimately issued by the City of Mountain View. If Tenant
desires to make any material changes to the exterior design of the
Initial Improvements, then prior to submitting any application for
amendment of the PCP to the City of Mountain View, Tenant shall
deliver such proposed amendment to Landlord for Landlord's review and
approval, which approval will not be unreasonably withheld or delayed.
Any such disapproval must be in writing stating with particularity the
reasons for such disapproval and the actions Tenant may take to modify
such proposal in a manner that Landlord would approve. Landlord's
failure to deliver such written disapproval within five (5) business
days after Tenant has delivered such request for approval to Landlord
shall be deemed Landlord's approval of such proposed amendment to the
PCP. Landlord shall cooperate with Tenant as reasonably requested by
Tenant with respect to any required governmental approvals, including,
without limitation, any application for amendment of the PCP, in
connection with the Initial Improvements, including the signing of any
reasonable applications or requests which are required to be signed by
the owner of the Project in order to obtain required approvals,
provided that Landlord shall not be required to incur any costs or
expenses or liability in connection therewith. Without limiting
Landlord's discretion concerning its approval rights as to any
amendments to the PCP that Tenant may reasonably request, the parties
agree that (i) Tenant shall not, without Landlord's prior written
consent, design or seek governmental approvals to construct more than
120,000 square feet of floor area (calculated as square footage is
calculated by the City of Mountain View pursuant to the City of
Mountain View Shoreline West Precise Plan) within the Initial
Improvements, and (ii) the general design of the Initial Improvements
shall be reasonably compatible, as reasonably determined by Landlord,
with the design of the buildings to be constructed on the 13.48 acre
parcel of property located on the opposite side of Amphitheater
Parkway from the Project. Promptly following completion of the
Initial Improvements, Tenant shall deliver to Landlord as built
drawings thereof on original sepia drawn to 1/8" scale, prepared at
Tenant's sole cost. Notwithstanding the foregoing, if Tenant fails to
substantially complete construction of the Initial Improvements on or
before September 1, 2003, then Landlord may, by written notice to
Tenant delivered at any time after such date and prior to substantial
completion of the Initial Improvements, elect to terminate this Lease,
which termination shall be effective ninety (90) days following the
date of delivery of such written notice to Tenant. Notwithstanding
the foregoing, (i) if Tenant substantially completes the construction
of the Initial Improvements prior to the expiration of such ninety-day
period, then such termination notice shall be deemed rescinded, and
(ii) if Tenant delivers to Landlord an Exercise Notice of the Purchase
Option to purchase the Premises as contemplated in Paragraph 34 of
this Lease, prior to the expiration of such 90-day period, then such
termination notice shall be deemed suspended until the date upon which
the closing pursuant to the Purchase Option is scheduled to occur
under the terms of this Lease. If Tenant thereafter fails to perform
its obligations under the Purchase Option after Tenant's delivery of
the Exercise Notice for any reason other than Landlord's failure to
perform its obligations with respect to the Purchase Option, then the
termination notice earlier delivered to Tenant by Landlord shall be
deemed reinstated, effective as of the business day following the
scheduled date for such closing which did not occur.
8.2. Assignment of Plans. Tenant hereby assigns to Landlord,
effective as of (i) the date of rescission of this Lease pursuant to
Paragraph 3.3 above or (ii) the date that Tenant comes to be in
default (pursuant to Paragraph 15 of this Lease, i.e. Tenant has
received notice of a default under this Lease and the applicable cure
period has expired and Tenant has not then cured such default), all of
its interest in and to the plans and specifications prepared for the
Initial Improvements, all studies, data and drawings with respect
thereto prepared by or for Tenant, and the contracts and agreements
relating to such plans and specifications or studies, data and
drawings, or to the construction or the Initial Improvements,
including but not limited to the general contract therefor, in each
case, to the extent assignable and without any representation or
warranty (but fully paid for by Tenant through the date of such
assignment), but Landlord shall not have any obligation under those
contracts or agreements unless it expressly agrees to assume such
obligations in writing. Landlord shall have the right to exercise any
rights of Tenant under those contracts and agreements or with respect
to such plans, specifications, studies, data and drawings at any time
following the occurrence of such assignment. If this Lease terminates
without the Purchase Option or Sales Option being exercised in
accordance with Paragraph 34 of this Lease, then Tenant shall at such
time assign its interest in the foregoing plans and other documents to
Landlord. Any assignment of any plans or other documents under this
Paragraph shall be made by Tenant to Landlord at no charge to
Landlord.
8.3. Subsequent Alterations and Additions. Following the completion
of the Initial Improvements, Tenant may make alterations to any
Building ("Alterations") without the prior written consent of
Landlord, provided Tenant (i) gives Landlord a minimum of five (5)
business days written notice of its intent to make any material
modifications to any Building; and (ii) as to any material Alteration,
provides to Landlord, upon completion of said construction, a 1/8
inch scale sepia "as built" plan reflecting said alterations and/or
additions. Notwithstanding the foregoing, Tenant shall not make any
Alteration to the exterior of any Building that would be inconsistent
with the design approved by the PCP, as amended with Landlord's
consent as provided above, unless Landlord first consents to such
Alteration, which consent shall not be unreasonably withheld.
8.4. Plans and Permits. Any Alteration to the Project which requires
the consent of Landlord shall be presented to Landlord in written form
for Landlord's approval, with proposed detailed plans and
specifications therefor, including an original sepia at 1/8" scale,
prepared at Tenant's sole cost. Any consent by Landlord thereto shall
be deemed conditioned upon Tenant's acquisition of all permits
required to make such Alterations from all appropriate governmental
agencies, the furnishing of copies thereof to Landlord prior to
commencement of the work, and the compliance by Tenant with all
conditions of said permits, all at Tenant's sole cost. Upon
completion of any such Alterations, Tenant shall, at Tenant's sole
cost, immediately deliver to Landlord "as-built" plans and
specifications therefor, including an original sepia at 1/8" scale,
prepared at Tenant's sole cost. Landlord shall cooperate with Tenant
as reasonably requested by Tenant with respect to any required
governmental approvals, including, without limitation, any application
for amendment of the PCP, in connection with the Alterations,
including the signing of any reasonable applications or requests which
are required to be signed by the owner of the Project in order to
obtain required approvals, provided that Landlord shall not be
required to incur any costs or expenses or liability in connection
therewith.
8.5. Construction Work Done by Tenant. All construction work required
or permitted to be done by Tenant, including the Initial Improvements,
shall be performed by a licensed contractor, at Tenant's sole cost and
expense, and in a good and workmanlike manner. All exterior
construction work subsequent to the completion of the Initial
Improvements shall conform in quality and design with that of the
Initial Improvements. All construction work shall be performed in
compliance with all applicable Governmental Regulations. Tenant shall
pay, when due, all claims for labor or materials furnished or alleged
to have been furnished to or for Tenant at or for use in the Project,
which claims are or may be secured by any mechanic's liens.
8.6. Title to Initial Improvements and/or Alterations. Any Initial
Improvements and/or Alterations which may be made on the Project and
not earlier removed by Tenant as a result of any earlier Alterations
to the Project shall become the property of Landlord upon the
expiration or earlier termination of this Lease. Without limiting the
generality of the foregoing, all heating, lighting, electrical
(including all wiring, conduits, main and subpanels), air
conditioning, partitioning (except movable partitions), drapery, and
carpet installations made by Tenant, regardless of how affixed to the
Project, unless included within the definition herein of Trade
Fixtures (as defined in Paragraph 7.4 above), shall be and become the
property of Landlord upon the expiration or earlier termination of
this Lease, and shall remain upon and be surrendered with the Project
at the expiration or sooner termination of this Lease. Tenant's
furnishings, machinery, equipment and Trade Fixtures, shall remain the
property of Tenant and may be removed by Tenant, and Tenant shall, at
Tenant's sole cost, immediately after removal repair any damage to the
Project caused thereby. Tenant shall be solely responsible for the
maintenance and repair of any and all Alterations made by Tenant to
the Project.
8.7. Notice. Tenant shall give Landlord notice of the date of
commencement of any work in the Project not less than five (5)
business days prior thereto, and Landlord shall have the right to post
notices of non-responsibility or similar notices in or on the Project
in connection therewith.
9. UTILITIES AND SERVICES. Tenant shall pay when due all metering
and, if applicable, connection charges and all costs of utility
services used upon or furnished to the Project. Tenant shall pay when
due all charges for water, gas, electricity, telephone, refuse pickup,
janitorial services, and all other utilities and services supplied or
furnished to the Project during the term of this Lease, together with
any taxes thereon, directly to the charging entity, and, if, due to
Tenant's failure to pay any such amounts prior to delinquency,
Landlord should elect to pay any such charges on Tenant's behalf,
Tenant shall reimburse Landlord for such amounts as Additional Rent
within ten (10) days after written request therefor. In no event
shall Landlord be liable to Tenant for any failure or interruption in
utility or service. No failure or interruption of any such utilities
or services shall entitle Tenant to terminate this Lease or to
withhold Rent or other sums due hereunder. Landlord shall not be
responsible for providing security guards or services or any other
services for any portion of the Project, and Tenant shall at its own
expense provide all such services.
10. TAXES.
10.1. Real Property Taxes. Tenant shall pay directly to the
applicable tax collector ("Tax Collector") and prior to delinquency
all Real Property Taxes (as hereinafter defined) which become due
during the Lease Term, as Additional Rent. The term "Real Property
Taxes" as used herein shall mean (1) all taxes, assessments, levies,
and other charges of any kind or nature whatsoever, general and
special, foreseen and unforeseen (including all installments of
principal and interest required to pay any general or special
assessments for public improvements and any increases resulting from
reassessments caused by any change in ownership of the Premises or the
Project) now or hereafter imposed by any governmental or quasi-
governmental authority or special district having the direct or
indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to (a) the value, occupancy, or use
of, all or any portion of the Premises or the Project (as now
constructed or as may at any time hereafter be constructed, altered,
or otherwise changed) or Landlord's interest therein, including
Landlord's interest in this Lease; or (b) any improvements located on
the Premises or the Project (regardless of ownership); and (2) all
area wide taxes, charges, levies or fees imposed by reason of
environmental regulation or other governmental control of the Project.
If at any time during the Lease Term the taxation or assessment of the
Project prevailing as of the Commencement Date shall be altered so
that in lieu of or in addition to any Real Property Taxes described
above there shall be levied, assessed or imposed (whether by reason of
a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate or additional tax or
charge (a) on the value, use or occupancy of the Project or Landlord's
interest therein; (b) on or measured by the gross receipts, income or
rentals from the Project; (c) on Landlord's business of leasing the
Premises; or (d) computed in any manner with respect to the operation
of the Premises or the Project, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real
Property Taxes". Notwithstanding the foregoing, the term "Real
Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax
imposed on Landlord's income from all sources. Notwithstanding
anything within this Paragraph 10.1, it is agreed that if any special
assessments for capital improvements are assessed, and if Landlord has
the option to either pay the entire assessment in cash or go to bond,
Landlord shall elect to go to bond so that Tenant will pay such
special assessment in installments rather than in a lump sum. It is
additionally agreed that Tenant shall have the right, at Tenant's sole
cost and expense, to contest with any taxing authority or appellate
body the imposition or amount of any Real Property Tax, but any such
contest shall not excuse Tenant from any of its obligations hereunder
as to paying any such Real Property Tax when payable hereunder. In
addition, Landlord agrees to consult with Tenant in advance of any
contemplated change in ownership of the Project so as to have the
benefit of Tenant's recommendations, if any, as to any possible way to
avoid any reassessment of the Project, but regardless of any such
consultation, Landlord shall have no obligation to Tenant to follow,
or any liability to Tenant for failing to follow, any recommendations
of Tenant.
10.2. Taxes on Tenant's Property. Tenant shall pay at least ten
(10) days prior to delinquency all taxes, license fees and public
charges assessed or levied against all equipment, personal property or
trade fixtures placed by Tenant in or about the Project. If any such
taxes, fees or charges are levied against Landlord or the Project or
if the assessed value of the Project is increased by the inclusion
therein of the value placed upon such equipment, personal property or
trade fixtures of Tenant and if Landlord pays the taxes, fees or
charges based on such increased assessment due to Tenant's failure to
pay the same prior to delinquency, which Landlord shall have the right
to do regardless of the validity thereof, Tenant shall upon demand,
repay to Landlord the taxes, fees or charges so levied against
Landlord, or the proportion thereof such taxes resulting from such
increase in the assessment.
11. INSURANCE.
11.1. Builder's Risk Insurance. Tenant shall obtain and keep in
force, at its sole cost, upon the commencement and during the period
of construction of the Initial Improvements, until completion of
construction of the Initial Improvements, a policy of builder's
completed value risk insurance against all risks of physical loss in
the amount of the guaranteed replacement cost of the Initial
Improvements and insurance against loss or damage to personal property
located on the Project by fire and other hazards covered by such
insurance, for the aggregate cost of the work performed and equipment
and supplies and materials furnished.
11.2. Tenant's Liability Insurance. Tenant shall, at Tenant's
sole cost, keep in force during the Lease Term a policy of commercial
general liability insurance on an occurrence policy form covering
property damage and liability for personal injury occurring in, on or
about the Project, with limits in the amount of at least Five Million
Dollars ($5,000,000) per occurrence combined single limit for injuries
to or death of persons and for property damage, and with a contractual
liability endorsement insuring Tenant's performance of Tenant's
obligation to indemnify Landlord contained in Paragraph 12. Landlord
shall have the right from time to time to require Tenant to increase
coverage limits under the foregoing policy to commercially reasonable
levels. Tenant shall, at Tenant's sole cost, pay all insurance
deductibles. Tenant may provide such insurance coverage under blanket
policies of insurance.
11.3. Property Insurance. Tenant shall, at Tenant's sole cost,
obtain and keep in force during the term of this Lease a policy or
policies of insurance for the benefit of Landlord and Tenant covering
loss or damage to the buildings, the common areas, and all other
portions of the Project, in the amount of the full replacement value
thereof, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious
mischief, special extended perils (all risk), including boiler and
machinery coverage (if applicable) and an inflation endorsement, but
excluding earthquake coverage. The insurance coverage shall include
sprinkler leakage insurance as to all portions of the Project
containing fire sprinklers. Throughout the Term of this Lease Tenant
shall be responsible, at Tenant's sole cost, for paying any and all
insurance deductibles and premiums. Tenant may provide such insurance
under blanket policies of insurance provided that such insurance is on
an occurrence basis.
11.4. Form and Certificates. Each policy of insurance required to
be carried by Tenant pursuant to Paragraph 11.1, 11.2 and 11.3 shall
be with a company rated A:IX or better in "Best's Insurance Guide" and
shall name Landlord and such other parties in interest as Landlord
reasonably designates as additional insured. Tenant's insurance
policy shall also be primary insurance, without right of contribution
from any policy carried by Landlord, and shall contain a cross-
liability and severability endorsement. A certificate of insurance
(ACCORD form) and a copy of each policy shall be provided to Landlord
which indicates that the coverage required hereunder is in effect and
which provides that such policy is not subject to cancellation,
expiration or change, except upon thirty (30) days' prior written
notice to Landlord.
11.5. Payment. Tenant shall pay all of the premiums and
deductibles for any insurance obtained pursuant to this Paragraph 11.
11.6. Waiver of Subrogation. Tenant and Landlord each hereby
waives any and all rights of recovery against the other, and against
the officers, employees, agents and representatives of the other, for
loss of or damage to the property of the waiving party or the property
of others under its control, to the extent such loss or damage is
covered by proceeds received under any insurance policy carried by
Landlord or Tenant and in force at the time of such loss or damage.
Each of Tenant and Landlord shall, upon obtaining the policies of
insurance required hereunder or otherwise carried by such party, give
notice to the insurance carrier or carriers that the foregoing mutual
waiver of subrogation is contained in this Lease.
11.7. No Limitation of Liability. Landlord makes no
representation that the limits of liability specified to be carried by
Tenant or Landlord under the terms of this Lease are adequate to
protect any party. If Tenant believes that the insurance coverage
required under this Lease is insufficient to adequately protect
Tenant, Tenant shall provide, at its own expense, such additional
insurance as Tenant deems adequate.
11.8. Restoration and Disposition of Casualty Insurance
Proceeds. Subject to the provisions of Paragraph 20.2, in the event
any Building and/or any of the Improvements and/or attached
furnishings and equipment located on the Project leased hereunder are
damaged or destroyed by fire or other casualty during the Lease Term,
Tenant shall, at Tenant's sole cost, repair or restore the same to the
external condition approved by the PCP, as the same may be amended
with Landlord's consent as provided in Paragraph 8.1 of this Lease.
The internal condition of the Project may be repaired and restored to
any appropriate condition and configuration in Tenant's reasonable
discretion. Such work of repair or restoration shall be commenced
within one (1) year after the damage or loss occurs and be completed
with due diligence, and shall be otherwise done in accordance with the
requirements of Paragraph 8. The available insurance proceeds
collected for such damage, shall be segregated by Tenant in an
appropriate account for Tenant's benefit to be applied to the cost of
such repairs or restoration, but if such insurance proceeds shall be
insufficient to complete the repairs or restoration, Tenant shall pay
the deficiency out of its own funds. If there are any excess
insurance proceeds following the full payment of the cost of such
repairs or restoration, such excess shall be retained by Tenant.
Until the repair or restoration is completed, Tenant shall keep
Landlord apprised of the amount deposited in and any withdrawals from
such account so as to provide Landlord with reasonable comfort that
the insurance proceeds will be available to be applied by Tenant to
the repair and restoration as required. If any such damage or
destruction occurs at any time on or after September, 1, 2003 and if
Tenant's net worth at the time of such damage or destruction (applying
generally accepted accounting principles, consistently applied) is
less than Five Hundred Million Dollars ($500,000,000) as reflected on
the most recent quarterly or annual audited financial statements of
Tenant preceding the date of such damage or destruction, then in such
event the account to be so established shall provide that any
withdrawals from such account shall require the joint signatures of
Tenant and Landlord (which signature Landlord agrees not to
unreasonably withhold in conjunction with any disbursements requested
by Tenant (i) to pay any reasonably documented costs of repairing and
restoring such damage or destruction and (ii) after the completion of
such repair or restoration, to pay the remaining funds in such account
to Tenant). Should Tenant fail or refuse to make the repairs or
restoration as hereinabove provided, then in such event such failure
or refusal shall constitute a default (under the provisions of
Paragraph 15 of this Lease, i.e. Tenant has received notice of a
default under this Lease and the applicable cure period has expired
and Tenant has not then cured such default) under the covenants and
conditions hereof.
12. WAIVER AND INDEMNIFICATION. Landlord shall not be liable to
Tenant and Tenant hereby waives all claims against Landlord for any
injury to or death of any person or damage to or destruction of
property in or about the Project by or from any cause whatsoever,
including, without limitation, gas, fire, oil electricity or leakage
of any character from the roof, walls, basement or other portion of
the Project except to the extent that the same results primarily from
the willful misconduct or active negligence of Landlord, its agents,
servants, employees, invitees or contractors of which negligence
Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the
willful misconduct or the active negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold
Landlord harmless from and defend Landlord against any and all
expenses, including reasonable attorneys' fees, in connection
therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about the
Project, or any part thereof, from any cause whatsoever, occurring
during the Lease Term.
13. LIENS. Tenant shall keep the Project free from any liens arising
out of any work performed, materials furnished or obligations incurred
by Tenant. In the event that Tenant shall not, within ten (10) days
following notice of the imposition of any such lien, cause the same to
be released of record, Landlord shall have, in addition to all other
remedies provided herein and by law, the right, but not the
obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien.
All sums paid by Landlord for such purpose, and all expenses incurred
by it in connection therewith, shall be payable to Landlord by Tenant
on demand with interest at the Bank of America Prime Rate (or
equivalent thereof) of interest plus five percent (5%) per annum, but
in no event greater then the maximum rate of interest permitted by
applicable law. Notwithstanding anything to the contrary in this
Paragraph 13, Tenant shall have the right to provide Landlord with a
bond in the amount of the Lien in a form satisfactory to Landlord and
to contest the Lien, in which event Landlord shall not be entitled to
pay or discharge the Lien, provided the Lien is removed within ninety
(90) days from the date the Lien is filed.
14. ASSIGNMENT AND SUBLETTING.
14.1. Permitted Transfers. Tenant may sublease all or any portion
of the Project or assign this Lease from time to time during the Term
without Landlord's consent, provided that Tenant shall deliver prior
written notice to Landlord, together with a copy of the sublease or
assignment agreement. Notwithstanding any sublease or assignment,
Tenant shall remain liable to Landlord for Tenant's performance of all
of its obligations under the Lease.
14.2. Form of Sublease and Assignment. Tenant shall provide
Landlord with a fully executed copy of any sublease or assignment
promptly upon execution thereof. Each assignment shall provide that
the assignee assumes and agrees to comply with each and every
obligation of Tenant under this Lease from the effective date of the
assignment through the termination date of the Lease, and that the
assignee shall pay all Rent thereafter falling due under this Lease
directly to Landlord. Each sublease shall provide that the subtenant
in its use and occupancy of any portion of the Complex shall observe
and not violate any provisions or restrictions of this Lease to the
extent applicable to the subleased premises from the commencement date
of the sublease through the termination date of the sublease, and that
upon written demand by Landlord in the event of an uncured default by
Tenant hereunder in the payment of Rent, Landlord may require the
subtenant to pay all rent otherwise payable to Tenant under the
sublease to be paid directly to Landlord to be applied against the
obligations of Tenant to Landlord under this Lease.
15. DEFAULT BY TENANT.
15.1. Default. The commencement of a bankruptcy action or
liquidation action or reorganization in bankruptcy action or
insolvency action or an assignment of or by Tenant for the benefit of
creditors, or any similar action undertaken by Tenant, or the
insolvency of Tenant, shall, at Landlord's option, constitute a breach
of this Lease by Tenant. If the trustee or receiver appointed to
serve during a bankruptcy, liquidation, reorganization, insolvency or
similar action elects to reject Tenant's unexpired Lease, the trustee
or receiver shall notify Landlord in writing of its election within
thirty (30) days after any order for relief in any liquidation action
or within thirty (30) days after the commencement of any action.
Within thirty (30) days after the court approval of the
assumption of this Lease, the trustee or receiver shall cure (or
provide adequate assurance to the reasonable satisfaction of Landlord
that the trustee or receiver shall cure) any and all previous defaults
under the unexpired Lease and shall compensate Landlord for all actual
pecuniary loss and shall provide adequate assurance of future
performance under said Lease to the reasonable satisfaction of
Landlord. Adequate assurance of future performance, as used herein,
includes, but shall not be limited to: (i) assurance of source and
payment of Rent, and other consideration due under this Lease; and
(ii) assurance that the assumption or assignment of this Lease will
not breach any provision in any agreement relating to the above
described Premises.
Nothing contained in this Paragraph shall affect the
exercising of any right of Landlord to refuse to accept an assignment
upon commencement or in connection with a bankruptcy, liquidation,
reorganization or insolvency action or an assignment of Tenant for the
benefit of creditors or other similar act. Nothing contained in this
Lease shall be construed as giving or granting or creating an equity
in the Premises to Tenant. In no event shall the leasehold estate
under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of
Landlord. In no event shall this Lease or any rights or privileges
hereunder be an asset of Tenant under any bankruptcy, insolvency or
reorganization proceedings.
The failure of Tenant to perform or honor any covenant,
condition or representation made under this Lease shall constitute a
default hereunder by Tenant upon expiration of the appropriate grace
period hereinafter provided. Tenant shall have a period of ten (10)
days following the date of written notice from Landlord within which
to cure any default in the payment of Rent when otherwise due
hereunder. Tenant shall have a period of thirty (30) days following
the date of written notice from Landlord within which to cure any
other default by Tenant under this Lease; provided, however, that if
the nature of Tenant's failure is such that more than thirty (30) days
is reasonably required to cure the same, Tenant shall not be in
default so long as Tenant commences performance within such thirty
(30) day period and thereafter prosecutes the same to completion.
Upon an uncured default of this Lease by Tenant, Landlord shall have
the following rights and remedies in addition to any other rights or
remedies available to Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2 including but not limited to, recovery of the worth at
the time of award of the amount by which the unpaid Rent for the
balance of the Lease Term after the time of award exceeds the amount
of rental loss for the same period that Tenant proves could be
reasonably avoided, as computed pursuant to subsection (b) of said
Section 1951.2.
(b) The rights and remedies provided by California Civil Code Section
1951.4 which allows Landlord to continue the Lease in effect and to
enforce all of its rights and remedies under this Lease, including the
right to recover Rent as it becomes due, for so long as Landlord does
not terminate Tenant's right to possession; acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a
receiver upon Landlord's initiative to protect its interest under this
Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent provided by law, the right and power to enter the
Premises and remove therefrom all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the
account of Tenant, and to sell such property and apply such proceeds
therefrom pursuant to applicable California law. Landlord may from
time to time sublet the Premises or any part thereof for such term or
terms (which may extend beyond the Lease Term) and at such Rent and
such other terms as Landlord in its reasonable sole discretion may
deem advisable, with the right to make alterations and repairs to the
Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to any other indebtedness other
than Rent due from Tenant to Landlord hereunder, the reasonable cost
of such subletting (to the extent allocable to the remaining Lease
Term), including, but not limited to, reasonable attorneys' fees, and
any real estate commissions actually paid, and the cost of such
reasonable alterations and repairs incurred by Landlord and the
amount, if any, by which the Rent hereunder allocable to the subleased
premises for the period of such subletting (to the extent such period
does not exceed the Lease Term) exceeds the amount to be paid as Rent
by the subtenant for the subleased premises for such period or (ii) at
the option of Landlord, rents received from such subletting shall be
applied first to payment of indebtedness other than Rent due hereunder
from Tenant to Landlord; second, to the payment of any costs of such
subletting and of such alterations and repairs; third, to payment of
Rent due and unpaid hereunder; and the residue, if any, shall be held
by Landlord and applied in payment of future Rent as the same becomes
due hereunder. If Tenant has been credited with any Rent to be
received by such subletting under option (i) and such Rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rentals
received from such subletting under option (ii) during any month be
less than that to be paid during the month by Tenant hereunder, Tenant
shall pay any such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No taking possession of the Premises by
Landlord shall be construed as an election on its part to terminate
this Lease unless a written notice of such intention be given to
Tenant. Notwithstanding any such subletting without termination,
Landlord may at any time thereafter elect to terminate this Lease for
such then uncured previous default.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord in accordance with applicable laws, to take
possession of the Premises and to apply any rental collected from the
Premises and to exercise all other rights and remedies granted to
Landlord pursuant to this Paragraph 15.
16. DEFAULT BY LANDLORD Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a
reasonable time, but in no event earlier than (30) days after written
notice by Tenant to Landlord (and, after September 1, 2003, to the
holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Tenant
in writing), specifying wherein Landlord has failed to perform such
obligations; provided, however, that if the nature of Landlord's
obligations is such that more than thirty (30) days are required for
performance, then Landlord shall not be in default if Landlord
commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
17. RIGHT TO ENCUMBER; SUBORDINATION.
17.1. Landlord's Interest. In the event Landlord's title to the
Premises is encumbered by a deed of trust on or after September 1,
2003, to secure a loan from a lender (hereinafter referred to as
"Lender") to Landlord, Tenant shall, at the request of Landlord or
Lender, execute in writing an agreement (in form reasonably acceptable
to Tenant), subordinating its rights under this Lease (subject to
customary nondisturbance protection in favor of Tenant) to the lien of
such deed of trust, or, if so requested, agreeing that the lien of
Lender's deed of trust shall be or remain subject and subordinate to
the rights of Tenant under this Lease. Notwithstanding any such
subordination, Tenant's possession under this Lease shall not be
disturbed if Tenant is not in default beyond any applicable cure
period and so long as Tenant shall pay all Rent and observe and
perform all of the provisions set forth in this Lease, and any
subordination agreement shall reflect the agreement of the Lender to
the same and the Lender's agreement upon any foreclosure to recognize
this Lease, including Tenant's Purchase Option under Paragraph 34.
hereof. Landlord represents to Tenant that, as of the date of this
Lease, the Premises are not presently encumbered by any mortgage, deed
of trust or other security device in favor of any Lender. Landlord
further agrees that it shall not encumber the Project by the lien of
any mortgage, deed of trust or other security device in favor of any
Lender during the period prior to September 1, 2003.
17.2. Tenant's Interest. Tenant hereby agrees that during the
Term of this Lease, Tenant shall not encumber or pledge (in any manner
whatsoever) its leasehold interest in the Premises.
18. ENTRY BY LANDLORD. Landlord reserves, and shall at all
reasonable times after at least twenty four (24) hours notice (except
in emergencies) have, the right to enter the Project to inspect it; to
perform any services or to make any repairs if Tenant is then in
default in the performance of such obligations under this Lease
pursuant to Paragraph 15 of this Lease, i.e. Tenant has received
notice of a default under this Lease and the applicable cure period
has expired and Tenant has not then cured such default); to submit the
Premises to prospective purchasers or mortgagees (and during the last
12 months of the term of this Lease to prospective tenants); to post
notices of non-responsibility; and (only if Tenant is then in default
in the performance of any of the terms, covenants and conditions of
this Lease pursuant to Paragraph 15 of this Lease, i.e. Tenant has
received notice of a default under this Lease and the applicable cure
period has expired and Tenant has not then cured such default) to
alter, improve or repair any Building or any other portion of the
Project, all without abatement of Rent, and may erect scaffolding and
other necessary structures in or through the Project where reasonably
required by the character of the work to be performed; provided,
however that the business of Tenant shall be interfered with to the
least extent that is reasonably practical. Any entry to the Project
by Landlord for the purposes provided for herein shall not under any
circumstances be construed or deemed to be a forcible or unlawful
entry into or a detainer of the Project or an eviction, actual or
constructive, of Tenant from the Project or any portion thereof.
19. ABANDONMENT. Tenant shall not abandon the Project at any time
during the term of this Lease (except that Tenant may vacate so long
as it pays Rent and otherwise performs its obligations hereunder), and
if Tenant shall abandon or surrender said Project, or be dispossessed
by the process of law, or otherwise, any personal property belonging
to Tenant and left on the Project shall be deemed to be abandoned, at
the option of Landlord.
20. DAMAGE OR DESTRUCTION.
20.1. Destruction. If prior to expiration of the Term, there is a
partial or total destruction of any Buildings or other Improvements on
the Project from any cause, the provisions of Paragraph 11.8 shall
control; provided, however, that if Tenant is entitled to and does
terminate this Lease pursuant to Paragraph 20.2 and if Landlord elects
to require the hereinafter described removal of any damaged Building
or other Improvements, Tenant shall remove the damaged Buildings or
other Improvements and restore the affected portions of the Premises
as nearly as possible to the condition that existed prior to the
construction of the damaged Building and other Improvements. Any and
all work described in the prior sentence shall be done at Tenant's
expense, with Tenant to be entitled to all associated insurance
proceeds and shall be solely entitled to negotiate any insurance claim
settlements. Except as expressly provided in Paragraph 20.2 below,
Tenant shall have no right to terminate this Lease on account of any
damage to or destruction of the Project and no such damage or
destruction shall relieve or discharge Tenant from the payment of any
Rent or Additional Rent due hereunder or from the performance and
fulfillment of any of Tenant's obligations and responsibilities as set
forth herein. Notwithstanding any such termination, Tenant shall
fully perform any obligation under this Lease relating to an event
occurring or circumstances existing prior to the date of termination
of this Lease, including the payment of all Rent and any Real Property
Taxes which Tenant is obligated to pay hereunder.
20.2. Limitation on Obligation to Replace. Tenant shall not be
obligated to repair or replace any Building or any other Improvements
or fixtures situated on or used in connection with the Project if
(i) the destruction occurs within the last twenty four (24) months of
the Lease Term, and (ii) the repair or replacement of the destroyed
building, improvements or fixtures would require more than one hundred
eighty (180) days to complete. If Tenant elects to terminate this
Lease following such destruction, Tenant shall (1) notify Landlord of
such election within twenty (20) days following the date of such
damage, (2) execute, acknowledge and deliver to Landlord a deed, in
form reasonably satisfactory to Landlord, conveying unto Landlord all
right, title and interest herein conveyed to Tenant in and to the
Project, (3) thereupon deliver the Project and any remaining portion
of any Building or other Improvements to Landlord and (4) assign to
Landlord the right to receive any net insurance proceeds that may have
been paid or thereafter be payable to Tenant relating to the cost of
repairing any such damage to any Building or other Improvements (but
excluding Trade Fixtures), net of the cost of collection of such
insurance proceeds and any costs incurred by Tenant (a) in making the
Project safe and secure, (b) in making any reasonable repairs or
restoration necessitated by the circumstances of any damage or
destruction to any Building or other Improvements, and (c) in removing
any Building or other Improvements and restoring the affected portions
of the Premises pursuant to the following sentence. Notwithstanding
the foregoing, Landlord shall be entitled to require Tenant to remove
any damaged Building and Improvements and restore the affected
portions of the Premises as nearly as possible to the condition that
existed prior to the construction of the damaged Building and other
Improvements by delivering written notice of such election within
twenty (20) days following Tenant's delivery to Landlord of such
cancellation notice. Termination of this Lease shall become effective
only upon compliance with the provisions of this subparagraph, but
Rent and Additional Rent shall abate as of the date of Tenant's
delivery of such cancellation notice. Except in the event of the
termination of the Lease as provided above, Tenant shall retain all
proceeds of insurance that remain after Tenant has performed its
obligations to restore or remove under this Paragraph 20.
20.3. Waiver. Each of Landlord and Tenant waives the provisions
of California Civil Code Sections 1932(2) and 1933(4), and any similar
or successor statutes relating to termination of leases when the thing
leased is substantially or entirely destroyed, and agrees that any
such occurrence shall instead be governed by the terms of this Lease.
21. EMINENT DOMAIN. If title to all or any part of the Project shall
be taken for any public or quasi-public use under any statute, or
eminent domain, or by any conveyance to avoid or compromise and settle
the same or by private or public purchase in lieu of any such taking,
the rights of Landlord and Tenant in such event shall be determined as
follows:
21.1. Total or Partial Taking. The term "total taking" as used in
this Paragraph means the taking of all of the Project under the power
of eminent domain or a taking of so much of the Project as to prevent
or substantially impair the conduct of Tenant's business thereon in
Tenant's reasonable discretion. The term "partial taking" means the
taking of a portion only of the Project which does not constitute a
total taking as above defined.
If, during the Lease Term, there shall be a total taking by
public authority under the power of eminent domain, the leasehold
estate of Tenant in or to the Project shall cease and terminate as of
the date the actual physical possession shall be taken.
If, during the Lease Term, there shall be a partial taking
of the Project, this Lease shall terminate as to the portion of the
Project taken upon the date upon which actual physical possession of
said portion of the Project is taken pursuant to eminent domain
proceedings, but this Lease shall continue in full force and effect as
to the remainder of the Project. The Rent payable by Tenant for the
balance of the Lease Term shall be abated in the ratio that the square
footage ground area of the Project taken bears to the total ground
area of the Project at the time of such taking.
21.2. Distribution of Award. All compensation and damages awarded
for the taking of the land that constitutes a part of the Project or
any portion thereof shall, except as otherwise herein provided, belong
to and be the sole property of Landlord, and Tenant shall not have any
claim or be entitled to any award for diminution in value of its
leasehold or for the value of any unexpired Lease Term, provided
however that the net amount of any award so received by Landlord (net
of the cost of collection) shall constitute a credit against the
Purchase Price calculated pursuant to Paragraph 34.4 hereof in the
event of the exercise of either the Purchase Option or the Sales
Option pursuant to Paragraph 34. All compensation and damages awarded
for the taking of any Building or other Improvements, or any portion
thereof, shall, except as otherwise herein provided, belong to and be
the sole property of Tenant, and Landlord shall not have any claim or
be entitled to any award for diminution in value of the land as a
result thereof, as severance damages or otherwise. In addition,
Tenant shall be entitled to any award specifically awarded by the
agency to Tenant for Tenant's moving and relocation costs including
the value of personal property and equipment of Tenant which cannot be
relocated and Tenant's loss of good will. Notwithstanding the
foregoing, in the event of any taking first occurring on or after
September 1, 2003, then any compensation and damages awarded for the
taking of any Building or other Improvements, or any portion thereof,
net of the cost of collection of such award and the cost of
repairing the Building or other Improvements, shall belong to and be
the sole property of Landlord, provided however that the net amount of
any award so received by Landlord (net of such costs of collection and
repair) shall constitute a credit against the Purchase Price
calculated pursuant to Paragraph 34.4 hereof in the event of the
exercise of either the Purchase Option or the Sales Option pursuant to
Paragraph 34.
21.3. Reconstruction. In the event of a partial taking of the
Project which does not result in a termination of this Lease pursuant
to the foregoing provisions, and subject to Paragraph 8 above, Tenant
shall promptly reconstruct or restore the Project and the buildings
and all Improvements located thereon so that the remainder of the
Project and the buildings and Improvements thereon will be suitable
for Tenant's continued use of the Project. Any award for such partial
taking of the land portion of the Project shall be available to Tenant
for Tenant's use in paying the costs (hard and soft) of the
reconstruction or restoration of any sidewalks, driveways, parking
lots, landscaping or the like (provided the cost of any such
reconstruction or restoration was not otherwise included in the award
for the partial taking of any Buildings or other Improvements). Any
award for such partial taking of any Buildings or other Improvements
shall be available to Tenant for Tenant's use in paying the costs
(hard and soft) of the reconstruction or restoration of the Buildings
and other Improvements. Any excess amount of such awards shall be
divided between Landlord and Tenant as provided above in Paragraph
21.2. Such reconstruction or restoration shall be performed by
Tenant, subject to the following provisions:
A. such reconstruction shall be completed by Tenant as if they were
the Initial Improvements in accordance with Paragraph 8, and in a good
and workmanlike manner and in conformity to, and with, all
requirements pertaining thereto;
B. all the costs and expenses of such reconstruction shall be paid
and borne by Tenant (subject to reimbursement from any award, as
provided above); and
C. during the period when such reconstruction is being performed,
the monthly Base Rent shall continue without abatement, but adjusted
as provided above.
21.4. Contest. Either Tenant or Landlord may contest any award
made on account of any such taking and may prosecute appeals
therefrom; provided, however, that all of the costs and expenses
thereof shall be paid and borne by the party hereto who so contests
the same.
22. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or
conveyance of the Premises or any interest therein by any owner of the
reversion then constituting Landlord, upon written assumption by the
successor in interest of the obligations and liabilities under this
Lease, the transferor shall thereby be released from any then current
and any further liability upon any of the terms, covenants or
conditions (express or implied) herein contained in favor of Tenant,
and in such event, insofar as such transfer is concerned, Tenant
agrees to look solely to the responsibility of the successor in
interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and
Tenant agrees to attorn to the successor in interest of such
transferor. Notwithstanding anything to the contrary set forth above,
if Landlord sells or otherwise conveys its interest in the Premises,
Landlord shall not be relieved of its obligations under the Lease,
unless Landlord's successor in interest assumes, in writing,
Landlord's obligations under the Lease. Prior to any such sale or
conveyance of the Premises or any interest therein, Landlord shall
consult with Tenant as contemplated in Paragraph 10.1.
23. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest
of Landlord in the Premises is on or after September 1, 2003,
encumbered by deed of trust, and such interest is thereafter acquired
by the Lender or any third party through judicial foreclosure or by
exercise of a power of sale at private trustee's foreclosure sale,
Tenant hereby agrees, upon receipt of written recognition by the
purchaser of Tenant's interest in the Premises under this Lease
(including Tenant's Purchase Option), to attorn to the purchaser at
any such judicial foreclosure or foreclosure sale and to recognize
such purchaser as the Landlord under this Lease. In the event the
lien of the deed of trust securing the loan from a Lender to Landlord
is prior and paramount to this Lease, this Lease shall nonetheless
continue in full force and effect for the remainder of the unexpired
Term, at the same Rental herein reserved and upon all the other terms,
conditions and covenants herein contained (including Tenant's Purchase
Option).
24. HOLDING OVER. Any holding over by Tenant after expiration or
other termination of the Lease Term with the written consent of
Landlord delivered to Tenant shall not constitute a renewal or
extension of the Lease or give Tenant any rights in or to the Project
except as expressly provided in this Lease. Any holding over after
the expiration or other termination of the Lease Term, with the
consent of Landlord, shall be construed to be a tenancy from month to
month, on the same terms and conditions herein specified insofar as
applicable except that the monthly Base Rent shall be increased to an
amount equal to one hundred fifty (150%) percent of the monthly Base
Rent required during the last month of the Lease Term.
25. ESTOPPEL CERTIFICATE. Tenant and/or Landlord shall at any time
upon not less than ten (10) days prior written notice from the other
party execute, acknowledge and deliver to the requesting party a
statement in writing (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 date to which the Rent and other
charges are paid in advance, if any, and (ii) acknowledging that there
are not, to the party's knowledge, any uncured defaults on the part of
the requesting party hereunder, or specifying such defaults, if any,
are claimed. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Premises or any
portion of the Project, or any assignee or subtenant of the Project.
A requested party's failure to deliver such statement within such time
shall be conclusive upon the requested party that this Lease is in
full force and effect, without modification except as may be
represented by the requesting party; that there are no uncured
defaults in the requesting party's performance, and that not more than
one month's Rent has been paid in advance. Landlord and Tenant
further agree to appropriately and timely respond to the respective
reasonable inquiries of the auditors of the other party, but such
response shall be limited to the respective knowledge of the
responding party.
26. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and
conditions of this Lease to be performed or observed by Tenant shall
be performed or observed by Tenant at Tenant's sole cost and expense
and without any reduction of Rent. If Tenant shall fail to pay any
sum of money, or other Rent, required to be paid by it hereunder or
shall fail to perform any other term of covenant hereunder on its part
to be performed, and such failure shall continue for twenty (20) days
after written notice thereof by Landlord, Landlord, without waiving or
releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obliged to, make any such payment or perform any such
other term or covenant on Tenant's part to be performed. All sums so
paid by Landlord and all necessary costs of such performance by
Landlord together with interest thereon at the rate of Bank of
America's Prime Rate (or equivalent rate thereof) of interest plus
five percent (5%) per annum, but in no event greater then the maximum
rate of interest permitted by applicable law, from the date of such
payment or performance by Landlord, shall be paid (and Tenant
covenants to make such payment) to Landlord within ten (10) business
days after demand by Landlord, and Landlord shall have (in addition to
any other right or remedy of Landlord) the same rights and remedies in
the event of nonpayment by Tenant as in the case of failure by Tenant
in the payment of Rent hereunder.
27. ATTORNEYS' FEES.
A. In the event that either Landlord or Tenant should bring
suit for the possession of the Project, for the recovery of any sum
due under this Lease, or because of the breach of any provision of
this Lease, or for any other relief against the other party hereunder,
then all costs and expenses, including reasonable attorneys' fees,
incurred by the prevailing party therein shall be paid by the other
party, which obligation on the part of the other party shall be deemed
to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to
judgment.
B. In addition to any other rights of Landlord under this Lease
to defense or indemnification by Tenant, should Landlord be named by a
third party as a defendant in any suit brought by such third party
principally against Tenant in connection with or arising out of
Tenant's alleged improper or tortious conduct associated with the
Project, Tenant shall pay to Landlord Landlord's reasonable costs and
expenses incurred in such suit, including reasonable attorney's fees
(but Landlord agrees to cooperate with Tenant in Tenant's efforts to
provide a joint defense to such suit or otherwise to minimize the
costs of such defense or the settlement of such suit).
28. WAIVER. The waiver by either party of the other party's failure
to perform or observe any term, covenant or condition herein contained
to be performed or observed by such waiving party shall not be deemed
to be a waiver of such term, covenant or condition or of any
subsequent failure of the party failing to perform or observe the same
or any other such term, covenant or condition therein contained, and
no custom or practice which may develop between the parties hereto
during the Lease Term shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and
observance by the other party in strict accordance with the terms
hereof.
29. NOTICES. All notices (including, without limitation, any
Exercise Notice) , demands, requests, advices or designations which
may be or are required to be given by either party to the other
hereunder shall be in writing. All notices, demands, requests,
advices or designations by Landlord to Tenant shall be sufficiently
given, made or delivered if personally delivered to or sent to Tenant
by United States certified or registered mail, postage prepaid or by a
reputable same day or overnight courier service addressed to Tenant at
950 Page Mill Road, Palo Alto, CA 94303, Attn: Manager Corporate Real
Estate ( and if such notice constitutes a notice of default under this
Lease or any Exercise Notice or other notice pertaining either to the
Purchase Option or the Sales Option, then an additional copy shall be
sent to Tenant at 950 Page Mill Road, Palo Alto, CA 94303, Attn:
General Counsel, Legal Department). All notices, demands, requests,
advices or designations by Tenant to Landlord shall be sufficiently
given, made or delivered if personally delivered to or sent to
Landlord by United States certified or registered mail, postage
prepaid, or by a reputable same day or overnight courier service
addressed to Landlord at its offices at c/o Peery/Arrillaga, 2560
Mission College Blvd., Suite 101, Santa Clara, CA 95054 Attn: Richard
T. Peery. Each notice, request, demand, advice or designation
referred to in this Paragraph shall be deemed received on the date of
receipt or refusal to accept receipt at the address so provided for
notices if sent in the manner herein provided, as the case may be.
Either party shall have the right, upon ten (10) days written notice
to the other, to change its address for notices as provided herein;
however, Landlord shall send Tenant notices to only one address
(provided that in the event of a notice of default and any Exercise
Notice or other notice pertaining either to the Purchase Option or the
Sales Option, Landlord will provide an additional copy of such notice
of default to such one additional addressee as may be duly notified by
Tenant to Landlord in accordance with the provisions of this Lease).
30. EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by either Tenant or Landlord does not
constitute a reservation of or option for a Lease, and this instrument
is not effective as a lease or otherwise until its execution and
delivery by both Landlord and Tenant.
31. CORPORATE AUTHORITY. If Tenant is a corporation (or a
partnership), each individual executing this Lease on behalf of said
corporation (or partnership) represents and warrants that he or she is
duly authorized to execute and deliver this Lease on behalf of said
corporation (or partnership) in accordance with the by-laws of said
corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or
partnership) in accordance with its terms. If Tenant is a
corporation, Tenant shall, within thirty (30) days after execution of
this Lease, deliver to Landlord a certified copy of the resolution of
the Board of Directors of said corporation authorizing or ratifying
the specific execution of this Lease by the individual executing said
Lease. In lieu of said corporate resolution, Tenant may provide
Landlord with an outside legal opinion stating that the parties
executing this Lease on behalf of Tenant are authorized to do so by
the Board of Directors.
32. CONSENT. Whenever the consent of one party to the other is
required hereunder, such consent shall not be unreasonably withheld.
33. LIMITATION OF LIABILITY. Except as set forth in the final
sentence of this Paragraph 33, in consideration of the benefits
accruing hereunder, Tenant and all successors and assigns to Tenant as
respects Tenant's interest under this Lease, covenant and agree that,
in the event of any actual or alleged failure, breach or default
hereunder by Landlord:
(A) the sole and exclusive remedy shall be against Landlord's
interest in the Project leased herein;
(B) no constituent member and/or no partner of Landlord shall be sued
or named as a party in any suit or action (except as may be necessary
to secure jurisdiction of the limited liability company or
partnership);
(C) no service of process shall be made against any constituent
member or partner of Landlord (except as may be necessary to secure
jurisdiction of the limited liability company or partnership);
(D) no constituent member or partner of Landlord shall be required to
answer or otherwise plead to any service of process;
(E) no judgment will be taken against any constituent member or
partner of Landlord;
(F) any judgment taken against any constituent member or partner of
Landlord may be vacated and set aside at any time without hearing;
(G) no writ of execution will ever be levied against the assets of
any constituent member or any partner of Landlord; and
(H) these covenants and agreements are enforceable both by Landlord
and also by any constituent member or any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements
shall be applicable to any covenant or agreement either expressly
contained in this Lease or imposed by statute or at common law with
respect to this Lease. Notwithstanding the foregoing provisions of
this Paragraph 33, such provisions shall not apply to, and Tenant
shall in no event be prohibited from pursuing any remedy against
Landlord, including seeking specific performance to enforce its rights
under the provisions of Paragraph 34 of this Lease, in the event of
Landlord's failure to perform any of its obligations under Paragraph
34 of this Lease (relating to the Purchase Option or Sales Option) or
under the Purchase Agreement to be delivered pursuant to the exercise
of either the Purchase Option or the Sales Option.
34. OPTION TO PURCHASE AND SELL.
34.1. Grant of Option. Landlord hereby grants to Tenant an option
to purchase the Premises "as is", without any warranties or
representations from Landlord, on the terms and conditions contained
in this Paragraph 34 (the "Purchase Option"). If Tenant exercises the
Purchase Option, Tenant shall purchase from Landlord and Landlord
shall sell and convey to Tenant by grant deed fee title to the
Premises for the Purchase Price (as defined below) and on the terms
set forth in this Paragraph 34. Landlord shall also have the option
(the "Sales Option") to elect to sell and to require Tenant to
purchase Landlord's interest in the Premises on the terms and
conditions contained in this Paragraph 34. In the event either
Landlord or Tenant exercises its respective Option, the parties shall
execute a purchase agreement in the form attached hereto as Exhibit D
("Purchase Agreement").
34.2. Exercise of Sales Option. At any time prior to the date of
August 31, 2001, Landlord shall be entitled to exercise the Sales
Option. Landlord shall exercise the Sales Option, if at all, by (i)
delivering to Tenant written notice (the "Sales Notice") of Landlord's
intention to exercise the Sales Option which notice shall include the
Closing Date selected by Landlord as described in Paragraph 34.6
below, and (ii) delivering to Tenant three originals of the Purchase
Agreement duly completed and executed by Landlord. Promptly following
receipt of the foregoing items, Tenant shall execute the three
originals of the Purchase Agreement. Tenant shall then deliver one
such original to Landlord, one such original to the Escrow Agent as
provided for in the Purchase Agreement, and retain one for its own
records. If Tenant defaults in performing its obligations as provided
in the Purchase Agreement to purchase the Premises following delivery
by Landlord of the Sale Notice, then the Purchase Option defined
hereinbelow shall lapse and be of no further force or effect and
Landlord shall be entitled to compel Tenant to purchase the Premises
by bringing an action for specific performance respecting said
purchase obligation.
34.3. Exercise of Purchase Option. The Purchase Option may be
exercised by Tenant at any time following the date of August 31, 2000,
unless the Purchase Option has lapsed pursuant to the terms of this
Paragraph 34. Tenant shall exercise the Purchase Option, if at all,
by (i) delivering to Landlord written notice (the "Exercise Notice")
of Tenant's intention to exercise the Purchase Option which notice
shall include the Closing Date selected by Tenant as described in
Paragraph 34.6 below, and (ii) delivering to Landlord three originals
of the Purchase Agreement duly completed and executed by Tenant.
Promptly following receipt of the foregoing items, Landlord shall
execute the three originals of the Purchase Agreement, then deliver
two of those originals to Tenant. Tenant shall deliver one such
original to the Escrow Agent as provided for in the Purchase
Agreement, and retain one for its own records.
34.4. Purchase Price. Upon exercise of the Sale Option or the
Purchase Option as herein provided, Tenant shall be obligated to
purchase, and Landlord shall be obligated to sell, the Premises at a
purchase price (the "Purchase Price") determined as follows: (i) if
Landlord gives the Sale Notice to Tenant, then the Purchase Price
shall be the sum of ** ($**), (ii) if Tenant gives an Exercise Notice
to Landlord, which, in accordance with the provisions of Paragraph
34.3 above, provides for the Closing Date to occur on or prior to
September 30, 2002, then the Purchase Price shall be the sum **
Dollars ($**), and (iii) if Tenant gives an Exercise Notice to
Landlord which, in accordance with the provisions of Paragraph 34.3
above, provides for the Closing Date to occur after September 30,
2002, then the Purchase Price shall be determined by multiplying: (A)
the sum of ** Dollars ($**) by (B) the Purchase Price Adjustment
Factor. The "Purchase Price Adjustment Factor" shall be that
fraction, the numerator of which is the Index published for the month
of September immediately prior to the Closing Date set forth in the
Exercise Notice, and the denominator of which is the Index published
for the month of September 2001.
34.5. Transfer of Title. Subject to the "Permitted Exceptions" as
provided in Section 3.2 of the Purchase Agreement, Landlord shall
convey to Tenant at the Close of Escrow by grant deed (the "Grant
Deed"), fee title to the Premises free of all monetary liens and
encumbrances, except for non-delinquent real property taxes and
assessments and free of any exceptions to title caused by any acts or
wrongful omissions of Landlord which were not otherwise caused or
consented to by Tenant. Landlord shall also assign to Tenant at Close
of Escrow all of Landlord's interest in this Lease and any
reversionary or other interest in any Buildings or other Improvements
then or thereafter to be constructed on the Premises. Tenant's
obligation to purchase shall be conditioned upon its obtaining at
Close of Escrow an ALTA extended coverage title insurance policy
naming Tenant as the insured party in the amount of the Purchase
Price, showing fee title to the Premises and the Project vested in
Tenant free of all such monetary liens and encumbrances other than the
"Permitted Exceptions" as provided in Section 3.2 of the Purchase
Agreement. Landlord agrees that, following the date of this Lease,
Landlord shall not take any actions, or wrongfully omit to take any
action (excepting only actions that are the obligation of Tenant under
this Lease) that would cause any new exceptions to title to the
Premises or the Project to arise without the prior written consent of
Tenant, which consent Tenant may withhold in its reasonable
discretion.
34.6. Escrow.
A. Close of Escrow. If Landlord exercises the Sale Option, then the
date for the Close of Escrow (the "Closing Date") shall be as selected
by Landlord, but no sooner than forty-five (45) days following the
date of delivery of the Sale Notice to Tenant. If Tenant exercises
the Purchase Option, then the Closing Date shall be as selected by
Tenant, but no sooner than one (1) year following the date of the
delivery of the Exercise Notice to Landlord. If any date so selected
as the Closing Date is not a business day, then the next occurring
business day shall be the Closing Date. The "Close of Escrow" shall
be deemed to occur at the moment the Grant Deed is recorded in the
County Recorder's Office.
B. Closing Costs. The Purchase Price shall be paid to Landlord by
Tenant in cash net of all customary closing costs, escrow fees,
transfer taxes and/or other customary closing costs, all of which
shall be paid by Tenant. Notwithstanding the foregoing, Landlord
shall bear its own attorney's fees, if any, any costs and expenses
incurred in clearing any title issues caused by Landlord as provided
in Paragraph 34.5, in prepaying or releasing any financing obtained by
Landlord, or in connection with any Exchange for the benefit of
Landlord.
C. Prorations in Escrow. Current rents and other payments (if any)
received as of the Close of Escrow by Landlord under this Lease shall
be prorated through the Escrow as of the Close of Escrow.
34.7. Cooperate with Tax-Free Exchange. In the event that
the Sale Option or the Purchase Option is exercised, each party agrees
to cooperate in any reasonable manner requested by the other, in order
to accomplish any like-kind exchange (the "Exchange") for the Premises
pursuant to Section 1031 of the Internal Revenue Code of 1986, as
amended, so long as (i) the cooperating party incurs no additional
cost as the result of such cooperation, (ii) is not required to take
or hold title to other property and (iii) the Closing Date is not
extended by more than three (3) months from the date selected pursuant
to Paragraph 34.6. Each Party shall remain fully liable to the other
for any breach of its obligations or any of its representations and
warranties under this Lease and the Purchase Agreement, regardless of
any assignment of this Lease to any third party intermediary in the
Exchange.
35. MEMORANDUM OF LEASE.
35.1. Upon the execution of this Lease, the parties hereto will
also execute and acknowledge the memorandum of lease in the form
attached hereto as Exhibit E for the purposes of recording at either
party's election.
36. MISCELLANEOUS AND GENERAL PROVISIONS.
A. This Lease shall in all respects be governed by and
construed in accordance with the laws of the State of California. If
any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof
shall be and remain in full force and effect.
B. The term "Landlord" or any pronoun used in place thereof includes
the plural as well as the singular and the successors and assigns of
Landlord. The term "Tenant" or any pronoun used in place thereof
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each of
their respective heirs, executors, administrators, successors and
permitted assigns, according to the context hereof, and the provisions
of this Lease shall inure to the benefit of and bind such heirs,
executors, administrators, successors and permitted assigns. The term
"person" includes the plural as well as the singular and individuals,
firms, associations, partnerships and corporations. Words used in any
gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph
headings of this Lease are for convenience of reference only and shall
have no effect upon the construction or interpretation of any
provision hereof.
C. Time is of the essence of this Lease and of each and all of
its provisions.
D. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) days after written demand from Landlord to Tenant, any quitclaim
deed or other document required by any reputable title company,
licensed to operate in the State of California, to remove the cloud or
encumbrance created by this Lease from the Premises.
E. This instrument along with any exhibits and attachments
hereto constitutes the entire Agreement between Landlord and Tenant
relative to the Premises and the Project and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord
and Tenant agree hereby that all prior or contemporaneous oral
agreements between and among themselves and their agents or
representatives relative to the leasing of the Premises are merged in
or revoked by this agreement.
F. Tenant further agrees, following the period of September 1, 2003,
to execute any tenant estoppel certificates in favor of Lender as may
be reasonably requested by Landlord in order for Landlord thereafter
to obtain financing for the Premises.
G. All Paragraphs listed in the Lease Summary as additional
paragraphs are added hereto and are included as a part of this Lease.
H. Clauses, plats and riders, if any, signed by Landlord and
Tenant and endorsed on or affixed to this Lease are a part hereof.
I. Tenant covenants and agrees that no diminution or shutting
off of light, air or view by any structure which may be hereafter
erected (whether or not by Landlord) on real property other than the
Premises shall in any way affect his Lease, entitle Tenant to any
reduction of Rent hereunder or result in any liability of Landlord to
Tenant.
J. The voluntary or other surrender of this Lease or the
Premises by Tenant or a mutual cancellation of this Lease shall not
work as a merger and, at the option of Landlord, shall either
terminate all or any existing subleases or subtenancies or operate as
an assignment to Landlord of all or any such subleases or
subtenancies.
37. BROKERS. Landlord shall not be responsible or liable for the
payment of commission to Catalyst Real Estate Group or any third party
broker in connection with the negotiation or consummation of this
Lease (or the purchase of the Premises by Tenant). Tenant agrees to
pay a commission to Catalyst Real Estate Group pursuant to the terms
of their separate written agreement, and to indemnify and hold
Landlord harmless from any cost, expense, or liability for any
compensation, commission or charges claimed by any realtor, broker, or
agent, with respect to this Lease or the negotiation of this Lease or
the potential sale of the Premises pursuant to Paragraph 34. Except
as provided above, each of Landlord and Tenant represents and warrants
to the other that no party is entitled to any real estate brokerage or
salesperson commission or any finders' fee as a result of such party's
action in connection with the leasing of the Premises to Tenant or the
potential sale of said Premises as provided for in Paragraph 34. Each
of Landlord and Tenant shall save, protect, defend, indemnify and hold
the other harmless from and against any claim to the contrary by any
salesperson, broker or finder based upon such salesperson's, broker's
or finder's relationship with such party.
IN WITNESS WHEREOF, Landlord and Tenant have executed and
delivered this Lease as of the day and year last written below.
LANDLORD: TENANT:
Richard T. Peery, as Trustee ALZA Corporation,
Under Trust Agreement dated a Delaware corporation
July 20, 1977, as Amended
(Richard T. Peery Separate
Property Trust)
By: /s/ Richard T. Peery By: s/ Gary V. Fulscher
Richard T. Peery, Trustee Gary V. Fulscher
Date: September 12, 1997 Gary V. Fulscher
(Typed or Printed Name)
John Arrillaga, as Trustee Title: Senior Vice President,
under Trust Agreement dated Commerical Services
July 20, 1977, as amended(John
Arrillaga Survivor's Trust, Date: September 12, 1997
formerly known as the
Arrillaga Family Trust)
By: /s/John Arrillaga
John Arrillaga, Trustee
Date: September 12, 1997
<PAGE>
<PAGE 17 OF PAPER FORMAT ANNUAL REPORT>
EXHIBIT 13
ALZA Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 EVENTS
Many significant events in 1997 affected the financial
condition and results of operations of ALZA Corporation ("ALZA"
or the "Company"). In 1997, ALZA:
- Purchased the Class A Common Stock of Therapeutic Discovery
Corporation ("TDC") for $100.0 million
- Contributed $300.0 million to Crescendo Pharmaceuticals
Corporation ("Crescendo") and distributed its shares to ALZA
stockholders and debenture holders
- Acquired rights to the Mycelex-registered trademark- Troche,
Ditropan-registered trademark-, and Elmiron-registered trademark-
products
- Acquired an option to develop and commercialize the Cereport
-trademark- (RMP-7-trademark-) product
- Entered into new agreements with Janssen Pharmaceutica, Inc.
(together with its affiliates "Janssen") covering E-TRANS-
trademark- fentanyl products for the treatment of acute and
chronic pain
Therapeutic Discovery Corporation
On September 29, 1997, ALZA purchased all of the outstanding
shares of TDC Class A Common Stock for $100.0 million in cash.
The purchase resulted in a charge of $77.0 million to acquisition
of in-process research and development. The remaining $23.0
million of the purchase price was allocated to a deferred tax
asset arising from TDC's net operating loss carryforward and
capitalized research and development. TDC was formed by ALZA in
1993 to develop and commercialize products incorporating ALZA's
drug delivery technologies. At the time of its purchase by ALZA,
TDC had a broad range of products in development.
Crescendo Pharmaceuticals Corporation
On September 29, 1997, ALZA contributed $300.0 million in
cash to Crescendo for Crescendo's Class A Common Stock (the
"Crescendo Shares"). On September 30, 1997, the Crescendo Shares
were distributed to holders of ALZA common stock and ALZA's outstanding
<PAGE>
<PAGE 17 OF PAPER FORMAT ANNUAL REPORT>
convertible subordinated debentures. ALZA recorded a charge of
$247.0 million (including expenses of $4.0 million) and interest
expense of $8.0 million related to ALZA's contribution to
Crescendo and the distribution to stockholders and debenture
holders, respectively. ALZA also recorded a dividend of $49.1
million to ALZA stockholders in connection with the distribution
of the Crescendo Shares.
Under a Development Agreement between ALZA and Crescendo,
Crescendo is funding the development of human pharmaceutical
products proposed by ALZA and accepted by Crescendo. The
development of certain specified products was funded by Crescendo
beginning August 25, 1997, the date on which TDC ceased funding
the development of such products.
Under a Technology License Agreement between ALZA and
Crescendo, ALZA has granted to Crescendo a worldwide license to
use ALZA technology solely to select and develop Crescendo
products, to conduct related activities, and to commercialize
Crescendo products. In exchange for the license to use existing
ALZA technology relating to the products initially under
development by ALZA and Crescendo, Crescendo pays a technology
fee to ALZA, payable monthly over a period of three years, in the
amount of $1.0 million per month for the 12 months following the
distribution of Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the following 12
months. The technology fee will no longer be payable at such
time as fewer than two of the seven initial products under
development by ALZA and Crescendo are being developed by
Crescendo and/or have been licensed by ALZA pursuant to the
option, granted to it by Crescendo, to license any or all
Crescendo products. ALZA recorded technology fee revenue from
Crescendo of $4.0 million for 1997. Five of the seven initial
products were in development at January 31, 1998.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. In addition, under
Crescendo's Restated Certificate of Incorporation, ALZA has the
right to purchase all (but not less than all) of the Crescendo
Shares at a price based upon a pre-established formula.
Product Acquisitions
In July 1997, ALZA acquired exclusive rights to Mycelex-
registered trademark- (clotrimazole) Troche in the United States
from Bayer Corporation ("Bayer"). Under the terms of the
agreement, ALZA made a $50.0 million upfront payment to Bayer,
which was capitalized, and will make an additional payment if net
sales of the product during
<PAGE>
<PAGE 17-18 OF PAPER FORMAT ANNUAL REPORT>
a certain period are above a specified level. Bayer manufactures
Mycelex-registered trademark- Troche for ALZA, and receives
payments from ALZA based on sales of the product.
<PAGE 18 OF PAPER FORMAT ANNUAL REPORT>
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron-registered trademark-
(pentosan polysulfate sodium) and three additional urology
products, BiCitra-registered trademark-(sodium citrate and citric
acid), PolyCitra-registered trademark-(potassium citrate) and
Neutra-Phos-registered trademark-(potassium and sodium
phosphate), from Baker Norton Pharmaceuticals, Inc. and its
parent, IVAX Corporation (together, "IVAX"). Under the terms of
the agreement, ALZA paid a $75.0 million upfront fee to IVAX,
which was capitalized, and will pay additional fees if specified
Elmiron-registered trademark- sales levels are achieved during
the next five years. IVAX manufactures the products for ALZA and
receives payments from ALZA based on sales of the products.
In October 1997, ALZA acquired the rights in the United
States to the immediate-release Ditropan-registered trademark-
(oxybutynin chloride) product and trademark from Hoechst Marion
Roussel, Inc. ("HMRI"). Under the terms of the agreement, ALZA
made an upfront payment to HMRI, which was capitalized, and will
make additional payments if specified sales levels of Ditropan-
registered trademark- are achieved. HMRI manufactures the
product for ALZA for a price based upon net sales. ALZA has the
right to market other products in the United States under the
Ditropan-registered trademark- trademark, and HMRI will receive
royalty payments from ALZA if the trademark is used by ALZA with
other products.
Development and Option Agreements
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes, Inc. ("Alkermes") relating to
Cereport-trademark-, a compound intended to facilitate the
delivery of chemotherapeutic agents to the brain. Under the
terms of the agreement, ALZA paid Alkermes $10.0 million, which
was charged to acquisition of in-process research and
development. Under the agreement, Alkermes is conducting
additional clinical activities related to Cereport-trademark-,
and ALZA has the option to acquire exclusive worldwide
commercialization rights to the product.
ALZA entered into two agreements with Janssen, effective
December 31, 1997, relating to two E-TRANS-trademark- fentanyl
products. Under a development and commercialization agreement,
ALZA and Janssen modified the agreement pursuant to which the
companies were jointly developing an E-TRANS-trademark- fentanyl
product for the treatment of acute pain. In connection with this
modified agreement, ALZA made a one-time payment
<PAGE>
<PAGE 18 OF PAPER FORMAT ANNUAL REPORT>
of $21.5 million to Janssen, which was charged
to acquisition of in-process research and development. ALZA will
receive a share of the U.S. operating profits from the product
and royalties from sales of the product outside the United
States. The product is currently in Phase III clinical trials.
Under the second agreement, ALZA will continue the development of
an E-TRANS-trademark- fentanyl product for the treatment of
chronic pain. Janssen will have an option, until a specified
time, to take over funding the continued development of the
product and to commercialize the product worldwide. If Janssen
exercises its option, ALZA will receive a share of the U.S.
operating profits from the product and royalties from sales of
the product outside the United States. If Janssen does not
exercise its option, ALZA may continue the development of the
product, which is currently under development with Crescendo.
Certain of the events described above resulted in
significant non-recurring charges in 1997. The discussion,
tables and graphs below cover the results of ALZA's business
operations excluding non-recurring items. Non-recurring items,
and their impact on ALZA's results of operations, are discussed
on page 22 and in the Notes to Consolidated Financial Statements.
The following discussion must be read in conjunction with the
discussion of the non-recurring items in order to fully
understand the results of ALZA's 1997, 1996 and 1995 operations
as reported.
RESULTS OF OPERATIONS
SUMMARY
(In millions, except per share amounts) 1997 1996
1995
_________________________________________________________________
Revenues
As reported $464.4 $413.1 $324.6
Excluding non-recurring items 464.4 404.7 326.2
_________________________________________________________________
Operating Income (Loss)
As reported (204.0) 139.2 114.7
Excluding non-recurring items 164.8 133.9 123.0
_________________________________________________________________
Net Income (Loss)
As reported (261.1) 92.4 72.4
Excluding non-recurring items 107.6 90.1 77.5
_________________________________________________________________
Earnings (Loss) per Share (diluted)
As reported (3.07) 1.08 0.88
Excluding non-recurring items 1.23 1.06 0.94
_________________________________________________________________
<PAGE>
<PAGE 19 OF PAPER FORMAT ANNUAL REPORT>
Excluding the impact of non-recurring items, ALZA's net
income increased 19% in 1997 compared with 1996. This increase
resulted primarily from higher net sales of ALZA-marketed
products, which more than doubled in 1997 compared with 1996.
Also contributing to the increase in 1997 net income were higher
royalties, fees and other revenues and a lower effective income
tax rate. Partially offsetting these contributions to net income
in 1997 were increases in research and development expenses and
sales and marketing expenses, and the amortization of product
acquisition costs, as well as decreased net interest income.
ALZA's net income increased 16% in 1996 compared to 1995,
excluding non-recurring items. This increase primarily resulted
from higher royalties, fees and other revenues in 1996 compared
to 1995, as well as increases in net sales, research and
development revenues and net interest income. These increases
were partially offset by higher research and development
expenses, and increased selling, general and administrative
expenses in 1996 compared with 1995.
(Presented graphically in paper format annual report)
REVENUES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Royalties and fees 183 163 145 132 114
Net sales 146 109 77 69 60
Research and development135 133 104 69 47
_________________________________________________________________
TOTAL REVENUES 464 405 326 270 221
(Presented graphically in paper format annual report)
OPERATING INCOME
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
165 134 123 103 94
ROYALTIES, FEES AND OTHER REVENUES
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Royalties, fees and other revenues $183.3 $162.8 $145.3
Percentage of total revenues 39% 40% 45%
_________________________________________________________________
Royalties, fees and other revenues increased 13% in 1997
compared to 1996, primarily as a result of increased royalties
due to higher
<PAGE>
<PAGE 19 OF PAPER FORMAT ANNUAL REPORT>
sales of Glucotrol XL-registered trademark- (glipizide) by Pfizer
Inc. ("Pfizer"), Duragesic-registered trademark- (fentanyl) by
Janssen, Nicoderm-registered trademark- and NicoDerm-registered
trademark- CQ-trademark- (nicotine) by HMRI and SmithKline
Beecham ("SmithKline"), respectively, and Catapres-TTS-registered
trademark- (clonidine) by Boehringer Ingelheim Pharmaceuticals,
Inc. These increases were partially offset by decreased
royalties on sales of Procardia XL-registered trademark-
(nifedipine) by Pfizer. Commercialization and licensing fees
also contributed to the increase in royalties, fees and other
revenues in 1997 compared with 1996. Fees for 1997 included
upfront payments from Knoll Pharmaceutical Company in connection
with an agreement for continued development and worldwide
commercialization of the OROS-registered trademark- hydromorphone
product, from SmithKline in connection with the agreement for the
commercialization of the Nicoderm-registered trademark-
transdermal nicotine product in numerous international markets,
and from Pfizer for the rights to commercialize the OROS-
registered trademark- pseudoephedrine product in certain
countries outside the U.S., and technology fee revenue of $4.0
million from Crescendo.
Sales of Procardia XL-registered trademark-, as reported by
Pfizer, decreased 18% in 1997 from 1996, and decreased 11% in
1996 from 1995. Royalties from Procardia XL-registered trademark-
accounted for approximately 29% of royalties, fees and other
revenues in 1997, compared with 40% in 1996. In 1997, Mylan
Laboratories Inc. ("Mylan") filed an Abbreviated New Drug
Application ("ANDA") with the United States Food and Drug
Administration ("FDA") requesting clearance to market a
controlled-release nifedipine tablet as a generic alternative to
Procardia XL-registered trademark-. Pfizer subsequently
commenced separate legal proceedings challenging Mylan's product
based on regulatory and patent issues. Under applicable law,
Pfizer's suits may have the effect of delaying FDA clearance of
Mylan's ANDA. However, it is not possible to predict the outcome
of such litigation, nor is it possible to predict the impact
Mylan's product, if cleared for marketing, may ultimately have on
sales of Procardia XL-registered trademark- and the resulting
royalties to ALZA.
The growth in royalties, fees and other revenues in 1996
compared with 1995 was due to increased sales of Adalat CR-
registered trademark- (nifedipine) by Bayer AG, Catapres-TTS-
registered trademark-, Duragesic-registered trademark-, Glucotrol
XL-registered trademark-, and NicoDerm-registered trademark- CQ-
trademark- following its introduction in the third quarter of
1996. In addition, despite lower sales of Procardia XL-
registered trademark- in 1996, royalties from this product
increased due to a higher effective royalty rate. Reducing
royalties and fees in 1996 were lower royalties on sales of
Transderm-Nitro-registered trademark- (nitroglycerin) by Novartis
Pharmaceuticals Corporation.
<PAGE>
<PAGE 20 OF PAPER FORMAT ANNUAL REPORT>
NET SALES AND COSTS OF PRODUCTS SHIPPED
Net Sales
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
ALZA-marketed products
Ethyol-registered trademark- $20.6 $9.4 -
Mycelex-registered trademark- Troche 10.8 - -
Testoderm-registered trademark- 6.3 6.7 6.8
Elmiron-registered trademark- 4.8 - -
Other 10.4 7.1 6.8
_________________________________________________________________
Total ALZA-marketed products 52.9 23.2 13.6
Contract manufacturing 93.2 85.4 63.3
_________________________________________________________________
Total net sales $146.1 $ 108.6 $ 76.9
=================================================================
Percentage of total revenues 31% 27% 24%
ALZA-marketed products as a percentage
of net sales 36% 21% 18%
Included in net sales are sales of products marketed
directly by ALZA and through distributors, and sales generated
from contract manufacturing activities for ALZA's client
companies. In 1997, net sales increased 35% from 1996, primarily
due to a substantial increase in sales of ALZA-marketed products,
the rights to many of which were acquired by ALZA during 1997.
Sales of Ethyol-registered trademark- (amifostine), which was
launched in April 1996, contributed to the increase in sales of
ALZA-marketed products in 1997, together with sales of Mycelex-
registered trademark- Troche, the U.S. rights to which were
acquired in July 1997, and sales of Elmiron-registered trademark-,
the U.S. and Canadian rights to which were acquired in October
1997. Net sales from contract manufacturing increased 9% in 1997
compared with 1996 primarily due to a 27% increase in ALZA
shipments of Nicoderm-registered trademark- and NicoDerm-
registered trademark- CQ-trademark-, and a 14% increase in ALZA
shipments of Duragesic-registered trademark-.
Net sales increased 41% in 1996 compared to 1995, primarily
due to sales of Ethyol-registered trademark- beginning in April
1996, and increased sales from shipments to client companies of
launch quantities of NicoDerm-registered trademark- CQ-trademark-
and Covera-HS-trademark-.
<PAGE>
<PAGE 20 OF PAPER FORMAT ANNUAL REPORT>
(Presented graphically in paper format annual report)
NET SALES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
ALZA-marketed products 53 23 14 11 7
Contract manufacturing 93 86 63 58 53
_________________________________________________________________
TOTAL NET SALES 146 109 77 69 60
Net sales of ALZA-marketed products can be expected to vary
from quarter to quarter, particularly in the first years after
launch of a new product. Rights to several of the ALZA-marketed
products were acquired by ALZA during 1997. Both Ethyol-
registered trademark- and Elmiron-registered trademark- were
cleared for marketing during the past few years and have not yet
achieved their steady-state sales levels. Wholesaler stocking
patterns, managed care and formulary acceptance, the introduction
of competitive products and acceptance by patients and physicians
will affect future sales of these products.
The timing and quantities of orders for products marketed by
client companies are not within ALZA's control. Net sales to
client companies can be expected to fluctuate from period to
period, sometimes significantly, depending on the volume, mix and
timing of orders of products shipped to client companies, and in
some quarters, due to the shipment of launch quantities of
products to the clients.
Costs of products shipped increased 12% to $92.8 million in
1997 compared to 1996, and 27% to $82.8 million in 1996 compared
with 1995, reflecting the increase in net sales.
1997 1996 1995
_________________________________________________________________
Gross margin as a
percentage of net sales (1) 36% 24% 15%
(1) Gross margin is net sales less costs of products shipped
The increase in ALZA's gross margin in 1997 compared to 1996
was due to increased sales of higher-margin ALZA-marketed
products and increased margins on products shipped to client
companies. ALZA expects its gross margin on net sales to
increase from historical rates over the longer term, although
quarter-to-quarter fluctuations, even significant ones, can be
expected to continue to occur for the reasons discussed above. A
trend of higher gross margins may be achieved through a
proportionate increase in the sales of ALZA-marketed products in
relation to contract manufacturing activities, increased
utilization of capacity, and greater operating efficiencies.
<PAGE>
<PAGE 20-21 OF PAPER FORMAT ANNUAL REPORT>
RESEARCH AND DEVELOPMENT
Research and Development Revenues
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
TDC $ 67.8 $ 102.0 $ 70.1
Crescendo 29.7 - -
Other clients 37.5 31.3 33.9
_________________________________________________________________
Total research and development
revenues $ 135.0 $ 133.3 $ 104.0
=================================================================
Percentage of total revenues 29% 33% 32%
_________________________________________________________________
The increase in research and development revenues in 1997
compared to 1996, and in 1996 compared with 1995, was due to
product development activities undertaken on behalf of client
companies, including TDC and Crescendo. In the third quarter of
1997, TDC ceased funding products under development. Crescendo
commenced operations in the third quarter of 1997, and began
funding certain of the products previously under development by
ALZA and TDC. Research and development revenues from other
clients increased 20% in 1997 compared to 1996, reflecting an
increase in product development activities under ALZA's
agreements with these companies. ALZA's research and development
revenues generally represent client reimbursement of costs,
including a portion of general and administrative expenses.
Therefore, product development activities do not contribute
significantly to operating results.
Research and Development Expenses
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Research and development expenses $ 155.4 $ 141.1 $ 103.4
As a percentage of total revenues 33% 35% 32%
_________________________________________________________________
The increase in research and development expenses in 1997
compared to 1996 reflects the increased activity for client
companies, including TDC and Crescendo. Research and development
expenses increased in 1996 compared to 1995 as a result of
increased activity for TDC.
<PAGE>
<PAGE 21 OF PAPER FORMAT ANNUAL REPORT>
(Presented graphically in paper format annual report)
INVESTMENT IN RESEARCH AND DEVELOPMENT
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Investment in Research
and Development 155 141 103 76 53
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Dollars in millions) 1997 1996 1995
_________________________________________________________________
Sales and marketing expenses $28.8 $24.0 $ 17.1
General and administrative expenses 18.6 20.7 17.3
Amortization of product acquisition
payments 4.0 2.2 -
_________________________________________________________________
Total selling, general and
administrative expenses $51.4 $46.9 $ 34.4
=================================================================
As a percentage of total revenues 11% 12% 11%
_________________________________________________________________
Selling, general and administrative expenses increased 10%
in 1997 compared with 1996 as a result of increased sales and
marketing expenses, and amortization of product acquisition
payments primarily related to products acquired in 1997. Higher
sales and marketing expenses in 1997 compared with 1996 resulted
from the expansion of ALZA's sales force and increased marketing
costs in support of Ethyol-registered trademark-, Mycelex-
registered trademark- Troche and Elmiron-registered trademark-.
General and administrative expenses declined 10% in 1997 compared
to 1996. While corporate administrative costs increased 5% in
1997 compared with 1996, this increase was offset by an increase
in the cash surrender value of life insurance policies.
Selling, general and administrative expenses increased 36%
in 1996 compared to 1995 due primarily to sales and marketing
expenses related to the launch of Ethyol-registered trademark-,
the amortization of the upfront payment to U.S. Bioscience, Inc.
("USB") for Ethyol-registered trademark-, and an increase in
overall general and administrative expenses in support of
increased corporate activities.
<PAGE>
<PAGE 21-22 OF PAPER FORMAT ANNUAL REPORT>
NET INTEREST
(In millions) 1997 1996 1995
_________________________________________________________________
Interest and other income $ 55.6 $ 54.6 $ 26.0
Interest expense 55.0 43.0 23.9
_________________________________________________________________
Net interest income $ 0.6 $ 11.6 $ 2.1
_________________________________________________________________
Interest and other income increased 2% in 1997 compared to
1996, primarily due to higher average invested cash balances
during 1997 following ALZA's issuance of $500.0 million of
5% convertible subordinated debentures due 2006 (the
"5% Debentures") in April 1996. Partially offsetting the higher
interest income were lower realized gains on the sales of
investments in 1997 compared with 1996.
The increase in interest and other income in 1996 compared to
1995 was primarily due to higher average invested cash balances
following the issuance of the 5% Debentures. Also contributing
to the increase in interest and other income in 1996 were net
realized gains of $8.4 million on sales of investments in 1996,
compared with $1.0 million of such gains in 1995.
Interest expense increased 28% in 1997 compared to 1996, as
the 5% Debentures were outstanding for all of 1997. Also
contributing to the increase were lower amounts of capitalized
interest on construction projects and higher interest on the 5 1/4%
zero coupon convertible subordinated debentures due 2014 (the
"5 1/4% Debentures").
The increase in interest expense in 1996 compared to 1995
reflects the interest expense on the 5% Debentures and higher
interest on the 5 1/4% Debentures.
EFFECTIVE TAX RATE
In 1997, ALZA recorded income tax expense of $49.7 million
despite ALZA's pretax loss, as certain non-recurring charges
recognized in 1997 are generally not deductible for income tax
purposes. Excluding nonrecurring items, ALZA's 1997 effective
income tax rate was 35% compared to 38% in 1996 and 1995. The
rate declined in 1997 from prior years primarily due to increased
investment and research tax credits in 1997.
<PAGE>
<PAGE 22 OF PAPER FORMAT ANNUAL REPORT>
NON-RECURRING ITEMS
The table below summarizes the non-recurring charges and
credits by income statement classification, and the related tax
effects, for 1997, 1996 and 1995:
(In millions) 1997 1996 1995
_________________________________________________________________
Royalties, fees and other revenues $ - $ 10.5 $ (1.6)
Research and development revenues - (2.1) -
Costs of products shipped - (2.4) -
Research and development expenses (1.4) (0.5) -
Selling, general and administrative
expenses (0.4) (0.2) (6.7)
Acquisitions of in-process research
and development (108.5) - -
Contribution to Crescendo (247.0) - -
Asset write-down (11.5) - -
Distribution to debenture holders (8.0) - -
Interest and other income - (1.7) -
Income taxes 8.1 (1.4) 3.2
_________________________________________________________________
Total non-recurring items $ (368.7) $ 2.2 $ (5.1)
=================================================================
The 1997 non-recurring items included acquisitions of in-
process research and development, which consisted of $77.0
million related to the purchase of the Class A Common Stock of
TDC, a $10.0 million charge in connection with a development and
option agreement for Cereport-trademark- between ALZA and
Alkermes, and $21.5 million related to a development and
commercialization agreement between ALZA and Janssen for an E-
TRANS-trademark- fentanyl product for the treatment of acute
pain. ALZA recorded a charge of $247.0 million and interest
expense of $8.0 million related to ALZA's contribution to
Crescendo and distribution of shares to stockholders and
debenture holders, respectively. Also included in 1997 non-
recurring items are a write-down of excess manufacturing
equipment of $11.5 million, and $1.8 million in costs related to
a workforce reduction ($1.4 million included in research and
development expenses, and $0.4 million included in selling,
general and administrative expenses).
The 1996 non-recurring items included a $7.1 million benefit
from the reversal of a reserve related to Procardia XL-registered
trademark- royalties and a $6.4 million benefit from the
settlement of litigation related to patent disputes concerning
transdermal nicotine patches, partially offset by a $4.0 million
charge for the unamortized portion of a partnership acquisition
prepayment, a $1.9 million charge related to a limited recall of
two lots of Duragesic-registered trademark-, and other joint
venture, partnership and product reserves.
<PAGE>
<PAGE 22-23 OF PAPER FORMAT ANNUAL REPORT>
The 1995 non-recurring items included a benefit of $7.4
million resulting from the partial reversal of a reserve
established in connection with a patent dispute concerning
transdermal nicotine patches, offset by a reserve of $9.0 million
established to account for a potential reduction of the royalties
from Pfizer on sales of Procardia XL-registered trademark-, and a
charge of $6.7 million for a portion of the initial payment by
ALZA to USB under the marketing and distribution agreement for
Ethyol-registered trademark-.
LIQUIDITY AND CAPITAL RESOURCES
(In millions) 1997 1996 1995
_________________________________________________________________
Working capital $ 253.4 $ 494.8 $ 273.2
Cash and investments 535.8 999.8 419.1
Total assets 1,369.2 1,613.7 937.2
Long-term debt 902.6 882.3 362.9
Net cash provided by
operating activities (1) 171.3 123.3 115.6
Capital expenditures 38.8 48.6 46.3
Product acquisition payments 140.1 - 13.3
_________________________________________________________________
(1) Excludes nonrecurring items
During 1997, ALZA paid $100.0 million in cash for the
purchase of all of the shares of TDC, and contributed $300.0
million in cash to Crescendo. Also in 1997, ALZA paid Bayer a
$50.0 million upfront fee for the United States rights to Mycelex-
registered trademark- Troche, made a $10.0 million payment to USB
related to Ethyol-registered trademark- and made an upfront
payment of $75.0 million to IVAX for the United States and
Canadian rights to Elmiron-registered trademark- and three
additional urology products. ALZA also paid $10.0 million to
Alkermes under the agreement related to Cereport-trademark- and
made a $36.2 million investment in a real estate joint venture,
described below. Cash for these transactions was provided from
the sales and maturities of short- and long-term investments, as
well as from cash and cash equivalents.
<PAGE>
<PAGE 23 OF PAPER FORMAT ANNUAL REPORT>
(Presented graphically in paper format annual report)
NET CASH PROVIDED BY OPERATING ACTIVITIES
(In millions of dollars)
1997 1996 1995 1994 1993
_________________________________________________________________
Net Cash Provided by
Operating activities 171 123 116 74 94
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture for the development of a 13-acre parcel of land in
Mountain View, California. ALZA invested $36.2 million in the
joint venture, which will be applied to the construction of
buildings on the parcel. ALZA is also obligated to make
improvements to the buildings, the total cost of which is
estimated to be between $60.0 million and $100.0 million. The
joint venture will lease the buildings to ALZA upon completion of
construction, currently scheduled for 1999. The leases provide
for an initial term of 15 years with scheduled annual rent
increases, followed by two 10-year extension periods with rent
increases based upon the Consumer Price Index. ALZA will receive
50% of the joint venture's income.
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property.
ALZA's capital spending for 1997 was $38.8 million for
additions to property, plant and equipment to support its
expanding research, development and manufacturing activities,
compared to capital spending of $48.6 million in 1996 and $46.3
million in 1995. While ALZA believes its current facilities and
equipment are sufficient to meet its current operating
requirements, ALZA is expanding its facilities and equipment to
support its medium-term and long-term requirements. Capital
expenditures in 1998 are currently expected to increase over 1997
levels.
ALZA believes that its existing cash and investment balances
are adequate to fund its cash needs for 1998 and beyond. In
addition, should the need arise, ALZA believes it would be able
to borrow additional funds or otherwise raise additional capital.
ALZA may consider using its capital to make strategic investments
or to acquire or license technology or products. ALZA may also
enter into strategic alliances with third parties that could
provide access to additional capital.
<PAGE>
<PAGE 23-24 OF PAPER FORMAT ANNUAL REPORT>
OUTLOOK
Notice Concerning Forward-Looking Statements
The following is intended to provide an outlook for 1998 and
beyond. To the extent any statements made in this Annual Report
to Stockholders, including this section, deal with information
that is not historical, these statements are forward-looking.
Such statements include, without limitation, plans concerning the
commercialization of products, statements concerning potential
product sales, future costs of products shipped (and gross
margins), associated sales and marketing expenses, plans
concerning development of products and other statements that are
not historical facts. The occurrence of the events described,
and the achievement of the intended results, are subject to
various risk factors that could cause ALZA's actual results to be
materially different from those presented in this outlook, some
or all of which are not predictable or within ALZA's control.
Many risks and uncertainties are inherent in the pharmaceutical
industry; others are more specific to ALZA's business. Many of
the significant risks related to ALZA's business are described in
ALZA's Annual Report on Form 10-K and discussed below.
ROYALTIES, FEES AND OTHER REVENUES
ALZA expects royalties, fees and other revenues to continue
to increase in 1998 as a result of growth in sales of products
currently marketed by client companies and, to a lesser extent,
products which are awaiting approval by regulatory authorities
outside of the United States. Sales of Procardia XL-registered
trademark-, and therefore ALZA's royalties from this product, are
expected to continue to decline in 1998.
Royalties, fees and other revenues, which are derived
largely from sales by client companies of products developed
jointly with ALZA, vary from quarter to quarter as a result of
changing levels of product sales by client companies and,
occasionally, the receipt by ALZA of certain one-time fees.
Because ALZA's clients generally take responsibility for
obtaining necessary regulatory approvals and make all marketing
and commercialization decisions regarding such products, most of
the variables that affect ALZA's royalties, fees and other
revenues are not directly within ALZA's control. Sales of
products from which ALZA derives royalties and fees are affected
by the clients' marketing efforts and the introduction and
marketing of competing products, among other factors. Fees are
one-time in nature and will vary year to year and quarter to
quarter. Royalties and fees for 1998 are expected to include
$10.7 million in technology fees from Crescendo and may include
upfront fees from third parties in connection with arrangements
for the commercialization of Crescendo products.
<PAGE>
<PAGE 24 OF PAPER FORMAT ANNUAL REPORT>
During the next several years, ALZA intends to continue
reducing its dependence on royalties and fees by further
expanding ALZA's sales and marketing activities and by directly
marketing and selling more products, including products developed
with Crescendo. However, there can be no assurance that ALZA
will be successful in undertaking this expansion, or that any
expanded sales and marketing activities will be successful, due
to factors such as the risks associated with developing,
clinically testing and obtaining regulatory clearance of products
for ALZA marketing, the difficulties and costs associated with
acquiring from third parties products for ALZA to market, the
length of the regulatory approval process, the uncertainties
surrounding the acceptance of new products by the intended
markets, the marketing of competitive products, risks relating to
patents and proprietary rights and the current health care cost
containment environment. ALZA expects that, in the near term,
royalties on sales by clients of currently marketed products will
continue to be a substantial contributor to net income.
NET SALES
Net sales of ALZA-marketed products are expected to
increase significantly in 1998, as the products acquired in
1997 contribute a full year of sales. Wholesaler stocking
patterns, managed care and formulary acceptance, the
introduction of competitive products, and acceptance by
patients and physicians will affect future sales of these
products. ALZA expects that 1998 contract manufacturing
revenues will remain approximately at 1997 levels. Because
many factors affecting contract manufacturing activities are
not within ALZA's control, revenues will fluctuate from
period to period depending on the volume, mix and timing of
orders received from client companies.
ALZA also expects that gross margins, as a percentage of net
sales, will continue to increase over the longer term, although
quarter-to-quarter fluctuations will continue to occur. Higher
gross margins may be achieved through continuing the
proportionate increase in the sales of ALZA-marketed products (as
compared with sales from contract manufacturing), increased
utilization of capacity and greater operating efficiencies.
RESEARCH AND DEVELOPMENT
Crescendo Pharmaceuticals Corporation
ALZA expects that Crescendo will expend its available funds
over the next three to four years. The rate of expenditure by
Crescendo will depend upon the continued development of products
currently under development by ALZA and Crescendo, and new
products proposed by ALZA and accepted by Crescendo for
development.
<PAGE>
<PAGE 24-25 OF PAPER FORMAT ANNUAL REPORT>
Pharmaceutical Company Clients
To maintain or increase 1997 product development
revenue levels, ALZA will need to enter into new
arrangements with client companies to replace revenues lost
when programs terminate or products are submitted for
regulatory clearance or cleared for marketing. Development
agreements with client companies are generally terminable by
the clients on short notice and may be terminated for many
reasons, including technical issues, marketing concerns,
reallocation of client resources, and changes in client
priorities. In addition, revenues from any particular
client program could decrease dramatically once the New Drug
Application for the product has been filed, and could
decrease earlier if the client, rather than ALZA, were to
undertake the clinical development of a product.
ALZA Technology Institute
In 1998, ALZA expects to continue its current level of
internal technology research in order to continue
strengthening ALZA's leadership in the drug delivery field.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales and marketing expenses are expected to continue to
increase in 1998 primarily due to growth in marketing efforts
resulting from the acquisition of new products and the
introduction of products developed by ALZA. The increase in the
size of ALZA's sales force in late 1997 will increase sales and
marketing expenses in 1998 compared with 1997. In December 1997,
ALZA received clearance from the FDA to market Testoderm-
registered trademark- TTS (testosterone transdermal system) CIII
for men with testosterone deficiency. Sales and marketing
efforts will expand as Testoderm-registered trademark- TTS is
introduced in March 1998. Sales and marketing expenses are also
expected to increase in anticipation of the launch of Ditropan-
registered trademark- XL-trademark-, which may occur in early
1999, and as ALZA increases its activities for recently acquired
products. Selling, general and administrative expenses in 1998
will include amortization of product acquisition fees relating to
products acquired in prior years.
INTEREST AND OTHER INCOME
Interest and other income is expected to be lower in 1998 as
a result of the significant reduction of cash and investment
balances in 1997.
INCOME TAX RATE
ALZA currently expects its combined federal and state 1998
effective income tax rate to be approximately 35%. The actual
effective income tax rate will depend upon the level of actual
earnings, changes in the tax laws, and the amount of investment
and research credits available and ALZA's ability to utilize such
credits.
<PAGE>
<PAGE 25 OF PAPER FORMAT ANNUAL REPORT>
YEAR 2000
The majority of ALZA's significant operating and accounting
systems are year 2000 compliant. The systems that are not
currently year 2000 compliant are in the process of being
upgraded or replaced. ALZA does not have a comprehensive program
for monitoring whether its suppliers' and vendors' systems are
year 2000 compliant. However, for material new agreements, ALZA
requests assurances of year 2000 compliance. ALZA does not
expect its financial condition or results of operations to be
materially adversely affected by its year 2000 issues.
ALZA TTS RESEARCH PARTNERS, LTD.
ALZA developed the Duragesic-registered trademark- and
Testoderm-registered trademark- products on behalf of the ALZA
TTS Research Partners, Ltd. (the "TTS Partnership"), a limited
partnership from which ALZA licensed the products. The TTS
Partnership receives payments from ALZA equal to 4% of Janssen's
net sales of Duragesic-registered trademark- and 4% of ALZA's
sales of Testoderm-registered trademark-.
ALZA's license from the TTS Partnership for Testoderm-
registered trademark- will become nonexclusive on July 26, 1998;
ALZA's license for Duragesic-registered trademark- will become
nonexclusive on December 4, 1998. Once ALZA's licenses become
nonexclusive, the TTS Partnership will need to determine whether
to grant nonexclusive licenses to third parties. Under ALZA's
distribution agreement with Janssen for the Duragesic-registered
trademark- product, if ALZA's license from the TTS Partnership
becomes nonexclusive, if the TTS Partnership licenses the product
to a third party and if the third party introduces the product,
Janssen's royalty payable to ALZA will drop significantly;
however, ALZA will continue to owe the TTS Partnership 4% of
Janssen's net sales.
ALZA has an option to purchase all of the interests in the
TTS Partnership for $120 million in cash less amounts paid by
ALZA to the TTS Partnership under its licenses prior to the date
the option is exercised. As of December 31, 1997, ALZA had paid
the Partnership $27.3 million under these licenses.
<PAGE>
<PAGE 26 OF PAPER FORMAT ANNUAL REPORT>
ALZA Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31,
(In millions, except per share amounts) 1997 1996 1995
_________________________________________________________________
REVENUES
Royalties, fees and other $ 183.3 $ 173.3 $ 143.7
Net sales 146.1 108.6 76.9
Research and development, including
amounts from TDC (1997-$67.8,
1996-$100.7, 1995-$70.1) and
Crescendo (1997-$29.7) 135.0 131.2 104.0
_________________________________________________________________
Total revenues 464.4 413.1 324.6
COSTS AND EXPENSES
Costs of products shipped 92.8 85.2 65.4
Research and development 156.8 141.6 103.4
Selling, general and administrative 51.8 47.1 41.1
Acquisitions of in-process
research and development 108.5 - -
Contribution to Crescendo 247.0 - -
Asset write-down 11.5 - -
_________________________________________________________________
Total costs and expenses 668.4 273.9 209.9
_________________________________________________________________
Operating income (loss) (204.0) 139.2 114.7
Interest expense 55.0 43.0 23.9
Distribution to debenture holders 8.0 - -
Interest and other income (55.6) (52.9) (26.0)
_________________________________________________________________
Net interest and other expense(income) 7.4 (9.9) (2.1)
_________________________________________________________________
Income (loss) before income taxes (211.4) 149.1 116.8
Provision for income taxes 49.7 56.7 44.4
_________________________________________________________________
Net income (loss) $(261.1) $ 92.4 $ 72.4
=================================================================
Earnings (loss) per share
Basic $ (3.07) $ 1.10 $ 0.88
=================================================================
Diluted $ (3.07) $ 1.08 $ 0.88
=================================================================
See accompanying notes.
<PAGE>
<PAGE 27 OF PAPER FORMAT ANNUAL REPORT>
ALZA Corporation
CONSOLIDATED BALANCE SHEET
December 31,
(In millions, except per share amounts) 1997 1996
_________________________________________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65.0 $187.7
Short-term investments 109.2 199.3
Receivables, net of allowance for doubtful
accounts(1997-$0.8; 1996-$0.6) 119.2 116.6
Inventories 37.8 39.2
Prepaid expenses and other current assets 26.8 19.2
_________________________________________________________________
Total current assets 358.0 562.0
PROPERTY, PLANT AND EQUIPMENT
Buildings and leasehold improvements 209.6 228.7
Equipment 145.0 144.2
Construction in progress 22.9 18.1
Land and prepaid land leases 24.3 17.1
_________________________________________________________________
401.8 408.1
Less accumulated depreciation and amortization (91.4) (100.3)
_________________________________________________________________
Net property, plant and equipment 310.4 307.8
Investments in long-term securities 361.6 612.8
Deferred product acquisition payments 147.2 11.1
Other assets 192.0 120.0
_________________________________________________________________
TOTAL ASSETS $1,369.2 $1,613.7
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 56.9 $ 28.7
Accrued liabilities 45.9 37.6
Current portion of long-term debt 1.8 0.9
_________________________________________________________________
Total current liabilities 104.6 67.2
5% convertible subordinated debentures 500.0 500.0
5 1/4% zero coupon convertible subordinated
debentures 402.6 382.3
Other long-term liabilities 60.8 67.5
Commitments and contingencies
<PAGE>
<PAGE 27 OF PAPER FORMAT ANNUAL REPORT>
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,300.0 shares authorized;
85.5 and 84.6 shares issued and outstanding at
December 31, 1997 and 1996, respectively 0.9 0.8
Additional paid-in capital 381.5 362.2
Unrealized losses on available-for-sale
securities, net of tax effect (4.8) (0.1)
Retained earnings (deficit) (76.4) 233.8
_________________________________________________________________
Total stockholders' equity 301.2 596.7
_________________________________________________________________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,369.2 $1,613.7
=================================================================
See accompanying notes.
<PAGE>
<PAGE 28 OF PAPER FORMAT ANNUAL REPORT>
ALZA Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(In millions)
GAINS
(UNREALIZED
LOSSES) TOTAL
ADDITIONAL ON AVAILABLE- RETAINED STOCK-
COMMON PAID-IN FOR-SALE EARNINGS HOLDERS'
STOCK CAPITAL SECURITIES (DEFICIT) EQUITY
___________________________________________________________________________
Balance,
December 31, 1994 $ 0.8 $ 302.2 $ (7.5) $ 69.0 $ 364.5
Common stock issued - 8.3 - - 8.3
Unrealized gains on
available-for-sale
securities, net of
tax effect - - 9.4 - 9.4
Net income - - - 72.4 72.4
________________________________________________________________________
Balance, December 31, 1995 0.8 310.5 1.9 141.4
454.6
Common stock issued - 51.7 - - 51.7
Unrealized losses on
available-for-sale secur-
ities, net of tax effect - - (2.0) - (2.0)
Net income - - - 92.4 92.4
__________________________________________________________________________
Balance,
December 31, 1996 0.8 362.2 (0.1) 233.8 596.7
Common stock issued 0.1 19.3 - - 19.4
Distribution of Crescendo
Shares - - - (49.1) (49.1)
Unrealized losses on
available-for-sale
securities, net of
tax effect - - (4.7) - (4.7)
Net loss - - - (261.1) (261.1)
__________________________________________________________________________
Balance,
December 31, 1997 $ 0.9 $ 381.5 $ (4.8) $ (76.4) $301.2
========================================================================
See accompanying notes.
<PAGE>
<PAGE 29 OF PAPER FORMAT ANNUAL REPORT>
ALZA Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Years ended December 31, 1997 1996 1995
_________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(261.1) $92.4 $72.4
Non-cash adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 29.3 19.8 15.3
Amortization of product acquisition
payments 4.0 2.2 -
Interest on 5 1/4% zero coupon
convertible subordinated debentures 20.3 19.3 18.4
Decrease (increase) in assets:
Receivables (2.6) (8.6) (23.1)
Inventories 1.5 (4.7) (1.1)
Prepaid expenses and other current
assets (4.4) (1.2) 6.2
Increase (decrease) in liabilities:
Accounts payable 28.1 8.7 -
Accrued liabilities 8.7 7.8 10.6
Deferred revenue (0.4) (17.2) 1.3
Other long-term liabilities (20.8) 4.8 11.4
Asset write-down 11.5 - -
_________________________________________________________________
Total adjustments 75.2 30.9 39.0
_________________________________________________________________
Net cash provided by (used in)
operating activities (185.9) 123.3 111.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Product acquisition payments (140.1) - (13.3)
Capital expenditures (38.8) (48.6) (46.3)
Investment in real estate joint venture (36.2) - -
Purchase of TDC deferred tax asset (23.0) - -
Purchases of available-for-sale
securities (370.8)(1,125.2) (205.2)
Sales of available-for-sale securities 680.9 542.6 134.1
Maturities of available-for-sale
securities 23.3 98.1 12.0
Increase in cash surrender value-life
insurance and prepaid premiums (12.8) (20.3) (4.1)
Decrease (increase) in other assets 12.4 (9.6) 3.1
_________________________________________________________________
Net cash provided by (used in) investing
activities 94.9 (563.0) (119.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution of Crescendo Pharmaceuticals
<PAGE>
<PAGE 29 OF PAPER FORMAT ANNUAL REPORT>
Corporation shares to ALZA
stockholders (49.1) - -
Net proceeds from 5% convertible
subordinated debentures - 488.8 -
Issuances of common stock 19.4 51.7 8.3
Principal payments on long-term debt (2.0) (1.1) (0.8)
_________________________________________________________________
Net cash provided by (used in)
financing activities (31.7) 539.4 7.5
_________________________________________________________________
Net increase (decrease) in cash and
cash equivalents (122.7) 99.7 (0.8)
Cash and cash equivalents at the
beginning of year 187.7 88.0 88.8
Cash and cash equivalents at the
_________________________________________________________________
end of year $65.0 $187.7 $88.0
=================================================================
See accompanying notes.
<PAGE>
<PAGE 30 OF PAPER FORMAT ANNUAL REPORT>
ALZA Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ALZA Corporation is an emerging pharmaceutical company with
leading drug delivery technologies. ALZA applies its delivery
technologies to develop pharmaceutical products with enhanced
therapeutic value for its own portfolio and for many of the
world's leading pharmaceutical companies. ALZA is currently
focusing its sales and marketing efforts in urology and oncology.
Nature of Operations
Royalties, fees and other revenues include royalty revenue
and other payments based on sales by ALZA's client companies of
products developed under joint development and commercialization
agreements, and certain one-time or infrequent fees or similar
payments under such agreements. Included in royalties, fees and
other revenues are revenues from ALZA's promotion and copromotion
of certain products, some of which are contingent on sales.
Royalties, fees and other revenues are recognized as earned.
Net sales includes sales of products marketed directly by
ALZA and through distributors, and sales generated from contract
manufacturing activities for ALZA's client companies. ALZA
recognizes sales revenues at the time of product shipment, net of
discounts, rebates and allowances. Export sales, principally to
distributors and client companies in Europe, were $31.5 million,
$23.0 million and $20.1 million in 1997, 1996 and 1995,
respectively.
Revenues from research and development activities with
client companies, including Crescendo, are reported as research
and development revenues, and are recognized as earned. ALZA's
research and development revenues represent clients'
reimbursement to ALZA of costs incurred in product development
and clinical evaluation, including a portion of general and
administrative expenses, and therefore do not contribute
significantly to operating results. ALZA's policy is to expense
all costs of research and product development related both to
costs incurred on its own behalf and on behalf of its clients.
Credit and Investment Risks
Royalties, fees and other revenues and research and
development revenues are derived from agreements with major
pharmaceutical company clients and Crescendo, all of which have
significant cash resources. Therefore, ALZA considers its credit
risk related to these transactions to be minimal. ALZA's net
sales result from sales of ALZA-marketed products primarily to
major pharmaceutical distributors, and sales from contract
manufacturing for ALZA's client companies. If
<PAGE>
<PAGE 30-31 OF PAPER FORMAT ANNUAL REPORT>
the financial condition or operations of any of the
pharmaceutical distributors were to deteriorate substantially,
ALZA's operating results could be adversely affected.
ALZA generally invests excess cash in securities of banks
and companies from a variety of industries with strong credit
ratings, and in U.S. government obligations. These securities
typically bear minimal risk and ALZA has not experienced any
losses on its investments due to institutional failure or
bankruptcy. ALZA's investment policy is designed to limit
exposure with any one institution.
Pfizer accounted for 17% of ALZA's total revenues in 1997,
22% in 1996 and 26% in 1995. TDC accounted for 15% of ALZA's
total revenues in 1997, 24% in 1996 and 22% in 1995. Janssen
accounted for 15% of ALZA's total revenues in 1997, 14% in 1996
and 13% in 1995. HMRI accounted for 10% of ALZA's total revenues
in 1997 and 11% in both 1996 and 1995.
Principles of Consolidation
The consolidated financial statements include the accounts
of ALZA and its wholly-owned subsidiaries, ALZA Development
Corporation, ALZA International, Inc., ALZA Land Management,
Inc., ALZA Limited and, since its acquisition in September 1997,
TDC. All significant intercompany accounts and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Restatements
In 1997, ALZA changed the presentation of its consolidated
statement of operations and consolidated balance sheet. In the
consolidated statement of operations, royalties, fees and other
revenue now include items related to operations that were
previously reflected in interest and other income. Interest
expense and income are now shown separately after operating
income (loss). On the consolidated balance sheet, ALZA has
reclassified securities which have maturities of one year or more
as investments in long-term securities; these securities were
previously treated as current assets. Prior year amounts have
been changed to conform with the current year presentation.
<PAGE>
<PAGE 31 OF PAPER FORMAT ANNUAL REPORT>
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents include cash balances and
investments with maturities of three months or less at the time
of purchase. Short-term investments include commercial paper and
other highly liquid investments with maturities less than one
year. The carrying amount reported on the balance sheet for
cash, cash equivalents and short-term investments approximates
their fair value.
Inventories
Raw materials, work in process and finished goods
inventories are stated at the lower of standard cost (which
approximates actual costs on a first-in, first-out cost method)
or market value.
Inventories consist of the following (in millions):
1997 1996
_________________________________________________________________
Raw materials $ 16.5 $17.7
Work in process 8.5 18.0
Finished goods 12.8 3.5
_________________________________________________________________
Total inventories $ 37.8 $39.2
=================================================================
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including
interest capitalized of $0.7 million in 1997, $2.2 million in
1996 and $1.3 million in 1995. Maintenance and repairs are
expensed as incurred. Depreciation and amortization are
generally computed on the straight-line method, over estimated
useful lives, as follows:
Classification Estimated Useful Life
_________________________________________________________________
Buildings 30 to 40 years
Leasehold improvements Terms of the leases (1 to 5 years)
Equipment 3 to 9 years
Prepaid land leases Remaining terms of the leases (17
to 60 years)
Depreciation and amortization expense for property, plant
and equipment was $24.7 million, $17.8 million and $14.8 million
for 1997, 1996 and 1995, respectively. Prepaid land leases
represent ALZA's total cost, paid in advance, of leasehold rights
to land upon which certain of ALZA's buildings in Palo Alto,
California are situated. Included in construction in progress
are payments made in connection with facilities being constructed
or modified, and the installation of related equipment in Palo
Alto and Mountain View, California (primarily research and
development) and Vacaville, California (primarily commercial
manufacturing).
<PAGE>
<PAGE 31 OF PAPER FORMAT ANNUAL REPORT>
In 1997, ALZA wrote down approximately $11.5 million of
fixed assets, $3.7 million of which related to excess
manufacturing equipment. Lower than expected production
requirements under a supply agreement with G.D. Searle & Co. for
Covera-HS-trademark- (verapamil) contributed to the excess
capacity of manufacturing equipment. Such equipment was written
down to its fair market value, which was determined based upon
estimates of current market prices. ALZA has not yet determined
the ultimate disposition of these assets. The remaining $7.8
million of the write-down is related primarily to obsolete and
idle assets.
Deferred Product Acquisition Costs
Initial payments and distribution fees for product
acquisitions that are capitalized are amortized over the
estimated life cycle of the products, which range from 10 to 20
years. Accumulated amortization of these costs was $6.2 million
and $2.2 million at December 31, 1997 and 1996, respectively.
Accrued Liabilities
Accrued liabilities are as follows(in millions):
1997 1996
_________________________________________________________________
Accrued compensation $ 17.7 $15.4
Accrued income taxes 9.7 7.3
Other accrued liabilities 18.5 14.9
_________________________________________________________________
Total accrued liabilities $ 45.9 $37.6
=================================================================
Advertising Costs
Advertising costs are accounted for as expenses in the
period in which they are incurred. Advertising expense for 1997,
1996 and 1995 was $6.4 million, $4.4 million and $3.3 million,
respectively.
Supplemental Disclosures of Cash Flow Information (in millions)
Cash paid during the year for:
1997 1996 1995
_________________________________________________________________
Income taxes $ 59.5 $ 42.2 $ 37.0
Interest, net of amount
capitalized 36.6 16.3 2.6
Noncash investing and financing activities:
1997 1996 1995
_________________________________________________________________
Net unrealized gains (losses)
on available-for-sale
securities, net of tax effect $ (4.7) $ (2.0) $ 9.4
<PAGE>
<PAGE 31-32 OF PAPER FORMAT ANNUAL REPORT>
Deferred issuance costs for
5% Debentures - 11.2 -
Investment in low-income housing
in exchange for long term debt 17.1 11.9 -
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No.
131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information". SFAS 130 establishes standards for
reporting comprehensive income and is effective in 1998. SFAS
131 establishes standards for annual and interim disclosures of
operating segments, products and services, geographic areas and
major customers, and is also effective in 1998. ALZA is in the
process of evaluating the disclosure requirements of the new
standards, the adoption of which will have no impact on ALZA's
results of operations or financial condition.
Note 2. Investments
ALZA has classified its entire investment portfolio,
including cash equivalents of $64.1 million and $185.2 million at
December 31, 1997 and 1996, respectively, as available-for-sale.
Investments in the available-for-sale category are generally
carried at fair value with unrealized gains and losses recorded
as a separate component of stockholders' equity. At December 31,
1997, net unrealized losses on available-for-sale securities were
$4.8 million, net of $3.4 million tax effect. At December 31,
1996, net unrealized losses on available-for-sale securities were
$0.1 million, net of $0.1 million tax effect. The cost of
securities when sold is based upon specific identification.
Realized gains and losses for the year ended December 31, 1997
were $7.6 million and $1.5 million, respectively. Realized gains
and losses for the year ended December 31, 1996 were $9.1 million
and $0.7 million, respectively.
The following is a summary of ALZA's investment portfolio:
(in millions)
<PAGE>
<PAGE 32 OF PAPER FORMAT ANNUAL REPORT>
December 31, 1997
__________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 143.2 $ 0.4 $ (0.3) $ 143.3
Collateralized mortgage
obligations and asset
backed securities 70.9 0.3 (0.2) 71.0
Corporate securities
(primarily corporate
notes and commercial
paper) 329.1 2.0 (10.4) 320.7
__________________________________________________________________
Total $ 543.2 $ 2.7 $ (10.9) $ 535.0
=================================================================
December 31, 1996
_________________________________________________________________
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________________________________________________________________
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 434.1 $ 1.0 $ (1.8) $ 433.3
Collateralized mortgage
obligations and asset
backed securities 112.8 0.3 (0.4) 112.7
Corporate securities
(primarily corporate
notes and commercial
paper) 450.6 1.9 (1.2) 451.3
__________________________________________________________________
Total $ 997.5 $ 3.2 $ (3.4) $ 997.3
=================================================================
The amortized cost and estimated fair value of debt
securities at December 31, 1997 and 1996, by contractual
maturity, are shown below (in millions). Expected maturities will
differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the
obligations without prepayment penalties.
<PAGE>
<PAGE 32-33 OF PAPER FORMAT ANNUAL REPORT>
December 31, 1997 1996
_________________________________________________________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
_________________________________________________________________
Due in one year or less $173.5 $173.4 $ 384.5 $ 384.5
Due after one year
through four years 235.1 235.6 428.1 427.8
Due after four years
through eight years 134.6 126.0 184.9 185.0
_________________________________________________________________
Total $543.2 $535.0 $ 997.5 $ 997.3
=================================================================
In early 1997, ALZA purchased approximately 1.2 million
common shares of USB (4.9% of the outstanding common shares) at a
price of $18.256 per share, for an aggregate investment of $21.5
million. Transfer of these shares by ALZA is restricted and they
are therefore recorded at cost.
In early 1997, ALZA purchased 2.0 million common shares of
Alkermes (9.7% of the outstanding common shares) at a price of
$25.0 per share, for an aggregate investment of $50.0 million.
This stock is not restricted and is therefore classified as
available-for-sale.
NOTE 3. PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" ("SFAS 128"), which was
adopted for the year ended December 31, 1997, with restatement of
all prior periods. Under SFAS 128, basic earnings (loss) per
share is calculated by dividing net income (loss) by the weighted
average common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average common shares outstanding for the
period plus the dilutive effect of stock options, warrants and
convertible securities.
The following table sets forth the computation of ALZA's
basic and diluted earnings (loss) per share (in millions, except
per share amounts):
1997 1996 1995
_________________________________________________________________
NUMERATOR:
Basic
Net income (loss) $(261.1) $ 92.4 $ 72.4
=================================================================
Diluted
<PAGE>
<PAGE 33 OF PAPER FORMAT ANNUAL REPORT>
Net income (loss) $(261.1) $ 92.4 $ 72.4
Interest on 5 1/4% Debentures,
net of tax - 12.2 -
_________________________________________________________________
Adjusted net income (loss) $(261.1) $104.6 $ 72.4
=================================================================
DENOMINATOR:
Basic
Weighted average shares 85.1 84.2 82.3
=================================================================
Diluted
Weighted average shares 85.1 84.2 82.3
Effect of dilutive securities:
Employee stock options - 0.7 0.3
5 1/4% Debentures - 12.3 -
_________________________________________________________________
Weighted average shares and
assumed conversions 85.1 97.2 82.6
=================================================================
Basic earnings (loss) per share $ (3.07) $ 1.10 $ 0.88
=================================================================
Diluted earnings (loss) per share $ (3.07) $ 1.08 $ 0.88
=================================================================
The potentially dilutive effect of outstanding options to
purchase 6.1 million shares of ALZA's common stock and the
5 1/4% Debentures would have been anti-dilutive in 1997 and were
therefore excluded from the 1997 diluted calculation. The
5% Debentures were not included in the diluted earnings per share
calculation for the periods presented as their inclusion would
have been anti-dilutive.
NOTE 4: ACQUISITIONS OF PRODUCT RIGHTS AND DEVELOPMENT AND OPTION
AGREEMENTS
Product Acquisitions
In late 1995, ALZA entered into a marketing and distribution
agreement with USB for Ethyol-registered trademark-. Under the
terms of the agreement, ALZA has exclusive rights to market the
product in the United States for five years after its launch in
April 1996, and is responsible for sales and marketing; the USB
sales force copromotes the product with ALZA. After the five-year
period, which ALZA has an option to extend for one year,
marketing rights to Ethyol-registered trademark- will revert to
USB, and ALZA will receive payments from USB for ten years based
on continued sales of the product. ALZA paid USB
<PAGE>
<PAGE 33-34 OF PAPER FORMAT ANNUAL REPORT>
an upfront payment and initial distribution fees totaling $20.0
million in 1995 and 1996. Of this amount, approximately $13.3
million was capitalized and approximately $6.7 million, which was
attributable to potential expanded product indications, was
charged to selling, general and administrative expenses. ALZA
paid $10.0 million in distribution fees in 1997 based on USB
clinical activities relating to Ethyol-registered trademark-, and
paid an additional $5.0 million in early 1998.
In July 1997, ALZA acquired exclusive rights to Mycelex-
registered trademark- Troche in the United States from Bayer.
Under the terms of the agreement with Bayer, ALZA made a
$50.0 million upfront payment to Bayer, which was capitalized,
and will make an additional payment if net sales of the product
during a certain period are above a specified level. Bayer
manufactures Mycelex-registered trademark- Troche for ALZA, and
receives payments from ALZA based on sales of the product.
In October 1997, ALZA acquired the exclusive rights in the
United States and Canada to Elmiron-registered trademark- and
three additional urology products, BiCitra-registered trademark-,
PolyCitra-registered trademark- and Neutra-Phos-registered
trademark-, from Baker Norton Pharmaceuticals, Inc. and its
parent, IVAX. Under the terms of the agreement, ALZA paid a
$75.0 million upfront fee to IVAX, which was capitalized, and
will pay additional fees if specified Elmiron-registered
trademark- sales levels are achieved during the next five years.
IVAX manufactures the products for ALZA and receives payments
from ALZA based on sales of the products.
In October 1997, ALZA acquired the rights in the United
States to the immediate-release Ditropan-registered trademark-
product and trademark from HMRI. Under the terms of the
agreement, ALZA made an upfront payment to HMRI, which was
capitalized, and will make additional payments if specified sales
levels of Ditropan-registered trademark- are achieved. HMRI
manufactures the product for ALZA for a price based upon net
sales. ALZA has the right to market other products in the United
States under the Ditropan-registered trademark- trademark. HMRI
will receive royalty payments from ALZA if the trademark is used
by ALZA with other products.
Development and Option Agreements
In September 1997, ALZA entered into a clinical development
and option agreement with Alkermes relating to Cereport-trademark-
, a compound for facilitating chemotherapy drug delivery to the
brain. Under the terms of the agreement, ALZA paid Alkermes
$10.0 million, which was charged to acquisition of in-process
research and development. Alkermes will conduct additional
clinical activities related to Cereport-trademark-, and ALZA has
the option to acquire exclusive worldwide commercialization
rights to the product.
<PAGE>
<PAGE 34 OF PAPER FORMAT ANNUAL REPORT>
ALZA entered into two agreements with Janssen, effective
December 31, 1997, related to two E-TRANS-trademark- fentanyl
products. Under a development and commercialization agreement,
ALZA and Janssen modified the agreement pursuant to which they
were jointly developing an E-TRANS-trademark- fentanyl product
for the treatment of acute pain. In connection with this
modified agreement, ALZA made a one-time payment of $21.5 million
to Janssen, which was charged to acquisition of in-process
research and development. ALZA will receive a share of the U.S.
operating profits from the product and royalties from sales of
the product outside the United States. The product is currently
in Phase III clinical trials. Under the second agreement, ALZA
will continue the development of an E-TRANS-trademark- fentanyl
product for the treatment of chronic pain. Janssen will have an
option, until a specified time, to take over funding of the
continued development of the product and to commercialize the
product worldwide. If Janssen exercises its option, ALZA will
receive a share of the U.S. operating profits from the product
and royalties from sales of the product outside the United
States. If Janssen does not exercise its option, ALZA may
continue the development of this product, which is currently
under development with Crescendo.
NOTE 5: DEBT OBLIGATIONS AND OTHER LONG-TERM LIABILITIES
In 1996, ALZA issued $500 million of 5% convertible
subordinated debentures due 2006 (the "5% Debentures"). Each 5%
Debenture is convertible, at the option of the holder, into
shares of ALZA common stock at an initial conversion price of
$38.19 per share, subject to certain anti-dilution adjustments.
Interest is payable semiannually. The 5% Debentures rank pari
passu with ALZA's outstanding 5 1/4% Debentures discussed below.
Unamortized costs related to the issuance of the 5% Debentures
were $10.0 million at December 31, 1997 and were included in
other assets. At December 31, 1997 and 1996, the fair value of
the 5% Debentures was $526.9 million and $490.0 million,
respectively.
In 1994, ALZA issued 5 1/4% zero coupon convertible
subordinated debentures due 2014 (the "5 1/4% Debentures"). The 5 1/4%
Debentures were issued at a price of $354.71 per $1,000 principal
amount at maturity. The 5 1/4% Debentures have a principal amount at
maturity of $948.8 million, with a yield to maturity of 5 1/4% per
annum, computed on a semiannual bond equivalent basis. There are
no periodic interest payments. At the option of the holder, each
5 1/4% Debenture is convertible into 12.987 shares of common stock.
At the option of the holder, the 5 1/4% Debentures will be purchased
by ALZA on July 14, 1999, July 14, 2004 or July 14, 2009, at a
purchase price equal to the issue price plus accreted original
issue discount to such purchase date. ALZA, at its option, may
elect to deliver either common stock or cash in the event of
conversion or purchase of the 5 1/4% Debentures. ALZA,
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<PAGE 34-35 OF PAPER FORMAT ANNUAL REPORT>
at its option, may redeem any or all of the 5 1/4% Debentures for
cash after July 14, 1999 at a redemption price equal to the issue
price plus accreted original issue discount. Unamortized costs
related to the issuance of the 5 1/4% Debentures were $7.5 million
at December 31, 1997. At December 31, 1997 and 1996, the fair
value of the 5 1/4% Debentures was $441.2 million and $397.3
million, respectively.
Other Long-term Liabilities
ALZA's other long-term liabilities are as follows(in millions):
1997 1996
_________________________________________________________________
Deferred compensation $ 35.8 $31.2
Deferred income taxes - 25.4
Long-term debt 25.0 10.9
_________________________________________________________________
Total other long-term liabilities $60.8 $67.5
=================================================================
ALZA has deferred compensation arrangements under which
selected employees may defer a portion of their salaries. ALZA
has purchased life insurance policies that it intends to use to
partially finance amounts to be paid in the future to
participants, based on their deferred salary amounts plus
interest. The cash surrender value of these policies totaled
$71.2 million and $58.4 million at December 31, 1997 and 1996,
respectively, and is included in other assets.
At December 31, 1997 and 1996, long-term debt consists of
notes representing the required future payments under investments
of $32.1 million and $11.9 million, respectively, in low income
housing partnerships (included in other assets). The aggregate
annual maturities of long-term debt at December 31, 1997 were
$1.8 million in 1998, $5.6 million in 1999, $3.7 million in 2000,
$3.6 million in 2001 and $3.4 million in 2002.
<PAGE>
<PAGE 35 OF PAPER FORMAT ANNUAL REPORT>
NOTE 6: CAPITAL STOCK AND WARRANTS
In January 1996, privately held warrants to purchase 1.0
million shares of ALZA common stock were exercised. Net proceeds
to ALZA totaled $25.0 million.
In connection with the formation of TDC, ALZA issued
warrants to purchase approximately 1.0 million shares of common
stock at an exercise price of $65 per share. The warrants, to
the extent not exercised, will expire on December 31, 1999.
ALZA is authorized to issue 100,000 shares of preferred
stock, $.01 par value, none of which was outstanding at December
31, 1997 or 1996. The Board of Directors may determine the
rights, preferences and privileges of any preferred stock issued
in the future.
NOTE 7: ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION AND
CRESCENDO PHARMACEUTICALS CORPORATION
Therapeutic Discovery Corporation
On September 29, 1997, ALZA purchased all of the Class A
Common Stock of TDC for $100.0 million in cash. This acquisition
was recorded as a purchase and, accordingly, the purchase price
was allocated to assets acquired based upon their fair market
value on the acquisition date. The purchase resulted in a charge
of $77.0 million to acquisitions of in-process research and
development, and the remaining $23.0 million of the purchase
price was allocated to a deferred tax asset arising from TDC's
net operating loss carryforward and capitalized research and
development.
ALZA and TDC had a development contract pursuant to which
ALZA conducted research and development activities on behalf of
TDC. Product development revenues from TDC during 1997, 1996 and
1995 under this development contract were $67.8 million, $100.7
million and $70.1 million, respectively. ALZA performed certain
administrative services for TDC under an administrative services
agreement for which ALZA was reimbursed its direct costs, plus
certain overhead expenses. For the years ended 1997, 1996 and
1995, administrative service revenue under this agreement was
$0.4 million, $0.2 million and $0.1 million, respectively, and is
included in royalties, fees and other revenues.
Crescendo Pharmaceuticals Corporation
Crescendo was formed by ALZA for the purpose of selecting and
developing human pharmaceutical products, and commercializing
such products, most likely through licensing to ALZA. On
September 29, 1997, ALZA contributed $300.0 million in cash to
Crescendo. On September 30, 1997, all of the Crescendo Shares
were distributed to the holders of ALZA common stock and ALZA's
outstanding convertible
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<PAGE 35-36 OF PAPER FORMAT ANNUAL REPORT>
subordinated debentures. ALZA recorded a charge of $247.0
million (including expenses of $4.0 million) and interest expense
of $8.0 million related to the distribution to stockholders and
debenture holders, respectively. ALZA also recorded a dividend
of $49.1 million for the distribution of the Crescendo Shares to
ALZA stockholders.
In connection with the contribution to Crescendo and the
distribution of the Crescendo Shares, ALZA and Crescendo entered
into a number of agreements. Crescendo and ALZA entered into a
Development Agreement for the selection and development of human
pharmaceutical products. Under the agreement, Crescendo funds
the development of products recommended by ALZA for development
and accepted by Crescendo. The development of certain specified
products was funded by Crescendo beginning August 25, 1997, the
date on which TDC ceased funding the development of such
products.
Under a Technology License Agreement between ALZA and
Crescendo, ALZA has granted to Crescendo a worldwide license to
use ALZA technology solely to select and develop Crescendo
products, and to conduct related activities, and to commercialize
such products. In exchange for the license to use existing ALZA
technology relating to seven products initially under development
by Crescendo and ALZA, Crescendo pays a technology fee to ALZA,
payable monthly over a period of three years, in the amount of
$1.0 million per month for the 12 months following the
distribution of the Crescendo Shares, $667,000 per month for the
following 12 months and $333,000 per month for the following 12
months. The technology fee will no longer be payable at such
time as fewer than two of the seven initial products are being
developed by Crescendo and/or have been licensed by ALZA pursuant
to the option, granted to it by Crescendo, to license any or all
Crescendo products. ALZA recorded technology fee revenue from
Crescendo of $4.0 million for 1997. Five of the seven initial
products were in development at January 31, 1998.
ALZA has an option to acquire an exclusive, royalty-bearing
license to each product developed by Crescendo under the
Development Agreement. The option is exercisable on a product-by-
product, country-by-country, basis. Also, under Crescendo's
Restated Certificate of Incorporation, ALZA has the right to
purchase all (but not less than all) of the Crescendo Shares at a
price based upon a pre-established formula.
NOTE 8: EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS
Bonuses and Awards
ALZA has a company-wide bonus program under which
substantially all regular employees are eligible to receive a
bonus. The annual bonus, if any, is determined by ALZA's Board
of Directors, at its discretion, based on ALZA's performance
during the year. Bonus and
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<PAGE 36-37 OF PAPER FORMAT ANNUAL REPORT>
award expenses under this program for 1997, 1996 and 1995 were
$7.9 million, $6.9 million and $5.3 million, respectively.
Defined Contribution Plan
ALZA has a company-funded, defined contribution retirement
plan for its employees. This plan provides for an annual basic
contribution and allows for additional discretionary
contributions on a year-by-year basis. Such contributions are
allocated to participants based on the participants' salaries and
ages. For 1997, 1996 and 1995, the total expense for such
contributions to this plan was $3.6 million, $2.9 million and
$2.7 million, respectively.
Employee Savings Plan
ALZA has an employee savings plan which permits participants
to make contributions by salary reductions pursuant to section
401(k) of the Internal Revenue Code. The Company matches
contributions up to a specified amount per participant. In 1997
and 1996, ALZA's contributions to the plan were $1.1 million and
$0.7 million. There were no matching contributions in 1995.
Stock Plan
ALZA has a stock plan whereby incentive stock options to
purchase shares of ALZA common stock at not less than the fair
market value of the stock at the date of the grant may be granted
to employees; nonstatutory stock options to purchase shares of
ALZA common stock at not less than 85% of the fair market value
of the stock at the date of grant may be granted to employees,
directors and consultants; and restricted stock may be issued.
Options typically vest one to three years from date of grant and
generally expire ten years after the date of grant. A total of
8.9 million shares of ALZA's common stock have been reserved for
issuance under its stock plan. To date, all options granted have
had exercise prices equal to the fair market value of common
stock on the date of grant. In 1997, a total of 25,000 shares of
restricted stock were issued to one employee at a price of $0.01
per share, the par value of the common stock. ALZA has the right
to repurchase a declining portion of the shares, at par value, if
the employee's employment with ALZA terminates within three years
of the date of issuance.
Financial Accounting Standards Board SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), effective
beginning in 1996, prescribes a fair value method of accounting
for employee stock options. SFAS 123 gives companies a choice of
recognizing related compensation expense by adopting the new fair
value method or continuing to measure compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company has elected to
continue to follow APB 25 in accounting for its employee stock
options and employee stock purchase plan.
<PAGE>
<PAGE 37 OF PAPER FORMAT ANNUAL REPORT>
Had compensation expense for stock options and shares issued
under the stock purchase plan been determined using the fair
value method in accordance with SFAS 123, ALZA's pro forma net
income (loss) and earnings (loss) per share would have been as
follows:
(in millions, except per share
amounts) 1997 1996 1995
_________________________________________________________________
Net income (loss)
As reported $(261.1) $92.4 $72.4
Pro forma (270.4) 85.8 70.0
Earnings (loss) per share (basic)
As reported $(3.07) $1.10 $0.88
Pro forma (3.18) 1.02 0.85
Earnings (loss) per share (diluted)
As reported $(3.07) $1.08 $0.88
Pro forma (3.18) 1.01 0.85
The fair value for these options was estimated at the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1997 1996 1995
_________________________________________________________________
Risk-free interest rate 6.4% 6.0% 6.1%
Expected dividend yield 0 0 0
Expected volatility 30% 30% 30%
Expected life (in years) 4.0 3.6 3.9
Changes in the assumptions can materially affect the fair
value estimate and therefore the existing models do not
necessarily provide a reliable single measure of the fair value
of ALZA's employee stock options or shares issued under the
employee stock purchase plan.
A summary of ALZA's stock option activity, and related
information for 1997, 1996 and 1995 follows:
<PAGE>
<PAGE 37 OF PAPER FORMAT ANNUAL REPORT>
1997 1996 1995
____________________________________________________________________________
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(in millions)Price (in millions)Price (in millions) Price
____________________________________________________________________________
Outstanding-beginning
of year 5.5 $24 5.7 $ 23 4.4 $ 21
Granted 1.6 29 0.9 27 1.8 23
Exercised (0.6) 21 (0.9) 20 (0.3) 14
Forfeited (0.4) 26 (0.2) 25 (0.2) 21
____________________________________________________________________________
Outstanding-
end of year 6.1 25 5.5 24 5.7 23
Exercisable-
end of year 2.7 24 2.2 23 1.8 23
Weighted-average fair
value of options
granted $9.93 $8.13 $7.75
At December 31, 1997 and 1996, shares available for grant under
the stock plan were 2.7 million and 4.0 million, respectively.
OPTIONS OUTSTANDING
_________________________________________________________________
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise at 12/31/97 Contractual life Exercise
Prices (in millions) (in years) Price
_________________________________________________________________
$12.00-21.75 1.7 5.79 $19.94
22.00-24.75 1.5 7.39 24.11
24.88-29.06 2.4 8.60 27.51
29.63-49.25 0.5 6.16 34.37
_________________________________________________________________
6.1
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<PAGE 37-38 OF PAPER FORMAT ANNUAL REPORT>
OPTIONS EXERCISABLE
_____________________________________________________________
Number
Range of Exercisable Weighted-Average
Exercise at 12/31/97 Exercise
Prices (in millions) Price
_________________________________________________________________
$12.00-21.75 1.4 $19.83
22.00-24.75 0.5 24.33
24.88-29.06 0.5 25.75
29.63-49.25 0.3 36.55
_________________________________________________________________
2.7
Employee Stock Purchase Plan
ALZA has an employee stock purchase plan in which
essentially all ALZA employees may participate and purchase stock
at 85% of its fair market value at certain specified dates.
Employee contributions are limited to 15% of compensation. In
1997, 1996 and 1995 total shares of ALZA common stock purchased
by the participants under the terms of this plan were 260,130,
237,950 and 165,314, respectively. Since adoption of this plan
in 1984, 1,665,528 shares have been issued under this plan and
384,472 shares are available for issuance. The fair value of the
employees' purchase rights was estimated using the Black-Scholes
option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995: risk free interest rates of
5.4%, 5.3% and 4.8%, respectively; dividend yields of zero; an
expected volatility factor of the market price of ALZA's common
stock of 30%; and an expected life of six months. The weighted-
average fair value for shares issued under the employee stock
purchase plan for 1997, 1996 and 1995 was $6.52, $6.00 and $5.62,
respectively.
NOTE 9: INCOME TAXES
The provision for income taxes is as follows (in millions):
1997 1996 1995
_________________________________________________________________
Federal
Current $ 46.9 $47.9 $30.1
Deferred (12.9) (2.4) 5.6
_________________________________________________________________
34.0 45.5 35.7
State
Current 16.5 11.2 6.4
Deferred (0.8) - 2.3
_________________________________________________________________
15.7 11.2 8.7
_________________________________________________________________
Provision for income taxes $ 49.7 $56.7 $44.4
===================================================================
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<PAGE 38 OF PAPER FORMAT ANNUAL REPORT>
Tax benefits associated with employee stock option transactions
reduced accrued income taxes by $2.3 million, $3.3 million and $1.0
million for 1997, 1996 and 1995, respectively.
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income before
income taxes. The sources and tax effects of the differences are
as follows (in millions):
1997 1996 1995
_________________________________________________________________
Expected federal tax at 35% $ (73.0) $52.2 $40.9
State income taxes, net of
federal benefit 10.2 7.3 5.7
Investment and research
tax credits (5.2) (2.3) (1.3)
Purchased in-process research and
development 113.4 - -
Other 4.3 (0.5) (0.9)
_________________________________________________________________
Provision for income taxes $ 49.7 $ 56.7 $44.4
===================================================================
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows (in millions):
1997 1996
_________________________________________________________________
Deferred tax assets:
Capitalized intangibles $ 35.9 $ 6.1
Compensation 16.1 14.5
State income taxes 7.4 4.8
Investments 5.7 1.0
Inventories 5.6 5.7
Bad debt 3.0 2.3
Deferred revenue 0.1 0.1
Other 1.6 -
_________________________________________________________________
Total deferred tax assets 75.4 34.5
_________________________________________________________________
Deferred tax liabilities:
Property, plant and equipment 43.1 39.8
Unrealized losses on
available-for-sale securities (3.4) (0.1)
Other 3.9 2.5
_________________________________________________________________
Total deferred tax liabilities 43.6 42.2
_________________________________________________________________
Net deferred tax assets (liabilities) $ 31.8 $(7.7)
===================================================================
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<PAGE 38-39 OF PAPER FORMAT ANNUAL REPORT>
NOTE 10: COMMITMENTS AND CONTINGENCIES
Commitments
ALZA leases certain buildings and equipment under operating
leases, the terms of which range from one to 33 years. Rent
expense under these leases for 1997, 1996 and 1995 was $4.0
million, $3.7 million and $1.7 million, respectively.
In late 1997, ALZA acquired a 50% interest in a real estate
joint venture for the development of a 13-acre parcel of land in
Mountain View, California. ALZA invested $36.2 million in the
joint venture, which will be applied to the construction of
buildings on the parcel. ALZA is also obligated to make
improvements to the buildings, the total cost of which is
estimated to be between $60.0 million and $100.0 million. The
joint venture will lease the buildings to ALZA upon completion of
construction, currently scheduled for 1999. The leases provide
for an initial term of 15 years with scheduled annual rent
increases, followed by two 10-year extension periods with rent
increases based upon the Consumer Price Index. ALZA will receive
50% of the joint venture's income.
ALZA has also entered into a ground lease agreement for an
adjacent seven-acre parcel of land on which it plans to construct
a pilot plant, laboratories and other technical facilities. The
term of the ground lease is approximately 33 years and includes
options for ALZA to purchase, or to be required to purchase, the
property.
Aggregate minimum lease commitments under all non-cancelable
operating lease arrangements as of December 31, 1997 were (in
millions):
1998 $3.9
1999 9.2
2000 10.4
2001 10.2
2002 10.4
Later years 162.1
_________________________________________________________________
Total $206.2
In January 1998, ALZA purchased a building in Mountain View,
California, which it had leased since 1992. The total purchase
price was approximately $19.0 million, the majority of which was
offset by the repayment of an outstanding note receivable from the
seller. The note receivable was included in other assets at
December 31, 1997.
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Contingencies
Pharmaceutical companies are subject to product liability
claims. Product liability suits have been filed against Janssen
and ALZA from time to time relating to the Duragesic-registered
trademark- product. Janssen is managing the defense of these suits
in consultation with ALZA under an agreement between the parties.
Historically, the cost of resolution of ALZA's liability
(including product liability) claims has not been significant, and
ALZA is not aware of any asserted or unasserted claims pending
against it, including the suits mentioned above, the resolution of
which would have a material adverse impact on ALZA's results of
operations or financial position.
NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share amounts)
1997
_________________________________________________________________
First Second Third(1) Fourth(2)
_________________________________________________________________
Total revenues $ 105.5 $ 118.2 $ 114.5 $ 126.2
Gross margin 7.8 13.3 14.5 17.7
Operating income (loss) 39.2 42.9 (305.9) 19.8
Net income (loss) 26.3 26.4 (326.5) 12.7
Earnings (loss) per share
Basic $0.31 $0.31 $(3.83) $0.15
Diluted 0.30 0.30 (3.83) 0.15
1996
_________________________________________________________________
First Second Third Fourth
_________________________________________________________________
Total revenues $88.5 $117.9 $98.4 $108.3
Gross margin 4.7 4.0 8.0 6.6
Operating income (loss) 31.0 38.1 33.7 36.4
Net income (loss) 20.4 23.2 23.1 25.7
Earnings (loss) per share
Basic $ 0.24 $ 0.27 $ 0.27 $ 0.30
Diluted 0.24 0.27 0.27 0.30
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<PAGE 39-40 OF PAPER FORMAT ANNUAL REPORT>
(1)In the third quarter of 1997, ALZA recorded nonrecurring
charges totaling $353.5 million, or $4.14 per share, diluted.
These charges included a $247.0 million charge and $8.0
million of interest expense related to the distribution of
Crescendo Shares, $87.0 million for acquired in-process
research and development and an asset write-down of $11.5
million.
(2)In the fourth quarter of 1997, ALZA recorded charges of $21.5
million for acquired in-process research and development and
$1.8 million in costs related to a workforce reduction. Net
of income taxes, these charges totaled $15.2 million, or
$0.17 per share, diluted.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALZA CORPORATION
We have audited the accompanying consolidated balance sheet of ALZA
Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of ALZA Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
February 13, 1998
<PAGE>
<PAGE 41 OF PAPER FORMAT ANNUAL REPORT>
SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
1997 1996 1995 1994 1993
__________________________________________________________________
Total revenues $ 464.4 $413.1 $324.6 $ 261.2 $ 214.6
Net income (loss) (261.1)(1) 92.4 72.4 58.1 45.6(2)
Earnings (loss)
per share, diluted (3.07) 1.08 0.88 0.7(1) 0.57
Cash and investments 535.8 999.8 419.1 344.9 257.5(4)
Total assets 1,369.2 1,613.7 937.2 806.3 621.8(4)
Convertible debentures902.6 882.3 362.9 344.6 -(5)
Total stockholders'
equity 301.2 596.7 454.6 364.5 306.7(4)
__________________________________________________________________
1992 1991 1990 1989 1988
_________________________________________________________________
Total revenues $ 230.1 $141.0 $100.2 $ 82.7 $ 74.4
Net income (loss) 72.2 (62.1)(3)24.7 18.8 17.0
Earnings (loss)
per share, diluted 0.90 (0.88) 0.35 0.27 0.25
Cash and investments 338.5 296.6 302.4 109.0 121.1
Total assets 698.4 580.5 530.9 288.4 261.6
Convertible debentures229.0 213.2 273.2 75.0 75.0
Total stockholders'
equity 407.5 322.9 219.6 186.6 159.8
_________________________________________________________________
1 Reflects a total of $368.7 million (or $4.30 per share,
diluted) of non-recurring charges, including a $247.0 million
charge and $8.0 million of interest expense related to ALZA's
distribution of shares of Crescendo, $108.5 million for
acquired in-process research and development, an asset write-
down of $11.5 million and
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<PAGE 41 OF PAPER FORMAT ANNUAL REPORT>
costs of $1.8 million related to a workforce reduction, less
a tax benefit of $8.1 million.
2 Includes pre-tax charges and allowances of $28.1 million
($0.23 per share, diluted) related primarily to manufacturing
activities. Also includes $6.6 million ($0.08 per share,
diluted) in one-time benefits resulting from the adoption of
SFAS No. 109, "Accounting for Income Taxes", and a $3.8
million ($0.05 per share, diluted) extraordinary charge
relating to the redemption of ALZA's 7 1/2% zero coupon
convertible subordinated debentures.
3 Includes the effects of a one-time charge of $101.3 million
($1.38 per share, diluted) related to the purchase of in-
process technology.
4 Includes the effect of the $250.0 million contribution to
Therapeutic Discovery Corporation and the related special
dividend of shares of Therapeutic Discovery Corporation to
ALZA stockholders.
5 Approximately $249.5 million of commercial paper (including
accrued interest) was outstanding.
ALZA COMMON STOCK (UNAUDITED)
ALZA common stock (symbol AZA) is listed for trading on the
New York Stock Exchange and, as of December 31, 1997, there were
8,242 holders of record. ALZA has never paid cash dividends on
its common stock and has no plan to do so in the near term. The
quarterly high and low sales prices of ALZA common stock for 1997
and 1996, as reported on the composite tape are shown below:
ALZA COMMON STOCK
_________________________________________________________________
1997 1996
_________________________________________________________________
High Low High Low
First quarter $31 3/8 $24 7/8 $34 7/8 $24 3/8
Second quarter 31 3/8 25 1/2 32 1/2 26 3/8
Third quarter 32 1/2 28 1/16 27 3/4 24
Fourth quarter 31 13/16 24 7/8 29 25 1/8
Exhibit 21
SUBSIDIARIES
ALZA Development Corporation (incorporated in California)
ALZA International, Inc. (incorporated in Delaware), doing
business in the United Kingdom, and doing business in Canada
as ALZA Canada
ALZA Limited (incorporated in the United Kingdom)
Therapeutic Discovery Corporation (incorporated in Delaware)
ALZA Land Management, Inc. (incorporated in Delaware)
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of ALZA Corporation of our report dated February 13,
1998, included in the 1997 Annual Report to Stockholders of ALZA
Corporation.
Our audits also included the consolidated financial statement
schedule of ALZA Corporation listed in Item 14(a). This schedule
is the responsibility of ALZA's management. Our responsibility is
to express an opinion based on our audits. In our opinion, the
consolidated financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the
Registration Statements (Forms S-3 No. 33-53671 and No. 333-02765
and Forms S-8 No. 2-92629, No. 2-97422, No. 33-21810, No. 33-36141,
No. 33-49824, No. 33-51890, and No. 333-21877) and in the related
Prospectuses, of our report dated February 13, 1998 with respect to
the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with
respect to the consolidated financial statement schedule included
in this Annual Report (Form 10-K) of ALZA Corporation.
Ernst & Young LLP
Palo Alto, California
March 27, 1998
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