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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission file number 0-22332
INSITE VISION INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-3015807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
965 Atlantic Avenue
Alameda, CA 94501
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (510) 865-8800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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 the 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. [ ]
The aggregate market value of Common Stock, $.01 par value, held by
non-affiliates of the registrant as of January 31, 1997: $64,140,520 (based upon
the closing sale price of the Common Stock on January 31, 1997). Number of
shares of Common Stock, $.01 par value, outstanding as of January 31, 1997:
12,936,400.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated: portions of the Proxy
Statement for the registrant's 1997 Annual Meeting of Stockholders to be held on
or about June 2, 1997 are incorporated by reference into Part III.
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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
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Page
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PART I
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 22
Item 3. Legal Proceedings......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 23
Item 6. Selected Financial Data................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................. 25
Item 8. Financial Statements and Supplementary Data............................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................ 38
PART III
Item 10 Directors and Executive Officers of the Registrant........................................ 38
Item 11. Executive Compensation.................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 38
Item 13. Certain Relationships and Related Transactions............................................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 38
</TABLE>
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the discussion
in this Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
document should be read as applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include those discussed below in "Risk Factors," as well as
those discussed elsewhere herein.
THE COMPANY
InSite Vision Incorporated ("InSite," "InSite Vision" or the "Company")
is focused on the development of ophthalmic pharmaceutical products based on its
proprietary DuraSite(R) drug delivery technology and on the development of
genetically based tools for the diagnosis and prognosis of glaucoma.
DuraSite-based products are designed to improve the safety and efficacy of
existing ophthalmic products, and may expand the ophthalmic pharmaceutical
market by permitting the novel use of drugs for ophthalmic indications that are
currently used or being developed for non-ophthalmic indications. Moreover, the
Company believes its drug delivery technology may improve patient compliance,
comfort and convenience by reducing dosage frequency, concentration and adverse
side effects. InSite's products under development are intended to address a
broad spectrum of ocular indications including glaucoma, inflammation and
infection.
The DuraSite delivery system is a patented eye drop formulation
comprising a cross-linked carboxyl containing polymer which incorporates the
drug to be delivered to the eye. The eye drop is instilled in the cul-de-sac of
the eye as a small volume eye drop. DuraSite can be customized to deliver a wide
variety of potential drug candidates with a broad range of molecular weights and
other properties. In addition, the DuraSite formulation remains in the eye for
up to several hours during which time the active drug ingredient is gradually
released. DuraSite extends the residence time of the drug due to a combination
of mucoadhesion, surface tension and viscosity. Eye drops delivered in the
DuraSite system contrast to conventional eye drops which typically only last in
the eye a few minutes, thus requiring delivery of a highly concentrated burst of
drug and frequent administration to sustain therapeutic levels. The increased
residence time for DuraSite is designed to permit lower concentrations of a drug
to be administered over a longer period of time, thereby minimizing the
inconvenience of frequent dosing and reducing the potential related adverse side
effects of a highly concentrated dose.
The first product utilizing the Company's DuraSite technology,
AquaSite(R) dry eye treatment, was launched as an over-the-counter medication in
1992 by CIBA Vision Ophthalmics ("CIBA Vision"), to which the Company has
licensed certain co-exclusive rights. Phase III clinical studies have been
completed for the Company's PilaSite(R) and BetaSite(R) product candidates to
treat glaucoma and in July 1996, the Company licensed certain rights for
PilaSite to Bausch and Lomb Incorporated ("B&L"). As a result of its agreement
with B&L, the Company is preparing a new drug application ("NDA") for PilaSite.
The Company, as part of its strategy to conserve financial resources
following its restructuring in November 1995, deferred filing "NDAs" for other
product candidates until alliances with one or more corporate partners for these
product candidates are reached and until registration lots necessary to support
such NDA filings have been manufactured. There can be no assurance that the
Company will successfully conclude any further corporate partnership agreements.
The Company has five additional products in Phase I or Phase II
clinical trials. In addition, InSite is conducting research or preclinical
studies on several proprietary drugs, some of which may have therapeutic
potential for inadequately addressed eye diseases. In connection with such
development efforts, the Company has established collaborations with Pharmacia &
Upjohn, Inc. ("Upjohn") and British
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Biotechnology plc ("British Biotech"), among others. See table on Page 5 for
additional information. MethaSite and ToPreSite have been licensed on a
co-exclusive basis in the U.S. and Canada to CIBA Vision; the use of ISV-205 for
inflammation and analgesia, has been licensed on an exclusive basis in the U.S.
to CIBA Vision; and PilaSite and ISV-208 have been licensed on an exclusive
basis to B&L. The Company is currently in discussions with several potential
partners to out license other product candidates.
OPHTHALMIC PHARMACEUTICAL MARKET
In 1996, the market for ophthalmic prescription pharmaceuticals in the
U.S. was approximately $1.2 billion. The principal categories of products in the
ophthalmic market are glaucoma treatments, anti-inflammatories, anti-infectives,
surgical adjuncts and artificial tear products.
The majority of eye diseases are age-related. As a result, the aging of
the population in developed countries is a significant factor which InSite
believes will contribute to increased demand for new ophthalmic pharmaceuticals.
The prevalence of eye disease is ten times greater in persons over the age of 65
than under age 65, and the U.S. Census Bureau projects that the percentage of
the U.S. population over age 65 will increase from 11.3% in 1980 to
approximately 13% by the year 2000.
In addition to changing demographics, the Company believes that recent
improvements in medical technology, such as increasingly sophisticated
diagnostic techniques, will allow identification of ocular diseases at an
earlier stage, enabling more effective treatment with drug intervention and
expanding the treatment regimens available to the ophthalmologist. Further, the
Company believes that the recent emergence of new laser-based procedures to
correct vision problems may substantially increase the need for comfortable,
extended-release drug therapy during the post-surgical ocular healing process.
Drug treatment for many prevalent eye problems is inadequate. For
example, there is no effective treatment for the underlying cause of glaucoma,
nor is there any U.S. Food and Drug Administration ("FDA") approved regimens to
prevent the recurrence of pterygia following surgical removal. Further, other
therapeutic indications, such as ocular allergies, are not satisfactorily
addressed by existing drug therapies. The Company believes its drug delivery
technology may improve patient compliance, comfort and convenience by reducing
dosage frequency, concentration and adverse side effects. Additionally, the
Company believes its drug delivery technology may expand the ophthalmic
pharmaceutical market by permitting the novel use of drugs for ophthalmic
indications that are currently used or being developed for non-ophthalmic
indications.
CONVENTIONAL OCULAR DRUG DELIVERY
The development of a safe, effective and efficient method of drug
delivery is critical in improving existing treatments and developing new
therapies for many diseases of the eye. In order to develop a delivery system,
however, several challenges must be overcome successfully. The cornea has one of
the highest concentrations of sensory nerves in the body, which makes the eye
very sensitive to drug formulation parameters such as pH, tonicity (relative
water and salt balance) and particle size. If a delivery system is not suitably
formulated, the user may experience discomforting sensations of burning,
stinging or presence of foreign bodies.
The length of time that a drug remains efficacious in the eye has a
significant effect on dosing frequency and patient compliance. This period is
largely regulated by the ability of the drug delivery system to release its
contents over an extended period of time. Tear film in the eye replaces itself
approximately every six minutes and therefore certain delivery systems, such as
conventional eye drops, begin to be drained from the eye immediately after
application, thus requiring frequent application. Studies have shown that an
effective delivery system which can reduce dosing frequency from four to two
times per day may significantly increase patient compliance with prescribed drug
regimens.
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Ease of dosing and maintenance of visual acuity are other major issues
in designing an effective drug delivery system for the eye. The primary means of
ophthalmic drug delivery to-date have been conventional eye drops, solid inserts
and ointments containing drugs to be administered. Conventional eye drops and
solid drug releasing inserts can be difficult for patients with vision
impairment or manual dexterity problems to administer. Moreover, InSite believes
that a significant portion of the U.S. population is averse to placing solid
objects, such as inserts, in the eye. In addition, inserts can become dislodged
as a result of normal eye and lid movement and tear flow patterns. This
interrupts therapy and causes inconvenience and discomfort to the user. The
prolonged blurring of vision associated with ointments is also considered
unacceptable for daytime use by active patients.
Approximately 90% of ophthalmic drugs are currently delivered by means
of a conventional eyedrop administered from a standard dropper bottle. However,
this system suffers from significant limitations. Because the standard eyedrop
is seven times the volume of normal tear film, rapid drainage and overflow
typically occur immediately upon its use. As a result, up to 90% of an eyedrop
can drain before the active drug becomes effective in the eye, and that portion
of the eyedrop that remains is rapidly dispersed, usually within a few minutes.
Eye drops must therefore be administered in frequent doses because they maintain
peak concentration for only a few minutes. As drug development produces a
greater variety of potential therapies for diseases of the eye, the Company
believes that the limitations of conventional eye drops will become more
pronounced.
THE INSITE SOLUTION--THE DURASITE SYSTEM
InSite has developed the DuraSite drug delivery system to deliver drugs
in a patented polymer formulation to treat ocular diseases. DuraSite is
comprised of a cross-linked carboxyl-containing polymer. DuraSite's polymer
incorporates the drug to be delivered, gradually releasing it over time. The
polymer content in the formulation is minimal with the remainder consisting
principally of salts and sterile water. The pH, tonicity and particle size
distribution in the formulation have been adjusted to minimize the sensations of
burning, stinging, presence of foreign bodies and blurring. The formulation is
instilled as a small volume eyedrop into the conjunctival sac. DuraSite extends
the residence time of the drug due to a combination of mucoadhesion, surface
tension and viscosity. DuraSite's polymer stabilizes the drugs in aqueous media
and/or retards degradation by the enzymes in the tear fluid. The Company
believes that DuraSite can be customized to permit ophthalmic uses for compounds
previously unavailable for ophthalmic applications, including compounds that are
unstable or have short biological half-lives, such as antioxidants and proteins
that may be useful in the treatment of degenerative eye diseases.
The DuraSite formulations are instilled into the eye using a patented
unit-dose, polyethylene dispenser. The dispenser has an easy-to-handle,
bent-neck design that delivers approximately a 25-microliter drop which the
Company believes is the optimal size to fill the average cul-de-sac without
overflowing. The bent neck permits administration directly into the cul-de-sac
of the eye while looking directly into a mirror, without having to tilt the head
back. Thus, drops can be more easily instilled compared to conventional eye
drops, even by patients with poor dexterity or depth perception.
The DuraSite system has been designed to be highly flexible with the
ability to incorporate a variety of soluble and insoluble drugs with varying
molecular weights ranging from small chemicals such as pilocarpine to large
proteins. All of the Company's therapeutic products under development and
AquaSite have been formulated with DuraSite.
The DuraSite system is designed to deliver effective, comfortable and
convenient treatment for ocular indications while reducing unwanted drug side
effects. The Company believes that products formulated in DuraSite may provide
the following improvements over existing therapies:
Reduced dosing frequency and improved compliance. Once the DuraSite
eyedrop is in the cul-de-sac, it adheres to the natural mucin layer.
The Company has demonstrated that DuraSite formulations can stay in the
eye up to six hours, depending on specific drug and formulation
characteristics. The DuraSite system releases the drug over this period
of time, long after
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conventional eye drops have dissipated. While DuraSite is in the eye,
its drug content is released over time by diffusion and bio-erosion
from eyelid movements and tear flow. In Phase III clinical trials,
InSite believes it has demonstrated that PilaSite used twice daily has
a substantially similar effect as four daily doses of pilocarpine.
Reduced side effects. This extended duration of action permits drugs to
be formulated in DuraSite at lower levels of concentration than in
conventional eye drop formulations. As a result, the amount of drug
released at any one time is reduced, which may reduce the potential for
adverse side effects from the drug being delivered. The DuraSite
dispenser has been designed to deliver drops smaller than the 40 to 50
microliter drops typically produced by more conventional containers.
This smaller drop size should minimize the overflow, which can cause
discomfort and contribute to systemic side effects. Because DuraSite is
insoluble, the polymer does not penetrate the eye or other mucous
membranes and does not break down into potentially toxic or unstable
by-products. As the polymer particles erode, they move through the
nasolacrimal ducts and leave the body via the gastrointestinal tract
without changing chemically or causing systemic side effects.
Increased efficacy. Drug efficacy may be enhanced for drugs formulated
in DuraSite because DuraSite is designed to permit drug release over an
extended time, compared to drugs delivered in conventional eye drops.
Enhanced convenience. The DuraSite dispenser has been designed to
facilitate eyedrop installation. The Company has also developed
color-coded and time-sequenced packaging to permit ease-of-use.
Dispenser ease-of-use and less frequent application provide enhanced
convenience, which the Company believes may contribute to improved
patient compliance with prescribed treatment regimens.
The Company is also developing additional polymer-based delivery
systems with bio-erodible polymers and plasticizers to be administered
topically. The expected advantages of these systems are (i) duration of action
may be extended to 24 hours or longer; (ii) drug delivery profiles may be
controlled more precisely to enable formulation of drugs with very narrow
therapeutic indices; and (iii) drugs that are unstable in aqueous solutions
(such as certain proteins) may remain stable for longer periods.
PRODUCTS AND PRODUCT CANDIDATES
The table on the following page summarizes the current status of the
Company's principal products and product candidates. A more detailed description
of each product and product candidate follows the table. There can be no
assurance that any of the listed products or product candidates will progress
beyond its current state of development, receive necessary regulatory approval
or be successfully marketed.
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PRODUCTS AND PRODUCT CANDIDATES
<TABLE>
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ANTICIPATED
PRODUCT INDICATIONS BENEFITS STATUS(1) COLLABORATOR
------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C>
MARKETED PRODUCT
AquaSite Dry eye Reduced dosing Marketed (OTC) CIBA Vision
frequency and extended Ophthalmics
duration of action
GLAUCOMA PRODUCT
CANDIDATES
PilaSite Glaucoma Reduced dosing Phase III completed Bausch & Lomb
frequency
BetaSite Glaucoma Lowest available Phase III completed
concentration
ISV - 205 Steroid-induced Treat/prevent disease Phase I completed University of
IOP progression California
elevation,
glaucoma
ISV - 900 Glaucoma Detect disease Research Universities of
prognostic/ susceptibility California and
diagnostic Connecticut
ISV - 208 Glaucoma Once daily product with Preclinical Bausch & Lomb
improved comfort
OTHER PRODUCT
CANDIDATES
MethaSite Inflammation Reduced dosing frequency Phase III completed CIBA Vision
Ophthalmics
ISV - 205 Inflammation Reduced dosing frequency Phase I completed CIBA Vision
and analgesia Ophthalmics
ISV - 120 Pterygium No satisfactory existing Phase II British Biotech
recurrence therapy
prevention
ISV - 611 Allergic Improved safety and Phase I British Biotech
conjunctivitis efficacy
ToPreSite Inflammation Reduced dosing frequency Preclinical CIBA Vision
and infection Ophthalmics
ISV - 600 Diabetic No satisfactory existing Research Upjohn
retinopathy, drug therapy
Cataract,
Macular
degeneration
ISV - 701 Anesthetic Extended duration of Phase I
action
</TABLE>
1) All products except AquaSite and ISV-900 are expected to be prescription
pharmaceuticals. As denoted in the table, "Preclinical" indicates that a
specific compound is being tested in preclinical studies in preparation for
filing an investigational new drug application ("IND"). For a description
of preclinical trials, IND, Phase I, Phase II and Phase III clinical trials
and NDA, see"--- Government Regulation."
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MARKETED PRODUCT
AquaSite. The first product utilizing InSite's DuraSite technology was
introduced to the OTC market in the U.S. in October 1992 by InSite's marketing
partner, CIBA Vision. The Company receives a royalty on sales of AquaSite by
CIBA Vision. The product contains the DuraSite formulation and demulcents for
the symptomatic treatment of dry eye. Dry eye is an extremely common condition
frequently associated with adverse environmental conditions such as heat and
dryness. The post-menopausal state in women is the most frequent underlying
medically related cause of the condition. In addition, some patients with
rheumatoid arthritis and Sjogren's syndrome are severely afflicted. Dry eye
products are designed to augment diminished natural tear production and to
lubricate and protect the ocular surface. AquaSite is designed to have a longer
ocular residence time than currently available artificial tear products. The dry
eye market is highly fragmented and characterized by numerous products, many of
which have relatively small market share.
PRODUCTS IN DEVELOPMENT
Glaucoma Products
Glaucoma is the leading cause of preventable blindness in the U.S. This
ocular disease is typically characterized by elevated intraocular pressure
("IOP"), which is believed to result from an imbalance between the flow of fluid
into and out of the eye. The early signs of glaucoma are subtle and usually
unnoticed by the patient. In the late stages of the disease, elevated IOP causes
damage to the optic nerve that can lead to blindness if left untreated. Current
therapy for glaucoma is focused on controlling elevated IOP through medications,
with recourse to laser or filtering surgery in later stages of the disease.
In some patients, glaucoma is thought to be the result of a genetic
predisposition. The prevalence of glaucoma in first-degree relatives of affected
patients has been documented to be as high as 7 to 10 times that of the general
population. Glaucoma also may occur as a complication of conditions such as
diabetes, or as a result of extended steroid use following ocular surgery. The
Company believes that the post-surgical use of topical steroids will increase
due to the recent FDA approval of the photorefractive keratotomy procedure for
correcting nearsightedness.
Glaucoma treatment is the largest ophthalmic drug category, accounting
for approximately 45% of U.S. ophthalmic prescription sales. Glaucoma affects
between 2 million and 3 million people in the U.S. Treatments for glaucoma and
ocular hypertension, which can develop into glaucoma, accounted for
approximately $440 million in sales in the U.S. in 1994. InSite Vision's
glaucoma-related product development efforts include:
PilaSite. Pilocarpine, the active ingredient in PilaSite eyedrop
formulation, is a drug used primarily in conjunction with beta-blockers to
provide maximum reduction of IOP. Pilocarpine works by increasing the outflow of
fluid from the eye to decrease IOP. Currently, pilocarpine eye drops are
commonly administered four times per day, and side effects often limit their
use. Patients may experience browache from the ciliary spasm induced by the
drug. Additionally, miosis (pupil constriction) caused by pilocarpine produces a
significant dimming of vision that limits a patient's ability to see in the dark
and therefore impairs a person's ability to drive in the evening. InSite has
developed its PilaSite eyedrop product candidate to allow less frequent dosing
of pilocarpine which may potentially reduce drug-related side effects.
InSite has completed two multicenter, randomized Phase III studies
comparing twice-daily dosing of PilaSite to four times daily dosing of
conventional pilocarpine eye drops. The second of the two studies was completed
in mid-1995. Approximately 200 patients were enrolled in each study. In both
studies, twice daily doses of PilaSite eye drops appeared to be substantially as
effective as four daily doses of pilocarpine in controlling elevated IOP.
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B&L currently has an exclusive worldwide license to manufacture, use
and sell PilaSite. The agreement calls for B&L to: prepare the protocols
governing stability testing of the product and drug substance; develop
specifications for drug substance and drug product and analytical assays methods
validation; test the stability of the drug substance and product and validation
thereof; supervise the preapproval inspection by the FDA and provide other
regulatory support and assistance; and validate product manufacturing and
sterilization processes.
BetaSite. The BetaSite eyedrop formulation provides the sustained
release of levobunolol, a leading beta-blocker currently used as a first-line
therapy for reducing IOP. Levobunolol acts by reducing fluid production in the
eye. While topical ophthalmic beta-blockers are generally free of local side
effects, they can cause serious systemic side effects, including cardiovascular
problems. InSite Vision's BetaSite formulation is designed so that levobunolol
will remain on the surface of the eye for several hours, which may lead to both
enhanced ocular absorption and diminished systemic absorption.
In March 1995, the Company announced Phase III results using its
BetaSite product candidate in patients with open-angle glaucoma or ocular
hypertension. The study was conducted in research sites and involved 670
patients, randomized to receive either 0.1% BetaSite, 0.5% BetaSite or 0.5%
levobunolol eye drops. The mean response rates of patients who received
lower-dose BetaSite showed a 21% reduction in IOP after three months' treatment.
Patients who received the higher-dose BetaSite and those treated with
conventional high-dose levobunolol showed a 25% reduction in IOP.
ISV-205. InSite Vision's ISV-205 product candidate contains the drug
diclofenac formulated in the DuraSite sustained-release delivery vehicle.
Diclofenac is a non-steroidal anti-inflammatory drug ("NSAID") currently used to
treat ocular inflammation. Co-exclusive rights to develop, manufacture, use and
sell ISV-205 to treat inflammation and infection or analgesia, were licensed to
CIBA Vision in May 1996. At higher concentrations than currently prescribed,
NSAIDs can block steroid-induced IOP elevation by inhibiting the production of a
protein (the "55/66 kDa protein") that appears to affect the fluid balance in
the eye. ISV-205 product candidate contains concentrations of diclofenac which
have been shown in cell culture and organ culture systems to inhibit the
production of the 55/66 kDa proteins.
A Phase I study was completed in 1996 which evaluated the safety of
concentrations as high as 0.6% diclofenac. The initial indication to be studied
is expected to be the prevention of IOP elevation following steroid use. Other
potential indications include glaucoma prevention, analgesia and the treatment
of allergic symptoms.
ISV-900. There is accumulating evidence that genetic predisposition is
a major factor in the development of Congenital and Primary Open-Angle Glaucoma.
Therefore, the Company is expanding its research in this area and has entered
into two research agreements. In October 1996, the Company obtained an option to
enter into an exclusive worldwide license agreement with the University of
Connecticut Health Center for the rights to commercialize certain research
related to genetic mutations associated with glaucoma and, in November 1994, the
Company obtained an exclusive worldwide license from the Regents of the
University of California (UC Regents) for a nucleic acid sequence that codes for
a protein associated with glaucoma. Through collaborations funded by InSite
Vision, scientists at both institutions are evaluating the potential use of
several gene sequences to develop genetic markers which may identify individuals
susceptible to developing glaucoma. InSite plans to develop
diagnostic/prognostic kits based on the data generated in these collaborations.
ISV-208. During 1996, the Company entered into an agreement with B&L to
develop a new DuraSite formulation. Under the terms of the agreement, B&L
obtained the worldwide exclusive rights to manufacture, use and sell the new
formulation.
Other Products
MethaSite(TM) is a DuraSite-based formulation of fluorometholone, an
anti-inflammatory steroid drug used primarily to control mild-to-moderate
inflammation in the anterior segment of the eye. Clinical
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testing of MethaSite has been conducted and an NDA was submitted to the FDA. In
March 1995, the Company elected not to file an amendment to the NDA because such
amendment would have necessitated the expenditure of significant additional
resources, time and effort to complete the manufacturing requirements for the
product and has withdrawn the NDA without prejudice. CIBA Vision, which has
co-exclusive rights with InSite Vision to manufacture and market MethaSite in
the U.S. and Canada, is evaluating whether to seek regulatory approval for, and
subsequent commercialization of, MethaSite.
ISV-120 is a DuraSite-based ophthalmic formulation of batimastat which
the Company is evaluating for its potential in preventing the recurrence of
pterygium, a vascular overgrowth which occurs on the front of the eye and may
impair vision. In a 1996 Phase II trial, regrowth occurred after patients were
dosed for 30 days. As a consequence, in 1997 the Company plans to conduct a
second Phase II trial in which patients will be dosed for a longer period.
Batimastat is a matrix metalloproteinase inhibitor, a substance that
appears to have an inhibitory effect on tumor neovascularization. While pterygia
can be removed surgically, the rate of recurrence is 30% or higher. Currently
there are no drug therapies approved for preventing recurrent pterygium
following surgical removal. Other therapies such as beta irradiation for the
prevention of recurrent pterygia have potentially serious side effects. The
Company has obtained Batimastat through a 1992 agreement with British Biotech,
which in December 1996, advised the Company that it had discontinued development
and manufacturing of this product. The Company is currently considering whether
to continue development of ISV - 120. See "Risk Factors - Dependence on Third
Parties."
ISV-611 is a DuraSite-based ophthalmic formulation of lexipafant which
the Company is evaluating as a potential alternative for treatment of allergic
conjunctivitis. Lexipafant is an antagonist of platelet activating factor, a
substance known to be involved in a variety of acute and chronic inflammatory
and ischemic diseases. The Company obtains lexipafant through a 1993
collaborative agreement with British Biotech, developer of the substance.
British Biotech is conducting Phase III clinical testing of lexipafant for
pancreatitis and has licensed the drug to Glaxo-Wellcome plc for asthma
indications. InSite Vision has studied ISV-611 in laboratory and animal models.
Clinical studies which were previously planned for in 1996 have been rescheduled
for the first half of 1997. See "Risk Factors - Dependence on Third Parties."
ToPreSite is a compound containing the antibiotic tobramycin and the
steroid prednisolone acetate, for use when both infection and inflammation are
present in the eye. In May 1996, the Company entered into a licensing agreement
with CIBA Vision which grants CIBA Vision the co-exclusive right to manufacture,
use and sell ToPreSite in the U.S.
ISV-600 and ISV-701 are ophthalmic formulations of tirilazad mesylate,
and proparacaine hydrochloride, respectively. The Company has deferred further
development of ISV-600 and ISV-701 pending the availability of additional
resources or corporate partners. There can be no assurance that such resources
or collaborations will be available on acceptable terms, or at all.
The DuraSite drug delivery system has potential for both ophthalmic and
non-ophthalmic applications. While InSite Vision remains focused on the field of
ophthalmology, the Company also intends to leverage the value of its technology
through licensing agreements. For example, in August 1993, InSite and Upjohn
entered into an agreement providing Upjohn with an option to license certain of
InSite's DuraSite formulations for use in Upjohn's dermatological applications
of lazaroids.
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COLLABORATIVE AND LICENSING AGREEMENTS
As a key element of its business strategy, the Company has entered
into, and expects to enter into additional, research collaborations, licensing
agreements and corporate collaborations. However, there can be no assurance that
the Company will be able to negotiate acceptable collaborative or licensing
agreements, or that its existing collaborative agreements will be successful or
will be renewed when they expire.
CIBA Vision Ophthalmics (CIBA Vision). In October 1991, the Company
entered into a license agreement with CIBA Vision (the "CIBA Vision Agreement"),
pursuant to which the Company granted CIBA Vision a co-exclusive license to
manufacture, have manufactured, use and sell fluorometholone and tear
replenishment products utilizing the DuraSite technology in the U.S. and Canada
and pilocarpine products utilizing the DuraSite technology solely in the U.S.
CIBA Vision also has a non-exclusive license to manufacture and use InSite's
delivery devices in single and multi-dosage form, and to sell products
incorporating such devices, for use in eye care. In May 1996, the Company
entered into an agreement with CIBA Vision whereby InSite regained full U.S.
marketing rights to its PilaSite product candidate. In exchange, CIBA Vision
received royalty-bearing, co-exclusive U.S. marketing rights to ToPreSite, a
product candidate for ocular inflammation/infection. CIBA Vision assumed all
subsequent product development, clinical and regulatory responsibility for
ToPreSite. In addition, CIBA Vision received royalty-bearing, exclusive U.S.
development, manufacturing and marketing rights to InSite Vision's ISV-205
product candidate for certain non-glaucoma related indications.
To date, the Company has entered into agreements with CIBA Vision for
co-exclusive rights with the Company in the U.S. to manufacture and market
AquaSite, MethaSite, ToPreSite and ISV-205 for certain non-glaucoma related
indications. Of these, only AquaSite, an OTC product for which regulatory
approval is not required, has been marketed.
Bausch and Lomb. In July 1996, the Company entered into a license
agreement ("the B&L Agreement") with B&L whereby InSite granted B&L an exclusive
worldwide royalty bearing license to make, use and sell PilaSite and ISV-208.
B&L paid InSite an up-front license fee of $500,000 and is obligated to pay
royalties on net sales of the licensed products. In addition, B&L agreed,
subject to certain conditions, to invest $2.0 million in the Company, to share
the cost of developing ISV-208 and to manufacture other InSite products, on
behalf of InSite. In 1996, $1.0 million of the investment was received.
Pharmacia & Upjohn ("Upjohn"). In December 1990, InSite entered into a
license agreement with Upjohn (the "Upjohn Agreement"), pursuant to which Upjohn
granted InSite an exclusive, worldwide license of certain rights with respect to
three of Upjohn's lazaroid compounds, including the active ingredient in the
Company's ISV-600 candidate. Under the license, the Company has rights to
products containing one of the licensed lazaroids, either as the sole active
ingredient or where the licensed lazaroid is one of at least two active
ingredients, and which are limited to use in a topical administration of a
formulation to the eye for ophthalmic applications.
InSite, in turn, has granted to Upjohn an exclusive, worldwide license
to any ophthalmic pharmaceutical treatment with lazaroids that is covered by the
patents that cover DuraSite and which is limited to systemic administration for
the treatment or prevention of ophthalmic disease or as an adjunctive component
of ocular surgery. InSite and Upjohn have agreed to pay each other certain
royalties on net sales of their respective licensed products. The Company is
also obligated to pay Upjohn an annual license maintenance fee. In addition, the
Company has agreed to pay Upjohn minimum royalties on each product developed
based on the license from Upjohn upon completion of certain milestones with
respect to such product commencing after the filing of an NDA for such product.
Upjohn has agreed to provide InSite with certain bulk supplies of the
licensed lazaroids for preclinical, clinical and registration purposes without
cost to InSite and to participate on a research board to provide consulting
services, information and know-how to facilitate the development of the
lazaroids by InSite. Upjohn has further agreed, subject to the negotiation of
mutually acceptable terms, to provide
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InSite with supplies of the lazaroids for development, pre-stocking and sales
purposes. In addition to certain other early termination provisions, Upjohn may
terminate the Upjohn Agreement if InSite fails to meet certain development and
marketing target dates.
In August 1993, InSite and Upjohn entered into an agreement providing
Upjohn with an option to license certain of InSite's DuraSite formulations for
use in Upjohn's dermatological applications of lazaroids.
British Biotech. In November 1992, InSite entered into a collaboration
agreement with British Biotech (the "ISV-120 Agreement"), pursuant to which
British Biotech has granted InSite the right to conduct, at InSite's own
expense, preclinical and clinical trials on British Biotech's batimastat
compound to determine whether its use in the eye can be enhanced by InSite's
drug delivery technology. British Biotech has agreed to provide InSite with bulk
supplies of ISV-120 and to participate on a joint development committee to
coordinate, plan and supervise the evaluation of ISV-120. For a certain period,
InSite has the exclusive option to initiate negotiations with British Biotech to
pursue further development of ISV-120. Upon exercise of such option, InSite and
British Biotech have agreed to negotiate reasonably and in good faith the terms
of a development and licensing agreement and manufacturing and supply agreement
providing for certain co-exclusive licenses for the development, use and sale of
ISV-120, in conjunction with InSite's delivery system, for ophthalmic uses.
Under certain circumstances, British Biotech has agreed to reimburse InSite for
certain costs incurred in evaluating ISV-120. InSite will retain ownership of
all inventions, discoveries and know-how with respect to any InSite delivery
system that may be developed during the course of the evaluation program, and
British Biotech will retain all such ownership rights with respect to ISV-120.
In December 1996 British Biotech advised the Company that it had discontinued
its development and manufacturing of this product. InSite is currently
evaluating whether it wishes to continue development for ophthalmic markets.
Subject to certain rights of early termination, the ISV-120 Agreement will
continue until the earlier of a specified period following completion of
InSite's last human clinical trial on the compound or December 31, 1997.
In April 1993, InSite and British Biotech entered into a collaboration
agreement with respect to another British Biotech compound (the "ISV-611
Agreement") on terms substantially similar to the ISV-120 Agreement. Subject to
certain rights of early termination, the ISV-611 Agreement will continue until
the earlier of a specified period following completion of InSite's last human
clinical trial on ISV-611 or December 31, 1997.
UC Regents. In March 1993, the Company entered into an exclusive
license agreement with the UC Regents for the development of ISV-205 and, in
August 1994, the parties entered into another exclusive license agreement for
the use of a nucleic acid sequence that codes for a protein associated with
glaucoma. Under both agreements, the Company paid initial licensing fees and
will make royalty payments to the UC Regents on future product sales, if any.
University of Connecticut Health Center ("UCHC"). The Company has an
option for a worldwide exclusive license to commercialize technologies related
to certain research UCHC is conducting in the area of Adult-Onset Primary Open
Angle Glaucoma. Under the agreement, the Company will pay a licensing fee and
will make royalty payments to on future product sales, if any. In January 1997,
this option was expanded to include congenital glaucoma.
Columbia Laboratories, Inc. In February 1992, InSite entered into a
cross-license agreement (the "Columbia Agreement") with Columbia Laboratories,
Inc. ("Columbia"), pursuant to which Columbia granted InSite a perpetual,
exclusive, irrevocable, royalty-free license to a polymer technology upon which
DuraSite is based to which Columbia has rights. This license permits InSite to
make, use and sell products using such polymer technology for non-veterinary
ophthalmic indications in the OTC and prescription market in North America and
East Asia (the "Columbia Territory"), and in the prescription market in
countries outside the Columbia Territory. In exchange, InSite granted Columbia a
perpetual, exclusive, irrevocable, royalty-free license, with the right to
sublicense, to use certain DuraSite technology in the OTC market outside the
Columbia Territory. In addition, InSite also granted Columbia a perpetual,
exclusive, irrevocable, worldwide license to certain DuraSite technology in the
veterinary field. Under
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certain circumstances, certain of the licenses in the Columbia Agreement become
non-exclusive. Subject to certain rights of early termination, the Columbia
Agreement continues in effect until the later of January 2002 or expiration of
all patents covered by the DuraSite technology to which Columbia has certain
rights.
Other. As part of InSite's basic strategy, InSite has entered into
agreements with other companies, universities and research institutions
concerning the licensing of additional therapeutic agents and drug delivery
technologies to complement and expand InSite's family of proprietary ophthalmic
products. InSite intends to continue exploring licensing and collaborative
opportunities.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are important to the Company's
business. The Company's policy is to file patent applications seeking to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. Additionally, the Company's policy
is to assist the UC Regents and UCHC, in filing patent applications seeking to
protect inventions which are the subject of the Company's agreements with those
institutions. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. InSite's DuraSite drug delivery products are made
under patents and applications, including four U.S. patents, owned by Columbia
and exclusively licensed to InSite in the field of human ophthalmic
applications. See "--Collaborative and Licensing Agreements." In addition, the
Company has filed a number of patent applications in the U.S. relating to the
Company's DuraSite technology, as well as foreign versions of certain of these
applications in many countries. Of these applications, four U.S. patents have
been issued. In addition, the Company has obtained two U.S. patents on its unit
dose dispenser. The Company has received six additional U.S. patents directed
toward certain uses of lazaroids in topical ophthalmic applications. Of the
patent applications licensed from the UC Regents, three patents have issued.
Several other patent applications by the Company and by the UC Regents relating
to the foregoing and other aspects of the Company's business and potential
business are also pending.
The patent positions of pharmaceutical companies, including InSite, are
uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before a
patent is issued. Consequently, the Company does not know whether any of its
pending patent applications will result in the issuance of patents or if any of
its patents will provide significant proprietary protection. Since patent
applications are maintained in secrecy until patents issue in the U.S. or their
foreign counterparts, if any, publish, the Company cannot be certain that it or
any licenser was the first to file patent applications for such inventions.
Moreover, the Company might have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to the Company, even if the
eventual outcome were favorable. There can be no assurance that the Company's
patents will be held valid or enforceable by a court or that a competitor's
technology or product would be found to infringe such patents.
A number of pharmaceutical companies and research and academic
institutions have developed technologies, filed patent applications or received
patents on various technologies that may be related to the Company's business.
Some of these technologies, applications or patents may conflict with the
Company's technologies or patent applications. Such conflict could limit the
scope of the patents, if any, that the Company may be able to obtain or result
in the denial of the Company's patent applications. In addition, if patents that
cover the Company's activities have been or are issued to other companies, there
can be no assurance that the Company would be able to obtain licenses to these
patents, at all, or at a reasonable cost, or be able to develop or obtain
alternative technology.
In addition to patent protection, the Company also relies upon trade
secret protection for its confidential and proprietary information. There can be
no assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets, that such trade secrets will not be disclosed or that the Company
can effectively protect its rights to unpatented trade secrets.
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ACCESS TO PROPRIETARY COMPOUNDS
The Company believes its drug delivery technology may expand the
ophthalmic pharmaceutical market by permitting the novel use of drugs for
ophthalmic indications that are currently used or being developed for
non-ophthalmic indications. However, the Company may be required to obtain
licenses from third parties that have rights to these compounds in order to
conduct certain research, to develop or to market products that contain such
compounds. There can be no assurance that such licenses will be available on
commercially reasonable terms, if at all. See "Business - Collaborative and
Licensing Agreements."
RESEARCH AND DEVELOPMENT
The Company's research and development group at December 31, 1996
numbered 40 people, of whom seven have Ph.D. or D.V.M. degrees. Research and
development expenses during 1996 were $5.5 million, all of which was sponsored
by the Company. During 1995 and 1994, research and development expenses were
$8.1 million and $9.9 million, respectively. See "Business - Collaborative and
Licensing Agreements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MANUFACTURING
The Company has no experience or facilities for the manufacture of
products for commercial processes. Moreover, the Company currently has no
intention of developing such experience or implementing such facilities. The
Company has a pilot facility, licensed by the State of California, to produce
potential products for Phase I and certain Phase II clinical trials. However, as
stated above, the Company has no large-scale manufacturing capacity and relies
on third parties such as B&L, for supplies and materials necessary for all of
its Phase III clinical trials. For example, the Company and B&L have entered
into an agreement to establish facilities capable of manufacturing and supplying
certain Phase III clinical supplies and commercial products at the B&L site in
Tampa, Florida. If the Company should encounter delays or difficulties in
establishing and maintaining its relationship with B&L or other qualified
manufacturers to produce, package and distribute its finished products, then
clinical trials, regulatory filings, market introduction and subsequent sales of
such products would be adversely affected. See "Risk Factors - No Commercial
Manufacturing Experience."
MARKETING AND SALES
In connection with its November 1995 restructuring, the Company elected
not to proceed with plans to establish its own sales and marketing organization.
Instead, the Company plans to enter into arrangements with one or more
pharmaceutical companies to market its products. There can be no assurance that
the Company will be able to conclude such arrangements on acceptable terms, if
at all.
CIBA Vision. In 1991, the Company entered into a co-exclusive rights
agreement to market the AquaSite and MethaSite products in the U.S. and Canada.
Additionally, in May 1996, the Company granted CIBA Vision an exclusive U.S.
license for ISV-205 for non-glaucoma indications, and co-exclusive rights within
the USA and non-exclusive worldwide rights to sell and use ToPreSite. InSite
Vision's trademark is being used, under license, by CIBA Vision for AquaSite dry
eye treatment and the Company's patents are identified on the AquaSite
packaging. The Company received a one time licensing fee and royalties based on
the net sales of the products, if any.
Bausch and Lomb. In July 1996, the Company entered into an exclusive
worldwide royalty bearing license agreement whereby B&L has agreed to market and
sell ISV-208 and PilaSite. Under the
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terms of the agreement, the Company received a one time licensing fee and is
entitled to royalties based on net sales of the products, if any.
COMPETITION
There are many competitors of the Company in the U.S. and abroad. These
companies include ophthalmic-oriented companies that market a broad portfolio of
products, large integrated pharmaceutical companies that market a limited number
of ophthalmic pharmaceuticals in addition to many other pharmaceuticals, and
smaller specialty pharmaceutical and biotechnology companies that are engaged in
the development and commercialization of prescription ophthalmic
pharmaceuticals. Many of these companies have substantially greater financial,
technical, marketing and human resources than those of the Company and may
succeed in developing technologies and products that are more effective, safer
or more commercially acceptable than any which have been or are being developed
by the Company. These competitors may also succeed in obtaining cost advantages,
patent protection or other intellectual property rights that would block the
Company's ability to develop its potential products, or in obtaining regulatory
approval for the commercialization of their products more rapidly or effectively
than the Company. The ophthalmic prescription pharmaceutical market in the U.S.
is dominated by five companies: Allergan Pharmaceuticals, a division of
Allergan, Inc.; Alcon Laboratories, Inc., a division of Nestle Company; Bausch
and Lomb; CIBA Vision, a division of Novartis Ltd.; and Merck, Sharp & Dohme, a
division of Merck & Co., Inc.
The Company believes that there will be increasing competition from new
products entering the market that are covered by exclusive marketing rights and,
to a lesser degree, from pharmaceuticals that become generic. The Company is
aware of certain products manufactured or under development by competitors that
are used for the treatment of certain ophthalmic indications which the Company
has targeted for product development. The Company's competitive position will
depend on its ability to develop enhanced or innovative pharmaceuticals,
maintain a proprietary position in its technology and products, obtain required
governmental approvals on a timely basis, attract and retain key personnel and
develop effective products that can be manufactured on a cost-effective basis
and marketed successfully.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and its
research and development activities are subject to regulation by numerous
governmental authorities in the U.S. and other countries. In the U.S., drugs are
subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder govern the testing, manufacture, labeling,
storage, record keeping, approval, advertising and promotion in the U.S. of the
Company's products. In addition to FDA regulations, the Company is also subject
to other federal and state regulations such as the Occupational Safety and
Health Act and the Environmental Protection Act. Product development and
approval within this regulatory framework take a number of years and involve the
expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
U.S. include (i) preclinical laboratory and animal tests, (ii) the submission to
the FDA of an Investigational New Drug application ("IND"), (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug, (iv) the submission of an NDA or Product License Application ("PLA")
to the FDA and (v) the FDA approval of the NDA or PLA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with,
and approved by, the FDA. Drug product manufacturing establishments located in
California also must be licensed by the State of California in compliance with
separate regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the potential safety and efficacy of the product
and its formulation. The results of the preclinical tests are
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submitted to the FDA as part of an IND, and unless the FDA objects, the IND will
become effective 30 days following its receipt by the FDA.
Clinical trials involve the administration of the drug to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA
as part of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board which considers, among other things,
ethical factors and the rights, welfare and safety of human subjects.
Clinical trials are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial introduction of the drug into
human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and (iii) identify possible adverse effects and
safety risks. When a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
further evaluate clinical efficacy and to further test for safety within an
expanded patient population at multiple clinical study sites. The FDA reviews
both the clinical plans and the results of the trials and may discontinue the
trials at any time if there are significant safety issues.
The results of the preclinical studies and clinical studies are
submitted to the FDA in the form of an NDA or PLA for marketing approval. The
testing and approval process is likely to require substantial time and effort
and there can be no assurance that any approval will be granted on a timely
basis, if at all. Additional animal studies or clinical trials may be requested
during the FDA review period and may delay marketing approval. After FDA
approval for the initial indications, further clinical trials are necessary to
gain approval for the use of the product for additional indications. The FDA may
also require post-marketing testing to monitor for adverse effects, which can
involve significant expense.
Among the conditions for manufacture of clinical drug supplies and for
NDA or PLA approval is the requirement that the prospective manufacturer's
quality control and manufacturing procedures conform to GMP. Prior to approval,
manufacturing facilities are subject to FDA and/or other regulatory agency
inspection to ensure compliance with GMP. Manufacturing facilities are subject
to periodic regulatory inspection to ensure ongoing compliance.
For marketing outside the U.S., the Company also is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
SCIENTIFIC AND BUSINESS ADVISORS
The Company has access to a number of academic and industry advisors
with expertise in clinical ophthalmology and pharmaceutical development,
marketing and sales. The Company's advisors meet with management and key
scientific employees of the Company on an ad hoc basis to provide advice in
their respective areas of expertise and further assist the Company by
periodically reviewing with management the Company's preclinical, clinical and
marketing activities. The Company plans to make arrangements with other
individuals to join as advisors as appropriate. Although the Company expects to
receive guidance from the advisors, all of such advisors are employed on a
full-time basis by other entities, or are primarily engaged in business
activities outside the Company, and may have other commitments to or consulting
or advisory contracts with other entities that may conflict or compete with
their obligations to the Company.
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The Company's advisors are as follows:
Name Position
- ----------------------------------- --------------------------------------
John G. Babcock, Ph.D. Vice President Research (Retired),
InSite; former Director of Scientific
Relations for Upjohn
Nicolas G. Bazan, M. D. Professor of Ophthalmology,
Biochemistry and Molecular Biology and
Neurology and Director, LSU
Neuroscience Center of Excellence,
Louisiana State University Medical
Center School of Medicine, New Orleans
David Harper, M. D. Ophthalmologist; private practice
Roy Karnovsky Advisor and Consultant in Business
Development and Marketing
Steven G. Kramer, M. D., Ph.D. Chairman, Department of Ophthalmology,
Director of Beckman Vision Center and
Professor, University of California,
San Francisco
Richard Lewis, M. D. Ophthalmologist; Assistant Clinical
Professor, University of California,
Davis; Chief of Ophthalmology, Mercy
General Hospital, Sacramento
Michael Marmor, M. D. Professor, Department of
Ophthalmology, Stanford University
School of Medicine
Thai D. Nguyen, Ph.D. Molecular Biologist, University of
California, San Francisco
Gary D. Novack, Ph.D. Founder and President, PharmaLogic
Development, Inc.; former Associate
Director for Glaucoma Research at
Allergan, Inc.
Jon R. Polansky, M. D. Associate Professor of Ophthalmology,
University of California, San
Francisco
Joseph R. Robinson, Ph.D. Professor of Pharmacy and
Ophthalmology, University of
Wisconsin, Madison
Mansoor Sarfarazi, Ph.D. Associate Professor, Department of
Surgery, University of Connecticut
Health Center
Roger Vogel, M. D. Medical Director
EMPLOYEES
As of December 31, 1996, the Company employed 47 persons, including 45
full time employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
The Company also utilizes independent consultants to advise the Company in
certain areas of its scientific and business operations.
RISK FACTORS
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY
InSite is at an early stage of development. Only one product utilizing
the Company's DuraSite technology, an over-the-counter ("OTC") dry eye
treatment, is currently being marketed. Most of the potential products currently
under development by the Company will require significant additional research
and development, and preclinical and clinical testing, prior to submission to
regulatory authorities for marketing approval. The Company's potential products
are subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibilities that the
Company's technology or any or all of its potential products will be found to be
unsafe, ineffective, or otherwise fail to receive necessary marketing clearance;
that the potential products, if safe and effective, will be difficult to
manufacture or market; that proprietary rights of third parties will preclude
the Company from marketing products; or that third parties will market superior,
equivalent or more cost-
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effective products. As a result, there can be no assurance that the Company's
research and development activities will result in any commercially viable
products.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will require substantial additional funds to conduct the
development and testing of its potential products and to manufacture and market
any products that may be developed. The Company's future capital requirements
will depend on numerous factors, including the progress of its research and
development programs, the progress of preclinical and clinical testing, the time
and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing collaborative and licensing relationships, the ability of the
Company to establish corporate partnerships for the manufacture and marketing of
its potential products, and the purchase of additional capital equipment. The
Company intends to seek additional funding through public or private financings,
collaborative or other arrangements, or from other sources. There can be no
assurance that additional financing will be available from any of these sources
or, if available, that it will be available on acceptable terms. Any failure by
the Company to obtain additional funding on acceptable terms, or at all, would
have a material adverse effect on the Company's business, financial condition
and results of operations. If additional funds are raised by issuing equity
securities, significant dilution to existing stockholders may result. If
adequate funds are not otherwise available, the Company may be required to
delay, scale back or eliminate one or more of its research, discovery or
development programs, or to obtain funds through entering into arrangements with
collaborators or others that may require the Company to relinquish rights to
certain of its technologies, product candidates or products, or to cease
operations.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE FINANCIAL RESULTS
The Company has incurred significant operating losses since its
inception in 1986 and it expects to continue to incur significant operating
losses for at least the next several years. As of December 31, 1996, the
Company's accumulated deficit was approximately $66 million. The amount of net
losses and the time required by the Company to reach profitability are
uncertain. The Company's ability to achieve profitability depends upon its
ability, alone or with others, to complete successful development of its
potential products, conduct clinical trials, obtain required regulatory
approvals and successfully manufacture and market its products. There can be no
assurance that the Company will ever achieve significant revenue or
profitability.
DEPENDENCE ON THIRD PARTIES
In connection with its restructuring in November 1995, the Company
elected not to proceed with plans to establish a dedicated sales and marketing
organization. In order to successfully commercialize its product candidates, the
Company will be required to enter into arrangements with one or more companies
that will: provide for Phase III clinical testing, commercial scale-up and
manufacture of the Company's potential products; obtain or assist the Company in
other activities associated with obtaining regulatory approvals for its product
candidates; and market and sell the Company's products, if approved.
To date, the Company has entered into agreements with CIBA Vision for
co-exclusive rights with the Company in the U.S. to manufacture and market
AquaSite, MethaSite, ToPreSite and ISV-205 for certain non-glaucoma-related
indications. Of these, only AquaSite, an OTC product for which regulatory
approval is not required, has been marketed. Through the Company's agreement
with CIBA Vision in May 1996, the Company regained full U.S. marketing rights to
the Company's PilaSite product candidate for glaucoma, which was subsequently
licensed on a worldwide basis to B&L. In exchange, CIBA Vision received
royalty-bearing, co-exclusive U.S. marketing rights to ToPreSite product
candidate for ocular inflammation/infection. CIBA Vision assumed all subsequent
product development, clinical and regulatory responsibility for ToPreSite. In
addition, CIBA Vision received royalty-bearing, co-exclusive
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U.S. marketing rights to the Company's ISV-205 product candidate for certain
non-glaucoma-related indications. CIBA Vision has no obligation to fund the
further development of MethaSite or ISV-205.
In July 1996, the Company entered into agreements with B&L pursuant
to which: (i) B&L has agreed to manufacture InSite product candidates at B&L's
facility in Tampa, Florida using equipment owned by InSite; B&L and InSite have
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L will receive, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite have agreed to collaborate
to develop and sell a new DuraSite based eyedrop formulation; and (iv) B&L has
agreed to make a $2 million equity investment in the Company, $1.0 million of
which was received by the Company in August 1996, with the remaining amount,
subject to certain conditions, due in August 1997.
There can be no assurance that, even if regulatory approvals are
obtained, the Company's products will be successfully marketed, or that the
Company will be able to conclude arrangements with other companies to support
the commercialization of such products on acceptable terms, if at all.
The Company's strategy for research, development and commercialization
of certain of its products requires the Company to enter into various
arrangements with corporate and academic collaborators, licensers, licensees and
others, and is dependent on the subsequent success of these outside parties in
performing their responsibilities. For example, the Company is dependent upon
British Biotech for the supply of batimastat and lexipafant, the active drugs
incorporated into the Company's ISV-120 and ISV-611 product candidates,
respectively. British Biotech is conducting clinical testing of lexipafant for
non-ophthalmic indications, but it has discontinued clinical testing of
batimastat and informed the Company that it will no longer manufacture the
product. The Company may have no source of ongoing raw materials for such
product candidates and its business may be adversely affected. In addition,
there can be no assurance that the Company's collaborators will not take the
position that they are free to compete using the Company's technology without
compensating or entering into agreements with the Company, or will not pursue
alternative technologies or develop alternative products either on their own or
in collaboration with others, including the Company's competitors, as a means
for developing treatments for the diseases or disorders targeted by these
collaborative programs.
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to
obtain patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. A substantial number of patents in the field of
ophthalmology have been issued to pharmaceutical, biotechnology and
biopharmaceutical companies. Moreover, competitors may have filed patent
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company. There can be no assurance that the Company's patent applications
will be approved, that the Company will develop additional proprietary products
that are patentable, that any issued patents will provide the Company with
adequate protection for its inventions or will not be challenged by others, or
that the patents of others will not impair the ability of the Company to
commercialize its products. The patent position of firms in the pharmaceutical
industry generally is highly uncertain, involves complex legal and factual
questions, and has recently been the subject of much litigation. No consistent
policy has emerged from the U.S. Patent and Trademark Office or the courts
regarding the breadth of claims allowed or the degree of protection afforded
under pharmaceutical patents. There can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around any patents of the Company.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies or patent applications. Such conflicts could limit
the scope of the patents, if any, that the Company may be able to obtain or
result in the denial of the Company's patent applications.
17
<PAGE> 20
In addition, if patents that cover the Company's activities have been or are
issued to other companies, there can be no assurance that the Company would be
able to obtain licenses to these patents, at all, or at a reasonable cost, or be
able to develop or obtain alternative technology. If the Company does not obtain
such licenses, it could encounter delays or be precluded from introducing
products to the market. Litigation may be necessary to defend against or assert
claims of infringement, to enforce patents issued to the Company or to protect
trade secrets or know-how owned by the Company, and could result in substantial
cost to and diversion of effort by, and may have a material adverse effect on,
the Company. In addition, there can be no assurance that these efforts by the
Company will be successful or, even if successful, will not result in
substantial cost to the Company.
The Company's competitive position is also dependent upon unpatented
trade secrets. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets, that such trade secrets
will not be disclosed or that the Company can effectively protect its rights to
unpatented trade secrets. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes also may arise as to the rights in related or
resulting know-how and inventions.
NO COMMERCIAL MANUFACTURING EXPERIENCE
The Company has no experience in the manufacture of products for
commercial purposes. The Company has a pilot facility licensed by the State of
California to manufacture certain of its products for Phase I and Phase II
clinical trials. In July 1996, the Company entered into an alliance under which
B&L has agreed to manufacture Company products. If the Company should encounter
delays or difficulties in establishing and maintaining its relationship with B&L
or other qualified manufacturers to produce, package and distribute its finished
products, then clinical trials, regulatory filings, market introduction and
subsequent sales of such products would be adversely affected.
Contract manufacturers must adhere to GMP regulations strictly enforced
by the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must pass a pre-approval plant inspection
before the FDA will approve an NDA. Certain material manufacturing changes that
occur after approval are also subject to FDA review and clearance or approval.
There can be no assurance that the FDA or other regulatory agencies will approve
the process or the facilities by which any of the Company's products may be
manufactured. The Company's dependence on third parties for the manufacture of
products may adversely affect the Company's ability to develop and deliver
products on a timely and competitive basis. Should the Company be required to
manufacture products itself, the Company will be subject to the regulatory
requirements described above, and to similar risks regarding delays or
difficulties encountered in manufacturing any such products and will require
substantial additional capital. There can be no assurance that the Company will
be able to manufacture any such products successfully or in a cost-effective
manner. In addition, certain of the raw materials the Company uses in
formulating its DuraSite drug delivery system are available from only one
source. Any significant interruption in the supply of these raw materials could
delay the Company's clinical trials, product development or product sales and
could have a material adverse effect on the Company's business.
GOVERNMENT REGULATION AND PRODUCT APPROVAL
FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon preclinical and clinical
testing, manufacturing and marketing of pharmaceutical products. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance
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<PAGE> 21
that the FDA or any other regulatory agency will grant approval for any products
developed by the Company on a timely basis, or at all. Success in preclinical or
early stage clinical trials does not assure success in later stage clinical
trials. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations which could delay, limit or prevent regulatory
approval. If regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses for which a product may be marketed.
Further, even if regulatory approval is obtained, later discovery of previously
unknown problems with a product may result in restrictions on the product,
including withdrawal of the product from the market. Delay in obtaining or
failure to obtain regulatory approvals would have a material adverse effect on
the Company's business.
The FDA's policies may change and additional government regulations may
be promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the U.S. could result in new government regulations which could
have a material adverse effect on the Company's business. The Company is unable
to predict the likelihood of adverse governmental regulation which might arise
from future legislative or administrative action, either in the U.S. or abroad.
See "Risk Factors - Uncertainty of Product Pricing, Reimbursement and Related
Matters."
COMPETITION
The Company's success depends upon developing and maintaining a
competitive position in the development of products and technologies in its
areas of focus. There are many competitors of the Company in the U.S. and
abroad, including pharmaceutical, biotechnology and other companies with varying
resources and degrees of concentration on the ophthalmic pharmaceuticals market.
The Company's competitors may have existing products or products under
development which may be technically superior to those of the Company or which
may be less costly or more acceptable to the market. Competition from such
companies is intense and expected to increase as new products enter the market
and new technologies become available. The Company's competitors, many of which
have substantially greater financial, technical, marketing and human resources
than the Company, may also succeed in developing technologies and products that
are more effective, safer, less expensive or otherwise more commercially
acceptable than any which have been or are being developed by the Company. The
Company's competitors may obtain cost advantages, patent protection or other
intellectual property rights that would block or limit the Company's ability to
develop its potential products, or may obtain regulatory approval for the
commercialization of their products more effectively or rapidly than the
Company. To the extent that the Company determines to manufacture and market its
products by itself, it will also compete with respect to manufacturing
efficiency and marketing capabilities, areas in which it has limited or no
experience.
MARKETING AND SALES
The Company plans to market and sell its products through arrangements
with one or more pharmaceutical companies with expertise in the ophthalmic drug
industry. There can be no assurance that the Company will be able to enter into
such arrangements on acceptable terms, if at all. If the Company is not
successful in concluding such arrangements, it may be required to establish its
own sales and marketing organization, although the Company has no experience in
sales, marketing or distribution. There can be no assurance that the Company
will be able to build such a marketing staff or sales force, or that the
Company's sales and marketing efforts will be cost-effective or successful. To
the extent the Company has entered into or enters into co-marketing,
co-promotion or other licensing arrangements for the marketing and sale of its
products, any revenues received by the Company will be dependent on the efforts
of third parties (such as CIBA Vision and B&L), and there can be no assurance
that such efforts will be successful.
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<PAGE> 22
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on Dr. Chandrasekaran and other
principal members of its scientific and management staff, the loss of whose
services might significantly delay the achievement of planned development
objectives. Furthermore, recruiting and retaining qualified personnel will be
critical to the Company's success. Competition for skilled individuals in the
biotechnology business is highly intense and there can be no assurance that the
Company will be able to continue to attract and retain personnel necessary for
the development of the Company's business. The loss of key personnel or the
failure to recruit additional personnel or to develop needed expertise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks
which are inherent in the development, testing, manufacturing, marketing and
sale of human therapeutic products. Product liability insurance for the
pharmaceutical industry generally is expensive. There can be no assurance that
the Company's present product liability insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops its
products, and no assurance can be given that adequate insurance coverage against
potential claims will be available in sufficient amounts or at a reasonable
cost.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's business may be materially adversely affected by the
continuing efforts of governmental and third party payers to contain or reduce
the costs of health care through various means. For example, in certain foreign
markets the pricing or profitability of health care products is subject to
government control. In the U.S., there have been, and the Company expects there
will continue to be, a number of federal and state proposals to implement
similar government control. While the Company cannot predict whether any such
legislative or regulatory proposals or reforms will be adopted, the announcement
of such proposals or reforms could have a material adverse effect on the
Company's ability to raise capital or form collaborations, and the adoption of
such proposals or reforms could have a material adverse effect on the Company's
business, financial condition or results of operations.
In addition, in the U.S. and elsewhere, sales of health care products
are dependent in part on the availability of reimbursement from third party
payers, such as government and private insurance plans. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third party payers are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that reimbursement from third
party payers will be available or will be sufficient to allow the Company to
sell its products on a competitive or profitable basis.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
The Company's research, development and manufacturing processes involve
the controlled use of small amounts of hazardous and radioactive materials. The
Company is subject to federal, state and local laws, regulations and policies
governing the use, manufacture, storage, handling and disposal of such materials
and certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
Moreover, the Company may be required to incur significant costs to comply with
environmental laws and regulations, especially to the extent that the Company
manufactures its own products.
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<PAGE> 23
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of December 31, 1996, the Company's management and principal
stockholders in the aggregate owned beneficially approximately 22% of the
Company's outstanding shares of Common Stock. As a result, these stockholders,
acting together, would be able to effectively control most matters requiring
approval by the stockholders of the Company, including the election of a
majority of the directors and the approval or disapproval of business
combinations.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of biopharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Future announcements concerning the Company, its competitors or other
biopharmaceutical companies including the results of testing and clinical
trials, technological innovations or new therapeutic products, governmental
regulation, developments in patent or other proprietary rights, litigation or
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant effect on the market price
of the Common Stock. The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Certain provisions of Delaware law applicable to the Company could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless certain conditions
are met.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME AGE TITLE
---- --- -----
S. Kumar Chandrasekaran, Ph.D. 53 Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
Lyle M. Bowman, Ph.D. 48 Vice President, Development and
Operations
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<PAGE> 24
Karen K. Church 51 Vice President, Regulatory, Quality
Assurance/Control and Clinical
Research
Michael D. Baer 52 Vice President, Finance and
Administration
S. Kumar Chandrasekaran joined the Company in September 1987 as Vice
President, Development. From 1988 to 1989, Dr. Chandrasekaran served as Vice
President, Research and Development. From 1989 to 1993, he served as President
and Chief Operating Officer. Since August 1993, Dr. Chandrasekaran has served as
Chairman of the Board of Directors, Chief Executive Officer and, since December
1995, as Chief Financial Officer. Dr. Chandrasekaran holds a Ph.D. in Chemical
Engineering from the University of California, Berkeley.
Lyle M. Bowman joined the Company in October 1988 as Director of Drug
Delivery Systems. From 1989 to 1991, Dr. Bowman served as Vice President,
Science and Technology. From 1991 to 1995 he served as Vice President,
Development, and since 1995 has served as Vice President Development and
Operations. Dr. Bowman holds a Ph.D. in Physical Chemistry from the University
of Utah.
Karen K. Church joined the Company in July 1995 as Vice President of
Regulatory, Quality Assurance/Control and Clinical Research. From May 1988 to
June 1995, Ms. Church was Vice President of Regulatory and Quality Assurance at
Gensia, Inc. Ms. Church holds a B.S. in zoology and microbiology from the
University of Wyoming and is a certified regulatory affairs professional and
past President of the Drug Information Association.
Michael D. Baer was appointed Vice President, Finance and
Administration in June 1996. Prior to his appointment, Mr. Baer had served as
the Company's controller since February 1995. Before joining the Company, Mr.
Baer served as Chief Financial Officer of the U.S. operations of Simsmetal
Limited from 1993 to 1994; the regional Chief Financial and Administrative
Officer for Deloitte & Touche from 1990 to 1993 and was the partner in charge of
the Sacramento office of Deloitte Haskins & Sells from 1984 to 1990. Mr. Baer is
a Certified Public Accountant and holds an MBA in Finance from the University of
California, Berkeley.
Officers are appointed to serve, at the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships between any directors or executive officers of the Company.
ITEM 2. PROPERTIES
InSite currently leases approximately 29,402 square feet of research
laboratory and office space located in Alameda, California. The facility
includes laboratories for formulation, analytical, microbiology, pharmacology,
quality control and development as well as a pilot manufacturing plant. The
lease expires on December 31, 2001 and contains provision for a five-year
renewal option. The Company believes its existing facilities will be suitable
and adequate to meet its needs for the immediate future.
ITEM 3. LEGAL PROCEEDINGS.
(a) The Company is not a party to any legal proceedings.
(b) No legal proceedings were terminated in the fourth quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the quarter ended December 31, 1996.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock trades on The Nasdaq National Market under
the symbol "INSV." Prior to its initial public offering on October 18, 1993,
there was no public market for the Company's common stock. The following table
sets forth the high and low sales price for the common stock as reported by The
Nasdaq National Market for the periods indicated. These prices do not include
retail mark-ups, mark-downs or commissions.
1995 HIGH LOW
---- ---- ---
First Quarter $ 5.00 $ 2.00
Second Quarter $ 3.50 $ 2.50
Third Quarter $ 5.50 $ 3.00
Fourth Quarter $ 5.00 $ 1.50
1996 HIGH LOW
---- ---- ---
First Quarter $ 8.25 $ 3.50
Second Quarter $ 7.50 $ 5.13
Third Quarter $ 6.13 $ 3.50
Fourth Quarter $ 6.00 $ 3.13
(b) Holders
As of December 31, 1996, the Company had approximately 4,000
stockholders. On February 21, 1997, the last sales price reported on The Nasdaq
National Market for the Company's common stock was $4.875 per share.
(c) Dividends
The Company has never paid dividends and does not anticipate paying any
dividends in the foreseeable future. It is the present policy of the Board of
Directors to retain the Company's earnings, if any, for the development of the
Company's business.
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<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company for the five years ended December 31, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
- ------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 544 $ 65 $ 112 $ 558 $ 1,882
Operating expenses:
Research and development 5,458 8,079 9,944 6,712 5,373
General and administrative 2,902 3,801 4,961 2,629 2,134
Loss on vacated facility 1,412
Restructuring 1,031
--------------------------------------------------------
Total expenses 9,772 12,911 14,905 9,341 7,507
Net interest and other income 466 224 845 296 176
Net loss $ (8,762) $(12,622) $(13,948) $ (8,487) $ (5,449)
Net loss per share $ (0.72) $ (1.38) $ (1.55) $ (2.69) $ (1.76)
Shares used to calculate net loss per
share 12,131 9,160 8,998 3,154 3,093
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET DATA
- -------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents and short-term
investments $ 10,518 $ 3,867 $ 17,546 $ 31,087 $ 8,886
Working capital 9,512 2,376 16,269 30,895 8,381
Total assets 12,820 7,643 21,266 33,745 11,847
Long term notes payable 92 1,256 652 18
Accumulated deficit (65,656) (56,894) (44,272) (30,324) (21,836)
Total stockholders' equity $ 11,619 $ 5,847 $ 17,953 $ 31,847 $ 10,236
</TABLE>
No dividends were declared or have been paid by the Company since its inception.
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<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included in Item 8 of this Form 10-K.
Except for the historical information contained herein, the discussion
in this Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
document should be read as being applicable to all related forward-looking
statements wherever they appear in this document. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors" in
Item 1 of this Form 10-K, as well as those discussed elsewhere herein.
OVERVIEW
InSite Vision is developing ophthalmic pharmaceutical products based on
its proprietary DuraSite eyedrop-based drug delivery technology, which is
designed to improve the safety, efficacy and medical value of existing
ophthalmic products and potentially permit the novel ophthalmic application of
drugs that are currently used or being developed for non-ophthalmic indications.
The DuraSite delivery system can be customized to deliver a wide variety of
potential drug candidates having a broad range of molecular weights and other
properties.
To date, InSite Vision has not received any revenues from the sale of
products, although it has received a small amount of royalties from the sale of
products using the Company's licensed technology. The Company has been
unprofitable since its inception and expects to continue to incur substantial
losses for at least the next several years, due to continuing research and
development efforts, including preclinical studies, clinical trials and
manufacturing of its product candidates. The Company has financed its research
and development activities and operations primarily through private and public
placement of its equity securities and, to a lesser extent, from collaborative
agreements.
In November 1995, InSite restructured its operations and reduced its
staff by approximately 50% to enable it to conserve its financial resources.
Self-funded product development was reduced substantially and the Company
discontinued plans to establish its own sales and marketing organization. The
Company is attempting, through corporate partnering and other potential business
opportunities, to recognize the value of its late-stage product candidates and
its drug delivery technology.
In May 1996, InSite entered into an agreement with CIBA Vision whereby
InSite regained full U.S. marketing rights to InSite's PilaSite product
candidate for glaucoma. In exchange, CIBA Vision received royalty-bearing,
co-exclusive U.S. marketing rights to InSite's ToPreSite product candidate for
ocular inflammation/infection. CIBA Vision assumed all subsequent product
development, clinical and regulatory responsibility for ToPreSite. In addition,
CIBA Vision received royalty-bearing, co-exclusive U.S. marketing rights to
InSite Vision's ISV-205 product candidate for certain non-glaucoma-related
indications.
In July 1996, the Company entered into agreements with B&L pursuant to
which: (i) B&L has agreed to manufacture InSite product candidates at B&L's
facility in Tampa, Florida using equipment owned by InSite; B&L and InSite have
agreed to share the cost of certain leasehold improvements in connection with
the installation and operation of the equipment; (ii) B&L will receive, for a
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite; (iii) B&L and InSite have agreed to collaborate
to develop and sell a new DuraSite based eyedrop formulation; and (iv) B&L has
agreed to make a $2 million equity investment in the Company, $1.0 million of
which was received by the Company in August 1996, with the remaining amount,
subject to certain conditions, due in August 1997.
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<PAGE> 28
As a result of these agreements, the Company elected to vacate its
co-tenancy of a manufacturing clean room at another manufacturer's plant and in
June 1996 wrote-off the amounts it had previously capitalized related to that
facility. This one-time write-off resulted in a non-cash charge to the Company's
results of operations of $1.4 million which is reported as a loss on vacated
facility in the accompanying financial statements.
As of December 31, 1996, the Company's accumulated deficit was
approximately $66 million. There can be no assurance that InSite Vision will
ever achieve either significant revenues from product sales or profitable
operations.
RESULTS OF OPERATIONS
The Company had total revenues of $544,000, $65,000 and $112,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. The increase
from 1995 to 1996 was primarily attributable to the license fee received from
B&L. The Company earned royalty income of $44,000 $65,000 and $68,000 for the
years ended December 31, 1996, 1995 and 1994, respectively, from sales of
AquaSite by CIBA Vision. To date, the Company has not relied on royalty revenues
for funding its activities, nor has it received revenues from the sale of
products. The Company does not expect to receive significant product revenue or
royalties for several years, if at all.
Research and development expenses declined 32% in 1996 to $5.5 million
from $8.1 million in 1995 and 19% in 1995 from $9.9 million in 1994. The
decreases are primarily due to reduced personnel costs resulting from the 1995
restructuring described above and lower expenditures for human clinical studies
of the Company's product candidates. The Company presently anticipates that
research and development expenses will be higher in 1997 than in 1996.
The Company has re-prioritized its earlier stage development
activities, placing emphasis on ISV-900 for prognosis and diagnosis of glaucoma,
on ISV-205 for the prevention of steroid-induced glaucoma, on ISV-611 for
allergic conjunctivitis, and on ISV-120 for prevention of pterygium recurrence.
Later stage product development is expected to be conducted through corporate
partnering arrangements, however there can be no assurance that such
arrangements will be available on acceptable terms, or at all.
General and administrative expenses declined 24% during 1996 to $2.9
million from $3.8 million in 1995, and 23% in 1995 from $5.0 million in 1994. In
November 1995, the Company announced that it would not establish its own sales
and marketing organization and that it had made staff reductions in its
administration and manufacturing areas.
Interest and other income was $509,000, $450,000 and $1.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. These
fluctuations are due principally to changes in average cash balances. Interest
earned in the future will be dependent on the Company's funding cycles and
prevailing interest rates. Interest expense relates primarily to notes payable.
The Company incurred net losses of $8.8 million, $12.6 million and
$13.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company expects to incur substantial additional losses over
the next several years. The losses are expected to fluctuate from period to
period based primarily on the level of product development and clinical
activities.
LIQUIDITY AND CAPITAL RESOURCES
InSite Vision has financed its operations primarily through private
placements of preferred stock totaling $32.0 million, an October 1993 public
offering of common stock which resulted in net proceeds of approximately $30.0
million, a January 1996 private placement of common stock and warrants which
raised net proceeds of $4.7 million and an April 1996 public offering which
raised net proceeds of $8.1 million. The Company also received approximately
$1.0 million through a private placement
26
<PAGE> 29
transaction with B&L in 1996. At December 31, 1996, the Company had cash and
cash equivalents totaling $10.5 million. It is the Company's policy to invest
these funds in highly liquid securities, such as interest bearing money market
funds, Treasury and federal agency notes and corporate debt.
For the years ended December 31, 1996, 1995 and 1994, cash used for
operating activities and additions to capital equipment was $7.6 million, $12.7
million and $14.3 million, respectively. Of those amounts, $91,000, $1.7 million
and $2.2 million were for additions to laboratory and other property and
equipment in 1996, 1995 and 1994, respectively. The timing of future
expenditures will correspond to the timing of clinical trials of potential
products and additional product development.
The Company's future capital expenditures and requirements will depend
on numerous factors, including the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in the Company's
existing collaborative and licensing relationships, the ability of the Company
to establish additional collaborative arrangements, acquisition of new products
and technologies, the completion of commercialization activities and
arrangements, and the purchase of additional plant and equipment.
The Company anticipates no material capital expenditures to be incurred
for environmental compliance in fiscal year 1997. Based on the Company's good
environmental compliance record to date and its current compliance with
applicable environmental laws and regulations, environmental compliance is not
expected to have a material adverse effect on the Company's operations.
The Company believes that its cash and cash equivalents will be
sufficient to meet its operating expenses and cash requirements through 1997.
The Company expects to incur substantial additional development costs prior to
reaching profitability. As a result, InSite Vision will require substantial
additional funds and the Company may seek private or public equity investments,
and possible future collaborative agreements and research funding to meet such
needs. Even if the Company does not have an immediate need for additional cash,
it may seek access to the private or public equity markets if and when
conditions are favorable. There is no assurance that such additional funds will
be available for the Company to finance its operations on acceptable terms, if
at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and Report of
Independent Auditors are included on the pages which follow:
Page
----
Report of Independent Auditors 28
Consolidated Statements of Operations 29
Years Ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets - December 31, 1996 and 1995 30
Consolidated Statements of Stockholders' Equity 31
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows 32
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 33-37
27
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InSite Vision Incorporated
We have audited the accompanying consolidated balance sheets of InSite Vision
Incorporated as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of InSite
Vision Incorporated at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
January 24, 1997
28
<PAGE> 31
INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
License fee $ 500 $ $
Royalties 44 65 68
Contract research 44
-------- -------- --------
Total 544 65 112
Operating expenses:
Research and development 5,458 8,079 9,944
General and administrative 2,902 3,801 4,961
Loss on vacated facilities 1,412
Restructuring 1,031
-------- -------- --------
Total 9,772 12,911 14,905
Loss from operations (9,228) (12,846) (14,793)
Interest and other income 509 450 1,013
Interest expense (43) (226) (168)
-------- -------- --------
Net loss $ (8,762) $(12,622) $(13,948)
======== ======== ========
Net loss per share $ (0.72) $ (1.38) $ (1.55)
Shares used to calculate net loss per share 12,131 9,160 8,998
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
INSITE VISION INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(in thousands, except share and per share amounts) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,518 $ 871
Short-term investments 2,996
Prepaid expenses and other current assets 195 151
-------- --------
Total current assets 10,713 4,018
Property and equipment, at cost:
Laboratory and other equipment 4,416 4,151
Leasehold improvements 1,671 2,931
Furniture and fixtures 355 355
-------- --------
6,442 7,437
Accumulated depreciation 4,335 3,812
-------- --------
2,107 3,625
-------- --------
Total assets $ 12,820 $ 7,643
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 562 $ 452
Accrued liabilities 247 145
Accrued compensation and related expense 300 744
Current portion of notes payable 92 301
-------- --------
Total current liabilities 1,201 1,642
Deferred rent -- 62
Notes payable -- 92
Commitments
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
12,935,927 issued and outstanding at December 31, 1996;
9,252,136 issued and outstanding at December 31, 1995; 129 93
Additional paid-in capital 77,146 62,651
Other -- (3)
Accumulated deficit (65,656) (56,894)
-------- --------
Stockholders' equity 11,619 5,847
-------- --------
Total liabilities and stockholders' equity $ 12,820 $ 7,643
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDERS'
(dollars in thousands) STOCK CAPITAL OTHER DEFICIT EQUITY
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 89 $ 62,663 $ (581) $(30,324) $ 31,847
Issuance cost of initial public offering (36) (36)
Issuance of 140,001 shares of common stock 2 169 171
Unrealized loss on securities valuation (242) (242)
Compensation expense 161 161
Net Loss (13,948) (13,948)
--------------------------------------------------------
Balance, December 31, 1994 91 62,796 (662) (44,272) 17,953
Issuance of 164,166 shares of common stock 2 149 151
Unrealized gain on securities valuation 239 239
Adjustment of deferred compensation for 1993 (294) 294
stock option grants
Compensation expense 126 126
Net Loss (12,622) (12,622)
--------------------------------------------------------
Balance, December 31, 1995 93 62,651 (3) (56,894) 5,847
Issuance of 1,469,232 shares of common stock 15 4,671 4,686
and warrants to purchase 367,308 shares of
common stock in private placement
Issuance of 254,032 shares of common stock 2 768 770
from exercise of options and employee stock
purchases
Issuance of 1,750,000 shares of common stock 17 8,062 8,079
in public offering
Issuance of 210,527 shares of common stock to 2 994 996
Bausch & Lomb in private placement
Other 3 3
Net Loss (8,762) (8,762)
--------------------------------------------------------
Balance, December 31, 1996 $ 129 $ 77,146 $ -- $(65,656) $ 11,619
========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 34
INSITE VISION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (8,762) $(12,622) $(13,948)
Adjustments to reconcile net loss to net cash used by
operating activities:
Loss on vacated facilities 1,412
Depreciation and amortization 696 992 885
Amortization of deferred compensation 126 161
Changes in:
Prepaid expenses and other current assets (44) 555 223
Accounts payable and accrued liabilities (794) (101) 583
-------- -------- --------
Net cash used by operating activities (7,492) (11,050) (12,096)
INVESTING ACTIVITIES:
Purchase of short-term investments -- -- (14,868)
Maturity of short-term investments 3,000 7,510 12,390
Purchases of property and equipment (91) (1,687) (2,198)
-------- -------- --------
Net cash provided (used) by investing activities 2,909 5,823 (4,676)
FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease (301) (1,367) (326)
obligations
Proceeds from notes payable 1,207
Issuance of common stock, net 14,531 151 135
-------- -------- --------
Net cash provided (used) by financing activities 14,230 (1,216) 1,016
Net increase (decrease) in cash and cash equivalents 9,647 (6,443) (15,756)
Cash and cash equivalents, beginning of period 871 7,314 23,070
-------- -------- --------
Cash and cash equivalents, end of period $ 10,518 $ 871 $ 7,314
======== ======== ========
Supplemental disclosures:
Interest paid in cash $ 43 $ 229 $ 165
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
INSITE VISION INCORPORATED
Notes to Consolidated Financial Statements
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial
statements include the accounts of InSite Vision and its wholly owned United
Kingdom subsidiary, InSite Vision Limited. InSite Vision Incorporated (the
"Company" or "InSite Vision") is focused on developing ophthalmic drugs and
ophthalmic drug delivery systems. InSite Vision Limited was formed for the
purpose of holding and licensing intellectual property rights. All intercompany
accounts and transactions have been eliminated.
The Company has incurred losses since its inception and expects to
incur substantial additional development costs prior to reaching profitability,
including costs related to clinical trials and manufacturing expenses. As a
result, the Company will require substantial additional funds, and the Company
may seek research funding, private or public equity investments, and possible
future collaborative agreements to meet such needs. Even if the Company does not
have an immediate need for additional cash, it may seek access to the private or
public equity markets if and when conditions are favorable. There is no
assurance that such additional funds will be available for the Company to
finance its operations on acceptable terms, if at all.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents and Short-Term Investments. The Company
invests its excess cash in investment grade, interest-bearing securities. As of
December 31, 1996, cash equivalents consisted of money market mutual funds. As
of December 31, 1995, cash equivalents and short-term investments consisted of
money market mutual funds and notes issued by the United States Treasury. The
Company has not experienced any losses on such investments.
Management determines the classification of investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. At
December 31, 1996, the Company's entire portfolio of investments is classified
as available-for-sale pursuant to Statement of Financial Accounting Standards
No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities." These securities are stated at fair value based on quoted market
prices, with unrealized gains and losses reported in a separate component of
stockholders' equity. The Company considers highly liquid investments with
original maturities of three months or less as cash equivalents.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation. Depreciation of property and equipment is provided
over the estimated useful lives of the respective assets, which range from three
to five years, using the straight-line method. Leasehold improvements are
amortized over the lives of the related leases or their estimated useful lives,
whichever is shorter, using the straight-line method.
Net Loss per Share. Net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options are excluded as their effect is antidilutive.
Accounting for Employee Stock Options. The Company accounts for stock
options granted to employees and directors using the intrinsic value method and,
accordingly, does not recognize compensation expense for options granted to
employees and directors at an exercise price equal to the fair value of the
underlying common stock.
33
<PAGE> 36
2. LOSS ON VACATED FACILITIES/RESTRUCTURING EXPENSE
Loss on Vacated Facilities. As a result of a new manufacturing
agreement with Bausch and Lomb Incorporated (B&L), the Company ended its
relationship with its previous contract manufacturer and wrote-off its share of
equipment and leasehold improvements installed at the previous manufacturer's
plant. This act resulted in a one-time non-cash charge of $1.4 million which is
reported separately in the accompanying statement of operations.
Restructuring Expense. In November 1995, the Company implemented
certain changes in the structure of its operations. These changes included a
reduction in its work-force. Accordingly, the Company recorded a restructuring
charge of $1,031,000 in the fourth quarter of 1995. Such expenses included
termination benefits for 36 employees totaling $917,000, of which $393,000 was
paid during 1995, sublease losses of $107,000 and other costs of $7,000. As of
December 31, 1995, the remaining accrual amounted to $561,000, all of which was
paid in 1996.
3. LICENSES
The Company has a license agreement with CIBA Vision Ophthalmics (CIBA
Vision), an ophthalmic company which is an affiliate of CIBA-GEIGY Limited.
Under the terms of the agreement, CIBA Vision has co-exclusive rights to
manufacture and market AquaSite, ToPreSite and MethaSite in the U.S. and
AquaSite and MethaSite in Canada. The license agreement requires CIBA Vision to
pay royalties on net sales of the licensed products. The Company recognized
$44,000, $65,000 and $68,000 of royalty revenue for sales of AquaSite in 1996,
1995 and 1994, respectively.
In July 1996, the Company entered into agreements with Bausch and Lomb
Pharmaceuticals, Inc. (B&L) which provide for (i) B&L to receive, for a one-time
license fee of $500,000, an exclusive worldwide royalty-bearing license to
manufacture and market PilaSite and (ii) a collaboration between the Company and
B&L to develop and sell a new DuraSite based eye-drop formulation for which,
after development, the Company will issue an exclusive, worldwide, royalty
bearing license to B&L.
4. LEASE COMMITMENTS
The Company leases its facilities under noncancelable operating lease
agreements which expire in 2001. Rent expense was $605,000, $520,000 and
$504,000 for 1996, 1995 and 1994, respectively. As of December 31, 1996, the
aggregate future minimum payments under noncancelable leases are:
<TABLE>
<S> <C>
1997 $ 495,318
1998 471,715
1999 485,828
2000 499,941
2001 514,054
----- ----------
Total $2,466,856
</TABLE>
5. INCOME TAXES
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31, 1996 and 1995 are as follows (in
thousands):
34
<PAGE> 37
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $23,671 $20,300
Research and development credit carryforwards 2,195 1,928
Capitalized research and development 1,404 1,374
Depreciation 670 534
Other 122 88
------- -------
Total 28,062 24,224
Valuation allowance -28,062 -24,224
------- -------
Net deferred tax assets -- --
================================================================================
</TABLE>
The valuation allowance increased by $3.8 million during the year ended December
31, 1996.
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $65.0 million, which expire in the
years 2001 through 2011 and net operating loss carryforwards for state income
tax purposes of approximately $27.4 million which expire in the years 1997
through 2001. The Company also has federal research and development credit
carryforwards of approximately $2.2 million which expire in the years 2001
through 2011.
Utilization of the Company's federal net operating loss carryforwards and
research and development tax credits, respectively, are subject to an annual
limitation against taxable income in future periods due to the ownership change
limitations provided by the Internal Revenue Code of 1986. As a result of this
annual limitation, a portion of these carryforwards will expire before becoming
available for offset against taxable income. Additional losses and credits will
be subject to limitation if the Company incurs another change of ownership.
6. STOCKHOLDERS' EQUITY
In January 1996, InSite Vision received net proceeds of approximately $4.7
million from a private placement of 1,469,232 shares of its common stock and
367,308 warrants. Each warrant entitles its holder to purchase one share of the
Company's common stock for $3.25 per share until January 2001. In April 1996,
the Company received net proceeds of approximately $8.1 million from a public
offering of 1,750,000 shares of its common stock. In July 1996, the Company
entered into a stock purchase agreement with B&L pursuant to which B&L agreed to
make an equity investment of $2.0 million. In August 1996, the Company received
$1.0 million from B&L for the purchase of 210,527 shares of common stock. The
balance of the investment by B&L will be made in August 1997.
Stock Option Plan. At December 31, 1996, a total of 1,482,892 shares of common
stock were reserved under the 1994 Stock Plan for issuance upon the exercise of
options or by direct sale to employees, including officers, directors and
consultants. Options granted under the plan expire 10 years from the date of
grant and become exercisable at such times and under such conditions as
determined by the Company's Board of Directors (generally ratably over four
years). Activity under the 1994 Stock Plan has been as follows:
35
<PAGE> 38
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Weighted Average
Available Options Exercise Price of
for Grant Outstanding Option Price Shares Under Plan
--------- ----------- ------------ -----------------
Balance at January 1, 1994 435,396 1,050,857 $0.60 - 9.25
Additional Shares reserved 500,000
Granted -292,850 292,850 3.50 - 8.50
Exercised -120,343 0.60 - 4.12
Forfeited 28,903 -28,903 0.60 - 4.12
--------- ---------
Balance at December 31, 1994 671,449 1,194,461 0.60 - 9.25
Granted -901,413 901,413 2.25 - 4.75 $2.90
Exercised -139,873 0.60 - 3.00 .60
Forfeited 632,021 -632,021 0.60 - 8.50 4.73
--------- ---------
Balance at December 31, 1995 402,057 1,323,980 0.60 - 9.25
Granted -277,250 277,250 4.25 - 6.38 5.67
Exercised -243,145 0.60 - 5.00 3.01
Forfeited 85,219 -85,219 0.60 - 7.25 3.74
--------- ---------
Balance at December 31, 1996 210,026 1,272,866 $0.60 - 9.25
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and December 31, 1995, options to purchase 470,091
and 642,300 shares respectively were exercisable at prices ranging from $0.60 to
$9.25 per share. During 1995, 273,613 options to purchase shares were canceled
and regranted at a lower price per share. These options are shown above as
granted at the new price and forfeited at the original price.
Pursuant to the terms of the 1994 Stock Plan, generally each
non-employee director who is newly elected or appointed after October 25, 1993,
is granted an option to purchase 10,000 shares of common stock at a price per
share equal to the fair market value of the common stock on the grant date. Each
continuing non-employee director receives an annual grant of an option to
purchase 5,000 shares thereafter, provided he or she did not receive a
10,000-share grant in the same calendar year. Such options vest one year after
the grant date.
In September 1993, the president and a consultant of the Company were
granted options to purchase 215,000 shares of common stock at $5.00 per share,
which the Company determined was below the fair market value at the date of the
grant. The Company recognized $126,000 of compensation expense in 1995 and
$161,000 in 1994 related to these options. During 1995, the president resigned
and stock options covering 97,993 shares and related deferred compensation of
$294,000 were canceled.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting registration
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's
36
<PAGE> 39
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates ranging
from 5.875% to 6.58%; volatility factors for the expected market price of the
Company's common stock of 1.153 and 1.1494; and a weighted-average expected life
for the options of 4 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Net loss - as presented $ (8,762) $ (12,622)
Net loss - pro forma (9,240) (13,196)
Loss per share - as presented (0.72) (1.38)
Loss per share - pro forma (0.76) (1.44)
- -------------------------------------------------------------
</TABLE>
Employee Stock Purchase Plan. On April 1, 1994, employees of the Company began
participating in an Employee Stock Purchase Plan which provides the opportunity
to purchase common stock at prices not less than 85% of market value at the time
of purchase. During the years ended December 31, 1996, 1995 and 1994,
respectively, 10,887, 24,293 and 19,658 shares of common stock were issued
pursuant to this plan. An additional 78,395 shares are reserved for issuance
under this plan. The effects of the Stock Purchase Plan on the pro forma
disclosures above are not material.
37
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the
identification of Directors is hereby incorporated by reference from the
information under the caption "Proposal One-Election of Directors" in the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
or about June 2, 1997 (the "Proxy Statement").
The information required by this item with respect to the
identification of Executive Officers is contained in Item 1 of Part I of this
report under the caption "Executive Officers."
The information required by Item 405 of Regulation S-K regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby
incorporated by reference from the information under the caption "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference from the information under the caption "Executive Compensation and
Related Information" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by
reference from the information under the caption "Principal Stockholders" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by
reference from the information under the captions "Executive Compensation and
Related Information" and "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Financial Statements and Report of Independent Auditors are
included in a separate section of this Annual Report on Form 10-K.
38
<PAGE> 41
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are
not applicable or are not required or the required information to be set forth
therein is included in the Financial Statements or notes thereto included in a
separate section of this Annual Report on Form 10-K.
(3) Exhibits
The following exhibits are referenced or included in this report.
Number Exhibit Table
3.1(1) Restated Certificate of Incorporation.
3.2(1) Amended Bylaws.
4.1(4) Registration Rights Agreement, dated January 24, 1996
(the "Registration Rights Agreement"), between the
Registrant and the investors listed on Schedule 1
thereto.
4.2(4) Form of Warrant to Purchase Shares of Common
Stock between the Registrant and each of the
investors listed on Schedule 1 to the
Registration Rights Agreement.
10.1(2HH) 1993 Stock Plan of InSite Vision Incorporated,
as amended and Form of Nonstatutory Stock
Option Agreement (effective prior to October
18, 1993).
10.2(2HH) 1993 Stock Plan of InSite Vision Incorporated (the
"Plan") (effective October 18, 1993).
10.3(2HH) Form of Incentive Stock Option Agreement under the Plan.
10.4(2HH) Forms of Non-Statutory Stock Option Agreement under the
Plan.
10.5(2) InSite Vision Incorporated Employee Stock Purchase Plan.
10.6(2) Form of Indemnity Agreement Between the Registrant and
its directors and officers.
10.7(2) Form of Employee's Proprietary Information and
Inventions Agreement.
10.11(3H) Letter Agreement dated July 12, 1990 by and between the
Company and The Upjohn Company.
10.12(3H) License Agreement dated as of December 12, 1990 by and
between the Company and The Upjohn Company.
10.13(3H) License Agreement dated as of October 9, 1991
by and between the Company and CIBA Vision
Corporation, as amended October 9, 1991.
10.14(3H) Letter Agreement dated February 27, 1992 by and among
the Company, Columbia
Laboratories, Inc. and Joseph R. Robinson, as amended
October 23, 1992.
10.15(2H) Collaboration Agreement dated as of November 24, 1992
by and between the Company and British Bio-technology
Limited.
10.16(2H) Collaboration Agreement dated as of April 30, 1993 by
and between the Company and British Bio-technology
Limited.
10.17 Facilities Lease, dated September 1, 1996, between the
Registrant and Alameda Real Estate Investments.
10.18(1H) Agreement dated as of February 15, 1994 by and between
the Company and Timm A. Carpenter.
10.19(1HH) InSite Vision Incorporated 1994 Stock Option Plan
(Amended and Restated as of January 1, 1994).
10.20(1HH) Form of InSite Vision Incorporated Notice of Grant of
Stock Option and Stock Option Agreement, with Addenda.
10.21(1HH) Form of InSite Vision Incorporated Notice of Automatic
Option Grant and Non-Employee Director Option Agreement.
10.22(1) InSite Vision Incorporated 1994 Employee Stock Purchase
Plan.
39
<PAGE> 42
10.23(1) Form of InSite Vision Incorporated Stock Purchase
Agreement.
10.24(1) Form of InSite Vision Incorporated Employee Stock
Purchase Plan
Enrollment/Change Form.
10.25(4) Letter Agreement dated February 3, 1995 between the
Company and David G. Harper.
10.26(4) Settlement Agreement and General Release dated March 3,
1995 between the Company and Clifford Orent.
10.27(5) Common Stock Purchase Agreement dated January
19, 1996 between the Registrant and the
Investors listed on Schedule 1 thereto.
10.28(6H) ISV-205 License Agreement dated May 28, 1996 by and
between the Company and CIBA Vision Ophthalmics.
10.29(6H) ToPreSite License Agreement dated May 28, 1996 by and
between the Company and CIBA Vision Ophthalmics.
10.30(6H) BetaSite7 Contract Manufacturing Agreement
dated July 18, 1996 by and between the Company
and Bausch & Lomb Pharmaceuticals, Inc.
10.31(6H) PilaSite7 License Agreement dated July 18,
1996 by and between the Company and Bausch &
Lomb Pharmaceuticals, Inc.
10.32(6H) Timolol Development Agreement dated July 18,
1996 by and between the Company and Bausch &
Lomb Pharmaceuticals, Inc.
10.33(6H) Stock Purchase Agreement dated July 18, 1996
by and between the Company and Bausch & Lomb
Pharmaceuticals, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included in Part IV of this Annual
Report on Form 10-K under the caption "Signatures").
27 Financial Data Schedule.
(1) Incorporated by reference to exhibit of the same number in the
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
(2) Incorporated by reference to exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No.
33-68024) as filed with the Securities and Exchange Commission on
August 27, 1993.
(3) Incorporated by reference to exhibit of the same number in Amendment
No. 1 the Company's Registration Statement on Form S-1 (Registration
No. 33-68024) as filed with the Securities and Exchange Commission on
September 16, 1993.
(4) Incorporated by reference to exhibit of the same number in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(5) Incorporated by reference to exhibit 10.25 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to exhibit of the same number in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(H) Confidential treatment has been granted with respect to certain
portions of this agreement.
(HH) Management contract or compensatory plan.
((b)) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the fourth
quarter of fiscal 1996.
40
<PAGE> 43
(c) Exhibits
See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules
See (a)(2) above.
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.
Dated: March 4, 1997
INSITE VISION INCORPORATED
By: /s/ S. Kumar Chandrasekaran
----------------------------------
S. Kumar Chandrasekaran, Ph.D.
Chairman of the Board,
Chief Executive Officer,
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of InSite Vision
Incorporated, a Delaware corporation, do hereby constitute and appoint S. Kumar
Chandrasekaran the lawful attorney and agent, with power and authority to do any
and all acts and things and to execute any and all instruments which said
attorney and agent determines may be necessary or advisable or required to
enable said corporation to comply with the Securities Exchange Act of 1934, as
amended, and any rules or regulations or requirements of the Securities and
Exchange Commission in connection with this Annual Report on Form 10-K. Without
limiting the generality of the foregoing power and authority, the powers granted
include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Annual Report on Form
10-K, to any and all amendments, and to any and all instruments or documents
filed as part of or in conjunction with this Annual Report on Form 10-K or
amendments or supplements thereof, and each of the undersigned hereby ratifies
and confirms all that said attorney and agent shall do or cause to be done by
virtue hereof. This Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
41
<PAGE> 44
Name Capacity Date
---- -------- ----
/s/ S. Kumar Chandrasekaran Chairman of the Board, March 4, 1997
- ------------------------------------- Chief Executive Officer,
S. Kumar Chandrasekaran, Ph.D. and Chief Financial Officer
/s/ Mitchell H. Friedlaender Director March 4, 1997
- -------------------------------------
Mitchell H. Friedlaender, M. D.
/s/ Grant M. Inman Director March 4, 1997
- -------------------------------------
Grant M. Inman
/s/ John E. Lucas Director March 4, 1997
- -------------------------------------
John E. Lucas
/s/ Jon S. Saxe Director March 4, 1997
- -------------------------------------
Jon S. Saxe
/s/ Anders P. Wiklund Director March 4, 1997
- -------------------------------------
Anders P. Wiklund
42
<PAGE> 1
EXHIBIT 10.17 - FACILITIES LEASE
MARINA VILLAGE
INDUSTRIAL GROSS OFFICE LEASE
BASIC LEASE INFORMATION
Date: September 1, 1996
Landlord: ALAMEDA REAL ESTATE INVESTMENTS,
a California limited partnership
Tenant: INSITE VISION INCORPORATED, Lease Reference
a Delaware corporation
<TABLE>
<S> <C> <C>
Premises and Building: Approximately 18,869 rentable square feet (rsf) in 965 Atlantic Paragraph 1
Avenue and approximately 10,533 rsf in 2020 Challenger Drive,
Alameda, California
Term Commencement: January 1, 1997 Paragraph 2
Term Expiration: December 31, 2001 Paragraph 2
Base Rent: Paragraph 3(a)
965 Atlantic Avenue 2020 Challenger Dr. Total
1/1/97-12/31/97 $24,661.78/month $13,471.71/month $38,133.49
1/1/98-12/31/98 $25,416.54/month $13,893.03/month $39,309.57
1/1/99-12/31/99 $26,171.30/month $14,314.35/month $40,485.65
1/1/00-12/31/00 $26,926.06/month $14,735.67/month $41,661.73
1/1/01-12/31/06 $27,680.82/month $15,156.99/month $42,837.81
Tenant's Percentage Share: 965 Atlantic Premises - 18,869 rsf ) 23,911 rsf = 78.91% Paragraph 4(a)
2020 Challenger Premises - 10,533 rsf ) 20,254 rsf = 31.54%
Base Year: 1997 Paragraph 4(a)
Use: Research, development and light manufacturing with ancillary office. Paragraph 6
Security Deposit: None required. Paragraph 15
Tenant's Address for Notices INSITE VISION INCORPORATED Paragraph 19
965 Atlantic Avenue
Alameda, California 94501
Landlord's Address for Notices Paragraph 19
Alameda Real Estate Investments With a Copy To:
c/o Vintage Properties Marina Village
314 Lytton Avenue 1150 Marina Village Parkway
Palo Alto, CA 94301 Suite 100
Attn: Joseph R. Seiger Alameda, CA 94501
Attn: Property Manager
Exhibit(s) and Addendum(s): Paragraph 22
</TABLE>
43
<PAGE> 2
Exhibit A: Diagram of leased Premises
Addendum
The provisions of the Lease identified above in the margin are those provisions
where references to particular Basic Lease Information appear. Each such
reference shall incorporate the applicable Basic Lease Information. In the event
of any conflict between any Basic Lease Information and the Lease, the latter
shall control.
TENANT: LANDLORD:
INSITE VISION INCORPORATED, ALAMEDA REAL ESTATE INVESTMENTS,
a Delaware corporation a California limited partnership
By: Vintage Alameda Investments, LP, a
California Limited partnership,
Operating General Partner
By: Vintage Properties - Alameda
Commercial, a California
corporation, Managing General
Partner
By: /s/ Michael D. Baer By: /s/ Joseph R. Seiger
----------------------------- -----------------------------
Its: Vice President Its: President
---------------------------- ----------------------------
MARINA VILLAGE
INDUSTRIAL GROSS
OFFICE TECH
LEASE
THIS LEASE, dated as of September 1, 1996, for purposes of reference only, is
made and entered into by and between ALAMEDA REAL ESTATE INVESTMENTS, a
California limited partnership ("Landlord"), and INSITE VISION INCORPORATED, a
Delaware corporation ("Tenant").
WITNESSETH
1. Premises. Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord for the term of this Lease and at the rental and upon the
conditions set forth below, the premises described in the Basic Lease
Information and identified on the diagram attached hereto as Exhibit A.
Landlord and Tenant agree that the amount of rentable square feet as
set forth in the Basic Lease Information, shall be binding and
conclusive for all purposes of this Lease. Subject to any obligations
of Landlord as set forth below relating to improvement of the premises,
Tenant shall accept the premises in its "as-is" condition at the
commencement of the term. The premises are located within the building
(the "Building") commonly known as described in the Basic Lease
Information.
2. Term.
a. The term of this Lease shall commence and, unless sooner terminated
as hereinafter provided, shall end on the dates respectively specified
in the Basic Lease Information. If Landlord, for any reason whatsoever,
cannot deliver possession of the premises to Tenant at the commencement
of the term, this Lease shall not be void or voidable, nor shall
44
<PAGE> 3
Landlord be liable to Tenant for any loss or damage resulting
therefrom, but in that event, subject to any contrary provisions in any
agreement with Landlord related to the initial improvement of the
premises, rental shall be waived for the period between commencement of
the term and the time when Landlord can deliver possession. If, for any
reason beyond Landlord's reasonable control, Landlord is unable to
obtain necessary governmental approvals to complete and deliver
possession of the premises to Tenant, then Landlord may, upon notice to
Tenant, terminate this Lease and both parties shall be relieved of any
and all obligations hereunder.
b. Subject to a mutually agreed upon time frame, Landlord shall
coordinate and pay the costs of recarpeting and repainting Tenant's 965
Atlantic premises and provide turnkey improvements with Tenant's 2020
Challenger premises; provided, however Landlord's maximum expenditure
towards such improvements shall be $3.00 per rsf of Tenant leased
premises, or $88,206.00. Additionally, Landlord agrees to reimburse
Tenant's leasing consultant, CB Commercial, $2.00 per rsf of Tenant's
leased premises, or $58,804.00 within 15 days of term commencement
under the Lease.
3. Rent.
a. Tenant shall pay to Landlord as rental the amount specified in the
Basic Lease Information as the Base Rent, payable in advance on the
commencement of the term and on or before the first day of each and
every successive calendar month during the term. If the term commences
on other than the first day of a calendar month, the first payment of
rent shall be appropriately prorated on the basis of a 30-day month.
The anniversary date for rental increases as set forth in the Basic
Lease Information shall be the first calendar day of the month in which
the Lease term commenced. If the last day of the term falls on a date
other than the last day of the month, then the term shall be extended
so that the last day of the term shall be the last calendar day of the
month in which the term would otherwise end.
b. Tenant shall pay, as additional rent, all amounts of money required
to be paid to Landlord by Tenant under this lease in addition to
monthly rent, whether or not the same be designated "additional rent."
If such amounts are not paid at the time provided in this Lease, they
shall nevertheless be collectable as additional rent with the next
installment of monthly rent thereafter falling due, but nothing herein
contained shall be deemed to suspend or delay the payment of any amount
of money at the time the same becomes due and payable hereunder, or
limit any other remedy of Landlord.
[SEE ADDENDUM TO LEASE]
c. Tenant hereby acknowledges that late payment by the Tenant to
Landlord of rent and other amounts due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which
will be extremely difficult to ascertain. Such costs include, but are
not limited to, processing and accounting charges, and late charges
which may be imposed on Landlord by the terms of any trust deed
covering the premises. Accordingly, if any installments of rent or any
other sums due from Tenant shall not be received by Landlord when due,
then Tenant shall pay to Landlord a late charge equal to six percent
(6%) of such overdue amount. The parties hereby agree that such late
charges represent a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant. Acceptance of such late
charge by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
[SEE ADDENDUM TO LEASE]
d. Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until the date paid at the rate of ten
percent (10%) per annum or, if a higher rate is legally permissible, at
the highest rate legally permitted, provided that interest shall not be
payable on late charges incurred by Tenant nor on any amounts upon
which late charges are paid by Tenant to the extent such interest would
cause the total interest to be in excess of that legally permitted.
Payment of interest shall not excuse or cure any default hereunder by
Tenant.
e. All payments due from Tenant to Landlord hereunder shall be made to
Landlord without deduction or offset in lawful money of the United
States of America at Landlord's address for notices hereunder, or to
such other person or at such other place as Landlord may from time to
time designate in writing to Tenant.
4. Taxes and Operating Expenses.
[SEE ADDENDUM TO LEASE]
a. For each calendar year during the term after the year specified in
the Basic Lease Information as the Base Year, Tenant shall pay its
percentage share, as specified in the Basic Lease Information, of the
increase in Property Taxes over
45
<PAGE> 4
Base Property Taxes and its percentage share of the increase in
Operating Expenses for such calendar year over Base Operating Expenses.
For the purposes hereof, "Property Taxes" shall mean all real property
taxes and assessments or governmentally imposed fees or charges (and
any tax levied wholly or partly in lieu thereof) levied, assessed,
confirmed, imposed or which have become a lien against the Building
(which for the purposes of defining "Property Taxes" shall include the
land underlying the Building), and "Operating Expenses" shall mean: (1)
all costs of management, operation, maintenance, and repair of the
Building, (2) the cost of all insurance maintained by Landlord with
respect to the Building and (3) the share allocable to the Building of
dues and assessments payable under any reciprocal easement or common
area maintenance agreements or declaration or by any owners'
associations affecting the Building. "Base Property Taxes" shall mean
those Property Taxes payable during the fiscal year ending in June of
the Base Year and "Base Operating Expenses" shall mean Operating
Expenses incurred by Landlord during the Base Year. Operating Expenses
for both the Base Year and each subsequent calendar year shall be
adjusted to equal Landlord's reasonable estimate of Operating Expenses
had the total rentable area of the Building been 100% occupied.
b. In the event the Building is not separately assessed for tax
purposes, then the Property Taxes to be paid by Tenant shall be
Tenant's percentage share of the product obtained by multiplying the
total of the real property taxes and assessments levied against the tax
parcel of which the Building is a part by a fraction, the numerator of
which is the rentable area of the Building and the denominator of which
is total rentable area of all improvements located within the tax
parcel of which the Building is a part.
c. Tenant shall pay to Landlord each month at the same time and in the
same manner as monthly rent 1/12th of Landlord's estimate of the
increase in Property Taxes and Operating Expenses from Base Property
Taxes and Base Operating Expenses from the then current calendar year.
Within 90 days after the close of each calendar year, or as soon after
such 90-day period as practicable, Landlord shall deliver to Tenant a
statement of actual Property Taxes and Operating Expenses for such
calendar year. If on the basis of such statement Tenant owes an amount
that is less than the estimated payments for such calendar year
previously made by Tenant, Landlord shall refund such excess to Tenant
within 30 days of delivery of such statement. If on the basis of such
statement Tenant owes an amount that is more than the estimated
payments for such calendar year previously made by Tenant, Tenant shall
pay the deficiency to Landlord within 30 days after delivery of the
statement. The obligations of Landlord and Tenant under this
subparagraph with respect to the reconciliation between estimated
payments and actual Property Taxes and Operating Expenses for the last
year of the term shall survive the termination of the Lease.
5. Other Taxes. Tenant shall pay or reimburse Landlord for any taxes upon,
measured by or reasonably attributable to the cost or value of Tenant's
equipment, furniture, fixtures, and other personal property located in
the premises or leasehold improvements made in or to the premises at
Tenant's expense; for any taxes, if any, measured by or reasonably
attributable to Tenant Improvements paid for by Landlord or Tenant in
excess of $30.00 per square foot; for any taxes, assessments, fees, or
charges imposed by any public authority or private community
maintenance association upon or by reason of the development,
possession, use or occupancy of the premises or the parking facilities
used by Tenant in connection with the premises; and for any gross
receipts tax imposed with respect to the rental payable hereunder.
[SEE ADDENDUM TO LEASE]
6. Use.
a. The premises shall be used and occupied by Tenant solely for the use
set forth in the Basic Lease Information. Tenant shall, at Tenant's
expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, and requirements in effect during the term
regulating Tenant's activities or the use by Tenant of the premises.
Tenant shall not use or permit the use of the premises in any manner
that will tend to create waste or a nuisance, or which shall tend
unreasonably to disturb other tenants of the Building or adjacent
buildings, nor shall Tenant place or maintain any signs on or visible
from the exterior of the premises without Landlord's written consent,
or use any corridors, sidewalks, or other areas outside of the premises
for storage or any purpose other than access to the premises. Except as
provided in paragraph 6(b) below, Tenant shall not use, keep, or permit
to be used or kept on the premises any foul or noxious gas or
substance, nor shall Tenant do or permit to be done anything in and
about the premises, either in connection with activities hereunder
expressly permitted or otherwise, which would cause a cancellation of
any policy of insurance (including fire insurance) maintained by
Landlord in connection with the premises or the Building or which would
violate the terms of any covenants, conditions, or restrictions
affecting the Building or the land on which it is located.
b. Tenant shall not cause, or allow anyone else to cause, any
hazardous, toxic, or radioactive materials (collectively "Hazardous
Materials") to be used, generated, stored, or disposed of on or about
the premises or the Building without the prior written consent of
Landlord, which consent may be withheld in the sole discretion of
Landlord and which consent may be revoked at any time. Tenant shall
strictly comply with all statutes, laws, ordinances, rules,
regulations, and
46
<PAGE> 5
precautions now or hereafter mandated or advised by any federal, state,
local or other governmental agency with respect to the use, generation,
storage, or disposal of Hazardous Materials. As herein used, Hazardous
Materials shall include, but not be limited to, those materials
identified in Sections 66680 through 66685 of Title 22 of the
California Administrative Code, Division 4, Chapter 30, as amended from
time to time, and those substances defined as "hazardous substances,"
"hazardous materials," "hazardous wastes," or other similar
designations in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et
seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801 et seq. and any other governmental statutes, laws, ordinances,
rules, regulations, precautions.
7. Utilities.
a. Tenant shall pay for all water, sewer, gas, electricity, heat,
cooling, energy, telephone, refuse collection, alarm monitoring
services, and other utility-type services furnished to Tenant or the
premises, together with all related installation or connection charges
or deposits. Wherever it is practical to do so such services shall be
separately metered or charged to Tenant by the provider thereof and
paid for directly by Tenant. To the extent any of the foregoing
services are provided by Landlord, Tenant shall reimburse Landlord for
all actual out-of-pocket costs incurred by Landlord in connection with
the provision of such services as billed by the provider thereof based
on Landlord's reasonable estimate of the level of Tenant's use or
consumption of such services. Landlord shall bill Tenant for such
services as incurred and payment shall be made by Tenant within ten
(10) days after submittal of Landlord's statement.
[SEE ADDENDUM TO LEASE]
b. Landlord shall not be in default hereunder or be liable for any
damages directly or indirectly resulting therefrom, and there shall not
be any rent abatement, by reason of any interruption or curtailment
whatsoever in utility services which is due to fire, accident, strike,
governmental authority, act of God or other causes beyond the
reasonable control of Landlord or any temporary interruption in such
services which is necessary to the making of alterations, repairs or
improvements to the Buildings or any part of it.
8. Maintenance, Repairs and Alterations.
[SEE ADDENDUM TO LEASE]
a. Subject to the provisions of paragraph 10 below, and except for
damages caused by Tenant, its agents or invitees, Landlord shall keep
in good condition and repair the foundations and exterior walls and
roof of the Building and all common areas within the Building not
leased to tenants. Tenant expressly waives the benefits of any statute
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 premises or the Building in good order, condition,
and repair.
[SEE ADDENDUM TO LEASE]
b. Tenant shall, at Tenant's expense, maintain the interior portion of
the premises (including, but not limited to, all plumbing and
electrical connections, outlets and light bulbs) in good condition and
repair. If Tenant fails to do so, Landlord may, but shall not be
required to, enter the premises and put them in the same condition as
upon the commencement of the Lease term, and Landlord's out-of-pocket
costs thereof shall automatically become due and payable as additional
rent. Tenant shall be responsible for the provision, at its own
expense, of appropriate janitorial service for the premises. Tenant
shall also cause to be maintained, at its expense and in good operating
condition and repair, all heat, ventilating, and air conditioning
equipment installed in the premises. If Landlord so elects, Tenant
shall retain the services of Landlord or a maintenance company retained
by it to perform maintenance of Tenant's heating, ventilating and air
conditioning equipment and shall reimburse Landlord for the cost
thereof upon demand. At the expiration of the term Tenant shall deliver
up possession of the premises in good condition and repair, only
ordinary wear and tear excepted.
[SEE ADDENDUM TO LEASE]
c. Tenant shall not, without Landlord's prior consent, make any
alterations, improvements, or additions in or about the premises. In
requesting Landlord's consent, Tenant shall submit to Landlord complete
drawings and specifications describing such work and the identify of
the proposed contractor. As a condition to giving such consent,
Landlord may, among other things, require that Tenant remove any such
alterations, improvements or additions at the expiration of the term,
and restore the premises to their prior condition. Before commencing
any work relating to alterations, additions, or improvements affecting
the premises, Tenant shall notify landlord of the expected date of
commencement thereof and of the anticipated cost thereof, and shall
furnish such information as shall reasonably be requested by Landlord
substantiating
47
<PAGE> 6
Tenant's ability to pay for such work. Landlord shall then have the
right at any time and from time to time to post and maintain on the
premises such notices as Landlord reasonably deems necessary to protect
the premises and Landlord from mechanics' liens or any other liens. In
any event, Tenant shall pay when due all claims for labor or materials
furnished to or for Tenant at or for use in the premises. Tenant shall
not permit any mechanics' liens to be levied against the premises for
any labor or material furnished to Tenant or claimed to have been
furnished to Tenant or to Tenant's agents or contractors in connection
with work of any character performed or claimed to have been performed
on the premises by or at the direction of Tenant. All alterations,
improvements, or additions in or about the premises performed by or on
behalf of Tenant shall be done in a first-class, workmanlike manner,
shall not unreasonably lessen the value of the leasehold improvements
in the premises, and shall be completed in compliance with all
applicable laws, ordinances, regulations, and orders of any
governmental authority having jurisdiction thereover, as well as the
requirements of insurers of the premises and the Building. Upon
Landlord's request, Tenant shall remove any contractor, subcontractor,
or material supplier from the premises and the Building if the work or
presence of such person or entity results in labor disputes in or about
the Building or the Marina Village Project, or damage to the premises,
Building or Project. Unless Landlord requires their removal as set
forth above, all alterations, improvements or additions which may be
made on the premises shall become the property of Landlord and remain
upon and be surrendered with the premises at the expiration of the
term; provided, however, that Tenant's machinery, equipment and trade
fixtures, other than any which may be affixed to the premises so that
they cannot be removed without material damage to the premises, shall
remain the property of Tenant and may be removed by Tenant provided
further Tenant shall be responsible for repairing all damage to the
premises caused by such removal.
9. Insurance and Indemnity.
[SEE ADDENDUM TO LEASE]
a. Tenant shall obtain and maintain during the term of this Lease
comprehensive general liability insurance with combined single limit
for personal injury and property damage in a form and with carriers
acceptable to Landlord in an amount not less than $1,000,000, and
employer's liability and workers' compensation insurance as required by
law. Tenant's comprehensive general liability insurance policy shall be
endorsed to provide that (i) it may not be canceled or altered in such
a manner as adversely to affect the coverage afforded thereby without
30 days' prior written notice to Landlord, (ii) Landlord is named as
additional insured, (iii) the insurer acknowledges acceptance of the
mutual waiver of claims by Landlord and Tenant pursuant to subparagraph
(b) below, and (iv) such insurance is primary with respect to Landlord
and that any other insurance maintained by Landlord is excess and
noncontributing with such insurance. If, in the opinion of Landlord's
insurance adviser, based on a substantial increase in recovered
liability claims generally, the specified amounts of coverage are no
longer adequate, such coverage shall be appropriately increased. Prior
to the commencement of the term, Tenant shall deliver to Landlord a
duplicate of such policy or a certificate thereof to Landlord for
retention by it, with endorsements, and at least 30 days prior to the
expiration of such policy of any renewal thereof, Tenant shall deliver
to Landlord a replacement or renewal binder, followed by duplicate
policy or certificate within a reasonable time thereafter. If Tenant
fails to obtain such insurance or to furnish Landlord any such
duplicate policy or certified as herein required, Landlord may, at its
election, without notice to Tenant and without any obligation to do so,
procure and maintain such coverage and Tenant shall reimburse Landlord
on demand as additional rent for any premium so paid by Landlord.
b. Landlord hereby waives all claims against Tenant, and Tenant's
officers, directors, partners, employees, agents and representatives
for loss or damage to the extent that such loss or damage is insured
against under any valid and collectible insurance policy insuring
Landlord or would have been insured against but for any deductible
amount under any such policy, and Tenant waives all claims against
Landlord including Landlord's officers, directors, partners, employees,
agents, and representatives for loss or damage to the extent such loss
or damage is insured against under any valid and collective insurance
policy insuring Tenant or required to be maintained by Tenant under
this Lease, or would have been insured against but for any deductible
amount under any such policy.
[SEE ADDENDUM TO LEASE]
c. As this Lease does not involve the public interest and insurance is
available to Tenant which will protect it against such claims, damage,
injury or death, Tenant hereby waives all claims against Landlord for
damage to any property or injury to or death of any person in, upon or
about the premises or the Building arising at any time and from any
cause. Tenant shall hold Landlord harmless from and defend Landlord
against all claims (except such as arises from the sole negligence or
willful misconduct of Landlord, its agents, employees or contractors)
(i) for damage to any property or injury to or death of any person
arising from the use of the premises by Tenant, or (ii) arising from
the negligence or willful misconduct of Tenant, its employees, agents,
or contractors in, upon or about those portions of the Building other
than the premises. The foregoing indemnity obligation of Tenant shall
include reasonable attorneys' fees, investigation costs, and
48
<PAGE> 7
all other reasonable costs and expenses incurred by Landlord from the
first notice that any claim or demand is to be made or may be made. The
provisions of this paragraph 9 shall survive the termination of this
Lease with respect to any damage, injury, or death occurring prior to
such termination.
[SEE ADDENDUM TO LEASE]
10. Damage or Destruction.
a. If during the term the premises are totally or partially destroyed,
or any other portion of the Building is damaged in such a way that
Tenant's use of the premises is materially interfered with, from a risk
which is wholly covered by insurance, Landlord shall proceed with
reasonable diligence to repair the damage or destruction and this Lease
shall not be terminated; provided, however, that if in the opinion of
Landlord's architect the work of repair cannot be completed in 90 days
Landlord may at its election terminate the Lease by notice given to
Tenant.
[SEE ADDENDUM TO LEASE]
b. If during the term the premises are totally or partially destroyed,
or any other portion of the Building is damaged in such a way that
Tenant's use of the premises is materially interfered with, from a risk
which is not wholly covered by insurance, Landlord may at its election
by notice given to Tenant restore the premises or terminate this Lease.
c. In case of destruction or damage which materially interferes with
Tenant's use of the premises, if this Lease is not terminated as above
provided, rent shall be abated during the period required for the work
of repair based upon the degrees of interference with Tenant's use of
the premises. Except for abatement of rent, Tenant shall have no claim
against Landlord for any loss suffered by Tenant due to damage or
destruction of the premises or any work of repair undertaken as herein
provided. Tenant expressly waives the provisions of Sections 1932 and
1933(4) of the California Civil Code.
[SEE ADDENDUM TO LEASE]
11. Eminent Domain. If all or any part of the premises shall be taken as a
result of the exercise of power of eminent domain, this Lease shall
terminate as to the part so taken as of the date of taking, and in the
case of a partial taking, either Landlord or Tenant shall have the
right to terminate this Lease as to the balance of the premises by
notice to the other within thirty (30) days after such date if the
portion of the premises taken shall be of such extent and nature as
substantially to handicap, impede or impair Tenant's use of the balance
of the premises for Tenant's purposes. In the event of any taking,
Landlord shall be entitled to any and all compensation, damages,
income, rent, awards, or any interest therein whatsoever which may be
paid or made in connection therewith, and Tenant shall have no claim
against Landlord for the value of any unexpired term of this Lease or
otherwise. In the event of a partial taking of the premises which does
not result in a termination of this Lease, the monthly rental
thereafter to be paid shall be equitably reduced on a square footage
basis.
12. Assignment and Subletting
a. Tenant shall not assign this Lease or any interest herein or sublet
the premises or any part thereof without the prior consent of Landlord,
which consent shall not be unreasonably withheld; Tenant shall not
hypothecate this Lease or any interest herein or permit the use of the
premises by any party other than Tenant without the prior consent of
Landlord, which consent may be withheld by Landlord in its absolute
discretion. This Lease shall not, nor shall any interest herein, be
assignable as to the interest of Tenant by operation of law without the
consent of Landlord. Any of the foregoing acts without such consent
shall be void and shall, at the option of Landlord, terminate this
Lease. In connection with each consent requested by Tenant, Tenant
shall submit to Landlord the terms of the proposed transaction, the
identity of the parties to the transaction, the proposed documentation
for the transaction, current financial statements of any proposed
assignee or sublessee and all other information reasonably requested by
Landlord concerning the proposed transaction and the parties involved
therein.
b. Without limiting the other instances in which it may be reasonable
for Landlord to withhold its consent to an assignment or subletting,
Landlord and Tenant acknowledge that it shall be reasonable for
Landlord to withhold its consent in the following instances:
(1) if the proposed assignee or sublessee is a governmental
agency;
(2) if, in Landlord's reasonable judgment, the use of the premises
by the proposed assignee or sublessee would entail any
alterations which would lessen the value of the leasehold
improvements in the premises, or would require increased
services by Landlord;
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<PAGE> 8
[SEE ADDENDUM TO LEASE]
(3) if, in Landlord's reasonable judgment, the financial worth of
the proposed assignee or sublessee does not meet the credit
standards applied by Landlord for other tenants under leases
with comparable terms, or the character, reputation or
business of the proposed assignee or sublessee is not
consistent with the quality of the other tenancies in the
Building;
[SEE ADDENDUM TO LEASE]
(4) in the case of a subletting of less than the entire premises,
if the subletting would result in the division of the premises
into more than two subparcels, would create a subparcel of a
configuration that is not suitable for normal leasing
purposes, or would require access to be provided through space
leased or held for lease to another tenant or improvements to
be made outside of the premises; or
(5) if, at the time consent is requested or at any time prior to
the granting of consent, Tenant is in default under the Lease
or would be in default under the Lease but for the pendency of
any grace or cure period under paragraph 13 below.
c. If at any time or from time to time during the term of this Lease
Tenant desires to sublet all or any part of the premises, Tenant shall
give notice to Landlord setting forth the terms of the proposed
subletting and the space so proposed to be sublet. Landlord shall have
the option, exercisable by notice given to Tenant within 20 days after
Tenant's notice is given, either to sublet from Tenant such space at
the rental and other terms set forth in Tenant's notice, or, if the
proposed subletting is for the entire premises for a sublet term ending
within the last year of the term of this Lease, to terminate this
Lease. If Landlord does not exercise such option, Tenant shall be free
to sublet such space to any third party on the same terms set forth in
the notice given to Landlord, subject to obtaining Landlord's prior
consent as hereinabove provided.
d. As used in this paragraph 12, the term "assign" or "assignment"
shall include, without limitation, any sale, transfer, or other
disposition of all or any position of Tenant's estate under this Lease,
whether voluntary or involuntary, and whether by operation of law or
otherwise including any of the following:
[SEE ADDENDUM TO LEASE]
(1) If Tenant is a corporation: (i) any dissolution, merger,
consolidation, or other reorganization of Tenant or (ii) a
sale of more than 50% of the value of the assets of Tenant or
(iii) if Tenant is a corporation with fewer than 500
shareholders, sale or other transfer of a controlling
percentage of the capital stock of Tenant. The phrase
"controlling percentage" means the ownership of, and the right
to vote, stocks possessing at least 50% of the total combined
voting power of all classes of Tenant's stock issues,
outstanding and permitted to vote for the election of
directors;
(2) If Tenant is a trust the transfer of more than 50% of the
beneficial interest of Tenant, or the dissolution of the
trust;
(3) If Tenant is a partnership or joint venture, the withdrawal,
or the transfer of the interest of any general partner or
joint venturer or the dissolution of the partnership or joint
venture;
(4) If Tenant is composed of tenants-in-common, the transfer of
interest of any cotenants or the partition or dissolution of
the cotenancy.
e. No sublessee (other than Landlord if it exercises its option
pursuant to subparagraph (c) above) shall have a right further to
sublet, and any assignment by a sublessee of its sublease shall be
subject to Landlord's prior consent in the same manner as if Tenant
were entering into a new sublease.
[SEE ADDENDUM TO LEASE]
f. In the case of an assignment, one half of all sums or other economic
consideration received by Tenant as a result of such assignment shall
be paid to Landlord after first deducting the unamortized cost of
leasehold improvements paid for by Tenant, and the cost of any real
estate commissions incurred in connection with such assignment. In the
event such consideration is received by Tenant in installments, the
portion of each installment to be paid to Landlord shall be determined
by multiplying the installment by a fraction, the numerator of which is
the total amount of the foregoing
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<PAGE> 9
permitted deductions and the denominator of which is the total
consideration receivable by Tenant as a result of such assignment.
[SEE ADDENDUM TO LEASE]
g. In the case of a subletting, one half of all sums or economic
consideration received by Tenant as a result of such subletting shall
be paid to Landlord after first deducting (i) the rental due hereunder,
prorated to reflect only rental allocable to the sublet portion of the
premises, (ii) the cost of leasehold improvements made to the sublet
portion of the premises at Tenant's cost, amortized over the term of
this Lease except for leasehold improvements made for the specific
benefit of the sublessee, which shall be amortized over the term of the
sublease, and (iii) the cost of any real estate commissions incurred in
connection with such subletting, amortized over the term of the
sublease.
h. Regardless of Landlord's consent, no subletting or assignment shall
release Tenant of Tenant's obligation nor alter the primary liability
of Tenant to pay the rental and to perform all other obligations to be
performed by Tenant hereunder. The acceptance of rental by Landlord
from any other person shall not be deemed to be a waiver by Landlord of
any provision hereof. Consent to one assignment or subletting shall not
be deemed consent to any subsequent assignment or subletting. In the
event of default by any assignee of Tenant or any successor of Tenant
in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies
against such assignee or successor. Landlord may consent to subsequent
assignments or subletting of this Lease or amendments or modifications
to this Lease with assignees of Tenant, without notifying Tenant, or
any successor of Tenant, and without obtaining its or their consent
thereto and such action shall not relieve Tenant of liability under
this Lease.
i. In the event Tenant shall assign or sublet the premises or request
the consent of Landlord to any assignment or subletting or if Tenant
shall request the consent of Landlord for any act that Tenant proposes
to do, then Tenant shall pay Landlord's reasonable attorneys' fees
incurred in connection therewith.
[SEE ADDENDUM TO LEASE]
13. Default by Tenant.
a. The following events shall constitute events of default under
this Lease:
[SEE ADDENDUM TO LEASE]
(1) a default by Tenant in the payment of any rent or other sum
payable hereunder for a period of 3 days after the same is
due;
(2) a default by Tenant in the performance of any of the other
terms, covenants, agreements, or conditions contained herein
and, if the default is curable, the continuation of such
default for a period of 10 days after notice by Landlord or
beyond the time reasonably necessary for cure if the default
is of the nature to require more than 10 days to remedy,
provided that if Tenant has defaulted in the performance of
the same obligation one or more times in any twelve-month
period and notice of such default has been given by Landlord
in each instance, no cure period shall thereafter be
applicable hereunder;
(3) the bankruptcy or insolvency of Tenant, any transfer by Tenant
in fraud of creditors, assignment by Tenant for the benefit of
creditors, or the commencement of any proceedings of any kind
by or against Tenant under any provision of the Federal
Bankruptcy Act or under any other insolvency, bankruptcy or
reorganization act unless, in the event any such proceedings
are involuntary, Tenant is discharged from the same within 60
days thereafter; the appointment of a receiver for a
substantial part of the assets of Tenant; or the levy upon
this Lease or any estate of Tenant hereunder by any attachment
or execution; and
(4) the abandonment of the premises.
b. Upon the occurrence of any event of default by Tenant
hereunder, Landlord may, at its option and without any further
notice or demand, in addition to any other rights and remedies
given hereunder or by law, do any of the following:
(1) Landlord shall have the right, so long as default continues,
to give the notice of termination to Tenant, and on the date
specified in such notice this Lease shall terminate.
51
<PAGE> 10
(2) In the event of any such termination of this Lease, Landlord
may then or any time thereafter, reenter the premises and
remove therefrom all persons and property and again repossess
and enjoy the premises, without prejudice to any other
remedies that Landlord may have by reason of Tenant's default
or of such termination.
(3) In the event of any such termination of this Lease, and in
addition to any other rights and remedies Landlord may have,
Landlord shall have all of the rights and remedies of a
landlord provided by Section 1951.2 of the California Civil
Code. The amount of damages which Landlord may recover in
event of such termination shall include, without limitation,
(i) the worth at the time of award (computed by discounting
such amount at the discount rate of the Federal Reserve Bank
of San Francisco at the time of award plus one percent) of the
amount by which the unpaid rent for balance of the term after
the time of award exceeds the amount of rental loss that
Tenant proves could be reasonably avoided, (ii) all reasonable
legal expenses and other related costs incurred by Landlord
following Tenant's default, (iii) all costs incurred by
Landlord in restoring the premises to good order and
condition, or in remodeling, renovating or otherwise preparing
the premises for reletting, and (iv) all costs (including,
without limitation, any brokerage commissions) incurred by
Landlord in reletting the premises.
(4) For the purpose of determining the unpaid rent in the event of
a termination of this Lease, or the rent due hereunder in the
event of a reletting of the premises, the monthly rent
reserved in this Lease shall be deemed to be the sum of the
rental due under paragraph 3 above and the amounts last
payable by Tenant pursuant to paragraph 4 above.
(5) After terminating this Lease, Landlord may remove any and all
personal property located in the premises and place such
property in a public or private warehouse or elsewhere at the
sole cost and expense of Tenant.
c. Even though Tenant has breached this Lease and abandoned the
premises, this Lease shall continue in effect for so long as Landlord
does not terminate Tenant's right to possession, and Landlord may
enforce all its rights and remedies under this Lease, including the
right to recover rental as it becomes due under this Lease. Acts of
maintenance or preservation, efforts to relet the premises, or the
appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under this Lease, shall not constitute a
termination of Tenant's right to possession.
d. The remedies provided for in this Lease are in addition to any other
remedies available to Landlord at law or in equity, by statute or
otherwise.
[SEE ADDENDUM TO LEASE]
14. Default by Landlord. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord hereunder within a
reasonable time, but in no event later than 30 days after notice by
Tenant to Landlord specifying wherein Landlord has failed to perform
such obligation; provided, however, that if the nature of Landlord's
obligation is such that more than 30 days are required for performance,
then Landlord shall not be in default if Landlord commences performance
within such 30 day period and thereafter diligently prosecutes the same
to completion.
15. Security Deposit. On execution of this Lease Tenant shall deposit with
Landlord the sum specified in the Basic Lease Information (the
"Deposit"). The Deposit shall be held by Landlord as security for the
performance by Tenant of all of the provisions of this Lease. If Tenant
fails to pay rent or other charges due hereunder, or otherwise defaults
with respect to any provisions of this Lease, Landlord may use, apply,
or retain all or any portion of the Deposit for the payment of any rent
or other charge in default, or the payment of any other sum to which
Landlord may become obligated by reason of Tenant's default, or to
compensate Landlord for any loss or damage which Landlord may suffer
thereby. If Landlord so uses or applies all or any portion of the
Deposit, then within 10 days after demand therefor Tenant shall Deposit
cash with Landlord in an amount sufficient to restore the Deposit to
the full amount thereof, and Tenant's failure to do so shall be a
material breach of this Lease. Landlord shall not be required to keep
the Deposit separate from its general accounts. If Tenant performs all
of Tenant's obligations hereunder, the Deposit, or so much thereof as
has not theretofore been applied by Landlord, shall be returned,
without payment of interest for its use, or Tenant (or, at Landlord's
option, to the last assignee, if any, of Tenant's interest hereunder)
at the expiration of the term hereof, and after Tenant has vacated the
premises. No trust relationship is created herein between Landlord and
Tenant with respect to the Deposit.
16. Estoppel Certificate.
a. Tenant shall at any time upon not more than 10 days' prior notice
from Landlord execute, acknowledge and deliver to Landlord a statement
certifying (i) 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) (ii) the date to which the rent, security deposit, and other
sums payable hereunder have been paid, (ii) acknowledging that there
are not,
52
<PAGE> 11
to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults, if any, which are claimed, and
(iv) such other matters as may reasonably be requested by Landlord. Any
such statement may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Building.
[SEE ADDENDUM TO LEASE]
b. Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant, (i) that this lease is in full force and
effect, without modification except as may be represented by Landlord,
(ii) that there are no uncured defaults in Landlord's performance, and
(iii) that not more than one month's rent has been paid in advance.
c. If the Landlord desires to finance or refinance the Building, Tenant
agrees to deliver to any lender designated by Landlord such financial
statements of Tenant as may be reasonably required by such lender. All
such financial statements shall be received by Tenant in confidence and
shall be used for the purposes herein set forth.
17. Subordination. This Lease, at Landlord's option, shall subordinate to
any ground lease, mortgage, deed of trust, or any other hypothecation
for security now or hereafter placed upon the Building and to any and
all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Tenant's right to quiet possession
of the premises shall not be disturbed if Tenant is not in default and
so long as Tenant shall pay the rent and observe and perform all of the
provisions of this Lease, unless this Lease is otherwise terminated
pursuant to its terms. If any mortgagee, trustee, or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed
of trust or ground lease, and shall give notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust, or ground
lease, whether this Lease is dated prior to or subsequent to the date
of said mortgage, deed of trust or ground lease or the date of
recording thereof. If any mortgage or deed of trust to which this Lease
is subordinate is foreclosed or a deed in lieu of foreclosure is given
to the mortgagee or beneficiary, Tenant shall attorn to the purchase at
the foreclosure sale or to the grantee under the deed in lieu of
foreclosure; if any ground lease to which this Lease is subordinate is
terminated, Tenant shall attorn to the ground lessor. Tenant agrees to
execute any documents required to effectuate such subordination or to
make this Lease prior to the lien of any mortgage, deed of trust or
ground lease, as the case may be, or to evidence such attornment.
[SEE ADDENDUM TO LEASE]
18. Attorneys' Fees. If, as a result of any breach or default in the
performance of any of the provisions of this Lease, Landlord uses the
services of any attorney in order to secure compliance with such
provisions or recovered damages therefor, or to terminate this Lease or
evict Tenant, Tenant shall reimburse Landlord for any and all
attorneys' fees and expenses in such amount as the court may adjudge
reasonable, provided that if Tenant shall be the prevailing party in
any legal action brought by Landlord against Tenant, Tenant will be
entitled to recover any and all attorneys' fees and expenses in such
amount as the court may adjudge reasonable.
19. Non-Discrimination. Tenant covenants for itself, its heirs, executors,
administrators, and assigns, and all persons claiming under or through
it, and this Lease is made and accepted upon it subject to the
condition that there shall be no discrimination against or segregation
of any person or group of persons, on account of race, color, creed,
religion, sex, marital status, national origin, or ancestry in the
leasing, subleasing, transferring, use, occupancy, tenure, or enjoyment
of the premises herein leased nor shall the Tenant itself, or any
person claiming under or through it, establish or permit any such
practice or practices of discrimination or segregation with reference
to the selection, location, number, use, or occupancy of tenants,
subtenants, or vendees in the premises.
20. Notices. All notices, consents, demands, and other communications from
one party to the other given pursuant to the terms of this Lease shall
be in writing and shall be deemed to have been fully given when
deposited in the United States mail, certified or registered, postage
prepaid, and addressed as follows: to Tenant at the address specified
in the Basic Lease Information or to such other place as Tenant may
from time to time designate in a written notice to Landlord; or, to
Landlord at the address specified in the Basic Lease Information, or to
such other place and with such other copies as Landlord may from time
to time designate in a written notice to Tenant.
21. General Provisions
a. This Lease shall be governed by and construed in accordance
with the laws of the state of California.
b. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect
the validity of any other provision hereof.
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<PAGE> 12
c. This Lease contains all agreements of the parties with respect
to any matter mentioned herein and only may be modified in
writing, signed by the parties.
d. No waiver by Landlord of any provision hereof shall be deemed
a waiver of any other provision or of any subsequent breach by
Tenant of the same or any other provision. Landlord's consent
to or approval of any act shall not be deemed to render
unnecessary the obtaining of Landlord's consent to or approval
of any subsequent act by Tenant. The acceptance of rent
hereunder by Landlord shall not be a waiver of any preceding
breach by Tenant of any provision hereof, other than the
failure of Tenant to pay the particular rent accepted,
regardless of Landlord's knowledge of such preceding breach at
the time of acceptance of such rent.
[SEE ADDENDUM TO LEASE]
e. If Tenant remains in possession of the premises or any part
thereof after the expiration of the term with the consent of
Landlord, such occupancy shall be a tenancy from month to
month at a rental in the amount of two times the last month's
rental during the term, plus all other charges payable
hereunder, and upon all of the terms hereof.
f. Subject to the provisions of this Lease restricting assignment
or subletting by Tenant, this Lease shall bind the parties,
their personal representatives, successors, and assigns.
[SEE ADDENDUM TO LEASE]
g. Landlord and Landlord's agents shall have the right to enter
the premises at reasonable times for the purpose of inspecting
the same, showing the same to prospective purchasers, tenants,
lenders and other interested parties, and making such
alterations, repairs, improvements, or additions to the
premises or to the Building as Landlord may deem necessary or
desirable. Landlord may at any time during the last 120 days
of the term place on or about the premises any ordinary "For
Lease" sign.
h. Tenant shall not conduct any auction at the premises without
Landlord's prior consent.
i. The voluntary or other surrender of this Lease by Tenant, the
mutual cancellation thereof or the termination of this Lease
by Landlord as a result of Tenant's default shall, at the
option of Landlord, terminate all or any existing subtenancies
or may, at the option of Landlord, operate as an assignment to
Landlord of any or all of such subtenancies.
[SEE ADDENDUM TO LEASE]
j. If Tenant is a corporation, each individual executing this
Lease on behalf of Tenant represents and warrants that he is
duly authorized to execute and deliver this Lease on behalf of
the corporation in accordance with a duly adopted resolution
of the Board of Directors and that this Lease is binding upon
the corporation in accordance with its terms.
k. The term "Landlord" as used herein means the then owner of the
Building and in the event of a sale of the Building the
selling owner shall be automatically relieved of all
obligations of Landlord hereunder, except for acts or
omissions of Landlord theretofore occurring.
l. The term "day" as used herein means a calendar day.
m. The obligations of Landlord under this Lease do not constitute
personal obligations of the partners, directors, officers,
shareholders, or trustees of Landlord, Tenant shall look
solely to Landlord and its assets for the realization of any
claims against Landlord and not to the assets of any of the
partners of Landlord, and Tenant expressly waives any and all
right to proceed against any of its partners or the officers,
directors, trustees, shareholders, agents, or employees of any
of such partners, except to the extent of their interest in
Landlord.
n. On request by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of payment of Tenant's business personal
property taxes pertaining to the premises and deliver copies
of such business personal property tax bills to Landlord.
22. Exhibits. The exhibits and addendum, if any, specified in the Basic
Lease Information are attached to this Lease and by this reference made
a part hereof.
54
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Lease on the respective dates
indicated below.
TENANT: LANDLORD:
INSITE VISION INCORPORATED, ALAMEDA REAL ESTATE INVESTMENTS,
a Delaware corporation a California limited partnership
By: Vintage Alameda Investments, LP, a
California Limited partnership,
Operating General Partner
By: Vintage Properties - Alameda
Commercial, a California
corporation, Managing General
Partner
By: /s/ Michael D. Baer By: /s/ Joseph R. Seiger
------------------------------- -------------------------------
Title: Vice President Title: President
---------------------------- -----------------------------
Date of Execution Date of Execution
by Tenant: 11 Sept. 1996 by Tenant: 9/20/96
------------------------ -------------------------
55
<PAGE> 14
ADDENDUM
TO
MARINA VILLAGE OFFICE TECH LEASE
This Addendum to Marina Village Lease shall constitute part of
that certain Marina Village Office Tech Lease dated as of September 1, 1996 (the
"Lease") by and between ALAMEDA REAL ESTATE INVESTMENTS, a California limited
partnership ("Landlord"), and INSITE VISION INCORPORATED, a Delaware corporation
("Tenant"), for leased premises in 965 Atlantic Avenue and 2020 Challenger
Drive, Alameda, California and the terms hereof shall for all purposes be
considered part of the Lease and supersede any provisions of the Lease to the
contrary.
1. Amendment of Paragraph 3. The last sentence of Paragraph 3(c) of the
Lease is hereby amended to read as follows:
Acceptance of such late charge by Landlord shall in no event constitute
a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies
granted hereunder subject to Tenant's right to cure as provided herein.
The first sentence of Paragraph 3(d) of the Lease is hereby amended to
read as follows:
(d) Any amount due to Landlord, if not paid when due, shall bear
interest from the date due until paid at the rate of 10% per annum,
provided interest shall not be payable on late charges incurred by
Tenant nor on any amounts upon which late charges are paid by Tenant.
2. Amendment of Paragraph 4. The following language is hereby added to the
end of Paragraph 4(a) of the Lease is to read as follows:
Tenant's Share of Property Taxes and Operating Expenses shall not
include the following: (i) any state, local, federal, personal or
corporate income tax measured by the income of Landlord from all
sources or from sources other than rent alone; (ii) any estate or
inheritance taxes, any franchise, succession, or transfer taxes, or any
interest on taxes or any penalties resulting from Landlord's failure to
pay taxes of any kind; (iii) taxes that are separately assessed by
government agencies to, and paid by, other tenants of the Building for
taxes attributable to tenant improvements or other alterations,
additions or improvements made by or for other tenants in the Building;
(iv) any increase in excess of a 12% increase in the total of Property
Taxes and Assessment Bonds (net of any tax increments received by
Landlord) which increase results from a sale of the Building; (v)
Landlord's general overhead expenses not related to the Building; (vi)
brokerage commissions, legal fees, advertising costs and other related
expenses incurred in connection with the leasing of the Building; (vii)
repairs, alterations, additions, improvements, or replacements made to
correct any defect in the design, materials or workmanship of the
Building or common areas or to comply with any requirements of any
governmental authority in effect as of the date of this Lease other
than as may be required pursuant to Tenant's specific use; (viii)
damage and repairs covered under any insurance policy carried by
Landlord in connection with the Building; (ix) damage and repairs to
the Building necessitated by the negligence or willful misconduct of
Landlord or Landlord's employees, contractors or agents; (x) structural
repairs or replacements or any improvements, alterations or
expenditures of a capital nature; (xi) damage and repairs attributable
to condemnation, fire or other casualty; (xii) damage and repairs
necessitated by the negligence or willful misconduct of Landlord or
Landlord's employees, contractors or agents; (xiii) executive salaries
of Landlord; (xiv) salaries of service personnel to the extent that
such service personnel perform services not solely in connection with
the management, operation, repair or maintenance of the Building or
common areas; (xv) Landlord's general overhead expenses not related to
the Building; (xvi) payments of principal or interest on any mortgage
or other encumbrance including ground lease payments and points,
commissions and legal fees associated with financing; (xvii)
depreciation; (xviii) legal fees, accountants' fees and other expenses
incurred in connection with disputes with Tenant or other tenants or
occupants of the Building or associated with the enforcement of any
leases or defense of Landlord's title to or interest in the Building or
any part thereof; (xiv) costs (including permit, license and inspection
fees) incurred in renovating or otherwise improving, decorating,
painting or altering space for other tenants in the building (xx) costs
incurred due to violation by Landlord or any other tenant in the
Building of the terms and conditions of any lease; (xxi) the cost of
any service provided to Tenant or other occupants of the Building for
which Landlord is entitled to be reimbursed; (xxii) charitable or
political contributions; (xxiii) interest, penalties or other costs
arising out of Landlord's failure to make timely payments of its
obligations; (xxiv) property management fees of any property management
firm in excess of three percent (3%) of the gross revenues of the
Building; (xxv) costs incurred in advertising and promotional
activities for the Building; and (xxvi) any other expense which under
generally accepted accounting principles and practice would not be
considered a normal maintenance and operating expense.
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<PAGE> 15
In addition, any taxes, assessments, levies or fees against the
Building or underlying land shall be paid or amortized over the longest
permissible period of time and Tenant shall pay the appropriate annual
amount during such year, provided that Tenant shall not be required to
pay any such amounts not accruing during the term hereof. Landlord
shall not collect in excess of 100% of all Operating Expenses.
3. Amendment of Paragraph 6(a). The following sentence is added after the
second sentence of Paragraph 6(a) to read as follows:
Notwithstanding the foregoing, nothing herein shall be deemed to
require Tenant to make any alterations required by law to the premises
that are of a structural or capital nature unless such alterations are
required by Tenant's specific use of the premises (as opposed to
research and development uses generally) or required due to alterations
voluntarily made to the premises by or on behalf of Tenant.
4. Amendment of Paragraph 7. The following language is hereby added to the
end of Paragraph 7(b) of the Lease to read as follows:
Except in case of an emergency, Landlord shall give Tenant a minimum of
two days prior notice of any planned interruption of utilities
contemplated by Landlord.
5. Amendment of Paragraph 8. The following two sentences hereby replace
the first sentence of Paragraph 8(a) of the Lease to read as follows:
(a) Subject to the provisions of Paragraph 10 below, and except for
damage caused by Tenant or its agents or invitees, Landlord, at
Landlord's expense, shall keep in good condition and repair the
foundations, roof (excluding the cost of any additional roof
maintenance due to roof penetrations resulting from Tenant's specific
use, e.g. laboratory facilities in comparison to general office use,
which shall be Tenant's responsibility), exterior walls of the Building
and all common areas within the Building not leased to tenants. Subject
to the provisions of Paragraph 10 below, Landlord shall keep in good
condition and repair the landscaping, walks and parking areas
associated with the Building and any costs resulting therefrom shall be
reimbursed to Landlord by Tenant in accordance with Paragraph 4(c) of
the Lease.
The second sentence of Paragraph 8(b) of the Lease is hereby amended to
read as follows:
If Tenant fails to do so, within any applicable notice and cure period,
Landlord may, but shall not be required to, enter the premises and put
them in good condition, and Landlord's costs thereof shall
automatically become due and payable as additional rent.
The fifth sentence of Paragraph 8(b) of the Lease is hereby deleted in
its entirety.
The last sentence of Paragraph 8(b) of the Lease is hereby amended to
read as follows:
At the expiration of the term, Tenant shall deliver up possession of
the premises in good condition and repair, excepting only ordinary wear
and tear and damage caused by anyone or anything other than Tenant or
Tenant's employees, agents or invitees.
The first sentence in Paragraph 8(c) of the Lease is hereby amended to
read as follows:
As a condition giving such consent and at the time of the request,
Landlord shall inform Tenant whether it is required to remove any such
alterations, improvements or additions at the expiration of the term,
and restore the premises to their prior condition.
The following sentence is hereby added after the final sentence in
Paragraph 8(c) of the Lease to read as follows:
Notwithstanding the foregoing, Tenant shall have the right, without
need for the written consent of (but with prior written notice to)
Landlord, to make non-structural alterations to the premises that do
not affect the Building systems and cost less than Twenty-Five Thousand
Dollars ($25,000) to install, provided such alterations are otherwise
made in compliance with the terms of this Paragraph 8(c).
The last sentence of Paragraph 8(c) of the Lease is hereby amended to
read as follows:
57
<PAGE> 16
Unless Landlord requires their removal, as set forth above, all
alterations, improvements or additions that may be made on the premises
shall become property of Landlord and remain upon and be surrendered
with the premises at the expiration of the term; provided, however,
that Tenant shall remove all machinery, equipment and trade fixtures
installed by it and repair any and all damage to the premises and any
machinery, equipment or trade fixtures remaining on the premises shall,
at Landlord's option, become the property of the Landlord.
6. Amendment of Paragraph 9. The third sentence of Paragraph 9(a) of the
Lease is hereby amended to read as follows:
If, in the reasonable opinion of Landlord's insurance advisor, based on
a substantial increase in recovered liability claims generally, the
specified amounts of coverage are no longer adequate, such coverage
shall be appropriately increased.
The last sentence of Paragraph 9(a) of the Lease is hereby amended to
read as follows:
If Tenant fails to obtain such insurance or to furnish Landlord any
such duplicate policy or certificate as herein required, Landlord may,
at its election and after 10 days' notice to Tenant, procure and
maintain such coverage and Tenant shall reimburse Landlord on demand as
additional rent for any premium so paid by Landlord.
The first sentence of Paragraph 9(c) of the Lease is hereby amended to
read as follows:
As this Lease does not involve the public interest and insurance is
available to Tenant which will protect it against such claims, damage,
injury or death, Tenant hereby waives all claims against Landlord for
damage to any property or injury to or death of any person in, or upon
or about the premises or the Building arising at any time and from any
cause (except such as arise from the negligence or willful misconduct
of Landlord, its agents, employees or contractors, and except as caused
by a breach of Landlord's obligations hereunder).
The following language is hereby added as new Paragraph 9(d) to read as
follows:
Landlord shall not be liable for any injury or damage which may be
sustained to the person, equipment or property of Tenant, its
employees, invitees or customers, caused by or resulting from fire,
steam, electricity, gas, water or rain, which may leak or flow from or
into any part of the premises, or from the breakage, leakage,
obstruction or other defects of the pipes, sprinklers, wires,
appliance, plumbing, air conditioning or lighting fixtures located
therein, whether the damage or injury results from conditions arising
upon the premises or upon other portions of the Building, or from other
sources.
7. Amendment of Paragraph 10. Paragraph 10(a) of the Lease is hereby
amended to read as follows:
(a) If during the term the premises are totally or partially destroyed,
or any other portion of the Building is damaged in such a way that
Tenant's use of the premises is materially interfered with, from a risk
that is wholly covered by insurance the proceeds of which are made
available to Landlord, Landlord shall proceed with reasonable diligence
to repair the damage or destruction and this Lease shall not be
terminated; provided, however, that if in the opinion of Landlord's
architect, the work of repair cannot be completed in 180 days, or if
the damage occurs within the last 2 years of the term and the repair
work cannot be completed within 90 days, either Landlord or Tenant may
elect to terminate the Lease by notice given to the other party.
The following language is hereby added to the end of Paragraph 10(b) of
the Lease to read as follows:
Landlord must give Tenant notice as to whether or not Landlord will
restore the premises within 30 days of the occurrence of such damage or
destruction. If Landlord elects not to restore the premises, Tenant may
elect to terminate the Lease by notice given to Landlord within 10 days
of receiving Landlord's notice. Notwithstanding the foregoing, if in
the opinion of Landlord's architect the work of repair cannot be
completed in 180 days, or if the damage occurs within the last two
years of the Lease term and the repair work cannot be completed within
90 days, either Landlord or Tenant may elect to terminate the Lease by
notice given to the other party.
8. Amendment of Paragraph 11. The last sentence of Paragraph 11 of the
Lease is hereby amended to read as follows:
In the event of a partial taking of the premises that does not result
in a termination of this Lease, the monthly rental thereafter to be
paid and Tenant's Percentage Share shall be equitably reduced on a
square footage basis.
9. Amendment of Paragraph 12. Subparagraph 12(b)(3) of the Lease is hereby
amended to read as follows:
58
<PAGE> 17
3. if, in Landlord's reasonable judgment, the financial worth of the
proposed assignee or sublessee is insufficient to fulfill such entity's
obligations under the assignment or sublease, as applicable, or the
character, reputation or business of the proposed assignee or sublessee
is not consistent with the quality of the other tenancies in the
Building or Project; provided, however, for one year following Tenant's
request, Landlord shall not enter into a lease with any proposed
assignee or sublessee which it rejects under this subparagraph 12(b)(3)
unless such lease is for a lesser amount of square footage than the
proposed assignee or sublessee would have leased from Tenant under the
proposed assignment or subletting.
Subparagraph 12(b)(4) of the Lease is hereby amended to read as
follows:
4. in the case of a subletting of less than the entire premises, if the
subletting would result in the division of the premises into a
configuration that is not suitable for normal leasing purposes, or
would require access to be provided through space leased or held for
lease to another tenant or improvements to be made outside of the
premises; or
Subparagraph 12(d)(1) of the Lease is hereby deleted in its entirety.
The first sentence of Paragraph 12(f) of the Lease is hereby amended to
read as follows:
In the case of an assignment, one half of all sums or other economic
consideration received by Tenant as a result of such assignment shall
be paid to Landlord after first deducting the unamortized cost of
leasehold improvements paid for by Tenant and the cost of any real
estate commissions, legal fees, advertising costs, tenant improvements
specifically made for assignee and all other reasonable costs incurred
with such assignment.
Paragraph 12(g) of the Lease is hereby amended to read as follows:
(g) In case of a subletting, one half of all sums or economic
consideration received by Tenant as a result of such subletting shall
be paid to landlord after first deducting (i) the rental due hereunder,
prorated to reflect only rental allocable to the sublet portion of the
premises, (ii) the cost of leasehold improvements made to the sublet
portion of the premises at Tenant's cost, amortized over the term of
this Lease except for leasehold improvements made for the specific
benefit of sublessee, which shall be amortized over the term of the
sublease, and (iii) the cost of any real estate commissions incurred in
connection with such subletting, and legal fees, advertising costs, and
all other reasonable costs incurred in the assignment.
A new subparagraph (j) is hereby added to the end of Paragraph 12 of
the Lease, to read as follows:
(j) Notwithstanding the foregoing, Tenant may assign the Lease or
sublet any portion thereof, without Landlord's consent, to: (1) any
corporation that controls, is controlled by, or is under common control
with Tenant, (2) any corporation resulting from the merger or the
consolidation of Tenant, or (3) any person or entity who acquires all
of the assets of Tenant as a going concern of the business that is
being conducted upon the premises, provided that the transferee assumes
all of the obligations of Tenant under the Lease.
10. Amendment of Paragraph 13. Subparagraph 13(a)(1) of the Lease is hereby
amended to read as follows:
(1) a default by Tenant in the payment of any rent or other sum payable
hereunder for a period of 10 days after written notice from Landlord
that the same is due, provided that if Tenant has failed three or more
times in any twelve-month period to pay any rent or other sum within 10
days after the due date, no written notice shall thereafter be
applicable hereunder;
Paragraph 13(a)(2) of the Lease is hereby amended to read as follows:
(2) a material default by Tenant in the performance of any of the other
terms, covenants, agreements or conditions contained herein and, if the
default is curable, the continuation of such default for a period of 30
days after notice by Landlord or beyond the time reasonably necessary
for cure if the default is of the nature to require more than 30 days
to remedy, provided that if Tenant has defaulted in the performance of
the same obligation three or more times in any twelve-month period and
notice of such default has been given by Landlord in each instance, no
cure period shall thereafter be applicable hereunder;
11. Amendment of Paragraph 14. The following phrase is hereby added to the
end of Paragraph 14 of the Lease, to read as follows:
59
<PAGE> 18
; provided further that, if Landlord's default materially interferes
with Tenant's use and enjoyment of the premises, Landlord shall
commence performance within 5 days after receipt of notice from Tenant
specifying the precise nature of Landlord's default and the manner in
which it interferes with Tenant's use of the premises, and diligently
prosecute the same to completion.
12. Amendment of Paragraph 16. Paragraph 16(b) of the Lease is hereby
amended to read as follows:
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant, (i) that this Lease is in full force and
effect, without modification except as may be represented by Landlord,
(ii) that to the best of Tenant's knowledge there are no uncured
defaults in Landlord's performance, and (iii) that not more than one
month's rent has been paid in advance.
13. Amendment of Paragraph 18. Paragraph 18 of the Lease is hereby amended
to read as follows:
18. Attorneys' Fees. In any action or proceeding which Landlord or
Tenant brings to enforce its respective rights hereunder or to enforce
any judgment granted in connection therewith, the unsuccessful party
shall pay all costs incurred by the prevailing party (whether or not
the action or proceeding is pursued to judgment), including reasonable
attorneys' fees fixed by the court, and said costs and reasonable
attorneys' fees fixed by the court, and said costs and reasonable
attorneys' fees fixed by the court, and costs and attorneys' fees shall
be a part of the judgment in said action.
14. Amendment of Paragraph 21. Paragraph 21(e) of the Lease is hereby
amended to read as follows:
(e) If Tenant remains in possession of the premises or any part thereof
after the expiration of the term with the consent of Landlord, such
occupancy shall be a tenancy from month to month at a rental in the
amount of the last month's rental during the term plus all other
charges payable hereunder, and upon all of the terms hereof.
The following language is hereby added to the end of Paragraph 21(g) of
the Lease to read as follows:
Notwithstanding anything contained herein to the contrary, Landlord
shall not enter, and shall prevent its employees, agents and invitees
from entering, those laboratory areas designated by Tenant from time to
time as needing to be kept sterile or isolated, except in the case of
an emergency or with the Tenant's specific consent, which consent shall
be granted on not more than two days' notice.
The following language is hereby added to the end of Paragraph 21(j) of
the Lease to read as follows:
Each individual executing this Lease on behalf of Landlord represents
and warrants that he is duly authorized to execute and deliver this
Lease on behalf of Landlord and that this Lease is binding on Landlord
in accordance with its terms.
15. Renewal Rent Below Market. Landlord and Tenant acknowledge and agree
that the Base Rent as set forth in this Lease reflects a below market
rental rate as a result of Tenant exercising an option to extend the
term of its previous lease on the premises, which option included
previously negotiated terms and conditions.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum to Marina
Village Office Tech Lease as of the date of the Lease.
TENANT: LANDLORD:
INSITE VISION INCORPORATED, ALAMEDA REAL ESTATE INVESTMENTS,
a Delaware corporation a California limited partnership
By: Vintage Alameda Investments, LP, a
California Limited partnership,
Operating General Partner
By: Vintage Properties - Alameda
Commercial, a California corporation,
Managing General Partner
By: /s/ Michael D. Baer By: /s/ Joseph R. Seiger
---------------------------- ----------------------------
Title: Vice President Title: President
------------------------- -------------------------
60
<PAGE> 19
EXHIBIT A Page 1 of 2
Outline of Leased Premises
965 Atlantic
[architectural rendering]
BUILDING TOTAL
GROSS AREA: 23,910 S.F.
CORE NON-RENTABLE: 0 S.F.
CORE RENTABLE: 96 S.F.
CORRIDORS: 0 S.F.
USEABLE: 23,814 S.F.
RENTABLE: 23,910 S.F.
LOAD FACTOR: 1.004
CORE-RENTABLE MARINA VILLAGE
CORE-NONRENTABLE 965 ATLANTIC AVENUE
CORRIDORS OFFICE TECH G
BURNS/
NETTLE
61
<PAGE> 20
EXHIBIT A Page 2 of 2
Outline of Leased Premises
2020 Challenger
[architectural rendering]
BUILDING TOTAL
GROSS AREA: 20,254 S.F.
CORE NON-RENTABLE: 0 S.F.
CORE RENTABLE: 94 S.F.
CORRIDORS: 0 S.F.
USEABLE: 20,160 S.F.
RENTABLE: 20,254 S.F.
LOAD FACTOR: 1.0046
CORE-RENTABLE MARINA VILLAGE
CORE-NONRENTABLE 2020 CHALLENGER DRIVE
CORRIDORS OFFICE TECH BLDG. H.
BURNS/
NETTLE
62
<PAGE> 1
EXHIBIT 23.1 - CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-75268 pertaining to the 1994 Stock Option Plan, 1994 Stock
Purchase Plan, No. 33-80662 pertaining to the 1994 Stock Option Plan, and No.
33-93394 pertaining to the 1994 Employee Stock Purchase Plan of InSite Vision
Incorporated of our report dated January 24, 1997, with respect to the
consolidated financial statements of InSite Vision Incorporated included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Walnut Creek, California
March 4, 1997
63
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<PERIOD-END> DEC-31-1996
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0
0
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