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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended DECEMBER 31, 1997 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: 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0255679
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
Address of principal executive offices
(760) 431-7080
Registrant's telephone number including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.0025
Preferred Stock
Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on March 20, 1998, was $207,108,640.
The number of shares of Common Stock outstanding as of March 20, 1998, was
22,832,428.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the
Registrant's 1998 Annual Meeting of Stockholders to be held on June 11, 1998
is incorporated by reference in Part III, Items 10 (as to directors), 11, 12
and 13 of this Form 10-K.
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ITEM 1. BUSINESS
GENERAL
The Immune Response Corporation ("Immune Response" or the "Company") is a
biopharmaceutical company developing immune-based therapies to induce
specific T cell responses for the treatment of HIV, autoimmune diseases and
cancer. The Company is conducting clinical trials for its immune-based
therapies for HIV, rheumatoid arthritis, psoriasis, multiple sclerosis, colon
cancer and brain cancer and preclinical studies for prostate cancer. In
addition, the Company is developing a targeted delivery technology for gene
therapy which is designed to enable the intravenous injection of genes for
delivery directly to the liver. The Company's gene therapy program is
currently focused on diseases of the liver and is in preclinical studies for
the treatment of hemophilia and hepatitis.
PRODUCTS UNDER DEVELOPMENT(1)
<TABLE>
<CAPTION>
PRECLINICAL PHASE I PHASE II PHASE III
----------- ------- -------- ---------
<S> <C> <C> <C> <C>
IMMUNE-BASED THERAPIES
HIV ---------------------------------------------------
Rheumatoid Arthritis --------------------------------------
Psoriasis ----------------------------------
Multiple Sclerosis -----------------------
Colon Cancer -----------------------
Brain Cancer ---------------
Prostate Cancer ----------
GENE THERAPY
------------
Hemophilia A ----------
Hepatitis ----------
</TABLE>
(1) The table describes the status of the current product candidates and
is not intended to depict the relative lengths of time of any of the
stages of drug discovery and preclinical and clinical development. The
amount of time spent in any phase of development will vary substantially
from product to product and there can be no assurance that any of the
products will proceed beyond the phase depicted or will receive
regulatory approval. See "Government Regulation."
IMMUNE-BASED THERAPIES
REMUNE HIV THERAPY
BACKGROUND. AIDS is a condition that slowly destroys the body's immune
defense system making the body vulnerable to opportunistic infections. AIDS
is caused by a virus known as HIV. Shortly after an individual is infected
with HIV, the virus multiplies rapidly and can be detected in the blood. The
immune system responds by producing antibody and cellular immune responses
capable of attacking HIV. While these and other responses are usually
sufficient to temporarily arrest progress of the infection and reduce levels
of virus in the blood, the virus continues to replicate and slowly destroy
the immune system by infecting and killing critical T cells, known as CD4
cells, which are needed to maintain the immune system. As the infection
progresses, the immune system's control of HIV levels weakens, the level of
virus in the blood rises and the level of CD4 cells declines to a fraction of
normal levels. These events are followed by progression of the disease and
the collapse of the immune system, leaving the body susceptible to fatal
infections and cancers. AIDS represents the "end stage" of the HIV infection,
and is characterized by pneumonia and other infectious diseases of the
pulmonary system, central nervous system, gastrointestinal tract and skin, as
well as cancers such as Kaposi's sarcoma and lymphoma.
The World Health Organization estimates there are approximately 20 million
individuals, including 1.5 million children, around the world infected with
HIV. In the United States, the number of HIV-infected individuals is
estimated at 1.0 million. The HIV epidemic represents a significant societal
threat to both developed and developing nations since most of the
HIV-infected individuals are expected to ultimately develop AIDS, creating a
significant burden on healthcare systems and economies around the world.
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EXISTING THERAPIES FOR HIV. The spread of HIV is a result of the virus
transferring its genetic material (RNA) into the host cell where it uses the
host cell's protein synthesis capability to replicate. The first antiviral
drugs approved in the United States to treat HIV were designed to inhibit the
synthesis of DNA from viral RNA in infected cells by targeting reverse
transcriptase enzymes. These reverse transcriptase inhibitors include:
zidovudine (AZT), dideoxyinosine (ddI), stavudine (d4T), dideoxycytidine
(ddC), lamivudine (3TC), nevirapine (Viramune) and delavirdine (Rescriptor).
Worldwide sales of reverse transcriptase inhibitors were approximately $1.0
billion in 1996.
A second class of HIV antiviral drugs inhibits HIV protease, a viral enzyme
required to cleave newly synthesized viral proteins into the correct size so
the virus can assemble itself into new infectious virus particles. Approved
HIV protease inhibitors include: invirase (Saquinavir), norvir (Ritonavir),
indinavir (Crixivan), and nelfinavir (Viracept). Worldwide sales of protease
inhibitors were approximately $400 million in 1996 and are projected to grow
significantly over the next several years.
Currently available antiviral products have been shown to be effective at
reducing the levels of virus in the blood, however, certain limitations in
the therapy have prevented the antiviral products from being as effective as
originally predicted. The antiviral products are often associated with
significant toxicity and eventual induction of viral resistance. In addition,
non-compliance with the strict dosage regimen may also reduce the
effectiveness and can accelerate emergence of resistance.
- - RESISTANCE. HIV is prone to mutations that produce resistance to reverse
transcriptase and protease inhibitors. In an effort to overcome such
resistance, physicians have begun to use reverse transcriptase and protease
inhibitors in various combinations. Reverse transcriptase and protease
inhibitors, in various combinations commonly referred to as "cocktail
therapy" represent an advance in the treatment of HIV infection, though no
cocktail therapy has yet proven to be a cure. Moreover, although these
cocktail therapies have slowed the emergence of resistance, new mutant
strains have been identified which are resistant to several of these drugs.
- - TOXICITY. Accumulating data indicate that certain patients are unable to
take reverse transcriptase and protease inhibitors, either alone or in
combination, due to toxic side effects, including gastrointestinal
disorders, peripheral neuropathy and kidney stones. Recent information has
suggested that protease inhibitors may cause diabetes-like symptoms in some
patients.
- - COMPLIANCE. In order to maintain a high level of the drugs in the blood,
many current drugs require complex dosing, with some medications to be
taken with meals and some on an empty stomach. A typical cocktail therapy
regimen includes 14 to 16 pills taken at six to eight times during the day.
If a patient misses a dose or delays taking the drugs even for a short
period of time, the drug level in the body may decline, allowing the virus
to replicate and increasing the potential to develop resistant strains.
It is currently estimated that only 20% to 30% of HIV-infected individuals in
the United States use cocktail therapies, and up to 50% of these individuals
discontinue treatment due to resistance, toxicity, lack of compliance or
because the cocktail therapy was not effective in reducing the viral load.
The Company believes HIV opinion leaders have begun to recognize that in
order to effectively stop or slow the progression of HIV to AIDS, therapies
must stimulate the infected individual's own immune system (HIV-specific T
cell proliferation) in addition to reducing viral load through the use of
antiviral drugs. In the November 21, 1997 issue of SCIENCE, Dr. Bruce
Walker and his colleagues at Harvard University reported on the importance of
maintaining an HIV-specific immune response. Specifically, Dr. Walker showed
there was a direct correlation between HIV-specific T cell proliferation and
the successful control of virus replication in the absence of antiviral drug
therapy in certain HIV-infected individuals. Dr. Walker and other
researchers suggest that these results provide some hope that an immune
response could be boosted even in people who show little evidence of having
an HIV-specific immune response, possibly by combining powerful antiviral
therapies with anti-HIV immune-based therapies. The Company believes its
published studies have shown that the administration of REMUNE to
HIV-infected individuals elicits not only HIV-specific T cell proliferation,
but also appears to impact other markers of disease progression, such as
chemokines and gamma interferon along with a reduction in tumor necrosis
factor, all of which are believed by scientists to have a favorable impact on
disease progression.
REMUNE - PRODUCT DESCRIPTION. REMUNE is an immune-based therapy intended to
treat HIV-infected individuals by preventing or delaying the progression of
HIV to AIDS. REMUNE is designed to stimulate an HIV-infected
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individual's immune system to attack HIV. The Company believes results from
its previous clinical trials demonstrated that REMUNE has a statistically
significant impact on boosting HIV-specific immune responses in HIV-infected
individuals. The Company believes REMUNE stimulates the immune system
against the virus and also stimulates specific antiviral substances, such as
chemokines, which are produced by the immune system and naturally protect T
cells from HIV infection. By utilizing an immune-based therapy such as
REMUNE, the Company believes it may be possible to augment the natural immune
system against the virus and further optimize the effects of antiviral drug
therapy. The Company is currently conducting a Phase III clinical endpoint
trial involving approximately 2,500 HIV-infected individuals to determine
whether REMUNE is effective in halting or delaying the progression of HIV to
AIDS. The Company anticipates the trial will conclude in the second quarter
of 1999.
The Company's technology in developing REMUNE employs the whole virus,
inactivated and depleted of its outer coat ("envelope" or "gp120"). REMUNE
is based on the core proteins of the virus which are consistent across
multiple strains of HIV. Earlier approaches to HIV immune-based therapies
were based on the envelope, proteins located on the outside of the virus,
which may not have been effective due to virus mutations. The Company
believes REMUNE has been shown to be safe and well tolerated after repeated
use in thousands of individuals. The Company believes REMUNE may be an
appropriate treatment for HIV-infected individuals to take alone or in
combination with other treatments. REMUNE is administered by intramuscular
injection, by a healthcare professional, once every three months.
HUMAN CLINICAL TRIALS. To support the Phase III clinical endpoint trial, the
Company has established relationships with leading academic and clinical
institutions in order to place control of the design, statistical results,
data and laboratory results under the control of independent third parties.
There are over 70 clinical sites participating in the trial. Physicians from
the University of California-San Francisco, Brown University and Cornell
University assisted in the design of this trial and are participating in
managing the trial as Principal Investigators. The statistical plans for the
trial were developed and data analyses are being conducted by
biostatisticians at Harvard University. Data management and analysis of
patient samples for this trial are being conducted by Quintiles, Inc., while
an independent data safety monitoring board of these clinicians and
statisticians will review the data during the interim and final analyses of
the Phase III trial. This trial design was reviewed by a FDA Advisory
Committee, and the trial was designated by the FDA as a pivotal Phase III
clinical endpoint trial.
The first statistical interim analysis of data from this Phase III trial is
scheduled for June 1998. The interim data, if positive, will most likely
result in the continuation of the trial. The Company would consider this
result to be considered an indication that the trial is progressing as
expected.
The FDA has also granted expanded access to REMUNE. Expanded access is a
procedure whereby patients who were ineligible to enroll in the existing
clinical trials are provided treatment under a separate clinical trial
protocol. Under this protocol, all patients are treated with REMUNE and are
monitored primarily for safety.
Prior to commencing its U.S. Phase III clinical endpoint trial, the Company
completed several Phase I and Phase II clinical trials of REMUNE involving
over 280 HIV-infected individuals. The Phase I clinical trials conducted at
the University of Southern California involved 107 individuals at various
stages of HIV infection. In these trials, REMUNE was well tolerated without
serious side effects and indicated its ability to enhance an immune system
response against HIV.
In one of these open-label Phase I clinical trials, which began in 1987, 25
HIV-positive individuals were treated with REMUNE. Of those individuals, 12
developed an HIV-specific immune response (as measured by a skin test), of
whom 11 have not experienced significant progression of the disease. The
long-term follow-up results from this clinical trial were published in the
JOURNAL OF ACQUIRED IMMUNE DEFICIENCY SYNDROMES AND HUMAN RETROVIROLOGY in
April 1996. Many of the participants in these Phase I trials have elected to
continue treatment with REMUNE, some for up to ten years. These patients are
being observed to assess the long-term safety of the therapy.
Two Phase II clinical trials of REMUNE were conducted to assess the ability
of this therapy to stimulate immune system responses against HIV, to evaluate
the effect of REMUNE on early markers of progression in asymptomatic
HIV-infected individuals and to monitor safety. A double-blind,
placebo-controlled Phase II dose-ranging clinical trial involving 60
asymptomatic HIV-infected individuals was conducted to determine the ability
of REMUNE administered at various doses to enhance responses to HIV proteins.
The Company believes the results of the trial demonstrated, in a
statistically significant manner, that REMUNE can stimulate enhanced immune
responses in HIV-
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infected individuals. The trial was not designed to evaluate the
effectiveness of REMUNE as a treatment for HIV infection. The results of this
Phase II trial were published in the British scientific journal AIDS in
October 1994.
A second double-blind, placebo-controlled Phase II clinical trial of REMUNE
was conducted to evaluate the effect of the therapy on the level of virus in
the blood and other potential surrogate markers for disease progression. The
Company believes the results of this trial, involving 103 HIV-infected
individuals, indicated that treatment with REMUNE is safe, well tolerated and
may slow the rate of increase in the levels of HIV in blood cells. In
addition, the Company believes the results of the trial indicated that REMUNE
has a favorable impact on multiple markers of HIV disease progression,
including viral burden, CD4 cell count, HIV-specific cell-mediated immunity,
antibody production and weight gain. The Company believes the trial results
also indicated that REMUNE may slow the rate of decline in key immune cells
known to be attacked by HIV, as well as enhance the immune system's attack
against HIV proteins. The results of this clinical trial were published in
THE JOURNAL OF INFECTIOUS DISEASES in June 1994 and in a supplement to THE
JOURNAL OF ACQUIRED IMMUNE DEFICIENCY SYNDROME in October 1994.
REMUNE IN COMBINATION WITH ANTIVIRAL THERAPIES
- -----------------------------------------------
REMUNE is designed to work alone or in conjunction with antiviral drugs. By
combining these therapies, the Company believes an HIV-infected individual
may be able to attack the virus from two fronts: boosting the immune system
with REMUNE to eliminate HIV-infected cells and reducing the level of the
virus in the blood with antiviral drugs. The Company has initiated several
combination drug trials which are designed to determine whether the
combination of REMUNE and antiviral drug therapies will act synergistically
(e.g. the antiviral drug therapies lowering viral load and REMUNE boosting
the immune system). One goal of the combination approach may prolong the
impact of antiviral drug therapies on viral load by increasing the immune
response to HIV-infected cells. If successful, a delay in drug resistance
and a prolonged duration of low levels of virus in the blood coupled with an
increase in the immune response to HIV could translate into clinical benefit.
[GRAPHIC]
(1) HIV infects T cells and takes over the cell machinery such that the
cell becomes a manufacturing facility that makes and releases
infectious HIV (RNA) particles into the bloodstream where the
virus infects other cells.
(2) Antiviral drugs interfere with the infected cells ability to
manufacture infectious virus particles, but does not impact or
eliminate the infected T cell.
(3) Treatment with REMUNE is intended to increase an HIV-specific immune
response believed to be associated with the destruction of the
HIV-infected T cell.
(4) The combination of REMUNE and antiviral drugs may act synergistically
--REMUNE potentially boosts the immune response while the drugs
lower the viral load.
The Company has combination drug trials underway in which REMUNE is used in
combination with antiviral drugs manufactured or distributed by Glaxo Wellcome,
Merck & Co. and Hoffman La Roche. In addition, the Company is currently
conducting a number of other clinical trials to obtain additional data with
respect to the use of REMUNE. The following table summarizes the clinical
trials the Company is conducting with REMUNE.
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CLINICAL TRIALS USING REMUNE
<TABLE>
<CAPTION>
CURRENT U.S. TRIALS
- -------------------
INTENDED
DATE PATIENT
STAGE INITIATED ENROLLMENT OBJECTIVES
- ----- --------- ---------------- ----------
<S> <C> <C> <C>
Phase III (pivotal efficacy) 1996 2,500 Intended to measure the ability of REMUNE to
(fully enrolled) impact progression to AIDS and death
Phase II (combination) 1997 50 Intended to measure HIV-specific immune
response during antiviral drug usage
(Merck/Glaxo Wellcome)
Phase I (pediatric) 1996 32 Intended to measure safety and ability to
stimulate an immune response in children
(National Institutes of Health)
Expanded Access 1996 1,000 Intended to measure long-term safety
CURRENT INTERNATIONAL TRIALS
- ----------------------------
INTENDED
DATE PATIENT
STAGE INITIATED ENROLLMENT OBJECTIVES
- ----- --------- ---------------- ----------
Phase II (safety and activity) 1996 300 Intended to measure safety, HIV-specific
Thailand immune response and effects on indicators of
disease progression
Phase II (combination) 1996 300 Intended to measure HIV-specific immune
Spain response during antiviral drug usage
Phase II (combination) 1998 30 Intended to measure HIV-specific immune
Switzerland response during antiviral drug usage
(Hoffman La Roche/Glaxo Wellcome)
Phase II (combination) 1998 40 Intended to measure HIV-specific immune
United Kingdom response during antiviral drug usage
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
COMPLETED U.S. TRIALS
- ---------------------
# OF
STAGE DATE PATIENTS RESULTS
- ----- ----------- ---------------- -------
Phase I (safety) 1987 - 1995 25 Safety indicated and long-term survival
observed in patients with strong, HIV-specific,
immune response
Phase I (safety) 1988 - 1995 82 Safety indicated and HIV-specific immune
response observed
Phase II (dose ranging) 1990 - 1992 60 Safety indicated and HIV-specific
immune response observed
Phase II (activity) 1990 - 1993 103 Safety indicated, HIV-specific immune response
and positive effect on indicators of disease
progression observed
Phase II (drug interaction) 1992 - 1993 27 REMUNE treatment indicated safe when
combined with antiviral drug therapy
Phase II (long-term safety) 1995 - 1996 175 Safety indicated
</TABLE>
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TECHNOLOGY. REMUNE is composed of inactivated HIV, depleted of its envelope,
and emulsified in Incomplete Freund's Adjuvant ("IFA"), an agent which
elicits a more potent immune response by more effectively presenting the
inactivated virus to the immune system. REMUNE is manufactured by first
culturing HIV-infected human T cells. The virus is then purified from this
cell culture and inactivated using two separate procedures. The virus is
first inactivated with betapropiolactone, a chemical agent commonly used for
viral inactivation, and then physically inactivated with irradiation. Each
of these procedures alone is capable of inactivating HIV. During processing
and purification, the outer envelope protein of the virus, known as gp120, is
depleted from the inactivated HIV. The final envelope-depleted HIV is
emulsified in IFA and is filled in syringes. When introduced into
HIV-infected individuals, REMUNE appears to stimulate an HIV-specific immune
system response, which the Company believes may provide a safe, effective and
long-lasting benefit to these individuals.
MANUFACTURING. The Company subleases a 51,000 square foot facility in King
of Prussia, Pennsylvania to manufacture REMUNE for clinical trials and, if
the product is approved by the FDA, initial commercial production. In
February 1996, the Company received clearance from the FDA to release the
product for use in clinical trials. The Company believes the facility, which
is a full-scale, GMP commercial process facility, is capable of supplying
clinical trial quantities and, providing initial commercial quantities. The
Company relies on a third party for the final inactivation step of the
manufacturing process. If the existing manufacturing operations prove
inadequate, there can be no assurance that any arrangement with a third party
can be established on a timely basis, or that the Company can establish other
manufacturing capacity on a timely basis. The Company believes that the raw
materials necessary to produce REMUNE are readily available from various
sources.
COMMERCIALIZATION STRATEGY. It is the Company's intent that if REMUNE is
approved by the FDA it will retain domestic distribution rights for REMUNE
and seek an international distribution partner. The Company has begun
discussions with organizations that specialize in the distribution of
pharmaceutical products to physicians and other healthcare providers in the
U.S. The Company has begun to conduct physician and patient focus group
sessions to begin preparations for a commercial marketing launch of REMUNE,
subject to the successful conclusion of the clinical trials and final
approval of the product by the FDA. If REMUNE is successfully developed and
approved for marketing, the Company will seek third party reimbursement for
the costs of related treatments from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations.
REMUNE INACTIVATION PROCESS
[GRAPHIC]
1. Fully intact, infectious HIV
2. Inactivation of the virus
3. The outer envelope protein of the virus, gp120, has been depleted
from the inactivated virus
4. Final envelope-depleted, inactivated "whole-killed" HIV
emulsified in IFA
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IMMUNE-BASED THERAPIES FOR AUTOIMMUNE DISEASES
BACKGROUND. The normal immune system is closely regulated. The body is able
to distinguish its own proteins from those that are present due to infection
or abnormalities. Aberrations in immune response are not uncommon and at
times may cause an individual's immune system to react inappropriately to a
component of one's own body as if the component were foreign. In these
instances, it is often T cells that exhibit aberrant behavior resulting in
the development of autoimmune diseases. These "autoreactive" T cells are
believed responsible for the incorrect identification and destruction of the
individual's own tissue. While autoimmune diseases may involve any organ
system, common targets include the lining of the joints in rheumatoid
arthritis, the skin in psoriasis and the white matter of the brain and spinal
cord in multiple sclerosis. Current treatments for these diseases address
only the symptoms and are ineffective in halting the progressive tissue
destruction caused by the autoreactive T cells. This progression often
results in severe debilitation or death.
TECHNOLOGY. The Company's proprietary autoimmune immune-based therapies
under development are designed to inhibit or downregulate the autoreactive T
cells that the Company believes cause the tissue damage in certain autoimmune
diseases. These therapies are designed to induce specific immune responses
by targeting markers on the T cell receptor ("TCR") present on autoreactive T
cells and inhibiting the disease-causing autoreactive T cells. The
Company's proprietary technology platform from which it is seeking to develop
immune-based therapies involves identifying receptors on autoreactive T cells
and synthesizing a therapeutic vaccine based on peptides (amino acid
sequences) located within these receptors. The Company is pursuing this
approach for the treatment of rheumatoid arthritis, psoriasis and multiple
sclerosis.
[GRAPHIC]
1. T cells believed to be involved in autoimmune diseases are
identified by the T cell receptor, a unique "fingerprint like"
structure that distinguishes one type of T cell from another T cell.
2. A small section (peptide) of the T cell receptor is identified.
This peptide represents the principal component of the potential
immune-based therapy.
3. The immune-based therapy under development is intended to
stimulate the immune system to downregulate (turn off) those T cells
believed to cause inflammation and tissue destruction.
The Company believes that its approach to the treatment of autoimmune
diseases may provide several advantages over existing therapies and competing
approaches based on immune system regulation. In Phase I and Phase II
studies, the Company's immune-based therapies using T cell receptor peptides
have indicated a lack of toxicity and a specific impact on the
disease-causing cells. These results, combined with the ease of
administration through
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infrequent intramuscular injections and the potential for a long-lasting
response of an active immune-based therapy, may provide an important
treatment compared to existing therapies.
The Company is in discussions with major pharmaceutical companies regarding a
corporate collaboration using this immune-based technology. There can be no
assurance that the Company will be able to negotiate collaborative
arrangement on favorable terms, or at all, or that any collaborative
arrangements would be successful.
RHEUMATOID ARTHRITIS.
Rheumatoid arthritis is a chronic inflammatory disease characterized by
persistent inflammation of the lining of the joints accompanied by stiffness
and pain or tenderness on motion. It is estimated that approximately four
million individuals in the United States, and 53 million worldwide, suffer
from rheumatoid arthritis, and up to $2 billion is spent annually in the U.S.
on medications which are designed to treat only the symptoms of this
debilitating disease.
EXISTING THERAPIES. There is currently no cure for rheumatoid arthritis.
Currently, management of rheumatoid arthritis requires early diagnosis and
aggressive treatment before functional impairment and irreversible joint
damage has occurred. Available therapies generally have adverse side effects
and address only the symptoms of the disease. Objectives of disease
management include relief of pain, reduction of inflammation, minimization of
undesirable side effects, preserving muscle strength and joint function, and
the return to a normal lifestyle. Drugs are necessary for treatment, but are
often unsatisfactory. Nonsteroidal anti-inflammatory drugs are a widely used
therapy. They require large doses and close monitoring. Steroidal and other
drugs may be used, but usually are accompanied by more severe side effects
and toxicity. By contrast, the Company's rheumatoid arthritis therapy is
intended to target and inhibit the specific T cells thought to be involved in
the disease process. The Company believes this inhibition may reduce the
inflammatory events that occur as the disease progresses.
PRODUCT DESCRIPTION. IR501 is the Company's proprietary rheumatoid arthritis
immune-based therapy under development and is based on a combination of three
peptides from the VBETA 3, VBETA 14 and VBETA 17 T cell receptors emulsified
in IFA. The Company published, in the PROCEEDINGS OF THE NATIONAL ACADEMY OF
SCIENCES in December 1991, the discovery of these specific T cell populations
that the Company believes may cause rheumatoid arthritis. The treatment
being developed is designed to stimulate the immune system of a rheumatoid
arthritis patient to control these T cells. The Company believes that
eliminating or inhibiting these T cells may prevent further damage to the
tissue of joints. Several scientific publications since 1991 by research
groups independent of the Company have confirmed the involvement of one or
more of these T cell populations in rheumatoid arthritis.
HUMAN CLINICAL TRIALS. In December 1996, the Company completed a Phase II
clinical trial evaluating the safety and ability of its rheumatoid arthritis
treatment to elicit an immune response. This double-blind,
placebo-controlled trial involved 99 rheumatoid arthritis patients and was
designed to generate additional safety data, determine the ability of the
rheumatoid arthritis therapy to stimulate responses against the T cell
receptor peptides used in the vaccine and to determine an optimal dose of the
therapy. While this trial was designed to show trends, results from this
trial indicated safety and a statistically significant clinical improvement
in disease condition using the American College of Rheumatology guidelines
(ACR 20). The ACR 20 criteria require an improvement in tender and swollen
joint counts of at least 20% from baseline, along with improvement in three
of five other disease-related criteria. Patients who showed improvement
after treatment also had evidence of a favorable reduction in the circulating
level of the inflammatory cytokine tumor necrosis factor alpha (TNF-ALPHA). In
December 1997, the Company initiated a Phase IIb clinical trial intended to
confirm and expand clinical results from the completed Phase II clinical
trial. This Phase IIb trial will include up to 300 individuals with
rheumatoid arthritis. This 24 week trial is a double-blind,
placebo-controlled, multi-center trial with patients being treated at 22
clinical sites. Results from this trial are expected to be available by
the end of 1998.
PSORIASIS.
Psoriasis is a chronic and recurrent proliferative disease of the skin
characterized by irritating and sometimes painful, defined red patches
covered with silvery-white scales. According to the National Psoriasis
Foundation, psoriasis affects over six million Americans. Annual outpatient
costs for treatment are currently estimated at up to $3 billion per year. A
distinguishing feature of the disease is the rapid sloughing of skin layers.
While normal skin cells mature in 28 to 30 days, skin cells of psoriasis
patients move to the surface of the skin in approximately four days.
EXISTING THERAPIES. Current treatments, which range from topical ointments
to phototherapy, address the symptoms of psoriasis rather than the cause of
the disease. Not all treatments work for every individual. These treatments
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often require individuals to experiment and/or combine therapies in order to
discover the regimen that is most effective. Treatment success requires
faithful compliance to the regimen and provides varying degrees of relief
from the disease. By contrast, the Company's psoriasis therapy is intended
to target and inhibit the immune system cells that may be involved in the
initiation of the disease process.
PRODUCT DESCRIPTION. The Company's proprietary immune-based therapy under
development for psoriasis, IR502, is based on a combination of two peptides
from the VBETA 3 and VBETA 13.1 T cell receptors emulsified in IFA. The
Company published, in the PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES in
1994, the discovery of these two T cell populations, which the Company
believes initiate the events that lead to the irritating and sometimes
painful lesions found on the skin of psoriasis sufferers. The treatment
being developed by the Company is designed to stimulate the immune system of
a psoriasis patient to control these T cells. The Company believes that
eliminating or inhibiting these T cells may alleviate the effects of this
disease.
HUMAN CLINICAL TRIALS. In December 1996, the Company completed a Phase II
clinical trial evaluating the safety and the ability of its psoriasis
treatment to elicit an immune response. This double-blind, placebo-controlled
clinical trial involved 93 psoriasis patients and was designed to test the
safety of the therapy, determine the ability of the psoriasis therapy to
stimulate responses against the T cell receptor peptides used in the vaccine
and to determine an optimal dose of the therapy. Results of the trial
indicated the product was well tolerated. Although patients in the trial
improved after treatment, there was no statistically significant difference
between the treated and control groups.
Based on strong immunological results seen the Phase II trial, the Company
began a second Phase II clinical trial in November 1997. This Phase II
trial involves 84 individuals with moderate to severe psoriasis. It is a 16
week double-blind, placebo-controlled, multi-center trial with patients being
treated at six clinical sites. Results from this trial are expected to be
available by mid-1998.
MULTIPLE SCLEROSIS.
Multiple sclerosis afflicts approximately 250,000 individuals in the United
States and more than 1.1 million individuals worldwide. Multiple sclerosis
is a chronic disease of the central nervous system and one of the most common
causes of chronic neurologic disability in young adults.
PRODUCT DESCRIPTION. The Company's proprietary immune-based therapy under
development for multiple sclerosis, IR208, also uses peptides from the VBETA
6.2 T cell receptors, emulsified in IFA. The T cells from individuals
afflicted with multiple sclerosis were found in the cerebrospinal fluid.
HUMAN CLINICAL TRIALS. In January 1995, in collaboration with the Sidney
Kimmel Cancer Center ("SKCC"), the Company completed a Phase I clinical trial
in multiple sclerosis patients, which provided evidence that this therapy is
safe and well tolerated and that it may stimulate immunological responses
against the specific T cells. In February 1997, the Company began a
compassionate use program in California for certain individuals.
IMMUNE-BASED THERAPIES FOR CANCER
BACKGROUND. Cancer is characterized by the uncontrolled growth of abnormal
cells that spread from the anatomic site of origin. This growth, if
uncontrolled, invades vital organs and may result in death. However, many
cancers can be cured if they are detected early and treated promptly; others can
be controlled for many years with a variety of treatment approaches. Cancer is
most often treated by surgery, radiation, chemotherapy, hormones and more
recently, immunotherapy.
EXISTING THERAPIES. There are currently several ways to treat cancer, all of
which have significant and often severe side effects. The most common
combination of treatment is surgery or radiotherapy followed by chemotherapy.
Unfortunately, certain tumors are drug resistant from the beginning while
others develop resistance with repeated treatments. The problem of drug
resistance is particularly serious in chemotherapy when tumors develop a
resistance to multiple drugs after only one drug has been administered.
TECHNOLOGY. The Company is utilizing proprietary immune-based cancer vaccine
technologies for the development of more effective cancer therapies. The
Company initially intends to focus on treatments for colon, brain and
prostate cancers. Each of the technologies being developed uses advanced
molecular gene therapy techniques combined with vaccine technology to enable
the immune system to recognize and control tumor growth.
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[GRAPHIC]
1. Inactivated tumor cells are combined with cells that stimulate
the immune system (interleukin-2 or other cytokines)
2. Through immunization, the immune system is presented with the
structure of the tumor cell in the presence of the stimulating agent
3. Activated T cells migrate to the site of residual tumor cells and
destroy them
COLON CANCER.
It is estimated that nearly 140,000 individuals in the United States annually
develop colon cancer, with an estimated 55,000 deaths attributable to the
disease.
HUMAN CLINICAL TRIALS. In June 1995, the Company, in conjunction with the
Sidney Kimmel Cancer Center ("SKCC"), initiated a Phase I clinical trial of
this potential therapy in colon cancer patients that had failed conventional
therapy. The Phase I clinical trial in patients involved the preparation of a
custom therapy for each patient. Results from this trial indicated the
treatment was well tolerated. The Company is developing therapies that would
alleviate the need for isolating fibroblasts and tumor cells from each
patient with the objective of creating a universal, non-patient specific,
treatment. Success in this development program may lead to the application
of this technology to other solid tumors. The Company has submitted an
Investigational New Drug application ("IND") to the FDA for a universal cell
line vaccine to treat colon cancer, and plans to begin a Phase I clinical
trial in late 1998.
BRAIN CANCER.
Brain tumors are responsible for significant morbidity and mortality in both
pediatric and adult populations. The most common type of brain cancer is
glioma, a tumor that arises in the supportive tissue of the brain. Glioma
tumor cells are known to overproduce the cytokine TGF-BETA , which can suppress
the activity of the immune system cells that are needed to destroy tumors,
and it is believed to be one of the mechanisms by which tumor cells evade
immune system recognition.
HUMAN CLINICAL TRIALS. The Company has submitted an IND to the FDA for a
universal cell line vaccine to treat brain cancer, and plans to begin a Phase
I clinical trial in late 1998.
RECURRENT PROSTATE CANCER.
Prostate cancer is the second leading cause of cancer death among men.
According to the American Cancer Society, in 1996 approximately 317,000
American men were diagnosed with prostate cancer and an estimated 40,000 died
of the disease. According to recent articles, recurrent disease will occur
in up to 40% of patients who undergo radical prostatectomy or radiation
therapy. Preclinical work is being conducted on a potential prostate cancer
vaccine.
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GENE THERAPY
TECHNOLOGY. The Company's proprietary GeneDrug products under development
are based on a patented delivery technology which can be used to treat a
variety of diseases, with initial focus on the liver. This technology was
exclusively licensed from The University of Connecticut Research Foundation
("University of Connecticut"), for intravenous injection and targeting of
genes or drugs directly to liver cells. The Company believes this technology
may have several advantages over current therapies including; targeted
delivery to the liver, versatility to treat different diseases with the same
technology, and safety since viruses are not used. Other competitive gene
therapy systems under development use disabled viruses to carry the gene to
the cell nucleus.
COMMERCIAL POTENTIAL: Each gene therapy product under development by the
Company is intended to be prepared and distributed like a traditional
injectable pharmaceutical. These therapies would not require
patient-specific processing of cells outside the body compared to other gene
therapy systems under development.
[GRAPHIC]
HEMOPHILIA
Hemophilia A, a hereditary blood clotting disorder, results from the
dysfunction or absence of the Factor VIII protein. Approximately one of
every 5,000 live male births in the United States results in a child
afflicted with hemophilia A. Current treatments for hemophilia A are
expensive, with total annual cost ranging from $60,000 to $100,000. The
Company's GeneDrug technology system is designed to produce therapeutic
concentrations of Factor VIII by delivering the gene that produces this
protein. Once delivered to the liver cells, the Factor VIII gene may express
the desired protein and secrete this protein into the bloodstream on a
continuous basis for several weeks. If successful, this product would
eliminate the regular bleeding episodes associated with hemophilia by
allowing the patient to receive periodic injections in order to maintain
therapeutic levels of Factor VIII. In July 1996, Immune Response entered
into an agreement with Bayer Corporation, the United States affiliate of
Bayer AG of Leverkusen, Germany, to develop gene therapy products for the
treatment of hemophilia A.
HEPATITIS.
Hepatitis B is a viral infection of the liver. As many as 300 million
individuals are infected with hepatitis B virus ("HBV") worldwide and in the
United States there are approximately 300,000 new cases of HBV infection each
year. Hepatitis C virus ("HCV") was recently identified as the major cause
of non-A/non-B hepatitis, of which there are at least 75,000 new cases in the
United States each year. Recombinant interferon-alpha (IFN-ALPHA) is
currently approved for treatment of both HBV and HCV. Many patients treated
with recombinant IFN-ALPHA do not respond and whether there is a long-term
benefit among those who have responses is uncertain. A preclinical study
evaluating delivery of the IFN-ALPHA gene to the liver has demonstrated
successful expression of IFN-ALPHA protein IN VITRO and IN VIVO for up to six
weeks. The Company's GeneDrug system is designed to enhance interferon
therapy by achieving continuous, low-level expression and secretion of the
protein specifically in liver cells. The Company is in
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discussions with a major pharmaceutical company regarding a corporate
collaboration for hepatitis using this gene delivery technology. There can be
no assurance that the Company will be able to negotiate a collaborative
arrangement on favorable terms, or at all, or that any collaborative
arrangements would be successful.
MANUFACTURING
The Company has established a pilot manufacturing facility at its
headquarters in Carlsbad, California for the production of the immune-based
and gene therapies. This facility is expected to be adequate to supply
limited clinical trial quantities for these therapies. Additional
manufacturing capacity will be needed for commercial scale production, if
these therapies are approved for commercial sale. For the manufacture of the
autoimmune disease therapies under development, the Company obtains synthetic
peptides from third party manufacturers. The Company believes that the
synthetic peptides and other materials necessary to produce the autoimmune
disease therapies are readily available from various sources and several
suppliers may be capable of supplying the autoimmune disease therapies in
both clinical and commercial quantities.
PATENTS
REMUNE - HIV THERAPY. In 1993, the Company received a United States patent
relating to REMUNE. The Company has also received similar patents in
Australia, certain European countries, Japan and Russia. The Company has
additional patent applications relating to REMUNE on file in the United
States, as well as in other countries. The patent applications cover, in
part, certain products and methods of their use for the immunotherapeutic
treatment of HIV-infected patients and/or preventive treatment of uninfected
individuals. There can be no assurance that any additional HIV-related
patents will be issued to the Company. Further, there can be no assurance
that the issued patents, or any patent that may be issued in the future, will
survive opposition or provide meaningful proprietary protection.
AUTOIMMUNE DISEASES. During January 1994, the European Patent Office granted
the Company a patent covering vaccination and methods against diseases
resulting from pathogenic responses by specific T cell populations. In March
1997, the Company was issued a broad patent covering this technology in the
United States. In May 1994, the Australian Industrial Property Organisation
accepted a similar application of the Company. These patents include
composition and method claims for the prevention or treatment of certain
autoimmune diseases, such as rheumatoid arthritis, psoriasis and multiple
sclerosis. The Company also has patent applications relating to its
autoimmune technology on file in the United States and other countries,
including members of the European Patent Convention and Japan. These patent
applications cover certain compositions and methods relating to the use of T
cell receptor peptide sequences to vaccinate against autoreactive T cells
involved in autoimmune disease. There can be no assurance that any further
autoimmune disease patents will be issued to the Company or that any issued
patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection. The Company is
aware that Connetics Corporation ("Connetics") has been granted U.S. and
European patents related to autoimmune disease which covers technology
similar to that used by the Company. The Company is in discussions with
Connetics to resolve any conflict between the Company's and Connetics'
patents. However, there can be no assurance that a cross license or other
resolutions satisfactory to the Company will result. A failure to resolve
this dispute in a manner favorable to the Company, could have a material
adverse effect on the Company. In March 1998, the Company successfully
defended its European patent with respect to its immune-based therapies for
autoimmune disease technology that was under opposition.
CANCER. Technology to genetically modify fibroblasts with cytokine genes or
genes to inhibit TGF-BETA production has been exclusively licensed to the
Company from SKCC. The technology to use cytokine modified fibroblasts to
increase sensitivity to chemotherapy was jointly developed by SKCC and the
Company, and the Company retains exclusive rights to develop this technology.
SKCC has applied for patent protection in the United States and Europe
related to the technologies licensed exclusively to the Company. There can
be no assurance that the issued patents, or any patent that may be issued in
the future, will survive opposition or provide meaningful proprietary
protection.
GENE THERAPY. In November 1992, the Company obtained an exclusive license to
a U.S. patent, received by the University of Connecticut, covering the
Company's core gene delivery system technology, including methods and
compositions for delivering DNA to the liver via receptors on the surface of
liver cells. In addition, during 1995 and 1996, one additional Australian
patent issued and four patent applications were allowed in the United States,
Europe and Australia, all of which are exclusively licensed by the Company.
In June 1997, a second related U.S. patent issued, extending the Company's
gene delivery protection to include the delivery of any polynucleotide to any
mammalian cell via any internalizing cell surface receptor. Thus, the
Company's patent protection in the United States is no longer limited to the
delivery of genes to the liver. In 1997, a corresponding Japanese patent
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application also was accepted, covering the delivery of any polynucleotide to
mammalian cells via non-protein (e.g., synthetic) liver-specific ligands.
This Japanese patent application is expected to issue during 1998.
In addition, during 1997, another U.S. patent issued, four U.S. patent
applications were allowed, and one Australian patent application was
accepted, all either owned or exclusively licensed by the Company. These
patents and patent applications cover the delivery of hepatitis B antiviral
polynucleotides to mammalian cells via any cell surface receptor, and
compositions and methods for increasing expression of genes targeted to
cells. The Company also exclusively licenses two Australian patents covering
the targeted delivery of genes encoding immunogenic proteins to cells for the
purpose of eliciting an immune response, and the targeted delivery of viruses
or cells for selective internalization by liver cells. The Company continues
to file patent applications covering novel genes and other aspects of its
proprietary gene delivery technology which the Company develops.
The Company is presently seeking to obtain licenses for certain genes from
several different third parties. There can be no assurance that the Company
will be able to obtain such licenses on commercially favorable terms, if at
all, and if these licenses are not obtained, the Company might be prevented
from using certain of its technologies. The Company's failure to obtain a
license required to continue practicing its own technologies would have a
material adverse effect on the Company.
There can be no assurance that any additional gene therapy patents will be
issued to the Company. Further, there can no assurance that the issued
patents, or any patent that may be issued in the future, will survive
opposition or provide meaningful proprietary protection.
COMPETITION
HIV. The Company is engaged in segments of the biopharmaceutical industry,
including the treatment of HIV, that are intensely competitive and rapidly
changing. If successfully developed and approved, the product candidates and
compounds that the Company is currently developing will compete with numerous
existing therapies. For example, 11 drugs are currently approved for the
treatment of HIV. In addition, a number of companies are pursuing the
development of novel pharmaceutical products that target the same diseases
that the Company is targeting, and some companies, including several
multinational pharmaceutical companies, are simultaneously marketing several
different drugs and may therefore be able to market their own combination
drug therapies. The Company believes that a significant number of drugs are
currently under development and will become available in the future for the
treatment of HIV.
Although the Company believes that there is a significant future market for
therapeutics to treat HIV and other viral diseases, the Company anticipates
that even if it successfully develops REMUNE and REMUNE is approved for
marketing, it will face intense and increasing competition in the future as
new products enter the market and advanced technologies become available.
There can be no assurance that existing products or new products for the
treatment of HIV developed by the Company's competitors, including Glaxo
Wellcome, plc, Merck & Co. and Abbott Laboratories, will not be more
effective, or more effectively marketed and sold, than REMUNE, should it be
successfully developed and receive regulatory approval, or any other
therapeutic for HIV that may be developed by the Company. Competitive
products or the development by others of a cure or new treatment methods may
render the Company's technologies and products and compounds obsolete,
noncompetitive or uneconomical prior to the Company's recovery of development
or commercialization expenses incurred with respect to any such technologies
or products or compounds. Many of the Company's competitors have
significantly greater financial, technical and human resources than the
Company and may be better equipped to develop, manufacture, sell, market and
distribute products. In addition, many of these companies have extensive
experience in preclinical testing and clinical trials, obtaining FDA and
other regulatory approvals and manufacturing and marketing pharmaceutical
products. For use individually or in combination therapy, many of these
competitors also have products that have been approved or are in late-stage
development and operate large, well-funded research and development programs.
Smaller companies may also prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical and
biotechnology companies. Furthermore, academic institutions, governmental
agencies and other public and private research organizations are becoming
increasingly aware of the commercial value of their inventions and are more
actively seeking to commercialize the technology they have developed.
New developments in areas in which the Company is conducting its research and
development are expected to continue at a rapid pace in both industry and
academia. If the Company's product candidates and compounds are successfully
developed and approved, the Company will face competition based on the safety
and effectiveness of its products and compounds, the timing and scope of
regulatory approvals, availability of manufacturing, sales,
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marketing and distribution capabilities, reimbursement coverage, price and
patent position. There can be no assurance that the Company's competitors
will not develop more effective or more affordable technology or products, or
achieve earlier patent protection, product development or product
commercialization than the Company. Accordingly, the Company's competitors
may succeed in commercializing products more rapidly or effectively than the
Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
TREATMENTS FOR AUTOIMMUNE DISEASE. Several emerging technologies related to
immune system regulation, if successfully developed, could compete with the
Company's autoimmune disease treatments under development. The Company
believes that its principal competition in the autoimmune disease area will
come from companies conducting research in the areas of T cell receptors,
interaction between T cells and the target antigen and tissue, specific
targeting of activated T cell populations, and mechanisms of tolerance
including oral tolerance approaches. Scientific reports on T cell receptor
research have also discussed approaches similar to that of the Company.
TREATMENTS FOR CANCER. New cancer therapies are being developed by a number
of individual investigators and companies. Some of these approaches involve
modification of tumor cells with a variety of cytokines, which approaches may
prove competitive with the technologies being developed by the Company. Many
of the Company's competitors have substantially greater experience, financial
and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.
GENE THERAPY. The Company believes that competition in the treatment of the
diseases targeted by its gene therapy program will be of two types: chronic
treatment with pharmaceutical products; and other gene therapy systems under
development for insertion of the correct gene. There currently exist a
number of approved therapies for treatment of hemophilia, and hepatitis B and
C. Both purified and recombinant forms of Factor VIII have been approved by
the FDA for treatment of hemophilia and are effective in stopping bleeding
episodes. Interferon alpha-2b is currently approved for treatment of chronic
hepatitis B and C. Other interferons are being tested for the treatment of
viral hepatitis. In addition to interferons, a variety of nucleoside analogs
have been tested for treatment of chronic hepatitis B, including 3TC.
Several major pharmaceutical companies are investigating gene therapy
treatments for the delivery of proteins to treat these diseases. If these
prove effective, they may compete with the Company's gene delivery therapies.
Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. There can be no assurance that competitors
have not or will not succeed in developing technologies and products more
quickly or that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive.
GOVERNMENT REGULATION
Clinical testing, manufacture, promotion and sale of the Company's drug
products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding
state and foreign regulatory agencies. The Company believes that REMUNE and
most of its other potential immune-based therapies will be regulated by the
FDA as biological drug products under current regulations of the FDA.
Biological products must be shown to be safe, pure and potent (i.e.,
effective) and are subject to the same regulatory requirements as
nonbiological products under the Food and Drug Administration Act ("FDA
Act"), as amended by the Food and Drug Administration Modernization Act of
1997 ("FDA Modernization Act"), except that a biological product licensed
under the PHS Act ("PHS Act") is not required to have an approved New Drug
Application ("NDA") under the Federal Food, Drug and Cosmetic Act ("FDC
Act"). The FDA Modernization Act directed the FDA to take measures to
minimize the differences in the review and approval of marketing applications
for biological and nonbiological products. The FDA Modernization Act also
made significant revisions to the statutory requirements with regard to the
approval of new biologics and nonbiological products. Among other things,
the FDA Modernization Act established a new statutory program for the
approval of fast track drugs, streamlined clinical research, and revised the
content of product approval applications and the FDA review process. The FDA
is required to issue regulations and guidelines in order to implement certain
of these new requirements. Until the FDA implements these regulations and
guidelines, it is impossible to predict the impact of the FDA Modernization
Act on the review and approval of any marketing applications that the
Company may submit to the FDA in the future. The
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FDC Act, the PHS Act and other federal and state statutes and regulations
govern or influence the testing, manufacture, safety, effectiveness,
labeling, storage, recordkeeping, approval, advertising, distribution and
promotion of biological prescription drug products. Noncompliance with
applicable requirements can result in, among other things, fines,
injunctions, seizure of products, total or partial suspension of product
marketing, failure of the government to grant premarket approval, withdrawal
of marketing approvals and criminal prosecution.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA, which must become effective pursuant to FDA
regulations before human clinical trials may commence. Reports of results of
preclinical studies and clinical trials for biological drug products are
submitted to the FDA in the form of a Biologics License Appliction (the
"BLA") for approval for marketing and commercial shipment. Submission of a
BLA does not assure FDA approval for marketing. The BLA review process may
take a number of years to complete, although reviews of applications for
treatments of AIDS, cancer and other life-threatening diseases may be
accelerated or expedited. Failure of the Company to receive FDA marketing
approval for REMUNE or any of its other products under development on a
timely basis could have a material adverse effect on the Company's business,
financial condition and results of operations.
In the past, in addition to obtaining approval for each biological drug
product, an Establishment License Application (the "ELA") usually was
required to be filed and approved by the FDA. However, the FDA Modernization
Act repealed the statutory requirement for an ELA for a biological product.
Now only a single BLA covering both the biological product and the facility
in which the product is manufactured is required. The FDA also has been
directed by the FDA Modernization Act to take measures to minimize the
differences in the review and approval of biological drugs required to have
approved BLAs under the PHS Act and nonbiological drugs required to have
approved NDAs under the FDC Act.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the Good Manufacturing Practices (the
"GMP") regulations specifically for biological drugs, as well as for other
drugs. In complying with the GMP regulations, manufacturers must continue to
expend time, money and effort in production, recordkeeping and quality
control to assure that the product meets applicable specifications and other
requirements. The FDA periodically inspects biological drug product
manufacturing facilities in order to assure compliance with applicable GMP
requirements. Failure to comply with the GMP regulations subjects the
manufacturer to possible FDA regulatory action, such as the suspension of
manufacturing, product recall or seizure, injunction and criminal
prosecution. There can be no assurance that the Company or its contract
manufacturers, if any, will be able to maintain compliance with the GMP
regulations on a continuing basis. Failure to maintain such compliance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes its proprietary GeneDrug and cancer treatment therapies
also will likely be regulated as biological products. This is because the
Company's gene products are subject to the FDA's Human Somatic Cell Therapy
Products and Gene Therapy Products Notice that the FDA issued in 1993 (the
"1993 Notice"). The 1993 Notice defines gene therapy products as biological
products subject to biological licensure requirements. In addition, the 1993
Notice covers many ancillary products used as part of the manufacturing
process for gene therapy products. The FDA states that such ancillary
products may be subject to medical device requirements or to new drug
application or BLA requirements. No assurance exists that the Company or its
suppliers can meet all the requirements of the 1993 Notice covering gene
therapy products. As with the Company's other potential products, the gene
therapy products will be subject to extensive FDA regulation throughout the
product development process, and there can be no assurance that any of these
products will be successful at securing the requisite FDA marketing approval
on a timely basis, if at all.
The preclinical and clinical testing process to obtain FDA approval of a
biological drug is expensive and time consuming. Preclinical studies are
conducted in animals usually to evaluate the potential safety of a product.
The results of preclinical studies are submitted to the FDA as part of the
IND application, which must become effective pursuant to FDA regulations
before human clinical trials may begin. Human clinical trials typically are
conducted in three phases and are subject to detailed protocols. Each
protocol indicating how the clinical trial will be conducted must usually be
submitted for review to the FDA as part of the IND application. The FDA's
review of a trial protocol does not necessarily mean that, if the trial is
completed, it will constitute proof of safety or efficacy (including
potency). Further, each clinical trial must be conducted under the auspices
of an independent Institutional Review Board ("IRB") established pursuant to
FDA regulations. The IRB considers, among other
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things, ethical concerns, informed consent requirements and the possible
liability of the institution conducting the trials. The FDA or IRB may
require changes in a protocol both prior to and after the commencement of a
clinical trial. There is no assurance that the IRB or FDA will permit a
trial to go forward or, once started, to be completed.
The three phases of clinical trials are generally conducted sequentially, but
they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a large but still limited patient population to determine the
preliminary effectiveness of the drug for specific indications, to determine
optimal dosage and to identify possible side effects and safety risks. Phase
II trials typically take at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase II evaluations, expanded Phase III trials are
undertaken to gather the additional information about safety and
effectiveness that is needed to evaluate the overall benefit-risk
relationship of the product and to provide an adequate basis for physician
labeling. Phase III trials for an indication generally take from two and
one-half to five years to complete. There can be no assurance that Phase I,
Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's
products that have not completed any such testing. Nor can there be any
assurance that completion of clinical testing will result in FDA approval.
Furthermore, the FDA may suspend clinical trials at any time if the patients
are believed to be exposed to a significant health risk.
The FDA Modernization Act amended the FDC Act to streamline clinical research
on biological and nonbiological drugs. Under the new law, a clinical
investigation may begin 30 days after the FDA receives an IND application
containing information about the drug and clinical investigation that
includes:
1. Information about the design of the investigation and adequate reports
of basic information, certified by the applicant, necessary to assess the
drug's safety in a clinical trial
2. Adequate information on the chemistry and manufacturing of the drug,
controls available for the drug and primary data tabulations from animal or
human studies.
The FDA is authorized by the new law to halt a clinical study at any time by
issuing a clinical hold, confirmed in writing, prohibiting the sponsor from
conducting the investigation. The clinical hold may be issued based on the
FDA's determination that the drug presents an unreasonable risk to the safety
of the research subjects, taking into account the qualifications of the
investigators, information about the drug, the design of the clinical
investigation, the conditions for which the drug is to be investigated, and
the health status of the subjects. Clinical holds also may be imposed by the
FDA for other reasons, as established by regulations. The new law, however,
largely codifies current regulations albeit with several significant changes.
First, the new law potentially reduces the amount of data required to be
submitted as part of an IND (most importantly by sanctioning the use of
"primary data tabulations from animal and human studies" rather than full
reports from such studies). Second, it codifies the procedural safeguards
for issuance of clinical holds and strengthens certain rights of the
manufacturer, including the right to obtain a written decision from the FDA
regarding the removal of a clinical hold within 30 days of a written request
from the IND sponsor.
Under the FDA's current IND regulations, a number of procedures are available
to expedite approval or to allow expanded access to investigational drugs.
Certain investigational drugs, including products for the treatment of AIDS,
can be distributed outside of traditional IND requirements on a "treatment"
basis. Generally, the FDA may permit an investigational drug, including an
investigational biological drug, to be used for "treatment" of patients
outside of controlled clinical trials, if: (1) the drug is intended to treat
a serious or immediately life-threatening disease; (2) there is no comparable
or satisfactory alternative drug or other therapy available to treat that
stage of the disease in the intended patient population; (3) the drug is
under investigation in a controlled clinical trial, or all clinical trials
have been completed; and (4) the sponsor of the controlled clinical trial is
actively pursuing marketing approval of the investigational drug with due
diligence. Although the FDA has granted expanded access to REMUNE for those
patients who are ineligible to enroll in the Phase III clinical endpoint
trial, the FDA has to date not designated expanded access protocols for
REMUNE as "treatment" protocols. Either expanded access or a treatment
protocol designation might permit third party reimbursement of some of the
costs associated with making REMUNE available to patients in such an expanded
access context. There can be no assurance that the FDA will determine that
REMUNE meets all of the FDA's criteria for use of an investigational drug for
treatment use or that, even if the product is allowed for treatment use, that
third party payers will provide reimbursement for any of the costs of REMUNE
treatment. The FDA Modernization Act also amended the FDC Act to permit
expanded access to
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individuals and larger groups to unapproved new therapeutic and diagnostic
products. Although the new law largely codifies existing FDA regulations in
this area, it expands access to all investigational therapies. First, the
new law allows the FDA to authorize the emergency shipment of investigational
new drugs for the diagnosis, monitoring, or treatment of a serious disease or
condition. Second, the new law permits any person, through a licensed
physician, to request and obtain from a manufacturer or distributor an
investigational drug for the diagnosis, monitoring, or treatment of a serious
disease or condition if the following conditions are met:
1. A comparable or satisfactory alternative therapy is not available.
2. There is sufficient evidence of the drug's safety and effectiveness to
permit such use.
3. The use will not interfere with the conduct of clinical investigations to
support marketing approval.
4. A clinical protocol is submitted to the FDA describing the use of the
investigational drug in a single patient or small group of patients.
The new law also authorizes expanded patient access to investigational drugs
under a treatment IND application.
The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments (e.g., the ability to treat patients
unresponsive to, or intolerant of, available therapy, or improved patient
response over available therapy). Under the accelerated approval program, the
FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case, based on an effect on a
surrogate endpoint or a clinical endpoint other than survival. Under the
program, the sponsor must agree to conduct postmarketing studies to verify
and describe the clinical benefits of the product. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. The term
"life-threatening" is defined by the FDA to mean: (1) disease or conditions
where the likelihood of death is high unless the course of the disease is
interrupted and (2) diseases or conditions with potentially fatal outcomes,
where the endpoint of clinical trial analysis is survival. "Severely
debilitating" is defined by the FDA to mean diseases or conditions that cause
major irreversible morbidity. As a condition of approval, the FDA may
require the sponsor to conduct certain postmarketing studies to delineate
additional information about the drug's risks, benefits and optimal use. The
FDA Modernization Act establishes a new statutory program for the approval of
fast track drugs, including biological products. Fast track drugs are
defined as new drugs or biological products intended for the treatment of
serious or life-threatening conditions and that demonstrate the potential to
address unmet medical needs for such conditions. Under the new fast track
program, a request for designation may be submitted concurrently with, or any
time after, submission of an IND application. If a product meets the
statutory criteria, the FDA is required to designate the product as a fast
track drug within 60 days of the request for designation. A BLA or NDA for a
fast track drug may be approved by the FDA upon a determination that the drug
has an effect on a clinical endpoint or a surrogate endpoint that is
reasonably likely to predict clinical benefits. The FDA can condition
approval of a fast track drug upon a requirement to conduct post-approval
studies and submit copies of promotional materials to the FDA prior to
dissemination. The new law also provides procedures for the expedited
withdrawal of marketing approval of a fast track. There can be no assurance
that the FDA will consider REMUNE, or any other of the Company's products
under development, to be an appropriate candidate for accelerated approval,
expedited review or fast track designation.
Since 1992, non-biological and biological drugs have been subject to the
Prescription Drug User Fee Act of 1992 ("PDUFA"). PDUFA requires that
companies submitting marketing applications for such products pay fees in
connection with review of the applications. In return, the FDA has committed
to reviewing a certain percentage of the applications within certain
timeframes. For example, in its Fiscal Year 1997 Report to Congress on
PDUFA, the FDA reported that 96% of all original premarketing applications
for biological and nonbiological drugs received in Fiscal Year 1996 were
reviewed within 12 months of the application submission date. The FDA's
PDUFA performance goal in Fiscal Year 1996 was to complete 80% of such
applications within 12 months of the submission date. Although PDUFA was
scheduled to expire on September 30, 1997, the Food and Drug Administration
Modernization Act of 1997 reauthorized PDUFA for five years (i.e., until
September 30, 2002). The FDA has committed to reaching an approval,
disapproval or additional-data-required decisions on 90% of standard original
NDAs and BLAs filed during Fiscal Year 1998 within 12 months of receipt of
the marketing application and to review and act on 90% of priority original
NDAs and BLAs (i.e., applications offering significant advances over existing
treatments) within six months of receipt. There can be no assurance,
however, that any BLA the Company submits to the FDA for any of its
biological products will be reviewed and acted upon within the
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timeframes set out above. The Company also is subject to regulation under
the Occupational Safety and Health Act, the Environmental Protection Act, the
Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other present and potential future federal, state or local regulations.
Regulations concerning biotechnology may affect the Company's research and
development programs. Furthermore, existing or additional government
regulations may be applied that could prevent or delay regulatory approval of
the Company's products, or affect the pricing or distribution of such
products.
The Company also is subject to foreign regulatory requirements governing
human clinical trials and pharmaceutical sales that vary widely from country
to country. Whether or not FDA approval has been obtained, approval of a
product by comparable regulatory authorities of foreign countries must be
obtained prior to marketing the product in those countries. The approval
process may be more or less rigorous from country to country and the time
required may be longer or shorter than that required in the United States.
The Company may seek to use foreign marketing partners to assist in obtaining
foreign regulatory approval for REMUNE and other products.
EMPLOYEES
As of December 31, 1997, the Company had 143 full-time employees, of whom 41
hold Ph.D. or other advanced degrees. Of these employees, 112 are engaged
in, or directly support, research and development. A significant number of
the Company's management and professional employees have had prior experience
with pharmaceutical and biotechnology companies. None of the Company's
employees is covered by a collective bargaining agreement.
RISK FACTORS
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING. The Company has
not completed the development of any products and there can be no assurance
any products will be successfully developed. The Company has been in
existence since 1986, and to date only six of its product candidates have
entered clinical trials. The Company's potential immune-based therapies for
HIV, autoimmune disease, cancer and gene therapy products currently under
development will require significant additional research and development
efforts and regulatory approvals prior to potential commercialization. To
achieve profitable operations, the Company must successfully develop,
manufacture, introduce and market products. There can be no assurance that
any of the Company's potential products will prove to be safe and effective
in clinical trials, that FDA or other regulatory approvals will be obtained
or that such products will achieve market acceptance.
The Company's potential HIV immune-based therapy, REMUNE, is in a Phase III
clinical endpoint trial designed to provide evidence of efficacy based on
clinical endpoints. There can be no assurance that the results of such
clinical trial will demonstrate that REMUNE is safe and efficacious or, that
even if the results of the clinical trial are considered successful by the
Company, that the Food and Drug Administration ("FDA") will not require the
Company to conduct additional large scale clinical trials with REMUNE before
the FDA will consider approving REMUNE for commercial sale. Failure to
successfully complete the Phase III clinical endpoint trial in a timely
fashion and a failure to obtain FDA approval of REMUNE will materially and
adversely affect the Company. There can be no assurance that the results of
the Phase III trial will be consistent with Phase II results. In addition,
REMUNE is being tested in a Phase II clinical trial in Thailand, in a
pediatric Phase I clinical trial in the United States and in combination
trials with approved HIV therapies in the United States and Spain. Failure
of these trials to demonstrate the safety and effectiveness of REMUNE could
have a material adverse effect on the regulatory approval process for this
potential product. The Company's other potential immune-based therapies and
gene therapy technologies are at a much earlier stage of development than
REMUNE. The Company's gene therapy technology and certain of its
technologies for the treatment of cancer have not yet been tested in humans
and there can be no assurance that human testing of potential products based
on such technologies will be permitted by regulatory authorities or, that
even if human testing is permitted, that products based on such technologies
will be developed and shown to be safe or efficacious. Potential
immune-based therapies based on certain of the Company's autoimmune
technology and certain of its cancer technologies are at an early stage of
clinical testing and there can be no assurance that such products will be
shown to be safe, efficacious or receive regulatory approval.
There can be no assurance that the results of the Company's preclinical
studies and clinical trials will be indicative of future clinical trial
results. A commitment of substantial resources to conduct time-consuming
research, preclinical studies and clinical trials, including the REMUNE Phase
III clinical endpoint trial will be required if the Company is to develop any
products. Delays in planned patient enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs,
program delays or both. There can be no assurance that any of
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the Company's potential products will prove to be safe and effective in
clinical trials, that FDA or other regulatory approvals will be obtained or
that such products will achieve market acceptance. Any products resulting
from these programs are not expected to be successfully developed or
commercially available for a number of years, if at all.
There can be no assurance that unacceptable toxicities or side effects will
not occur at any time in the course of human clinical trials or, if any
products are successfully developed and approved for marketing, during
commercial use of the Company's products. The appearance of any such
unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of the Company's products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there
can be no assurance that disease resistance will not limit the efficacy of
potential products.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company will
need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring its potential
products to market and establish manufacturing and marketing capabilities.
The Company anticipates that in 1998, the REMUNE clinical trials will cost
approximately $10 million, and the manufacturing, research and all other
expenses associated with the product will cost approximately an additional
$15 million. The Company also anticipates that costs related to the
development of REMUNE will continue to increase as the Company approaches
possible commercialization. The anticipated costs with respect to REMUNE
will depend on many factors, including the results of interim analyses of the
data from the Phase III clinical endpoint trial, the availability of third
party reimbursement for expanded access protocols for REMUNE, the potential
for accelerated approval and certain other factors which will influence the
Company's determination of the appropriate continued investment of the
Company's financial resources in this program. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the scope and results of
preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing scale-up, effective commercialization activities and
arrangements and other factors not within the Company's control. The Company
intends to seek additional funding through public or private financings,
arrangements with corporate collaborators or other sources. If funds are
acquired through collaborations, the Company will likely be required to
relinquish some or all rights to products that the Company may have otherwise
developed itself. Adequate funds may not be available when needed or on
terms acceptable to the Company. Insufficient funds may require the Company
to scale back or eliminate some or all of its research and development
programs or license to third parties products or technologies that the
Company would otherwise seek to develop itself. The Company believes that
its existing resources, including interest thereon will enable the Company to
maintain its current and planned operations through 1998.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed, or participated
as licensee, in the filing of a number of patent applications in the United
States and many international countries. The Company files applications as
appropriate for patents covering its products and processes. The Company has
been issued patents, or has licensed patents, covering certain aspects of its
proposed immune-based therapies for HIV, autoimmune disease, cancer and gene
therapy technologies. The Company's success may depend in part on its
ability to obtain patent protection for its products and processes. The
Company is aware that a group working with Connetics Corporation has received
a United States patent related to autoimmune disease research that covers
technology similar to that used by the Company
There can be no assurance that the Company will be successful in these
opposition proceedings. An unfavorable outcome could have an adverse impact
on the Company's ability to consummate future corporate partnerships or
market autoimmune disease products in Europe. There can be no assurance that
the Company will be able to negotiate any necessary cross licenses, and if
not successful, failure to do so could have a negative impact on the Company.
There can be no assurance that the Company's patent applications will be
issued as patents or that any of its issued patents, or any patent that may
be issued in the future, will provide the Company with adequate protection
for the covered products, processes or technology.
The patent positions of biotechnology and pharmaceutical companies can be
highly uncertain, and involve complex legal and factual questions.
Therefore, the breadth of claims allowed in biotechnology and pharmaceutical
patents cannot be predicted. The Company also relies upon unpatented trade
secrets and know how, and no assurance can be given that others will not
independently develop substantially equivalent trade secrets or know how. In
addition, whether or not the Company's patents are issued, or issued with
limited coverage, others may receive patents which contain claims applicable
to the Company's product. There can be no assurance that any of the
Company's patents,
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or any patents issued to the Company in the future, will afford meaningful
protection against competitors. Defending any such patent could be costly to
the Company, and there can be no assurance that the patent would be held
valid by a court of competent jurisdiction.
The Company also relies on protecting its proprietary technology in part
through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. There can be no assurance
that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or independently discovered by its competitors.
It is possible that the Company's products or processes will infringe, or
will be found to infringe, patents not owned or controlled by the Company,
such as the patent owned by Connetics Corporation. If any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or
would be required to obtain licenses or redesign its products or processes to
avoid infringement. There can be no assurance that such licenses would be
available at all or on terms commercially reasonable to the Company or that
the Company could redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to
enforce patents issued to the Company or to protect trade secrets. Such
litigation could result in substantial costs and diversion of management
efforts regardless of the results of such litigation and an adverse result
could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed or require the Company to cease using
such technology.
HISTORY OF OPERATING LOSSES. As of December 31, 1997, the Company had an
accumulated deficit of $153.5 million. The Company has not generated
revenues from the commercialization of any products and expects to incur
substantial net operating losses over the next several years. There can be
no assurance that the Company will be able to generate sufficient product
revenue to become profitable at all or on a sustained basis. The Company
expects to have quarter-to-quarter fluctuations in expenses, some of which
could be significant, due to expanded research, development and clinical
trial activities.
LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS. Clinical testing, manufacture, promotion and sale of the
Company's drug products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies. The Company believes
that REMUNE and most of its other potential immune-based therapies will be
regulated by the FDA as biological drug products under current regulations of
the FDA. Biological products must be shown to be safe, pure and potent
(i.e., effective) and are subject to the same regulatory requirements as
nonbiological products under the FDC Act, as amended by the FDA Modernization
Act, except that a biological product licensed under the PHS Act is not
required to have an approved NDA under the FDC Act. The FDA Modernization
Act directed the FDA to take measures to minimize the differences in the
review and approval of marketing applications for biological and
nonbiological products. The FDA Modernization Act also made significant
revisions to the statutory requirements with regard to the approval of new
biological and nonbiological products. Among other things, the FDA
Modernization Act established a new statutory program for the approval of
fast track drugs, streamlined clinical research, and revised the content of
product approval applications and the FDA review process. The FDA is
required to issue regulations and guidelines in order to implement certain of
these new requirements. Until the FDA implements these regulations and
guidelines, it is impossible to predict the impact of the FDA Modernization
Act on the review and approval of any marketing applications that the Company
may submit to the FDA. The FDC Act, the PHS Act and other federal and state
statutes and regulations govern or influence the testing, manufacture,
safety, effectiveness, labeling, storage, recordkeeping, approval,
advertising, distribution and promotion of biological prescription drug
products. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, seizure of products, total or partial
suspension of product marketing, failure of the government to grant premarket
approval, withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive
and there can be no assurance that necessary FDA clearances will be obtained
in a timely manner, if at all. There can be no assurance as to the length of
the clinical trial period or the number of patients the FDA will require to
be enrolled in the clinical trials in order to establish the safety and
efficacy of the Company's products. The Company may encounter significant
delays or excessive costs in its efforts to secure necessary approvals, and
regulatory requirements are evolving and uncertain. Future United States or
foreign legislative or administrative acts could also prevent or delay
regulatory approval of the Company's products. There can be no assurance
that the Company will be able to obtain the necessary approvals for clinical
trials,
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manufacturing or marketing of any of its products under development. Even if
commercial regulatory approvals are obtained, they may include significant
limitations on the indicated uses for which a product may be marketed. In
addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well
as possible civil or criminal sanctions.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA. Reports of results of preclinical studies and
clinical trials for biological drug products are submitted to the FDA in the
form of a Biologics Licensing Application ("BLA") for approval for marketing
and commercial shipment. Submission of a BLA does not assure FDA approval
for marketing. The BLA review process may take a number of years to
complete, although reviews of applications for treatments of AIDS, cancer and
other life-threatening diseases may be accelerated or expedited. Failure of
the Company to receive FDA marketing approval for REMUNE or any of its other
products under development on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition to obtaining approval for each biological drug
product, an ELA usually must be filed and approved by the FDA.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the FDA's GMP requirements specifically
for biological drugs, as well as for other drugs. In complying with the FDA's
GMP requirements, manufacturers must continue to expend time, money and
effort in production, recordkeeping and quality control to assure that the
product meets applicable specifications and other requirements. Failure to
comply with the FDA's drug GMP requirements subjects the manufacturer to
possible FDA regulatory action. There can be no assurance that the Company
or its contract manufacturers, if any, will be able to maintain compliance
with the FDA's drug GMP requirements on a continuing basis. Failure to
maintain such compliance could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes its proprietary GeneDrug and cancer treatment therapies
will likely be regulated as biological products. As with the Company's other
potential products, the gene therapy and cancer products will be subject to
extensive FDA regulation throughout the product development process, and
there can be no assurance that any of these products will be successful at
securing the requisite FDA marketing approval on a timely basis, if at all.
The FDA Modernization Act also amended the FDC Act to permit expanded access
to individuals and larger groups to unapproved new therapeutic and diagnostic
products. Although the new law largely codifies existing FDA regulations in
this area, it expands access to all investigational therapies under certain
conditions. See "Business -- Government Regulation." Although the FDA has
granted expanded access to REMUNE for those patients who are ineligible to
enroll in the Phase III clinical endpoint trial, the FDA has to date not
designated expanded access protocols for REMUNE as "treatment" protocols.
Either expanded access or a treatment protocol designation might permit third
party reimbursement of some of the costs associated with making REMUNE
available to patients in such an expanded access context. There can be no
assurance that the FDA will determine that REMUNE meets all of the FDA's
criteria for use of an investigational drug for treatment use or that, even
if the product is allowed for treatment use, that third party payers will
provide reimbursement for any of the costs of treatment with REMUNE.
The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments. Under the accelerated approval program,
the FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely-debilitating illnesses,
especially when no satisfactory alternative therapy exists. In addition, the
FDA Modernization Act established a new statutory program for the approval of
fast track drugs, including biological products. See "Business -- Government
Regulation." There can be no assurance that the FDA will consider REMUNE or
any other of the Company's products under development to be an appropriate
candidate for accelerated approval, expedited review or fast track
designation.
To market any drug products outside of the United States, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented
by foreign health authorities, governing the design and conduct of human
clinical trials and marketing approval. The approval procedure varies among
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval.
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The foreign regulatory approval process includes all of the risks associated
with obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the health authorities of any other country. See
"Business -- Government Regulation."
TECHNOLOGICAL CHANGE AND COMPETITION. The biotechnology industry continues
to undergo rapid change and competition is intense in the fields of HIV,
autoimmune disease, cancer and gene therapy, and such competition is expected
to increase. The Company will compete with fully integrated pharmaceutical
companies, small biotechnology companies, universities and research
organizations. There can be no assurance that competitors have not or will
not succeed in developing technologies and products that are more effective
than any which have been or are being developed by the Company or which would
render the Company's technology and products obsolete and noncompetitive.
Many of the Company's competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than the Company. Accordingly, certain of the Company's
competitors may succeed in obtaining regulatory approval for products more
rapidly or effectively than the Company. If the Company commences commercial
sales of its products, it will also be competing with respect to
manufacturing efficiency and sales and marketing capabilities, areas in which
it currently has no experience. There can be no assurance that competitors
will not develop and commercialize more effective or affordable products.
DEPENDENCE ON THIRD PARTIES. The Company's strategy for the research,
development and commercialization of its products requires entering into
various arrangements with corporate collaborators, licensors, licensees and
others, and the Company's commercial success is dependent upon these outside
parties performing their respective contractual responsibilities, including
the analysis of the data generated in the Company's clinical trials. The
amount and timing of resources such third parties will devote to these
activities may not be within the control of the Company. There can be no
assurance that such parties will perform their obligations as expected and
the failure of third parties to perform their obligations would have a
material adverse effect on the Company. Although the Company has
collaborative agreements with several universities and research institutions,
the Company's agreement with Bayer is the only collaborative agreement that
provides the Company with contract revenue. There can be no assurance that
these collaborations will result in the development of any commercial
products. Immune Response intends to seek additional collaborative
arrangements to develop and commercialize certain of its products. There can
be no assurance that the Company will be able to negotiate collaborative
arrangements on favorable terms, or at all, in the future, or that its
current or future collaborative arrangements will be successful.
DEPENDENCE ON KEY PERSONNEL. Since its inception, Immune Response has relied
on the technical and management skills of its experienced staff. The Company
does not maintain key man life insurance on any of its personnel. The
Company's success also depends in large part upon its ability to attract and
retain highly qualified scientific and management personnel. The Company
faces competition for such personnel from other companies, academic
institutions, government entities and other organizations. There can be no
assurance that the Company will be successful in hiring or retaining
requisite personnel.
LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE. The Company has a
manufacturing facility for REMUNE located in King of Prussia, Pennsylvania,
and a pilot manufacturing facility in Carlsbad, California for its other
products. The Company has not yet manufactured its product candidates in
commercial quantities. No assurance can be given that the Company, on a
timely basis, will be able to make the transition from manufacturing clinical
trial quantities to commercial production quantities successfully or be able
to arrange for contract manufacturing. The Company believes it will be able
to manufacture REMUNE for initial commercialization, if the product obtains
FDA approval, but it has not yet demonstrated the capability to manufacture
REMUNE in commercial quantities, or its autoimmune disease, cancer and gene
therapy treatments in large-scale clinical or commercial quantities. The
Company has no experience in the sales, marketing and distribution of
pharmaceutical products. There can be no assurance that the Company will be
able to establish sales, marketing and distribution capabilities or make
arrangements with its collaborators, licensees or others to perform such
activities or that such efforts will be successful. There can be no assurance
of market acceptance of the Company's products, if they are developed and
approved for commercialization.
The manufacture of the Company's products involves a number of steps and
requires compliance with stringent quality control specifications imposed by
the Company itself and by the FDA. Moreover, the Company's products can only
be manufactured in a facility that has undergone a satisfactory inspection by
the FDA. For these reasons, the Company would not be able quickly to replace
its manufacturing capacity if it were unable to use its manufacturing
facilities as a result of a fire, natural disaster (including an earthquake),
equipment failure or other
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difficulty, or if such facilities are deemed not in compliance with the FDA's
drug GMP requirements and the non-compliance could not be rapidly rectified.
The Company's inability or reduced capacity to manufacture its products would
have a material adverse effect on the Company's business and results of
operations.
The Company may enter into arrangements with contract manufacturing companies
to expand its own production capacity in order to meet requirements for its
products, or to attempt to improve manufacturing efficiency. If the Company
chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely
affected. Further, contract manufacturers must also operate in compliance
with the FDA's drug GMP requirements; failure to do so could result in, among
other things, the disruption of product supplies. Until recently, biologic
product licenses could not be held by any company unless it performed
significant manufacturing operations. The FDA recently amended its
regulations in this regard, and the Company believes that under these new
regulations it can now hold licenses for its biological products without
performing significant manufacturing steps. Nonetheless, the Company's
potential dependence upon third parties for the manufacture of its products
may adversely affect the Company's profit margins and its ability to develop
and deliver such products on a timely and competitive basis.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS. The
Company's ability to earn sufficient returns on its products will depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations. Third party payors are increasingly challenging the
price of medical products and services. If purchasers or users of the
Company's products are not able to obtain adequate reimbursement for the cost
of using such products, they may forego or reduce such use. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and there can be no assurance that adequate third party
coverage will be available. Failure to obtain appropriate reimbursement would
have a material adverse effect on the Company.
PRODUCT LIABILITY EXPOSURE. The Company faces an inherent business risk of
exposure to product liability and other claims in the event that the
development or use of its technology or prospective products is alleged to
have resulted in adverse effects. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can be
no assurance that it will avoid significant liability exposure. Although the
Company currently carries product liability insurance for clinical trials,
there can be no assurance that the Company has sufficient coverage, or can
obtain sufficient coverage, at a reasonable cost. An inability to obtain
product liability insurance at acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. A product liability
claim could have a material adverse effect on the Company's business,
financial condition and results of operations.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS. Although the Company does not
currently manufacture commercial quantities of its product candidates, it
produces limited quantities of such products for its clinical trials. The
Company's research and development processes involve the controlled storage,
use and disposal of hazardous materials, biological hazardous materials and
radioactive compounds. The Company is subject to federal, state and local
laws and regulations 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. There can be no assurance that the
Company will not be required to incur significant costs to comply with
current or future environmental laws and regulations nor that the operations,
business or assets of the Company will not be materially or adversely
affected by current or future environmental laws or regulations.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of
Immune Response's common stock, like that of the common stock of many other
biopharmaceutical companies, has been and is likely to be highly volatile.
Factors such as the results of preclinical studies and clinical trials by the
Company, its collaborators or its competitors, other evidence of the safety
or efficacy of products of the Company or its competitors, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory actions, changes or announcements in reimbursement
policies, developments with the Company's collaborators, developments
concerning patent or other proprietary rights of the Company or its
competitors (including litigation), concern as to the safety of the Company's
products, period-to-period fluctuations in the Company's operating
25
<PAGE>
results, changes in estimates of the Company's performance by securities
analysts, market conditions for biopharmaceutical stocks in general and other
factors not within the control of the Company could have a significant
adverse impact on the market price of the common stock. The Company has
never paid cash dividends on its common stock and does not anticipate paying
any cash dividends in the foreseeable future.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation and Bylaws include provisions that could discourage potential
takeover attempts and make attempts by stockholders to change management more
difficult. The approval of 66 2/3 percent of the Company's voting stock is
required to approve certain transactions and to take certain stockholder
actions, including the calling of special meetings of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Certificate of Incorporation. Further, pursuant to the terms of its
stockholder rights plan, the Company has distributed a dividend of one right
for each outstanding share of common stock. These rights will cause
substantial dilution to the ownership of a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors and may
have the effect of deterring hostile takeover attempts.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
DENNIS J. CARLO, PH.D., age 54, a co-founder of the Company, has been
President and Chief Executive Officer since September 1994, and was Chief
Operating Officer from April 1987 to September 1994 and Assistant Corporate
Secretary and a Director since 1987. Dr. Carlo was Chief Scientific Officer
from April 1987 to September 1995 and Executive Vice President from October
1987 to September 1994. From January 1982 to May 1987, Dr. Carlo was Vice
President of Research and Development and Vice President of Therapeutic
Manufacturing at Hybritech Incorporated, a biotechnology company that was
acquired by Eli Lilly & Company ("Eli Lilly"), a pharmaceutical company, in
1986. From 1971 to 1981, Dr. Carlo held various positions at Merck & Co.,
Inc., including Director of Development and Basic Cellular Immunology and
Director of Bacterial Vaccines and Immunology. Dr. Carlo is also a director
of Vyrex Corporation. Dr. Carlo has authored or co-authored over 100 articles
and abstracts in the field of immunology. Dr. Carlo received his Ph.D., M.S.
and B.S. from Ohio State University.
STEVEN P. RICHIERI, R.PH., age 43, has served as Chief Operating Officer
since January 1998 and Senior Vice President, since October 1995, and was
Vice President, Medical and Regulatory Affairs from May 1992 to October 1995,
and Executive Director, Medical and Regulatory Affairs from October 1991 to
May 1992. From 1984 to 1991, Mr. Richieri held various positions with Dura
Pharmaceuticals, Inc. including Vice President, Regulatory and Technical
Affairs. From 1981 to 1984, Mr. Richieri worked in Regulatory Affairs with
Barnes Hind Inc., a subsidiary of Revlon, Inc. Prior to joining Barnes Hind
Inc., Mr. Richieri worked as a Pharmacist in the medical community. Mr.
Richieri received his M.B.A. from the University of San Diego and his B.S.
from Rutgers College of Pharmacy.
CHARLES J. CASHION, age 47, has been Senior Vice President, Finance and
Administration since January 1998 and Chief Financial Officer of the Company
since February 1989, Secretary of the Company since September 1989 and
Treasurer of the Company since May 1991, and was Vice President, Finance from
February 1989 to December 1997. From September 1987 to August 1989, Mr.
Cashion was Executive Vice President and Secretary of Smith Laboratories and
President and Chief Executive Officer of Sutter Corporation, a wholly owned
subsidiary of Smith Laboratories. From 1980 to 1987, Mr. Cashion was Vice
President, Chief Financial Officer and Treasurer of Smith Laboratories. Mr.
Cashion previously held positions at Baxter International, Inc., and
Motorola, Inc. Mr. Cashion received his M.B.A. and B.S. from Northern
Illinois University.
STEVEN W. BROSTOFF, PH.D., age 55, has been Chief Scientific Officer since
October 1995 and Vice President, Research and Development for the Company
since May 1992, and was Executive Director of Autoimmune Disease Research
from July 1988 to May 1992. From 1973 to 1988, Dr. Brostoff held various
positions within the Medical University of South Carolina including:
Director, University Research Development; Director, Medical Scientist
Training Program; Director, Program in Molecular and Cellular Biology and
Pathobiology; Professorships in Microbiology and Immunology, and in
Neurology; and served as Associate Dean of the Graduate School. During his
tenure at the University, Dr. Brostoff also served as a Visiting Scientist at
Oxford University in the United Kingdom. Prior to this, Dr. Brostoff held
positions with Albert Einstein College of Medicine, Merck Institute for
Therapeutic Research, the Salk Institute, and the Eleanor Roosevelt Institute
for Cancer Research. Dr. Brostoff received his Ph.D. and B.S. from the
Massachusetts Institute of Technology.
26
<PAGE>
FRED C. JENSEN, D.V.M., age 72, has served as Vice President, Virology
Research and Development since May 1992 and was Executive Director, Virology
Research from March 1988 to May 1992. From 1983 to 1987, Dr. Jensen was the
Senior Vice President of Cytotech, Inc. From 1973 to 1982, Dr. Jensen served
as an Associate Member with Scripps Clinic and Research Foundation in various
scientific disciplines including Immunopathology and Cellular and Development
Immunology. Prior to joining Scripps, Dr. Jensen worked with Wistar Institute
and Microbiological Associates. Dr. Jensen received his D.V.M. from the
University of BRNO, School of Veterinary Medicine in Czechoslovakia after
completion of undergraduate studies.
PAULA B. ATKINS, age 44, has been Vice President, Administration of the
Company since September 1992, and was Executive Director, Administration from
June 1991 to September 1992, and Director, Administration from March 1988 to
June 1991. From January 1985 to March 1988, Ms. Atkins was Director of Human
Resources and Administration for Access Research Corporation. Ms. Atkins held
positions previously with Foodmaker, Inc., a wholly owned subsidiary of
Ralston Purina, and Scripps Clinic and Research Foundation. Ms. Atkins
received her M.S. and B.A. from San Diego State University.
27
<PAGE>
ITEM 2. PROPERTIES
The Company leases a 50,000 square foot laboratory and headquarters facility
located in Carlsbad, California. Under the terms of the lease, which expires
on December 31, 2000, and has two five-year options to extend, current
monthly rental on the facility is approximately $64,500.
The Company also expects to begin leasing, in May 1998, a 31,200 square foot
facility located adjacent to its headquarters facility in Carlsbad,
California. The Company expects this facility to be used for additional
laboratory and office space. Under the terms of the lease, which is expected
to expire in March 2008, initial monthly rental on the facility will be
approximately $18,400. The Company has also delivered to the lessor a Letter
of Credit for $600,000 as an additional security deposit.
The Company subleases a 51,000 square foot manufacturing facility located in
King of Prussia, Pennsylvania. Under the terms of the sublease which expires
on September 30, 2000, the monthly rental on the facility is approximately
$28,450. The Company has an option to extend the sublease for up to six
years, in three-year increments. The Company has also delivered to the
sublessor a Letter of Credit for $203,200 as an additional security deposit.
The Company owns 4.65 acres of undeveloped property adjacent to its
headquarters facility in Carlsbad, California. This property may be used in
the future as a manufacturing facility or for additional laboratory and
office space.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market ("NNM") under
the symbol "IMNR." The following table sets forth the range of high and low
sales prices for the Common stock on the NNM for the periods indicated since
January 1, 1996.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
January 1 - March 31, 1996 $ 8.50 $ 4.75
April 1 - June 30, 1996 15.25 5.94
July 1 - September 30, 1996 11.38 7.13
October 1 - December 31, 1996 9.63 6.52
1997
----
January 1 - March 31, 1997 $ 9.13 $ 6.06
April 1 - June 30, 1997 9.13 6.50
July 1 - September 30, 1997 14.25 7.38
October 1 - December 31, 1997 13.75 9.00
</TABLE>
As of March 20, 1998, the Company's Common Stock was held by 969 stockholders
of record. The Company has never paid cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract research revenue $ 2,000 $ 1,000 $ 1,561 $ 6,035 $ 4,768
Licensed research revenue --- 6,000 --- 1,000 ---
Research and development expenses 34,090 27,211 19,489 13,511 11,854
Net loss (33,557) (21,026) (19,936) (17,399) (15,738)
Net loss per share - Basic (1.53) (1.19) (1.19) (1.05) (.95)
Shares used in computing net loss
per share 21,883 17,658 16,750 16,614 16,550
DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, marketable
securities and short-term investments $30,439 $47,787 $44,610 $59,328 $75,359
Working capital 28,939 45,684 43,586 59,226 75,691
Total assets 37,375 54,086 50,429 68,483 86,680
Stockholders' equity 35,102 51,304 48,441 67,086 84,915
</TABLE>
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Immune Response is a biopharmaceutical company developing immune-based
therapies to induce specific T cell responses for the treatment of HIV,
autoimmune diseases and cancer. The Company is conducting clinical trials
for its immune-based therapies for HIV, rheumatoid arthritis, psoriasis,
multiple sclerosis, colon cancer and brain cancer and preclinical studies for
prostate cancer. In addition, the Company is developing a targeted delivery
technology for gene therapy which is designed to enable the intravenous
injection of genes for delivery directly to the liver. The Company's gene
therapy program is currently focused on diseases of the liver and is in
preclinical studies for the treatment of hemophilia and hepatitis. The
Company's strategy is to retain ownership of these proprietary technologies
and to seek corporate collaborations or joint ventures for certain
disease-specific applications.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements
are subject to risks and uncertainties which could cause actual results to
differ materially from those projected. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors,"
as well as those discussed elsewhere in this Form 10-K. The following should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. These forward-looking
statements speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
During 1997, the Company completed a $16.0 million private placement of units
consisting of common stock and warrants to purchase common stock of the
Company. These units were separately purchased at a price of $7.80 per unit
by two directors of the Company, one of whom is the Company's President and
Chief Executive Officer. The units sold in the private placement consisted
of 2,051,281 shares of common stock plus warrants exercisable for 2,051,281
shares of common stock. The warrants, with an exercise price of $14.00 per
share, are callable by the Company if the Company's common stock trades at
$28.00 per share or greater for 45 consecutive days. The warrants expire on
April 17, 2001. The shares and warrants are unregistered and are not
transferable until April 1998.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
implemented a plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four digits
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that the Year 2000 problem
will not pose significant operational problems for the Company's computer
systems.
The Company has not been profitable since inception and had an accumulated
deficit of $153.5 million as of December 31, 1997. To date, the Company has
not recorded any revenues from the sale of products. Revenues recorded
through December 31, 1997 were earned in connection with contract research,
licensing of technologies and investment income. The Company expects its
operating losses to continue to increase over the next several years, as well
as to have quarter-to-quarter fluctuations, some of which could be
significant, due to expanded research, development and clinical trial
activities. There can be no assurance that the Company will be able to
generate sufficient product revenue to become profitable at all or on a
sustained basis.
RESULTS OF OPERATIONS
License and contract research revenues of $2 million in 1997 and $7 million
in 1996, were received from Bayer Corporation related to a research
collaboration for a potential therapy for hemophilia which began in July
1996. Contract research revenues of $1.6 million in 1995 were primarily
derived from a research and development agreement from the Company's former
joint venture with Rhone-Poulenc Rorer Inc. ("Joint Venture"). Revenues
derived from this agreement included reimbursement for research and
development costs and certain administrative expenses. The Company has not
received any revenue from the commercial sale of products and may not derive
revenue from the sale of products for the foreseeable future.
31
<PAGE>
Investment income was $2.4 million in 1997, $2.6 million in 1996 and $3.0
million in 1995. The fluctuation in investment income over the past three
years was due to the Company's cash position during that period, as well as
to the fluctuation in interest rates.
The Company's research and development expenses have increased substantially
over the past three years from $19.5 million in 1995, to $27.2 million in
1996, to $34.1 million in 1997. These increases were due primarily to the
expansion of clinical testing and regulatory management of REMUNE, as well as
increased staffing levels and purchases of laboratory materials and supplies
related to the assumption of the manufacturing responsibility of REMUNE from
the Joint Venture. The Company has also expanded its autoimmune disease
research programs, including Phase II clinical trials with a rheumatoid
arthritis treatment and a psoriasis treatment. In addition, research and
development expenditures have increased related to research using GeneDrug
delivery and cancer treatments. Research and development expenses are
expected to continue to rise in the foreseeable future due to expanding
preclinical and clinical testing of the Company's proposed treatments.
The Company's costs incurred for the development of REMUNE during 1997, 1996
and 1995 were $23.7 million, $17.8 million and $11.3 million, respectively.
Costs incurred for the development of potential products in the autoimmune
disease program were $3.9 million, $4.3 million and $4.1 million for the
years 1997, 1996 and 1995, respectively. The gene therapy program incurred
costs in 1997, 1996 and 1995 of $4.9 million, $4.3 million and $3.7 million,
respectively. The cancer program, which began in 1996, incurred costs of
$1.6 million through December 31, 1997 and $756,000 during 1996.
General and administrative expenses were $3.9 million in 1997, $3.4 million
in 1996 and $3.7 million in 1995. General and administrative expenses
increased in 1997 compared to 1996 primarily due to the Company evaluating
corporate strategies. General and administrative expenses decreased in 1996
compared to 1995 primarily due to the additional costs incurred in 1995
related to the Company's acquisition of Rhone-Poulenc Rorer's interest in the
Joint Venture. General and administrative expenses necessary to support
corporate activities are expected to increase in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December, 1997, the Company had working capital of $28.9 million,
including $30.4 million of cash, cash equivalents, marketable securities and
short-term investments. This compares with working capital as of December
31, 1996 of $45.7 million, including $47.8 million of cash, cash equivalents,
marketable securities and short-term investments. Working capital decreased,
despite the $16.0 million received from the private placement of common stock
and warrants in 1997, as a result of normal costs of operations, in
particular, due to the cost of the HIV clinical trials with REMUNE.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in 1998, the REMUNE clinical
trials will cost approximately $10 million, and the manufacturing, research
and all other expenses associated with the product will cost approximately an
additional $15 million. The Company also anticipates that costs related to
the development of REMUNE will continue to increase as the Company approaches
possible commercialization. The anticipated costs with respect to REMUNE
will depend on many factors, including the results of interim analyses of the
data from the Phase III clinical endpoint trial, the potential for
accelerated approval and certain other factors which will influence the
Company's determination of the appropriate continued investment of the
Company's financial resources in this program. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the scope and results of
preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing scale-up, effective commercialization activities and
arrangements and other factors not within the Company's control. The Company
intends to seek additional funding through public or private financings,
arrangements with corporate collaborators or other sources. If funds are
acquired through collaborations, the Company will likely be required to
relinquish some or all rights to products that the Company may have otherwise
developed itself. Adequate funds may not be available when needed or on
terms acceptable to the Company. Insufficient funds may require the Company
to scale back or eliminate some or all of its research and development
programs or license to third parties products or technologies that the
Company would otherwise seek to develop itself. The Company believes that
its existing resources, including interest thereon, will enable the Company
to maintain its current and planned operations through 1998.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election of
Directors" and "Other Matters" contained in the Company's Proxy Statement to be
filed with the Securities and Exchange
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Compensation of Executive Officers and Directors"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) (1) Financial Statements
The consolidated financial statements required by this item are submitted in
a separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
Consolidated Financial Statements of The Immune Response Corporation
--------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the
three years ended December 31, 1997 F-3
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1997 F-4
Consolidated Statements of Cash Flows for the
three years ended December 31, 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed identified. See paragraph (c) below.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the fourth quarter
of the fiscal year ended December 31, 1997.
(c) Exhibits
3(i)(6) Restated Certificate of Incorporation of The Immune Response
Corporation.
3(ii)(6) Restated Bylaws of The Immune Response Corporation.
10.1(7) Amended and Restated 1989 Stock Plan of The Immune Response
Corporation.
10.13(1) Assignment, dated May 27, 1988, by Jonas Salk and Dennis J. Carlo,
assignors, to the Company.
10.14(1) Assignment, dated May 27, 1988 by Jonas Salk to the Company.
10.17(1) Lease, dated as of May 22, 1989, between the Company and BDN Carlsbad
#1 Limited Partnership.
10.28(5)* Form of Indemnification Agreement entered into between the Company
and its officers and directors.
10.36(2) First Amendment, dated February 19, 1990, to Lease between BDN
Carlsbad #1 Limited Partnership and the Company.
10.37* Amended and Restated 1990 Directors' Stock Option Plan of The
Immune Response Corporation.
10.42(3) Second and Third Amendments to the Lease, dated as of May 22, 1989,
between the Company and BDN Carlsbad #1 Limited Partnership.
35
<PAGE>
10.47(4) Rights Agreement, dated February 26, 1992, between the Company and
First Interstate Bank, Ltd., as Rights Agent.
10.53* Form of The Immune Response Corporation Special Nonstatutory Stock
Option Agreement.
10.55 Stock Purchase Agreement dated as of September 15, 1995, between
The Immune Response Corporation and Trinity Medical Group Co., Ltd.
10.56 Sublease dated as of March 2, 1995, between Immunization Products
Limited and Rhone-Poulenc Rorer Pharmaceuticals Inc.
10.57 Amendment No. 1 to sublease dated as of June 5, 1995, between
Immunization Products Limited and Rhone-Poulenc Rorer Pharmaceuticals
Inc.
10.58(8) Collaboration Agreement by and between The Immune Response
Corporation and Bayer Corporation, dated as of July 8, 1996.
10.59(9) Unit Purchase Agreement, dated April 15, 1997, between The Immune
Response Corporation and Kevin B. Kimberlin, including Common Stock
Purchase Warrant, Promissory Note and Stock Pledge Agreement.
10.60(9) Unit Purchase Agreement, dated April 15, 1997, between The Immune
Response Corporation and Dennis J. Carlo, Ph.D., including Common
Stock Purchase Warrant, Promissory Note and Stock Pledge Agreement.
10.61(9) Amendment No. 1 to Rights Agreement (Exhibit 10.47), dated April 17,
1997, between The Immune Response Corporation and Harris Trust
Company of California
10.62(10) Common Stock Purchase Warrant, dated June 26, 1997, between The
Immune Response Corporation and Kevin B. Kimberlin.
10.63(10) Common Stock Purchase Warrant, dated June 26, 1997, between The
Immune Response Corporation and Dennis J. Carlo, Ph.D.
10.64 Lease, dated December 15, 1997, between the Company and The Childs
Family Investment Partnership, L.P. and The A.J. Gardner Family
Trust, U/T/A 3/5/81.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (see page 37).
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(2) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-34096.
(3) Incorporated by reference to the exhibits of the same number to the
Company's Report on Form 10-K for the Fiscal Year ended December 31, 1990
(Commission File No. 0-18006).
(4) Incorporated by reference to Exhibit 5.1 to the Company's Report on Form
8-K filed March 4, 1992 (Commission File No 0-18006).
(5) Incorporated by reference to the exhibits of the same number to the
Company's Registration Statement on Form S-1, No. 33-31057.
(6) Exhibits 3(i) and 3(ii) are incorporated by reference to Exhibits 4.1 and
4.2 respectively, to the Company's Registration Statement on Form S-8, No.
33-62940.
(7) Incorporated by reference to the exhibit of the same number to the
Company's Registration Statement on Form S-8, No. 33-80884.
(8) Incorporated by reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K, as amended, dated July 8, 1996. Confidential treatment has
been granted for certain portions of the Exhibit.
(9) Incorporated by reference to the Exhibits of the same number filed with the
Company's March 31, 1997 Form 10-Q.
(10) Incorporated by reference to the Exhibits of the same number filed with the
Company's June 30, 1997 Form 10-Q.
* Indicates management contract or compensatory plan or arrangement.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE IMMUNE RESPONSE CORPORATION
By: /s/ DENNIS J. CARLO
----------------------------------
Dennis J. Carlo,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis J. Carlo and Charles J. Cashion his
attorneys-in-fact, each with full power of substitution, for him in any and
all capacities, to sign any amendments to this Report and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
/s/ James B. Glavin Chairman of the March 23, 1998
- ----------------------------- Board of Directors
James B. Glavin
/s/ Dennis J. Carlo President, March 23, 1998
- ----------------------------- Chief Executive Officer,
Dennis J. Carlo and Director
/s/ Charles J. Cashion Senior Vice President, March 23, 1998
- ----------------------------- Finance and Administration,
Charles J. Cashion Chief Financial Officer
Secretary and Treasurer
/s/ Kevin B. Kimberlin Director March 23, 1998
- -----------------------------
Kevin B. Kimberlin
/s/ Gilbert S. Omenn Director March 23, 1998
- -----------------------------
Gilbert S. Omenn
/s/ Melvin Perelman Director March 23, 1998
- -----------------------------
Melvin Perelman
37
<PAGE>
/s/ John Simon Director March 23, 1998
- -----------------------------
John Simon
/s/ William M. Sullivan Director March 23, 1998
- -----------------------------
William M. Sullivan
/s/ Philip M. Young Director March 23, 1998
- -----------------------------
Philip M. Young
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
The Immune Response Corporation:
We have audited the accompanying consolidated balance sheets of The Immune
Response Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Immune Response Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 19, 1998
F1
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,872 $ 3,786
Marketable securities-available-for-sale 25,567 42,736
Short-term investment -- 1,265
Other current assets 773 680
------------ -----------
Total current assets 31,212 48,467
Property and equipment, net 5,810 5,570
Deposits and other assets 353 49
------------ -----------
$ 37,375 $ 54,086
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,356 $ 1,871
Accrued expenses 562 497
Deferred rent obligation 355 414
------------ -----------
Total current liabilities 2,273 2,782
Commitments (Note 3)
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized:
none issued -- --
Common stock, $.0025 par value, 40,000,000
shares authorized, 22,815,054 and 20,229,719
shares issued and outstanding at
December 31, 1997 and 1996, respectively 57 51
Warrants 2,144 --
Additional paid-in capital 186,374 171,056
Unrealized gain on marketable securities 27 140
Accumulated deficit (153,500) (119,943)
------------ -----------
Total stockholders' equity 35,102 51,304
------------ -----------
$ 37,375 $ 54,086
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
F2
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Contract research revenue $ 2,000 $ 1,000 $ 1,561
Licensed research revenue -- 6,000 --
----------- ----------- -----------
2,000 7,000 1,561
Expenses:
Research and development 34,090 27,211 19,489
General and administrative 3,904 3,420 3,684
----------- ----------- -----------
37,994 30,631 23,173
Other revenue and expense:
Investment income 2,437 2,605 2,960
Equity in operations of joint venture -- -- (1,284)
----------- ----------- -----------
2,437 2,605 1,676
----------- ----------- -----------
Net loss $ (33,557) (21,026) $ (19,936)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share - Basic $ (1.53) $ (1.19) $ (1.19)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares outstanding 21,883,235 17,658,383 16,750,460
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F3
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain
Common Stock Additional (Loss) on Total
-------------- Paid-in Marketable Accumulated Stockholders'
Shares Amount Warrants Capital Securities Deficit Equity
------ ------ -------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 16,740 $ 42 $ --- $ 146,634 $ (610) $ (78,981) $ 67,085
Issuance of common stock from exercise of options 49 --- --- 136 --- --- 136
Change in unrealized gain (loss) on marketable
securities --- --- --- --- 1,155 --- 1,155
Net loss --- --- --- --- --- (19,936) (19,936)
------ ------ -------- ---------- ---------- ----------- ------------
Balance at December 31, 1995 16,789 42 --- 146,770 545 (98,917) 48,440
Issuance of common stock in private stock
transactions 568 1 --- 7,999 --- --- 8,000
Issuance of common stock from public offering,
net of issuance costs of $1,189,000 2,530 7 --- 15,250 --- --- 15,257
Issuance of common stock from exercise of options 343 1 --- 1,037 --- --- 1,038
Change in unrealized gain (loss) on marketable
securities --- --- --- --- (405) --- (405)
Net loss --- --- --- --- --- (21,026) (21,026)
------ ------ -------- ---------- ---------- ----------- ------------
Balance at December 31, 1996 20,230 51 --- 171,056 140 (119,943) 51,304
Issuance of common stock and warrants in
private transaction, net of issuance
costs of $360,000 (Note 4) 2,051 5 2,144 13,491 --- --- 15,640
Issuance of common stock from exercise of options 534 1 --- 1,827 --- --- 1,828
Change in unrealized gain (loss) on marketable
securities --- --- --- --- (113) --- (113)
Net loss --- --- --- --- --- (33,557) (33,557)
------ ------ -------- ---------- ---------- ----------- ------------
Balance at December 31, 1997 22,815 $ 57 $ 2,144 $ 186,374 $ 27 $ (153,500) $ 35,102
------ ------ -------- ---------- ---------- ----------- ------------
------ ------ -------- ---------- ---------- ----------- ------------
See accompanying notes.
</TABLE>
F4
<PAGE>
THE IMMUNE RESPONSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss $ (33,557) $ (21,026) $ (19,936)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,266 848 1,038
Equity in operations of joint venture --- --- 1,284
Other --- --- 374
Deferred rent expense (59) (30) (1)
Changes in operating assets and liabilities:
Research contract receivable from a
related party --- --- (1,199)
Other current assets (93) 284 332
Accounts payable (515) 713 651
Accrued expenses 64 111 73
----------- ----------- -----------
Net cash used by operating activities (32,894) (19,100) (17,386)
Investing activities:
Purchase/sale of marketable securities, net 18,322 6 15,543
Purchase of short-term investment --- (1,265) ---
Purchase of property and equipment (2,526) (1,613) (442)
Net proceeds from sale of equipment --- --- 1,948
Sale of land 1,020 --- ---
Other assets (304) --- 4
----------- ----------- -----------
Net cash provided from (used by)
investing activities 16,512 (2,872) 17,053
Financing activities:
Net proceeds from sale of common stock through
public offering --- 15,256 ---
Proceeds from other sales of common stock --- 8,000 ---
Net proceeds from sale of common stock and
warrants through private offering 15,640 --- ---
Net proceeds from exercise of stock options 1,829 1,038 136
Payment on debt and capital lease obligations --- --- (132)
----------- ----------- -----------
Net cash provided from financing activities 17,469 24,294 4
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,087 2,322 (329)
Cash and cash equivalents at beginning of year 3,785 1,463 1,792
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,872 $ 3,785 $ 1,463
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of noncash investing
and financing activities:
Equipment received from liquidation of joint
venture $ --- $ --- $ 2,009
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F5
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Immune Response Corporation (the "Company"), a Delaware corporation, is a
biopharmaceutical company with proprietary technologies in four core areas:
Human Immunodeficiency Virus ("HIV"), autoimmune disease, gene therapy and
cancer. The Company is conducting clinical trials for potential immune-based
therapies for HIV, rheumatoid arthritis, psoriasis, multiple sclerosis, brain
and colon cancers. The Company has potential gene therapies in preclinical
studies for hemophilia and hepatitis. The Company intends to retain ownership of
its core technologies and to license selected applications.
The Company's products are in various stages of development. Prior to
generating product revenues, the Company must complete the development of its
products, including several years of human clinical testing, and receive
regulatory approvals prior to selling these products in the human health care
market. No assurance can be given that the Company's products will be
successfully developed, regulatory approvals will be granted, or patient and
physician acceptance of these products will be achieved.
The Company faces additional risks associated with biopharmaceutical companies
whose products are in various stages of development. These risks include, among
others, the Company's need for additional financing to complete its research and
development programs and commercialize its technologies. There is no assurance
such financing will be available to the Company when required or that such
financing would be available under favorable terms.
The Company believes that patents and other proprietary rights are important to
its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to the development of its business. The patent positions of
pharmaceutical and biotechnology firms, including the Company, are uncertain and
involve complex legal and factual questions for which important legal principles
are largely unresolved.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares are excluded as
the effect would be antidilutive.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 128, "Earnings per Share." The
Company adopted these new rules effective December 15, 1997. The adoption of
this new standard did not have an impact upon current or previously reported
earnings per share.
In December 1997, the Company adopted SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement establishes standards for disclosing
information about an entity's capital structure. This Statement is effective
for financial statements for periods ending after December 15, 1997. The
adoption of SFAS No. 129, in fiscal 1997, did not have an effect on the
Company's results of operations or financial position.
During July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners
("comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
The Company does not anticipate that the adoption of the accounting and
disclosure provisions of SFAS No. 130 will have an impact on the Company's
financial statements and results of operations.
F6
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. Government securities and money
market accounts. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated or amortized over
the estimated useful lives of the assets (five to seven years) or the lease term
using the straight-line method. Property and equipment consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(IN THOUSANDS) 1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 1,246 $ 1,078
Equipment 1,393 1,064
Leasehold improvements 7,034 6,344
Land 1,339 --
-------- --------
11,012 8,486
Less accumulated depreciation and
amortization (5,202) (3,936)
-------- --------
5,810 4,550
Land held for sale -- 1,020
-------- --------
$ 5,810 $ 5,570
-------- --------
-------- --------
</TABLE>
INCOME TAXES
All income tax amounts have been computed in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this statement, the liability method is used to account for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax base of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences reverse.
2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of cash and time deposits with original
maturities of less than three months. Short-term investments are stated at
market.
Marketable securities consist of treasury securities with maturities of more
than three months. The Company has classified all of its marketable securities
as available-for-sale securities. The following table summarizes
available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
GROSS GROSS
(IN THOUSANDS) UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Government Securities $ 25,540 $ 99 $ 72 $ 25,567
--------- --------- --------- ---------
--------- --------- --------- ---------
DECEMBER 31, 1996
U.S. Government Securities $ 42,596 $ 198 $ 58 $ 42,736
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The net realized losses on sales of available-for-sale securities totaled
$16,000 for the year ended December 31, 1997.
F7
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 17,957 $ 17,961
Due after one year through
three years 7,583 7,606
--------- ---------
$ 25,540 $ 25,567
--------- ---------
--------- ---------
</TABLE>
3. COMMITMENTS
The Company leases its offices, research facility and certain office and
laboratory equipment under operating lease agreements. The equipment lease
agreements require monthly payments through September 1998. The office and
research facility lease agreement, which commenced in January 1991, is for a
term of ten years, with two five-year options to extend. In connection with this
lease, the Company received certain deferred payment terms and the minimum
annual rent is subject to certain annual increases. Rent is being expensed on a
straight-line basis over the term of the lease. Deferred rent reflected in the
accompanying balance sheet represents the difference between rent expense
accrued and amounts actually paid under the terms of the lease.
At December 31, 1997, future minimum rental payments due under the Company's
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
--------------
<S> <C>
(in thousands)
1998 $2,859
1999 2,242
2000 1,488
2001 241
2002 249
Thereafter 1,429
--------
$ 8,508
--------
--------
</TABLE>
Included in the 1998 balance is $600,000 to purchase a certificate of deposit to
be used as collateral for a letter of credit that will be delivered to the
landlord of a facility the Company expects to begin leasing in April 1998.
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $2.4
million, $3.2 million, and $2.5 million, respectively.
4. STOCKHOLDERS' EQUITY
STOCK TRANSACTIONS
During 1997, the Company completed a $16.0 million private placement of units
consisting of common stock and warrants to purchase common stock of the Company.
These units were purchased at a price of $7.80 per unit by a director of the
Company, and the Company's and President and Chief Executive Officer. The units
sold in the private placement consisted of 2,051,281 shares of common stock plus
warrants exercisable for 2,051,281 shares of common stock. The warrants, with
an exercise price of $14.00 per share, are callable by the Company if the
Company's common stock trades at $28.00 per share or greater for 45 consecutive
days. The warrants expire on April 17, 2001. The shares and warrants are
unregistered and are not transferable until April 1998.
In April 1996, the Company received $5 million from Trinity Medical Group Co.,
Ltd. of Bangkok, Thailand for the purchase of the Company's common stock at $15
per share. Trinity has also agreed to make additional equity investments of up
to $10 million based on the achievement of certain regulatory and commercial
milestones and governmental approvals.
F8
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
STOCK TRANSACTIONS - CONTINUED
In October 1996, the Company entered into an agreement with Viru-Tech Limited to
develop and distribute REMUNE in South America and Central America. Under the
agreement, Viru-Tech Limited purchased $3 million of the Company's common stock.
Also in October 1996, the Company issued 2,530,000 shares, at $6.50 per share,
in an underwritten public offering. Net proceeds from this offering were $15.3
million.
STOCK OPTIONS
The Company has established various stock option plans to grant options to
purchase common stock to employees and non-employee directors of the Company and
certain other individuals. The plans authorize the Company to issue or grant
qualified and non-qualified options to purchase up to 6,150,000 shares of its
common stock.
Under the terms of the 1989 Stock Plan, options may be granted at not less than
100% and 85% of fair market value as of the date of grant for qualified and
non-qualified options, respectively. To date, all options have been issued at
100% of fair market value. These options primarily become exercisable over a
four year period from the date of grant.
During April 1995, the Company offered holders of stock options issued under the
1989 Stock Plan, with the exception of members of the Board of Directors, the
opportunity to exchange an issued stock option for a new stock option on a
one-for-one basis on April 19, 1995. The new stock option price per share of
$3.25 exceeded the market value of the Company's stock on that day. The stock
options will continue the vesting schedule of the exchanged stock options. Of
the 2,305,885 eligible stock options, 2,213,581 were exchanged for new options.
The 1990 Directors' Stock Option Plan provides for the Company to issue or grant
non-qualified options to purchase up to 650,000 common shares to its
non-employee directors. Under the terms of the plan, options will be granted at
the fair market value as of the date of grant. These options become exercisable
in four equal annual installments on each of the first four anniversaries of the
date of grant. Additionally, the 1990 Directors' Stock Option Plan provides that
upon each date of the Company's Annual Meeting of the Stockholders, non-employee
directors are eligible to receive a grant of 6,250 shares at the fair market
value on date of grant, with a one-year vesting schedule.
Activity with respect to the various stock plans is summarized as follows:
<TABLE>
<CAPTION>
STOCK WEIGHTED
OPTIONS AVERAGE
(IN THOUSANDS) OUTSTANDING PRICE
----------- -----------
<S> <C> <C>
Balance at December 31, 1994 3,198 $11.45
Granted 637 3.38
Exercised (48) 2.82
Cancelled (186) 13.39
-----------
Balance at December 31, 1995 3,602 3.91
Granted 902 7.29
Exercised (342) 3.03
Cancelled (111) 4.69
-----------
Balance at December 31, 1996 4,050 4.71
Granted 578 8.34
Exercised (534) 3.42
Cancelled (91) 6.75
-----------
Balance at December 31, 1997 4,003 5.36
-----------
-----------
</TABLE>
The weighted avereage remaining useful life of the outstanding stock options
at December 31, 1997 is approximately six years. At December 31, 1997,
6,887,558 shares of common stock were reserved for the exercise of stock
options.
F9
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Company has adopted the disclosure-only provisions of FAS 123. Accordingly,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1997 consistent with the
provisions of FAS 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except
per share data) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss - as reported $33,557 $ 21,026 $ 19,936
Net loss - pro forma $45,290 $ 30,078 $ 25,480
Net loss per share - as reported $ 1.53 $ 1.19 $ 1.19
Net loss per share - pro forma $ 2.07 $ 1.70 $ 1.52
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: risk free interest rate of 5.72%, expected
option life of 5 years, expected volatility of .8288 and a dividend rate of
zero.
Because FAS 123 has not been applied to options granted prior to January 1,
1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred stock.
No shares of preferred stock were outstanding at December 31, 1996 or 1997.
STOCKHOLDER RIGHTS PLAN
The Company has a Stockholder Rights Plan that provides for the distribution of
a preferred stock purchase right (a "Right") as a dividend for each share of the
Company's common stock of record held at the close of business on March 12,
1992, as well as all future stock issuances. Under certain conditions involving
an acquisition by any person or group of 15% or more of the common stock, the
Rights permit the holders (other than the 15% holder) to purchase the Company's
common stock at a 50% discount upon payment of an exercise price of $150 per
Right. In addition, in the event of certain business combinations, the Rights
permit the purchase of the common stock of an acquiror at a 50% discount. Under
certain conditions, the Rights may be redeemed by the Board of Directors in
whole, but not in part, at a price of $.01 per Right. The Rights have no voting
privileges and are attached to and automatically trade with the Company's common
stock. The Rights expire February 26, 2002.
5. LICENSE AGREEMENT
In July 1996, Immune Response entered into an agreement with Bayer Corporation
("Bayer"), the United States affiliate of Bayer AG of Leverkusen, Germany, to
develop gene therapy products for the treatment of hemophilia A, a hereditary
blood clotting disorder. Bayer made an initial license payment of $6 million
upon signing this agreement. Bayer also purchased $4 million of Immune Response
Common Stock in the Company's public stock offering completed in October 1996.
In addition, during the term of the agreement, the Company will receive research
funding from Bayer for Immune Response's hemophilia A program and may receive
milestone payments and royalties on future sales, if a product is developed and
commercialized. Under the agreement, Bayer is responsible for all medical and
regulatory activities associated with developing any potential hemophilia A
products, and will also be responsible for commerical-scale manufacturing and
commercialization of any such product developed. The agreement provides Bayer
with a worldwide license to the Company's GeneDrug-TM- technology for the
delivery of the Factor VIII gene and the option to enter into negotiations with
the Company to use this technology to treat other blood coagulation disorders.
F10
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. INVESTMENT IN JOINT VENTURE
Immunization Products Limited (the "Joint Venture"), a joint venture between the
Company and Rhone-Poulenc Rorer Inc., was formed to develop, manufacture and
market certain products related to the diagnosis and treatment of human
immunodeficiency virus infection.
In March 1995, the Company regained all manufacturing, marketing and
distribution rights for REMUNE from Rhone-Poulenc Rorer Inc. The Company also
assumed control and responsibility for the Joint Venture's manufacturing
facility. The Company agreed to pay Rhone-Poulenc Rorer Inc. up to $3 million
in royalties on future commercial sales of REMUNE, or upon certain transactions
involving licensing rights to REMUNE to a future corporate partner.
7. INCOME TAXES
At December 31, 1997, the Company had federal and California tax net operating
loss carryforwards of approximately $124.4 million and $19.4 million,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to capitalized research and development
expenses for California and the 50% limitation of California loss carryforwards.
The federal tax loss carryforwards will begin expiring in 2002, unless
previously utilized, while the California tax loss carryforwards began to expire
in 1995. The Company also has federal and California research and development
tax credit carryforwards of $6 million and $2.1 million, respectively, which
begin expiring in 2002 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards will be limited because of
a cumulative change in ownership of more than 50% which occurred during 1992.
However, the Company does not believe such change will have a material impact
upon the utilization of these carryforwards. Included in the federal loss
carryforwards are approximately $4.4 million of acquired net operating loss
carryforwards that can only be used to the extent of the separate taxable income
of the acquired company.
The components of the Company's deferred tax assets as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(IN THOUSANDS) 1996 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards $ 32,776 $ 43,460
Unused research and development credits 5,100 8,100
Capitalized research and development 3,200 5,026
Other 803 1,054
--------- ---------
41,879 57,640
Valuation allowance (41,879) (57,640)
--------- ---------
$ -- $ --
--------- ---------
--------- ---------
</TABLE>
Approximately $4.2 million of the valuation allowance at December 31, 1997
relates to benefits of stock options which, when recognized, will be allocated
directly to stockholders' equity.
F11
<PAGE>
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. QUARTERLY RESULTS (UNAUDITED)
The following unaudited quarterly financial information includes, in
management's opinion, all normal and recurring adjustments necessary to fairly
state the Company's consolidated results of operations and related information
for the periods presented. Net loss per share has been computed using the
weighted average shares outstanding during each quarter.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Contract research revenue $ 1,000 $ -- $ 1,000 $ --
Operating expenses (9,592) (10,602) (8,458) (9,342)
-------- -------- -------- --------
Loss from operations (8,592) (10,602) (7,458) (9,342)
Other income (expense) 609 669 591 568
-------- -------- -------- --------
Net loss $ (7,983) $ (9,933) $ (6,867) $ (8,774)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share $ (0.39) $ (0.45) $ (0.31) $ (0.38)
-------- -------- -------- --------
-------- -------- -------- --------
1996
Contract research revenue $ -- $ -- $ 1,000 $ --
Licensed research revenue -- -- 6,000 --
Operating expenses (6,245) (8,310) (7,719) (8,357)
-------- -------- -------- --------
Loss from operations (6,245) (8,310) (719) (8,357)
Other income (expense) 744 579 585 697
-------- -------- -------- --------
Net loss $ (5,501) $ (7,731) $ (134) $ (7,660)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share $ (0.33) $ (0.45) $ (0.01) $ (0.40)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F12
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
December 15, 1997, is made by and between The Childs Family Investment
Partnership, L.P. and The A.J. Gardner Family Trust, U/T/A 3/5/81 ("Lessor"),
and The Immune Response Corporation, a Delaware Corporation ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this lease, and commonly
known as 5931 Darwin Court, Carlsbad, California 92008, located in the County of
San Diego, State of California and generally described as (describe briefly the
nature of the property and, if applicable, the "Project", if the property is
located within a Project) An approximately 31,200 square foot concrete tilt up
freestanding building and appurtances located in the Carlsbad Research Center.
(See Addendum) ("Premises"). (See also Paragraph 2)
1.3 TERM: Ten (10) years and Zero (0) months ("Original Term") commencing
See Addendum ("Commencement Date") and ending one hundred twenty (120) months
thereafter ("Expiration Date"). (See also Paragraph 3)
1.4 EARLY POSSESSION: See Addendum ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $18,408.00 (See Addendum) per month ("Base Rent"), payable
in advance on the first (1st) day of each month commencing on the Commencement
date. (See also Paragraph 4)
/X/ If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $18,408.00 (Eighteen Thousand Four
Hundred Eight and no/100ths Dollars) as Base Rent for the period beginning with
the first month following the Commencement Date.
1.7 SECURITY DEPOSIT: $24,024.00 ("Security Deposit"). (See also
Paragraph 5)
1.8 AGREED USE: See Addendum. (See also Paragraph 6)
1.9 INSURING PARTY. Lessor is the "Insuring Party" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
/X/ David Onosko, CB Commercial Real Estate Group, Inc. represents Lessor
exclusively ("Lessor's Broker");
/X/ William Driscoll, CB Commercial Real Estate Group, Inc. represents Lessee
exclusively ("Lessee's Broker"); or
/ / ____________________ represents both Lessor and Lessee ("Dual Agency").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of _____% of the
total Base Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of 15 Pgs through ____ and Exhibits 1.2, 5, 6.2, 50 and 56, all of
which constitute a part of this Lease.
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2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises. for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental. is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("Start Date"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within (i) one year* as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense. *as to patent defects and three (3) years as to latent defects
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("Applicable Requirements") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations or Utility Installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessees intended use,
and acknowledges that past uses of the Premises may no longer be allowed If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such noncompliance, rectify the same
at Lessors expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance. or the reinforcement or other physical modification
of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the
cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such, Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination., Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1 (c): provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital
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Expenditure, Lessee may advance such funds and deduct same, with Interest,
from Rent until Lessor's share of such costs have been fully paid. If Lessee
is unable to finance Lessor's share, or if the balance of the Rent due and
payable for the remainder of this Lease is not sufficient to fully reimburse
Lessee on an offset basis, Lessee shall have the right to terminate this
Lease upon thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed in use, change in intensity of
use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right
to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately Prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by
December 31, 1997. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within
sixty (60) days after the Commencement Date, Lessee may, at its option, by
notice in writing within ten (10) days after the end of such sixty (60) day
period, cancel this Lease, in which event the Parties shall be discharged from
all obligations hereunder. If such written notice is not received by Lessor
within said ten (10) day period, Lessee's right to cancel shall terminate.
Except as otherwise provided, if possession is not tendered to Lessee *by
December 31, 1997 the April 1, 1998 date in 1.3 shall be extended by the number
of days beyond December 31, 1997 that the Lessor delivered possession, but minus
any days of delay caused by the acts or omissions of Lessee. If possession of
the Premises is not delivered within four (4) months after December 31, 1997,
this Lease shall terminate unless other agreements are reached between Lessor
and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession
of the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.5). Pending delivery of such evidence,
Lessee shall be required to perform all of its obligations under this Lease from
and after the Start Date, including the payment of Rent, notwithstanding
Lessor's election to withhold possession pending receipt of such evidence of
insurance. Further, if Lessee is required to perform any other conditions prior
to or concurrent with the Start Date, the Start Date shall occur but Lessor may
elect to withhold possession until such conditions are satisfied.
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4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due. Rent for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of said month. Payment of Rent shall be made to Lessor at
its address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less than
the amount then due shall not be a waiver of Lessor's rights to the balance of
such Rent, regardless of Lessor's endorsement of any check so stating. Rent
shall be payable to LANDCO and mailed to 432 So. Bentley Avenue, Los Angeles,
California 90049-3513.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or to reimburse
or compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor so that the total amount of the Security
Deposit shall at ail times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the
Agreed Use be amended to accommodate a material change in the business of Lessee
or to accommodate a sublessee or assignee, Lessor shall have the right to
increase the Security Deposit to the extent necessary, in Lessors reasonable
judgment, to account for any increased wear and tear that the Premises may
suffer as a result thereof. If a change in control of Lessee occurs during this
Lease and following such change the financial condition of Lessee is, in
Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such
additional monies with Lessor as shall be sufficient to cause the Security
Deposit to be at a commercially reasonable level based on said change in
financial condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the Security
Deposit only to unpaid Rent, and otherwise within thirty (30) days after the
Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall
return that portion of the Security Deposit not used or applied by Lessor. No
part of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose, Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES. (See Addendum)
(a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products
or fractions thereof, Lessee shall not engage in any activity in or on the
Premises which constitutes a Reportable Use of Hazardous Substances without the
express prior written consent of Lessor and timely compliance (at Lessee's
expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the
installation or use
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of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that
requires a permit from, or with respect to which a report, notice,
registration or business plan is required to be filed with, any governmental
authority, and/or (ml the presence at the Premises of a Hazardous Substance
with respect to which any Applicable Requirements requires that a notice be
given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may use any ordinary and
customary materials reasonably required to be used in the normal course of
the Agreed Use, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may condition
its consent to any Reportable Use upon receiving such additional assurances
as Lessor reasonably deems necessary to protect itself, the public, the
Premises and/or the environment against damage, contamination, injury and/or
liability, including, but not limited to, the installation (and removal on or
before Lease expiration or termination) of protective modifications (such as
concrete encasements) and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of Such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties.* Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Lessor in writing at the time of
such agreement.
* unless migration is from an affiliated company
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate
fully in any such activities at the request of Lessor, including allowing Lessor
and Lessor's agents to have reasonable access to the Premises at reasonable
times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to
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Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at
Lessor's option, either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect,
or (ii) if the estimated cost to remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater, give
written notice to Lessee, within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days
following the date of such notice. In the event Lessor elects to give a
termination notice, Lessee may, within ten (10) days thereafter, give written
notice to Lessor of Lessee's commitment to pay the amount by which the cost
of the remediation of such Hazardous Substance Condition exceeds an amount
equal to twelve (12) times the then monthly Base Rent or $100,000, whichever
is greater. Lessee shall provide Lessor with said funds or satisfactory
assurance thereof within thirty (30) days following such commitment. In such
event, this Lease shall continue in full force and effect, and Lessor shall
proceed to make such remediation as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and
provide the required funds or assurance thereof within the time provided,
this Lease shall terminate as of the date specified in Lessor's notice of
termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of an emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the Procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair, Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repairing of the Building.
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(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic
utility feed to the perimeter of the Building, and (ix) any other equipment,
if reasonably required by Lessor. Lessee may use its own qualified personnel
with Lessor's approval which shall not be unreasonably withheld.
(c) REPLACEMENT. Subject to Lessees indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
Practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of
replacing such Basic Elements, then such Basic Elements shall be replaced by
Lessor, and the cost thereof shall be prorated between the Parties and Lessee
shall only be obligated to pay, each month during the remainder of the term
of this Lease, on the date on which Base Rent is clue, an amount equal to the
product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of
months of the useful life of such replacement as such useful life is
specified pursuant to Federal income tax regulations or guidelines for
depreciation thereof (including interest on the unamortized balance as is
then commercially reasonable in the judgment of Lessor's accountants), with
Lessee reserving the right to prepay its obligation at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of
the Lessee. It is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to maintenance and repair
of the Premises, and they expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (See Addendum)
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and
fencing in or on the Premises. The term "Alterations" shall mean any
modification of the improvements, other than Utility Installations or Trade
Fixtures, whether by addition or deletion, "Lessee Owned Alterations and/or
Utility Installations" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of
the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000
in the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon Lessee's: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance
with all conditions of said permits and other Applicable Requirements in a
prompt and expeditious manner. Any Alterations or Utility Installations
shall be performed in a workmanlike manner with good and sufficient
materials. Lessee shall promptly upon completion furnish Lessor with
as-built plans and specifications. For work which costs an amount equal to
the greater of one month's Base Rent, or $10,000. Lessor may condition its
consent upon Lessee providing a lien and completion pond in an amount equal
to one and one-half times the estimated cost of such Alteration or Utility
Installation and/or upon Lessee's posting an additional Security Deposit with
Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post
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notices of non-responsibility. If Lessee shall contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof. If Lessor shall require, Lessee shall furnish a surety
bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for
the same. If Lessor elects to participate in any such action, Lessee shall
pay Lessor's attorneys fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered
a part of the Premises. Lessor may, at any time, elect in writing to be the
owner of all or any specified part of the Lessee Owned Alterations and
Utility Installations. Unless otherwise instructed per Paragraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or termination of this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee
Owned Alterations or Utility Installations be removed by the expiration or
termination of this Lease. Lessor may require the removal at any time of all
or any part of any Lessee Owned Alterations or Utility Installations made
without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and
in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee.
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee. The failure by Lessee to timely vacate the Premises pursuant to this
Paragraph 7.4(c) without the express written consent of Lessor shall
constitute a holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000
per occurrence. Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor on a monthly basis along with
other estimated Triple Net Expenses.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based
upon or arising out of the ownership, use, occupancy or Maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises Endorsement" and contain the "Amendment of the Pollution Exclusion
Endorsement" for damage caused by heat, smoke or fumes from a hostile fire.
The Policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance shall
not, however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance carried by Lessee shall be primary to
and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
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(b) CARRIED BY LESSOR. Lessor may maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or
damage to the Premises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by any Lenders, but in no event more than the
commercially reasonable and available insurable value thereof. If Lessor is
the Insuring Party, however, Lessee Owned Alterations and Utility
installations, Trade Fixtures, and Lessee's personal property shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor, it the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks of direct physical loss or damage* (except the
perils of flood ), including coverage for debris removal and the enforcement
of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of
a covered loss. Said policy or policies shall also contain an agreed
valuation provision in lieu of any coinsurance clause, waiver of subrogation,
and inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the
event of an Insured Loss.
*including earthquake
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said insurance shall contain an agreed valuation provision in
lieu of any coinsurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period. Lessee shall be liable for any deductible
amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to
the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee
Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property, Trade Fixtures and Lessee Owned
Alterations and Utility Installations. Lessee shall provide Lessor with
written evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable
to prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
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8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where
the Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current
issue of "Best's Insurance Guide", or such other rating as may be required by
a Lender. Lessee shall not do or permit to be done anything which
invalidates the required insurance policies. Lessee shall, prior to the
Start Date, deliver to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of the required
insurance. No such policy shall be cancelable or subject to modification
except after thirty (30) days prior written notice to Lessor. Lessee shall,
at least thirty (30) days prior to the expiration of such policies, furnish
Lessor with evidence of renewals or "insurance binders" evidencing renewal
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such
policies shall be for a term of at least one year, or the length of the
remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to
be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property
damage insurance carriers waive any right to subrogation that such companies
may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnity, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, liens, judgments, penalties, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with,
the use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the foregoing
matters, Lessee shall upon notice defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with
Lessee in such defense, Lessor need not have first paid any such claim in
order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee. Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources or places. Lessor shall not be
liable for any damages arising from any act or neglect of any other tenant of
Lessor, Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor snail notify Lessee
in writing within thirty (30) days from the date of the damage or destruction
as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six
(6) months or less from the date of the damage or destruction, Lessor shall
notify Lessee in writing within thirty (30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
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(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements,
and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility installations) as soon as reasonably possible and this Lease shall
continue in full force and effect: provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make any applicable insurance proceeds available to Lessee on a reasonable
basis for that purpose. Notwithstanding the foregoing, if the required
insurance was not in force or the insurance proceeds are not sufficient to
effect such repair, the Insuring Party shall promptly contribute the shortage
in proceeds (except as to the deductible which is Lessee's responsibility) as
and when required to complete said repairs. In the event, however, such
shortage was due to the fact that, by reason of the unique nature of the
improvements, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor, it Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect, if such funds
or assurance are not received, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee
shall not be entitled to reimbursement of any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3, notwithstanding that there
may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (6) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of
such damage. Such termination shall be effective sixty (60) days following
the date of such notice. In the event Lessor elects to terminate this Lease,
Lessee shall have the right within ten (10) days after receipt of the
termination notice to give written notice to Lessor of Lessee's commitment to
pay for the repair of such damage without reimbursement from Lessor. Lessee
shall provide Lessor with said funds or satisfactory assurance thereof within
thirty (30) days after making such commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make
such repairs as soon as reasonably possible after the required funds are
available, If Lessee does not make the required commitment, this Lease shall
terminate as of the date specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. It the damage or destruction was caused by
the gross negligence or willful misconduct of Lessee. Lessor shall have the
right to recover Lessor's damages from Lessee, except as provided in
Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate
this Lease effective sixty (60) days following the date of occurrence of such
damage by giving a written termination notice to Lessee within thirty (30)
days after the date of occurrence of such damage. Notwithstanding the
foregoing, if Lessee at that time has an exercisable option to extend this
Lease or to purchase the Premises, then Lessee may preserve this Lease by,
(a) exercising such option and (b) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or
(ii) the day prior to the date upon which such option expires. If Lessee
duly
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exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds,
Lessor shall, at Lessors commercially reasonable expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force
and effect. If Lessee fails to exercise such option and provide such funds
or assurance during such period, then this Lease shall terminate on the date
specified in the termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee for
the period required for the repair, remediation or restoration of such damage
snail be abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value insurance. All other obligations of Lessee hereunder shall be
performed by Lessee, and Lessor shall have no liability for any such damage,
destruction, remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee
gives such notice and such repair or restoration is not commenced within
thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect,
"Commence" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by
Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of
Lessee's Security Deposit as has not been, or is not then required to be,
used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"Real Property Taxes" shall include any form of assessment: real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other
than inheritance, personal income or estate taxes); improvement bond; and/or
license fee imposed upon or levied against any legal or equitable interest of
Lessor in the Premises, Lessor's right to other income therefrom, and/or
Lessor's business of leasing, by any authority having the direct or indirect
power to tax and where the funds are generated with reference to the Building
address and where the proceeds so generated are to be applied by the city,
county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "Real Property Taxes" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by
reason of events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises. Not withstanding the
foregoing, Lessee shall not be responsible for any increase in Real Property
Taxes during the first five (5) years following the Start Date.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease on a monthly basis
along with other estimated Triple Net charges paid to Lessor. Subject to
Paragraph 10.2(b), all such payments shall be made at least ten (10) days
prior to any delinquency date. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes
shall cover any period of time prior to or after the expiration or
termination of this Lease, Lessee's share of such taxes shall be prorated to
cover only that portion of the tax bill applicable to the period that this
Lease is in effect, and Lessor shall reimburse Lessee for any overpayment, if
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Lessee shall fail to pay any required Real Property Taxes. Lessor shall have
the right to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate 'he current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at
least twenty (20) days prior to the applicable delinquency date, or (ii)
monthly in advance with the payment of the Base event. If Lessor elects to
require payment monthly in advance, the monthly payment shall be an amount
equal to the amount of the estimated installment of taxes divided by the
number of months remaining before the month in which said installment becomes
delinquent. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payments shall be adjusted as required
to provide the funds needed to pay the applicable taxes. If the amount
collected by Lessor is insufficient to pay such Real Property Taxes when due,
Lessee shall pay Lessor, upon demand, such additional sums as are necessary
to pay such obligations. All moneys paid to Lessor under this Paragraph may
be intermingled with other moneys of Lessor and shall not bear interest. In
the event of a Breach by Lessee in the performance of its obligations under
this Lease, then any balance of funds paid to Lessor under the provisions of
this Paragraph may at the option of Lessor, be treated as an additional
Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes for all of the land and improvements included within the tax parcel
assessed, such proportion to be conclusively determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee. When possible, Lessee shall cause such property to be
assessed and billed separately from the real property of Lessor. It any of
Lessee's said personal property shall be assessed with Lessors real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within
ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. SEE ADDENDUM
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a
noncurable Breach. Lessor may either: (i) terminate this Lease, or
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(ii) upon thirty (30) days written notice, increase the monthly Base Rent to
one hundred ten percent (110%) of the Base Rent then in effect. Further, in
the event of such Breach and rental adjustment, (i) the purchase price of any
option to purchase the Premises held by Lessee shall be subject to similar
adjustment to one hundred ten percent (110%) of the price previously in
effect, and (ii) all fixed and non-fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased to One Hundred Ten Percent
(1 10%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any
other obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for Lessee's Default or
Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible
for the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held
by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a fee of
$1,000 or ten percent (1 0%) of the current monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment
or sublease, whichever is greater, as consideration for Lessor's considering
and processing said request. Lessee agrees to provide Lessor with such other
or additional information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed
to have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by
Lessee during the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented to in
writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such
Rent and apply same toward Lessee's obligations under this Lease, provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of
the foregoing or any assignment of such sublease, nor by reason of the
collection of Rent, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease. Sublessee shall
rely upon any such notice from Lessor and shall pay all Rents to
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Lessor without any obligation or right to inquire as to whether such Breach
exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee. Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time
of the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or
Breaches of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH, REMEDIES.
13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "Breach" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such
Default within any applicable grace period:
(a) The abandonment of the Premises: or the vacating of the
Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances
to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor
or to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of
three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (1 0) days following
written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more
than thirty (30) days are reasonably required for its cure, then it shall not
be deemed to be a Breach if Lessee commences such cure within said thirty
(30) day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph (e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
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(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (6) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the
Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case
of an emergency, without notice), Lessor may, at its option, perform such
duty or obligation on Lessee's behalf, including but not limited to the
obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such
performance by Lessor shall be due and payable by Lessee upon receipt of
invoice therefor. If any check given to Lessor by Lessee shall not be
honored by the bank upon which it is drawn, Lessor, at its option, may
require all future payments to be made by Lessee to be by cashiers check. In
the event of a Breach, Lessor may, with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided: (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of the District within which the Premises are located at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding any unpaid Rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any
part thereof in a separate suit. If a notice and grace period required under
Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to
perform or quit given to Lessee under the unlawful detainer statute shall
also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
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13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as
"Inducement Provisions," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this
Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision
shall automatically be deemed deleted from this Lease and of no further force
or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of rent or the cure of the Breach which initiated the operation of
this paragraph shall not be deemed a waiver by Lessor of the provisions of
this paragraph unless specifically so stated in writing by Lessor at the time
of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor 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 upon Lessor by any Lender.
Accordingly, if any Rent shall not be received by Lessor within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten
percent (10%) of each such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs
Lessor will incur by reason of such late payment. Acceptance of such late
charge by Lessor shall in no event constitute a waiver of Lessee's Default or
Breach with respect to such overdue amount, nor prevent the exercise of any
of the other rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding any provision of
this Lease to the contrary, Base Rent shall, at Lessor's option, become due
and payable quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such
as Base Rent) or within thirty (30) days following the date on which it was
due for non-scheduled payment, shall bear interest from the date when due, as
to scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("Interest") charged shall be equal to
the prime rate reported in the Wall Street Journal as published closest prior
to the date when due plus four percent (4%), but shall not exceed the maximum
rate allowed by law. Interest is payable in addition to the potential late
charge provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph, a reasonable time shall in no event be less than thirty (30) days
after receipt by Lessor, and any Lender whose name and address shall have
been furnished Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is such that
more than thirty (30) days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach
at Lessee's expense and offset from Rent an amount equal to the greater of
one month's Base Rent or the Security Deposit, and to pay an excess of such
expense under protest, reserving Lessee's right to reimbursement from Lessor,
Lessee shall document the cost of said cure and supply said documentation to
Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "Condemnation"), this Lease shall terminate as to the
part taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building
portion of the premises, or more than twenty-five percent (25%) of the land
area portion of the premises not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after
the condemning authority shall have taken possession) terminate this Lease as
of the date the condemning authority takes such possession. It Lessee does
not terminate this Lease in accordance with the foregoing, this Lease shall
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remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in proportion to the reduction in
utility of the Premises caused by such Condemnation. Condemnation awards
and/or payments shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold, the value of
the part taken, or for severance damages; provided, however, that Lessee
shall be entitled to any compensation for Lessee's relocation expenses, loss
of business goodwill and/or Trade Fixtures, without regard to whether or not
this Lease is terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by Lessee, for
purposes of Condemnation only, shall be considered the property of the Lessee
and Lessee shall be entitled to any and ail compensation which is payable
therefor. In the event that this Lease is not terminated by reason of the
Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith,
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges
which may be claimed by any such unnamed broker, finder or other similar
party by reason of any dealings or actions of the indemnifying Party,
including any costs, expenses, attorneys' fees reasonably incurred with
respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATES.
(a) Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in
form similar to the then most current "Estoppel Certificate" form published
by the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force
and effect without modification except as may be represented by the
Requesting Party, (ii) there are no uncured defaults in the Requesting
Party's performance, and (iii) it Lessor is the Requesting Party, not more
than one month's rent has been paid in advance, Prospective purchasers and
encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and
the Responding Party shall be estopped from denying the truth of the facts
contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such tender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
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17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event
of a transfer of Lessor's title or interest in the Premises or this Lease.
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor. Upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined. Notwithstanding
the above, and subject to the provisions of Paragraph 20 below, the original
Lessor under this Lease, and all subsequent holders of the Lessors interest in
this Lease shall remain liable and responsible with regard to the potential
duties and liabilities of Lessor pertaining to Hazardous Substances as outlined
in Paragraph 6 above.
18. SEVERABILITY. 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.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS: BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the tee received by such
Broker pursuant to this Lease: provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given it served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessees taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If
sent by regular mail the notice shall be deemed given forty-eight (48) hours
after the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt,
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provided a copy is also delivered via delivery or mail. If notice is received
on a Saturday, Sunday or legal holiday, it shall be deemed received on the
next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of moneys or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership: (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of
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the Premises, and this Lease, including any options to extend the term
hereof, will not be disturbed so long as Lessee is not in Breach hereof and
attorns to the record owner of the Premises. Further, within sixty (60) days
after the execution of this Lease. Lessor shall use its commercially
reasonable efforts to obtain a Non-Disturbance Agreement from the holder of
any pre-existing Security Device which is secured by the Premises. In the
event that Lessor is unable to provide the Non-Disturbance Agreement within
said sixty (60) days, then Lessee may, at Lessee's action, directly contact
Lessors lender and attempt to negotiate for the execution and delivery of a
Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents: provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. It any Party brings an action or proceeding involving
the Premises to enforce the terms hereof or to declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action, or
appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may
be awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "Prevailing
Party" shall include, without limitation, a Party who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party of its claim or
defense. The attorneys' fees award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred, in addition, Lessor shall be entitled to attorneys' fees,
costs and expenses incurred in the preparation and service of notices of Default
and consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES: REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time in the case of an
emergency, and otherwise at reasonable times for the purpose at showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "For Lease" signs. Lessee may at any time place on or
about the Premises any ordinary "For Sublease" sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessors prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies, Lessor's failure within ten (110) days following any
such event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed, Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt at an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
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hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessees inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) Lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Defaults are cured, or (iii) if Lessee commits a
Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including the care and cleanliness of the
grounds and including the parking, loading and unloading of vehicles, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
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41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same,
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their properly from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the Part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to Pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder. Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease : is 9 is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED
TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE
PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING
SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
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<PAGE>
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
------------------------- ----------------------------
on: on:
---------------------------------- -------------------------------------
By LESSOR: By LESSEE:
THE CHILDS FAMILY INVESTMENT THE IMMUNE RESPONSE CORPORATION,
PARTNERSHIP, L.P. AND THE A.J. GARDNER A DELAWARE CORPORATION
FAMILY TRUST, U/T/A 3/5/81
By: /s/ ROLAND A. CHILDS By: /s/ PAULA BAXTER ATKINS
---------------------------------- -------------------------------------
Name Printed: ROLAND A. CHILDS Name Printed: DENNIS J. CARLO, PH.D.
------------------------ ---------------------------
Title: Title: PRESIDENT CHIEF EXECUTIVE OFFICER
------------------------------- ----------------------------------
By: /s/ ALLAN J. GARDNER By:
---------------------------------- -------------------------------------
Name Printed: ALLAN J. GARDNER Name Printed:
------------------------ ---------------------------
Title: Title:
------------------------------- ----------------------------------
Address: C/O LANDCO, 432 SOUTH Address:
----------------------------- --------------------------------
BENTLEY AVENUE, LOS ANGELES,
- ------------------------------------- ----------------------------------------
CA 90049-3513
- ------------------------------------- ----------------------------------------
Telephone: (310) 476-3209 Telephone: ( )
-------------------------- ------------------------------
Facsimile: (310) 476-0111 Facsimile: ( )
--------------------------- ------------------------------
Federal ID No. Federal ID No.
----------------------- --------------------------
BROKER: BROKER:
- ------------------------------------- ----------------------------------------
Executed at: Executed at:
------------------------- ----------------------------
on: on:
---------------------------------- -------------------------------------
By: By:
---------------------------------- -------------------------------------
Name Printed: Name Printed:
------------------------ ---------------------------
Title: Title:
------------------------------- ----------------------------------
Address: Address:
----------------------------- --------------------------------
- ------------------------------------- ---------------------------------------
Telephone: ( ) Telephone: ( )
-------------------------- -----------------------------
Facsimile: ( ) Facsimile: ( )
--------------------------- -----------------------------
Federal ID No. Federal ID No.
----------------------- --------------------------
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<PAGE>
ADDENDUM TO LEASE
This Addendum to Lease ("Addendum") is made by and between The Childs Family
Partnership, L.P. and The A. J. Gardner Family Trust u/t/a 3/5/81, general
partners doing business as "Darwin Court" but holding title as tenants-in-common
(collectively, "Lessor") and The Immune Response Corporation, a Delaware
corporation ("Lessee") and shall supplement that certain Standard
Industrial/Commercial Single-Tenant Lease Net between Lessor and Lessee dated as
of December 15, 1997 and Exhibits thereto (collectively, the "Lease"). Where
appropriate the numbering used in the Addendum shall refer to the same numbered
paragraphs in the Lease. Notwithstanding anything contained in the Lease to the
contrary, the provisions set forth below will be deemed to be part of the Lease
and if there is any inconsistency between this Addendum and the Lease, the terms
of this Addendum shall supersede and control. All references in the Lease and
in this Addendum shall be construed to mean the Lease and the Exhibits thereto,
as amended and supplemented by this Addendum. All defined terms used in this
Addendum, unless specifically defined in this Addendum, shall have the same
meaning as such terms have in the Lease. References to "Paragraph" shall refer
to the pre-printed Lease form and references to "Section" shall refer to this
Addendum.
1.1 PARTIES. The phrase ", general partners doing business as "Darwin Court"
but holding title as tenants-in-common" is inserted after the names of the
entities comprising Lessor.
1.2 PREMISES. Lessor at its expense shall construct a Building Shell of
approximately 31,200 square feet. The phrase "Building Shell" means the
Building improvements and related site improvements as shown on those certain
plans and specifications (collectively, "Lessor's Plans") prepared by Smith
Consulting Architects ("Lessor's Architect"), dated on the various sheets
between April 3, 1997 and April 18, 1997 an entire set of which has been
delivered to Lessee by Lessor's contractor, Riggins Construction & Management,
Inc. as listed on the attached Schedule 1.2. Lessee has the right to expand the
second floor office space at its cost in which case the total leasable area will
be correspondingly increased. Lessor shall not amend or modify Lessor's Plans
in any material respect without the prior consent of Lessee.
Lessor represents and warrants that no part of the Building Shell will
contain asbestos, asbestos-containing material or other Hazardous Substances
(collectively "ACHM"). If Lessor does employ ACHM, the ACHM will be promptly
removed in a manner required by the appropriate government agency and in
accordance with Applicable Requirements.
Lessor will be fully responsible for making all alterations and repairs to
the Premises and the Building Shell at its cost required to remove any and all
ACHM discovered at any time to have existed in the Premises or Building Shell as
of the Start Date, or resulting from or necessitated by the failure by Lessor
and/or Lessor's contractor to comply with Applicable Requirements regarding
ACHM, or from Lessor's and/or Lessor's contractor's utilization of Hazardous
Substances as defined by Applicable Requirements at the time the Lease is
executed, in violation of such Applicable Requirements or which could pose a
health risk to occupants of the Premises.
1.3 TERM. The Commencement Date shall be the earliest of the completion of
Lessee's completion of Lessee's Tenant Improvements (as defined in Addendum
Section 50.1 below) or April 1, 1998. Lessor will confirm in writing the exact
Commencement Date and Lease expiration date both of which will be acknowledged
in writing by Lessee upon Lessee's confirmation of the accuracy thereof. For
purposes of this Section 1.3, completion of Lessee's Tenant Improvements shall
be deemed to have occurred on the date on which (i) Lessee's architect, with no
undue delay, issues a certificate to Lessee stating that all Tenant Improvements
have, in all material respects, been completed in accordance with drawings
approved by Lessee therefor and are operable, (ii) all Utility Installations
which are identified as part of Lessee's Tenant Improvements are operational at
the Premises, (iii) adequate access to the Premises for Lessee's uses under the
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Lease has been completed, and (iv) the government agency having appropriate
jurisdiction thereover issues a "right to occupy" designation (or such similar
designation) in the inspection record for Lessee's Tenant Improvements.
1.4 EARLY POSSESSION. Early Possession will start when the Lessor has
completed the Building Shell in accordance with Lessor's Plans and shall end at
the earliest of Lessee's completion of the Tenant Improvements as described in
Section 1.3 above or April 1, 1998. In the event of the imposition of a water
moratorium by local governmental agencies with authority thereover such that
establishment of exterior landscaping to be installed by Lessor would be
adversely affected, Lessor may delay completion of such landscaping without
affecting the Start Date otherwise applicable, provided such landscaping is
completed as soon as practicable thereafter, and in all events not later than
the Commencement Date.
1.5 BASE RENT. Base Rent is calculated on the basis of $.59 per square foot of
the Premises per month on a "triple net" basis. The Base Rent shall be subject
to adjustment during the ninety (90) day period following the Commencement Date
by $.59/ft. if Lessor's Architect determines the Building is more or less than
31,200 sq. ft. based on Building "as-builts" filed with the City of Carlsbad.
All square footage measurements shall be from the roof "drip line" and in
accordance with the Building Owners and Managers Association International
standards for industrial/commercial projects (the "BOMA Standard"). Lessor's
Architect shall complete such calculations within said 90-day period at Lessor's
expense. Lessee shall have the right, exercisable within ninety (90) days after
the later of (a) the date Lessor gives Lessee written notice of the final
calculation of the Premises and the Building as contemplated above, or (b) the
date Lessee commences business operations from the Premises (or, when
appropriate, any additional space leased by Lessee pursuant to the Lease), to
remeasure the Premises and the Building within such ninety (90) day period. In
the event that subsequent remeasurement of the Premises and/or the Building by
Lessee, within the time period specified above, indicates that the square
footage measurement prepared by Lessor produces a square footage number in
excess of or lower than the square footage number which would have resulted had
the BOMA Standard been properly utilized, any payments due to Lessor from Lessee
based upon the amount of square feet contained in the Premises shall be
proportionally, retroactively and prospectively reduced or increased, as
appropriate, to reflect the actual number of square feet as properly remeasured
under the BOMA Standard. If Lessor disagrees with Lessee's remeasurement and if
a dispute occurs regarding the final accuracy of the measurement of the Premises
and the Building in accordance with the BOMA Standard, such dispute will be
resolved pursuant to binding arbitration pursuant to this Addendum. Operating
Expenses (defined below) other than the Administration Fee (defined below) shall
commence on the Start Date. Base Rent and the Administration Fee shall not
commence prior to the Commencement Date; PROVIDED, HOWEVER, to the extent Lessee
commences business operations on, and utilizes therefor, any portion of the
Premises from and after the Start Date, Lessee shall be responsible for payment
of Base Rent and the Administration Fee prorated with respect to the portion of
the Premises so used. In no event shall use of the Premises for Lessee's
construction activities prior to the Commencement Date be deemed to constitute a
use of the Premises for Lessee's business operations.
1.8 AGREED USE. Lessee will use the Premises for general medical, office use
and biopharmaceutical use, research and development, product production,
manufacture and distribution and any other like use in keeping with the class
and character of the building and permitted uses within the Carlsbad Research
Center.
1.9 INSURING PARTY. Lessee may opt to be the Insuring Party for all leasehold
improvements which are for biopharmaceutical uses as opposed to
industrial/office uses upon thirty (30) days prior written notice to Lessor.
Lessee shall also have the option of insuring the Building Shell in the event
Lessee can obtain the insurance coverages required under the Lease with respect
thereto at a premium cost of at least ten percent (10%) less than the premium
cost obtained by Lessor provided Lessee's carriers for such insurance are
substantially comparable in all material respects to Lessor's. Notwithstanding
the foregoing, Lessor may opt to remain the
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<PAGE>
Insuring Party and retain its insurance carrier if it pays the amounts in
excess of such ten percent (10%) premium differential at its sole cost and
expense.
2.2 CONDITION. Lessor's delivery of the Premises shall include the Building
Shell fully completed in accordance with the Plans and ready for Lessee's
construction of its Tenant Improvements. There shall be no requirement that
service contracts under Paragraph 7.1(b) of the Lease be obtained by Lessee as a
condition to Lessor's warranty regarding the HVAC as the HVAC systems are the
responsibility of Lessee as part of the Tenant Improvements (defined below).
Written notices to be given to Lessor regarding non-compliance with the
warranties given under Paragraph 2.2 of the Lease shall be given with reasonable
promptness by Lessee following discovery of the condition giving rise to such
notice and the period during which such notices may be given is modified to one
(1) year as to all systems and elements of the Building which are part of the
Building Shell, however, Lessee shall have the benefit of any longer warranty
periods otherwise accruing to Lessor from contractors and suppliers providing
services or materials to Lessor as part of the Building Shell construction. The
acknowledgements set forth in Paragraph 2.4 of the Lease shall not affect this
Section.
2.3 COMPLIANCE. Lessor shall be responsible for the compliance of the Building
Shell with all Applicable Requirements in effect as of the Start Date throughout
the Term of the Lease and shall effect such compliance promptly following notice
from any party, including Lessee, thereof at any time during the Term or any
extensions thereof. Lessee shall not be required to comply with the six month
notification period stated in Paragraph 2.3 with respect to such non-compliance.
All costs incurred by Lessor to comply with Applicable Requirements in effect on
the Start Date shall be born by Lessor solely and shall not be part of the Base
Rent or otherwise payable by Lessee. The acknowledgements set forth in
Paragraph 2.4 of the Lease shall not affect this Section.
2.4 ACKNOWLEDGEMENTS. All references to Brokers are hereby deleted from
Paragraph 2.4.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. Paragraph 2.5 of the Lease is hereby
deleted.
3.3 DELAY IN POSSESSION. In the event possession of the Premises is not
delivered by Lessor to Lessee by April 1, 1998, Lessee shall have the right to
terminate the Lease.
3.4 LESSEE COMPLIANCE. The last sentence of Paragraph 3.4 is hereby deleted.
5. SECURITY DEPOSIT. In the event Lessor utilizes the Security Deposit as
permitted under the Lease, Lessee shall have thirty (30) days after request
therefore to replenish the amount of the Security Deposit with the required
amount under the Lease. Lessee shall have no obligation to increase the amount
of the Security Deposit, for any reason, so long as the L/C (as defined below)
is in place. Any application by Lessor of the Security Deposit shall cure the
default to which such portion of the Security Deposit is applied, to the extent
thereof. As additional security for monetary defaults, Lessee shall deliver to
Lessor no later than the Start Date an irrevocable Letter of Credit for $600,000
from Union Bank of California or other comparable financial institution having
substantially the same net worth, substantially in the form attached as Schedule
5 (excluding any terms which are found to be commercially unreasonable by the
issuer thereof), or otherwise on terms and conditions mutually acceptable to
Lessor, Lessee and such issuer ("L/C"). If Lessee fails to timely deliver the
L/C, and such failure continues for a period of thirty (30) days following the
Start Date, Lessor shall have the right to immediately terminate the Lease by
giving Lessee written notice of such election, and such termination shall be
effective immediately upon Lessor's delivery of such notice. Lessee shall also
have the option of maintaining the L/C amount as a cash deposit with Lessor as
contemplated under Section 5.2(i) below.
5.1 Lessor shall not resort to the L/C without first exhausting the proceeds of
the monetary portion of the Security Deposit. Fifteen (15) days before each
anniversary of the issuance of the L/C, Lessee shall obtain a
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commitment of renewal and if the L/C is not renewed within ten (10) days, the
failure to renew will permit Lessor to draw down the L/C in full and maintain
it in lieu of the L/C as contemplated under Section 5.2(i) below.
5.2 Notwithstanding any other provision of the Lease and so long as no uncured
material Breach exists, Lessor agrees to release the L/C under any one of the
following independent conditions:
(i) Lessee substitutes cash with Lessor which Lessor agrees to keep in
interest bearing accounts in the name of Lessor with Lessee entitled to an
offset against rental obligations for the amount of interest income earned (the
financial institutions with which such deposit, or portions thereof, is
maintained, and the rate of interest accruing thereon, shall be reasonably
acceptable to Lessee), or
(ii) Lessee reports net income of at least $50,000,000 for three years in a
row, or
(iii) Lessee's audited Balance Sheet indicates a Net Worth of at least
$100,000,000.
6.2 HAZARDOUS SUBSTANCES. The word "potentially" is hereby deleted from
Paragraph 6.2(a)(i). Paragraph 6.2(b) is hereby modified to provide that such
notice from Lessee to Lessor regarding the presence of Hazardous Substances with
respect to the Premises shall only be required if such presence of Hazardous
Substances is in violation of Applicable Requirements. Paragraph 6.2(c) is
modified to require that Lessee shall not be responsible for any Hazardous
Substances brought on to the Premises by Lessor, its employees, agents or
representatives. Paragraph 6.2(d) is modified to provide that Lessee shall not
be required to indemnify Lessor or its employees, agents or representatives
against such party's own actions, negligence or omissions. Without limiting
Lessee's obligations under this section regarding reporting requirements with
respect to Hazardous Substances, Lessee shall, within ten (10) business days
following Lessee's first use of a Hazardous Substance required to be reported
thereon, complete and deliver to applicable government authorities a Hazardous
Materials Questionnaire in the form as set forth in Schedule 6.2 annexed to this
Addendum, with a copy to Lessor.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Lessee shall be entitled
to satisfy its requirements regarding evidencing its compliance with Applicable
Requirements by providing Lessor with copies of permits filed with applicable
government authorities by Lessee on an annual basis other than building permits,
copies of which shall be provided to Lessor by Lessee as soon as practicable
following Lessee's receipt of same. Lessee shall only be required to comply
with reasonable recommendations of Lessor's engineers and/or consultants.
7.1 LESSEE'S OBLIGATIONS. Lessor shall assign all warranties and guarantees in
connection with the Building Shell and the Premises for work completed by or on
behalf of Lessor, to Lessee and shall extend all reasonable assistance to Lessee
in the enforcement thereof. Lessor shall also provide a list of all
subcontractors and vendors supplying services or materials in connection with
the construction and completion of the Building Shell and the Premises to Lessee
promptly following the Commencement Date.
7.3 ALTERATIONS; TRADE FIXTURES. Lessee is granted the right to make
non-structural alterations and improvements to the Premises costing less than
$100,000 per year without any consent required of Lessor, as long as (a) Lessee
pays for the entire cost of such alterations and improvements, (b) Lessee agrees
to remove said alterations and improvements upon the expiration or termination
of the Lease, if requested by Lessor, and (c) such alterations and improvements
will not adversely affect the structural integrity of the Premises and/or the
Building. Any time Lessee proposes to make such alterations and/or improvements
for which Lessor has a right of approval hereunder, Lessee shall provide Lessor
with ten (10) business days' notice of such proposed alterations and/or
improvements, together with the plans and specifications therefor and a list of
all vendors and
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subcontractors supplying services or materials with respect to such
alterations, and Lessor shall grant its approval within such ten (10) day
period, unless Lessor reasonably determines that such alterations and/or
improvements would adversely affect the structural integrity of the Premises
and/or the Building or would adversely affect the exterior appearance of the
Building. Lessee shall not be required to provide any completion bonds with
respect to alterations installed by Lessee. Lessee shall provide "as-builts"
for all alterations.
Notwithstanding anything to the contrary in the Lease, all articles of
personal property and all Trade Fixtures, machinery and equipment, furniture and
movable partitions owned by Lessee or installed by or on behalf of Lessee in the
Premises shall remain the property of Lessee, and may be removed by Lessee at
any time during the Term of the Lease as long as Lessee is not in Breach
hereunder with any applicable cure period having expired. If Lessee fails to
remove all of its effects from the Premises upon the expiration or earlier
termination of the Lease for any cause whatsoever, Lessor may, at its option,
any time after five (5) days' written notice to Lessee of its intention to
remove such effects, remove same in any manner that Lessor shall choose and
store such effects without liability to Lessee for loss thereof, and Lessee
shall pay Lessor upon demand any and all reasonable expenses incurred in
connection with such removal, including court costs, attorneys' fees, and
reasonable storage charges incurred while such effects were in Lessor's
possession. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment that has been installed without penetrating the roof membrane and can
be removed without doing material damage to the Premises (unless repaired by
Lessee) whether or not the item is plugged into an electrical outlet or hot
wired.
7.4(b) REMOVAL. Lessee shall receive not less than one hundred twenty (120)
days prior written notice from Lessor to remove alterations required by Lessor
to be removed due to the expiration of the Lease Term, such removal to be
completed within said 120-day period or as soon as practicable thereafter with
due and diligent effort. Such 120-day notice from Lessor may be given at any
time during the period commencing on the date which is six (6) months prior to
the expiration of the Term of the Lease and ending on the date which is six (6)
months after the expiration of the Term of the Lease.
8.1 PAYMENT FOR INSURANCE. To the extent Lessor is the Insuring Party,
payments for premiums shall be made by Lessee to Lessor annually not less than
fifteen (15) business days following Lessee's receipt of notification from
Lessor of such premium amount based on the actual due date for Lessor's annual
payment of such premiums.
8.3(a) PROPERTY INSURANCE-BUILDING AND IMPROVEMENTS. Notwithstanding
language to the contrary, deductibles for policies of insurance required to be
maintained hereunder may be $25,000 per occurrence.
8.3(b) RENTAL VALUE. Rental Value insurance required to be maintained under
the Lease shall not extend beyond the date of completion of repairs or
replacements with respect to any such loss giving rise to a claim thereunder, or
beyond the date of any termination of the Lease.
8.3(c) ADJACENT PREMISES. Paragraph 8.3(c) is hereby deleted.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. Paragraph 8.4 is hereby
deleted from the Lease.
8.5 INSURANCE POLICIES. Lessor shall not do or permit to be done anything
which invalidates required insurance policies under the Lease.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be exempted from
liability for Lessor's (or anyone acting through or on behalf of Lessor)
intentional misconduct.
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9.2 PARTIAL DAMAGE - INSURED LOSS. The reference to a total cost of repair of
$10,000 shall be replaced with a reference to $100,000. Lessee shall have the
right to effect any repairs to the Premises which Lessor elects not to effect.
To the extent any amounts contributed by Lessee to repair damage or destruction
are in excess of the actual cost thereof, or cost savings are realized with
respect thereto, the full amount of such excess proceeds or cost savings shall
be paid to Lessee.
9.4 TOTAL DESTRUCTION. Lessee shall not be liable for payment of any rent
under the Lease after the date of Lease termination (subject to any abatement
occurring from the date of Premises Total Destruction).
9.5 DAMAGE NEAR END OF TERM. Lessee shall be entitled to a reciprocal right to
terminate the Lease in the event of such damage. Lessee is also granted the
following additional rights to terminate.
A. Notwithstanding anything in the Lease to the contrary, and except
as expressly set forth in Subsection (B) below, in the event that Lessee is
notified or becomes aware of the occurrence of the following:
(i) damage or destruction to the Premises, and/or the
Building or any part thereof so as to interfere substantially with
Lessee's use of the Premises, Premises parking, and/or the Building;
(ii) a taking by eminent domain or exercise of other
governmental authority of the Premises, and/or the Building or any
part thereof so as to interfere substantially with Lessee's use of the
Premises, Premises parking, and/or the Building; or
(iii) any discovery of Hazardous Substances in, on or
around the Premises, the Building and/or the Building site not placed
in, on or around the Premises, the Building and/or the site by Lessee,
that, considering the nature and amount of the substances involved,
interferes with Lessee's use of the Premises or which presents a
health risk to any occupants of the Premises (each of the items set
forth in provision (A)(i), (ii) and (iii) being referred to herein as
a "Trigger Event"); and
Lessee cannot, within nine (9) months ("Non-Use Period") of the occurrence of
the Trigger Event, be given reasonable use of, and access to, a fully repaired,
restored, safe and healthful Premises, Premises parking and Building (except for
minor "punch-list" items which will be repaired promptly thereafter), and the
utilities and services pertaining to the Premises, the Premises parking and the
Building, all suitable for the efficient conduct of Lessee's business therefrom,
then Lessee may elect to exercise a right to terminate the Lease upon thirty
(30) days' written notice sent to Lessor upon the expiration of the Non-Use
Period.
B. In the event of any Trigger Event occurring during the last year
of the Lease Term or, if an applicable renewal option has been exercised, during
the last year of any renewal term, should the Non-Use Period continue for ninety
(90) days, Lessee may elect to exercise a right to terminate the Lease upon
thirty (30) days' written notice sent to Lessor at any time following the
expiration of the Non-Use Period.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. Paragraph 9.6 of the Lease is hereby
deleted and replaced with the following:
In the event that Lessee is prevented from using, and does not use,
the Premises or any portion thereof, for five (5) consecutive business
days or ten (10) business days in any twelve (12) month period (the
"Eligibility Period") as a result of (a) any damage or destruction to
the Premises, the Premises parking and/or the Building (other than due
to Premises Total
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Destruction when abatement of Lessee's rent shall commence as of the
date of such destruction, (b) any repair, maintenance or alteration
performed by Lessor after the Commencement Date and required or
permitted by the Lease, which substantially interferes with Lessee's use
of the Premises, the Premises parking and/or the Building, (c) any
failure by Lessor to provide Lessee with services or access to the
Premises, the Premises parking and/or the Building, (d) because of an
eminent domain proceeding, or (e) because of the presence of Hazardous
Substances in, on or around the Premises, the Building or the Site which
could pose a health risk to occupants of the Premises, then Lessee's
Base Rent shall be abated or reduced, as the case may be, after
expiration of the Eligibility Period for such time that Lessee continues
to be so prevented from using, and does not use, the Premises or a
portion thereof, in the proportion that the rentable area of the portion
of the Premises that Lessee is prevented from using, and does not use,
bears to the total rentable area of the Premises. However, in the event
that any portion of the Premises comprising seventy-five percent (75%)
of the rentable area of the Premises is rendered unusable as described
hereinabove, then for such time after expiration of the Eligibility
Period during which such portion of the Premises is so rendered
unusable, the Base Rent for the entire Premises shall be abated;
provided, however, if Lessee reoccupies and conducts its business from
any portion of the Premises during such period, the rent allocable to
such reoccupied portion, based on the proportion that the rentable area
of such reoccupied portion of the Premises bears to the total rentable
area of the Premises, shall be payable by Lessee from the date such
business operations commence. If Lessee's right to abatement occurs
because of an eminent domain taking and/or because of damage or
destruction to the Premises, the Premises parking, the Building, or
Lessee's property, provided rental value insurance proceeds are
available to Lessor therefor, Lessee's abatement period shall continue
until Lessee has been given sufficient time and sufficient access to the
Premises, the Premises parking facility and/or the Building, to rebuild
such portion it is required to rebuild, to install its property,
furniture, fixtures, and equipment to the extent the same shall have
been removed and/or damaged as a result of such damage or destruction
and/or eminent domain taking and to move in over one (1) weekend. To
the extent Lessee is entitled to abatement without regard to the
Eligibility Period, because of an event covered by Lease Articles 9 or
14, then the Eligibility Period shall not be applicable.
10.1 DEFINITION OF "REAL PROPERTY TAXES". Real Property Taxes shall not include
any tax based on any net income of Lessor with respect to the Building for state
or federal income tax purposes and shall not include any tax penalties incurred
as a result of Lessor's negligence or failure to file any tax or informational
returns when due.
10.2 PAYMENT OF TAXES. Paragraph 10.2 is hereby deleted. Lessee shall pay all
Real Property Taxes to Lessor who shall pay such amounts directly to the taxing
authorities prior to delinquency thereof. Such payment shall be made only at
such time as payment of Real Property Taxes is actually due to the taxing
authorities to prevent imposition of penalties for delinquent payment. Real
Property Taxes shall also include reimbursement to Lessor for its prepayment of
amounts assessed against the Premises under City of Carlsbad Community
Facilities District #1, provided such reimbursement is made in such amounts and
at such times as such assessment would have been payable by Lessor in the
ordinary course absent such prepayment.
10.3 JOINT ASSESSMENT. Paragraph 10.3 of the Lease is hereby deleted.
10.4 PERSONAL PROPERTY TAXES. All of Paragraph 10.4 of the Lease except for the
first sentence thereof is hereby deleted.
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12.1 ASSIGNMENT AND SUBLETTING. Lessor's Consent required. All of Paragraph
12.1 of the Lease is hereby deleted and replaced with the following:
Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage or encumber (collectively, "assign or assignment") or sublet all or any
part of Lessee's interest in this Lease or in the Premises without Lessor's
prior written consent. Notwithstanding the foregoing, Lessee may assign the
Lease or may sublet the Premises or any part thereof without Lessor's consent to
any subsidiary, parent, affiliate or control corporation or to any corporation
which acquires all of Lessee's assets or with which it may merge providing
Lessee remains liable and the use does not substantially change.
Notwithstanding any other provision in Paragraph 12 of the Lease, Lessor's
consent to a sublease shall not be required and Lessor shall not have the right
to adjust the rental so long as all of the following conditions are and remain
satisfied: (a) the sublease is for a portion of the Premises constituting less
than fifty percent (50%) of the total rentable square feet of the Premises; (b)
Lessee continues to occupy the remaining portions of the Premises; (c) the
sublessee does not employ on the Premises Hazardous Substances in violation of
Applicable Requirements and its use is not otherwise in violation of the Lease;
and (d) Lessee is not otherwise in Breach of this Lease.
For any other assignment or subletting, Lessor agrees it will not
unreasonably withhold, condition or delay its consent to any such assignment or
subletting. Rental amounts in excess of the Base Rent payable to Lessor by
Lessee under the Lease (the "Excess Rental") on account of such assignment or
subletting will be shared between the Lessor and Lessee. Lessor shall be
entitled to that portion of the Excess Rental arising by virtue of the value of
the Premises as a warehouse (offices, distribution of electrical, bathrooms
etc.) and Lessee shall be entitled to that portion of the Excess Rental arising
by virtue of the improvements installed by Lessee having a biopharmaceutical use
and character as opposed to an industrial/office use and character; PROVIDED,
HOWEVER, Excess Rental shall be calculated net of all expenses incurred by
Lessee in any assignment or subleasing of the Premises, including, without
limitation, any amounts paid to Lessor by Lessee during periods where the
assigned or subleased portion of the Premises was vacant; any improvement
allowance or other economic concession paid by Lessee to any sublessee or
assignee; broker's commissions; attorneys' fees; lease take-over payments; costs
of advertising the space for sublease or assignment; and any other costs
actually paid in assigning or subletting the Premises. Lessor shall not be paid
any Excess Rental amounts until Lessee has recovered all such costs incurred in
connection with such subleasing or assignment.
12.2(e) The amount which Lessor may receive for consideration of any request
for assignment or subletting shall not exceed $500 in any instance.
12.3(c) Paragraph 12.3(c) is hereby modified to provide that for any action by
a sublessee with respect to the Premises that would trigger a requirement for
Lessor's consent under the Lease if such action were taken by Lessee under the
Lease, such subtenant shall be required to seek Lessor's consent to such action.
12.3(e) The last sentence of Paragraph 12.3(e) is hereby deleted.
13.1(b) Paragraph 13.1(b) is hereby deleted and replaced with the following:
The failure to pay any installment of base rent, or any other monetary
payment required to be made by Lessee under the Lease, when due and
payable hereunder, upon the date when payment is due, such failure
continuing for a period of five (5) business days after written notice
of such failure; or
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13.1(c) Paragraph 13.1(c) is hereby modified to replace the reference to "ten
(10) days" with a reference to "thirty (30) days."
13.1(f) Paragraph 13.1(f) is hereby deleted and replaced with the following:
"All notices to be given pursuant to this Section 13.1 shall be in addition to,
and not in lieu of, the notice requirements of California Code of Civil
Procedure Section 1161."
13.1(g) Paragraph 13.1(g) is hereby deleted from the Lease.
13.4 LATE CHARGES. The late charge of 10% is deleted and replaced with a late
charge of six percent (6%).
13.5 INTEREST. The reference to 4% for purposes of calculating Interest on the
Lease is deleted and replaced with two percent (2%).
15. BROKERS' FEES. Lessor shall be responsible for payment of all fees owed to
the Brokers with respect to the Lease.
16.2 Lessee shall have no obligation to deliver any financial statements to
Lessor so long as Lessee is required to report to the United States Securities
and Exchange Commission with respect to its financial status and such filings
are publicly available.
26. NO RIGHT TO HOLDOVER. The amount of 150% as an increase in the Base Rent
for a holdover by Lessee shall not apply if Lessee has notified Lessor not less
than three (3) months prior to the expiration of the Term of the Lease that
Lessee intends to hold over in the Premises, subject to Lessor's written
consent, not to be unreasonably withheld, conditioned or delayed, in which event
such holdover by Lessee shall be on all the terms and provisions of the Lease,
at a Base Rent adjusted pursuant to Section 55 below. The duration of such
holdover shall be specified by Lessee at the time notice of such holdover is
given to Lessor and shall not exceed three (3) months.
30.2 ATTORNMENT. As a condition to any requirement of attornment hereunder, the
beneficiary of a Security Device shall have elected that this Lease shall be
prior and superior to such Security Device prior to any event of foreclosure
thereunder.
31. ATTORNEYS' FEES. The provisions of Paragraph 31 of the Lease shall apply
to arbitration.
32. LESSOR'S ACCESS. Lessor shall only enter the Premises to the extent
reasonably required by Lessor and not "as Lessor may deem necessary."
37. GUARANTOR. Paragraph 37 is hereby deleted from the Lease.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Notwithstanding the provisions of
Paragraph 39.2, Lessee may assign its Options under the Lease to any permitted
assignee under the Lease provided Lessee remains liable for full performance of
the Lease by such assignee.
40. MULTIPLE BUILDINGS. Paragraph 40 is hereby deleted from the Lease.
50. TENANT IMPROVEMENTS. Lessee at its sole cost shall be responsible for the
Tenant Improvements including space plans, building plans, and for all costs of
construction including, but not by way of limitation, permit fees for its Tenant
Improvements. Office improvements shall be constructed of a quality comparable
to the quality existing at 5935 Darwin Court or otherwise reasonably acceptable
to Lessor and consist of a
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minimum of 5,100 square feet on the second floor and 5,100 square feet
directly below on the first floor. A minimum of 5,100 square feet of such
office improvements shall be completed within twelve (12) months of the
Commencement Date, with the remainder to be completed not later than eighteen
(18) months from the Commencement Date. Lessee's plans for construction of
the Tenant Improvements ("Lessee's Plans") and its general contractor for
such construction shall be subject to the Lessor's prior approval to be given
not later than ten (10) business days after submittal to Lessor, with
Lessor's approval not to be unreasonably withheld, conditioned or delayed. In
the event Lessor disapproves Lessee's Plans, Lessor shall specify the reasons
for such disapproval and Lessee shall have ten (10) business days to revise
and re-submit Lessee's Plans for Lessor's approval. Lessor shall respond
thereto within five (5) business days and if the revised Lessee's Plans are
again disapproved by Lessor, the foregoing procedure shall be re-instituted
until Lessor's approval is obtained. Lessee warrants that the Tenant
Improvements will comply with all Applicable Requirements in effect at the
time of such construction. Lessee shall construct as part of the Tenant
Improvements, screening of the HVAC units on the roof of the Building in
accordance with the requirements of the covenants, conditions and
restrictions ("CC&Rs") applicable to the project of which the Building is a
part. Lessee acknowledges that Lessor has notified those individuals
responsible for administering the CC&Rs that such screening will be completed
in accordance with the attached Schedule 50. Unless Lessee is successful in
obtaining such individual's consent to a deviation from the screening
requirements set forth in the attached Schedule 50, Lessee shall complete
such screening to the satisfaction of such individuals in accordance with the
attached Schedule 50.
50.1 The phrase "Tenant Improvements" means all interior and exterior
(including HVAC systems) improvements which will not be part of the Building
Shell constructed by Lessor and shall include but not by way of limitation (a)
partitions, walls, doors, (b) all surface finishes, including wall coverings,
paint, floor coverings, suspended ceilings and other similar items, (c) duct
work, heat pumps, vents filters, diffusers, terminal boxes and accessories for
completion of heating, ventilation and air conditioning systems within the
Premises, (d) electrical distribution systems (including panels, subpanels,
wires and outlets), lighting fixtures, outlets, switches and other electrical
work to be installed in the Premises, (e) plumbing lines, fixtures and
accessories, and all fire and life safety control systems such as fire walls and
fire alarms ( including piping, wiring and accessories) to be located in the
Premises , (f) improvements required for compliance with Title 24, and other
governmental agencies, and (g) all the construction specific for Lessee's
biopharmaceutical needs, to the extent the foregoing are included in the Plans.
Lessee represents and warrants that no part of its Tenant Improvements
will contain ACHM in violation of Applicable Requirements in effect at the time
of such construction. If Lessee does employ ACHM, the ACHM will be promptly
removed in a manner required by the appropriate government agency in accordance
with Applicable Requirements.
Lessee shall be fully responsible for making all alterations and
repairs to the Tenant Improvements at its cost to remove any and all ACHM
resulting from or necessitated by the failure of Lessee and/or Lessee's
contractor to comply with Applicable Requirements regarding ACHM's in effect at
the time of such construction, or from Lessee's and/or Lessee's contractor's
utilization of Hazardous Substances as defined by Applicable Requirements, in
violation of such Applicable Requirements or which could pose a health risk to
occupants of the Premises.
51 OPERATING EXPENSES. In addition to payment of the Base Rent, Lessee shall,
from and after the Start Date, be responsible for payment of all "Operating
Expenses." The term "Operating Expenses" means all direct expenses and costs
attributable to Lessee's use, occupancy and operation of the Premises which are
customary in a "triple net" lease. Other than payments of Real Property Taxes,
the Administration Fee and premiums for insurance policies maintained by Lessor
as the Insuring Party, all Operating Expenses shall be paid directly by Lessee
to the appropriate third party provider of services, utilities or items of
operating expense prior to
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delinquency. Lessor shall promptly forward to Lessee any and all invoices
received by Lessor with respect to Operating Expenses, and in all events in
sufficient time to permit timely payment thereof by Lessee. Operating
Expenses shall also include a fee payable to Lessor (the "Administration
Fee") for the due and punctual performance of all administrative
responsibilities of Lessor under the Lease. The Administration Fee shall be
payable concurrently with Base Rent in an amount equal to two percent (2%) of
the monthly Base Rent then payable with respect to the Premises. In the
event of any abatement of rent permitted Lessee pursuant to the provisions of
the Lease, the Administration Fee shall also be abated in the same proportion
as the Base Rent.
52. SERVICES. At the time of completion of the Building Shell, Lessor and its
contractors shall, at no cost to Lessee, provide "as-builts" for the Building
Shell and shall conduct a thorough inspection of the Building's systems in order
to certify that the equipment and systems are in full working order. At the
same time, Lessor will supply a written certification of the results of its
mechanical contractor's inspection. Lessee will be given all certifications
that Lessor receives from its contractors, subcontractors and vendors for
construction of the Building Shell.
53. NON-DISTURBANCE. Lessor warrants and represents that in the event Lessor
introduces any lien or mortgage holder to the Premises, then Lessor will obtain
nondisturbance agreements in a form reasonably acceptable to Lessee from any and
all of such mortgage or lien holders, ground lessors, etc., which agreements
shall provide that as long as Lessee is not in default of the Lease beyond any
applicable grace period, Lessee's occupancy of the Premises shall not be
disturbed, its rights under the Lease will continue to be recognized and all of
the Lessor's future obligations under the Lease will continue to be performed.
54. REAL ESTATE LICENSES. California law requires that Lessee be informed that
Roland A. Childs, a general partner of the Childs Family Investment Partnership,
L.P. and Allan J. Gardner, a trustee of the A. J. Gardner Family Trust are each
State of California Real Estate Licensees.
55. RENT ADJUSTMENTS. The monthly rent for each month of the adjustment periods
specified below shall be increased using the cost of living adjustment.
(a) On the month of the first anniversary of the Commencement Date and
each twelve months thereafter, the monthly rent payable under paragraph 1.5
("Base Rent") of the Lease shall be adjusted by the change, if any, from the
Base Month specified below, in the Consumer Price Index of the Bureau of Labor
Statistics of the US Department of Labor for CPI U (All Urban Consumers), for
Los Angeles-Anaheim-Riverside, All Items (19821984=100), herein referred to as
"CPI."
(b) The monthly rent payable in accordance with subparagraph (a) of this
Section 55 shall be calculated as follows: the Base Rent set forth in Paragraph
1.5 of the Lease, shall be multiplied by a fraction the numerator of which shall
be the CPI of the calendar month 2 (two) months prior to the month specified in
(a) during which the adjustment is to take effect, and the denominator of which
shall be the CPI of the calendar month which is two (2) months prior to the
month containing the Commencement Date. The sum so calculated shall constitute
the new monthly rent hereunder, but in no event, shall any such new monthly rent
be less than the rent payable for the month immediately preceding the date for
rent adjustment nor shall it be less than three (3) percent or more than six (6)
percent during the first five (5) years unless the CPI exceeds twelve (12)
percent in which case the overage over twelve (12) percent will be added to the
maximum six (6) percent as additional rent. Thereafter, during the remainder of
the initial term and any extension if one or both of the two options to extend
are exercised, the Base Rent will be adjusted utilizing the same CPI in the same
manner with an annual minimum of three (3) percent increase and a maximum seven
(7) percent increase unless the CPI exceeds thirteen (13) percent in which case
the overage over thirteen (13) percent will be added to the maximum seven (7)
percent as additional rent.
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56. OPTIONS TO EXTEND. Lessor hereby grants to Lessee two (2) options (each,
an "Option") to extend the Term of this Lease for an additional sixty (60) month
period for each Option, commencing when the prior term expires upon each and all
of the following terms and conditions:
(i) Lessee gives to Lessor and Lessor actually receives (which
receipt may be independently confirmed by Lessee) on a date which is prior to
the date that the option period would commence (if exercised) by at least six
(6) and not more than nine (9) months, a written notice in accordance with
the Lease of the exercise of the options to extend this Lease for said
additional terms, time being of the essence. If said notification of the
exercise of said Options are not so given and received, the Options shall
automatically expire; said Options may only be exercised consecutively;
(ii) The provisions of Paragraph 39, including the provision
relating to default of Lessee set forth in Paragraph 39.4 of this Lease are
conditions of the Options;
(iii) All of the terms and conditions of this Lease except where
specifically modified by these Options shall apply;
(iv) The monthly Base Rent for each month of the applicable Option
period shall be calculated as follows, using the methods indicated below:
MARKET RENTAL VALUE ADJUSTMENTS (MRV)
(a) On the 10th anniversary of the Commencement Date if the first
Option to extend is timely exercised and again five (5) years later if the
second Option to extend is timely exercised, Base Rent shall be adjusted to
the "Market Rental Value" of the Premises as follows:
1. Four months prior to the Market Rental Value (MRV) Adjustment
Dates described above, Lessor and Lessee shall meet to establish an agreed
upon new MRV for comparable space in the Carlsbad Research Center for the
specified term. In determining MRV, the comparable space will be limited to
an industrial building with offices, electrical distribution and other
typical warehouse space such as but not limited to bath rooms but
specifically excluding the peculiar attributes required by a
biopharmaceutical firm such as refrigeration, and required plumbing and
piping. If agreement cannot be reached, then:
(i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next
thirty (30) days. Any associated costs will be split equally between the
parties, or
(ii) Both Lessor and Lessee shall each immediately select and
pay the appraiser or broker of their choice to establish a MRV within the
next thirty (30) days. If, for any reason, either one of the appraisals is
not completed within the next thirty (30) days, as stipulated, then the
appraisal that is completed at that time shall automatically become the new
MRV. If both appraisals are completed and the two appraisers/brokers cannot
agree on a reasonable average MRV then they shall immediately select a third
mutually acceptable appraiser/broker to establish a third MRV within the next
thirty (30) days. The average of the two appraisals closest in value shall
then become the new MRV. The costs of the third appraisal will be split
equally between the parties.
2. If Lessee does not add additional mezzanine to the existing
5,100 sq. ft., the minimum MRV will be One and Five One-Hundredths Dollars
($1.05) per ft. for the eleventh (11th) year and One and Twenty-One
One-Hundredths Dollars ($1.21) for the sixteenth (16th) year. If Lessee adds
additional mezzanine during the Term of the Lease, the minimum MRV will be
computed in the same manner as the
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stated minimums were determined, the example of which is shown on the
attached Schedule 56. In any event, the new MRV shall not be less than the
Base Rent payable for the month immediately preceding the date for rent
adjustment.
(b) Upon the establishment of each new MRV:
1. The monthly Base Rent so calculated for each Term as specified in
subsection (a) above will become the new "Base Rent" for the purpose of
calculating any further CPI adjustments as specified in Section 55 above; and
2. the first month of each Market Rental Value term as specified in
subsection (a) above shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in Paragraph 55.
57. ARBITRATION. This Addendum provision contains the sole and exclusive
method, means and procedure to resolve any and all disputes or disagreements,
including whether any particular matter constitutes, or with the passage of time
would constitute, a Default or Breach under the Lease. The parties hereby
irrevocably waive any and all rights to the contrary and shall at all times
conduct themselves in strict, full, complete and timely accordance with the
provisions of this Addendum provision. Any and all attempts to circumvent the
provisions of this Addendum provision shall be absolutely null and void and of
no force or effect whatsoever. As to any matter submitted to arbitration to
determine whether it would, with the passage of time, constitute a Default or
Breach, such passage of time shall not commence to run until any such
affirmative determination, so long as it is simultaneously determined that the
challenge of such matter as a potential Default or Breach was made in good
faith, except with respect to the payment of money. With respect to the payment
of money, such passage of time shall not commence to run only if the party which
is obligated to make the payment does in fact make the payment to the other
party. Such payment can be made "under protest," which shall occur when such
payment is accompanied by a good-faith notice stating why the party has elected
to make a payment under protest. This Section shall not prevent Lessor's
recourse to the L/C or to cash held in lieu thereof for Breaches under the
Lease, however, if Lessee disputes the existence of such Breach any draw down of
the L/C or cash held in lieu thereof, as the case may be, shall be deemed made
"under protest" pending resolution of such dispute hereunder. Such protest will
be deemed waived unless the subject matter identified in the protest is
submitted to arbitration as set forth in the following:
(a) ARBITRATION PANEL. Within ninety (90) days after delivery of written
notice ("Notice of Dispute") of the existence and nature of any dispute given by
any party to the other party, and unless otherwise provided herein in any
specific instance, the parties shall each: (i) appoint one (1) lawyer actively
engaged in the licensed and full-time practice of law, specializing in real
estate, in the County of San Diego for a continuous period immediately preceding
the date of delivery ("Dispute Date") of the Notice of Dispute of not less than
ten (10) years, but who has at no time ever represented or acted on behalf of
any of the parties, and (ii) deliver written notice of the identity of such
lawyer and a copy of his or her written acceptance of such appointment and
acknowledgment of and agreement to be bound by the time constraints and other
provisions of this Addendum provision ("Acceptance") to the other parties
hereto. The party who selects the lawyer may not consult with such lawyer,
directly or indirectly, to determine the lawyer's position on the issue which is
the subject of the dispute. In the event that any party fails to so act, such
arbitrator shall be appointed pursuant to the same procedure that is followed
when agreement cannot be reached as to the third arbitrator. Within ten (10)
days after such appointment and notice, such lawyers shall appoint a third
lawyer (together with the first two (2) lawyers, "Arbitration Panel") of the
same qualification and background and shall deliver written notice of the
identity of such lawyer and a copy of his or her written Acceptance of such
appointment to each of the parties. In the event that agreement cannot be
reached on the appointment of a third lawyer within such period, such
appointment and notification shall be made as quickly as possible by any court
of competent jurisdiction,
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<PAGE>
by any licensing authority, agency or organization having jurisdiction over
such lawyers, by any professional association of lawyers in existence for not
less than ten (10) years at the time of such dispute or disagreement and the
geographical membership boundaries of which extend to the County of San Diego
or by any arbitration association or organization in existence for not less
than ten (10) years at the time of such dispute or disagreement and the
geographical boundaries of which extend to the County of San Diego, as
determined by the party giving such Notice of Dispute and simultaneously
confirmed in writing delivered by such party to the other party. Any such
court, authority, agency, association or organization shall be entitled
either to directly select such third lawyer or to designate in writing,
delivered to each of the parties, an individual who shall do so. In the
event of any subsequent vacancies or inabilities to perform among the
Arbitration Panel, the lawyer or lawyers involved shall be replaced in
accordance with the provisions of this Addendum provision as if such
replacement was an initial appointment to be made under this Addendum
provision within the time constraints set forth in this Addendum provision,
measured from the date of notice of such vacancy or inability, to the person
or persons required to make such appointment, with all the attendant
consequences of failure to act timely if such appointed person is a party
hereto.
(b) DUTY. Consistent with the provisions of this Addendum provision, the
members of the Arbitration Panel shall utilize their utmost skill and shall
apply themselves diligently so as to hear and decide, by majority vote, the
outcome and resolution of any dispute or disagreement submitted to the
Arbitration Panel as promptly as possible, but in any event on or before the
expiration of thirty (30) days after the appointment of the members of the
Arbitration Panel. None of the members of the Arbitration Panel shall have any
liability whatsoever for any acts or omissions performed or omitted in good
faith pursuant to the provisions of this Addendum provision.
(c) AUTHORITY. The Arbitration Panel shall (i) enforce and interpret the
rights and obligations set forth in the Lease to the extent not prohibited by
law, (ii) fix and establish any and all rules as it shall consider appropriate
in its sole and absolute discretion to govern the proceedings before it,
including any and all rules of discovery, procedure and/or evidence, and
(iii) make and issue any and all orders, final or otherwise, and any and all
awards, as a court of competent jurisdiction sitting at law or in equity could
make and issue, and as it shall consider appropriate in its sole and absolute
discretion, including the awarding of monetary damages (but shall not award
consequential damages to either party and shall not award punitive damages
except in situations involving knowing fraud or egregious conduct condoned by,
or performed by, the person who, in essence, occupies the position which is the
equivalent of the chief executive officer of the party against whom damages are
to be awarded), the awarding of reasonable attorneys' fees and costs to the
prevailing party as determined by the Arbitration Panel and the issuance of
injunctive relief. If the party against whom the award is issued complies with
the award, within the time period established by the Arbitration Panel, then no
Default or Breach will be deemed to have occurred, unless the Default or Breach
pertained to the non-payment of money by Lessee or Lessor, and Lessee or Lessor
failed to make such payment under protest.
(d) APPEAL. The decision of the Arbitration Panel shall be final and
binding, may be confirmed and entered by any court of competent jurisdiction at
the request of any party and may not be appealed to any court of competent
jurisdiction or otherwise except upon a claim of fraud on the part of the
Arbitration Panel, or on the basis of a mistake as to the applicable law. The
Arbitration Panel shall retain jurisdiction over any dispute until its award has
been implemented, and judgment on any such award may be entered in any court
having appropriate jurisdiction.
-14-
<PAGE>
(e) COMPENSATION. Each member of the Arbitration Panel (i) shall be
compensated for any and all services rendered under this Addendum provision at a
rate of compensation not to exceed the sum of (a) Two Hundred Fifty Dollars
($250.00) per hour and (b) the sum of Ten Dollars ($10.00) per hour multiplied
by the number of full years of the expired Term under the Lease, plus
reimbursement for any and all expenses incurred in connection with the rendering
of such services, payable in full promptly upon conclusion of the proceedings
before the Arbitration Panel. Such compensation and reimbursement shall be
borne by the nonprevailing party as determined by the Arbitration Panel in its
sole and absolute discretion.
_________________ _________________
Lessor's Initials Lessee's Initials
58. ACCESS; PARKING. Lessee shall have full and uninterrupted access to the
Premises twenty-four (24) hours per day, seven (7) days per week, every day of
the year. All parking allocated to the Building under Applicable Requirements
shall be for Lessee's sole and exclusive use at no additional cost or rent
during the entire Lease Term or any extensions thereof. Lessee's parking
privileges shall be available to Lessee twenty-four (24) hours per day, seven
(7) days per week, every day of the year.
59. ENTRY BY LESSOR. Notwithstanding anything to the contrary set forth in the
Lease to the contrary, Lessor and/or those acting on Lessor's behalf may only
enter the Premises upon not less than two (2) business days prior notice to
Lessee acknowledged by Lessee, except in cases of emergency, in which case only
telephone notice shall be required. In any event, any such entry shall be
accomplished as expeditiously as reasonably possible, in a manner so as to cause
as little interference to Lessee as reasonably possible and in accordance with
Lessee's security requirements. Lessor shall be accompanied by an employee of
Lessee at all times. Lessee may designate certain areas of the Premises as
"Secured Areas" should Lessee require such areas for the purpose of securing
certain valuable property or confidential information or operations. Lessor may
not enter such Secured Areas except in the case of emergency or in the event of
a permitted Lessor inspection, in which case Lessor shall provide Lessee with
five (5) business days' prior written notice of the specific date and time of
such Lessor inspection and be accompanied by an employee of Lessee on all such
inspections.
60. WHEN PAYMENT IS DUE. Other than payment of Base Rent, whenever in the
Lease a payment is required to be made by one party to the other, but a specific
date for payment is not set forth or a specific number of days within which
payment is to be made is not set forth, or the words "immediately," "promptly"
and/or "on demand," or their equivalent, are used to specify when such payment
is due, then such payment shall be due thirty (30) days after the party which is
entitled to such payment sends written notice to the other party demanding such
payment.
61. LESSOR BANKRUPTCY PROCEEDING. In the event that the obligations of Lessor
under the Lease are not performed during the pendency of a bankruptcy or
insolvency proceeding involving the Lessor as the debtor, or following the
rejection of this Lease in accordance with Section 365 of the United States
Bankruptcy Code, then notwithstanding any provision of this Lease to the
contrary, Lessee shall have the right to set off against rents next due and
owing under this Lease (a) any and all damages caused by such non-performance of
Lessor's obligations under the Lease by Lessor, debtor-in-possession, or the
bankruptcy trustee, and (b) any and all damages caused by the non-performance of
Lessor's obligations under the Lease following any rejection of the Lease in
accordance with Section 365 of the United States Bankruptcy Code.
62. CONSENT/DUTY TO ACT REASONABLY. Regardless of any reference to the words
"sole" or "absolute" (but except for matters which (a) would have an adverse
effect on the structural integrity of the Building Shell, (b) could have an
adverse effect on the Building HVAC systems, or (c) could have an effect on the
exterior appearance of the Building, whereupon in each such case Lessor's duty
is to act in good faith and in compliance with the Lease), any time the consent
of Lessor or Lessee is required, such consent shall not be unreasonably
-16-
<PAGE>
withheld, conditioned or delayed. Whenever the Lease grants Lessor or Lessee
the right to take action, exercise discretion, establish rules and
regulations or make allocations or other determinations (other than decisions
to exercise expansion, contraction, cancellation, termination or renewal
options), Lessor and Lessee shall act reasonably and in good faith and take
no action which might result in the frustration of the reasonable
expectations of a sophisticated lessee or lessor concerning the benefits to
be enjoyed under the Lease.
63. COVENANTS AND AGREEMENTS. The failure of Lessor or Lessee to insist in any
instance on the strict keeping, observance or performance of any covenant or
agreement contained in the Lease, or the exercise of any election contained in
the Lease, shall not be construed as a waiver or relinquishment for the future
of such covenant or agreement, but the same shall continue and remain in full
force and effect.
64. DAYS. All references in the Lease to "days" involving less than "ten (10)
days" shall mean business days, and all references to "notice" shall mean
written notice.
65. JOINT AND SEVERAL OBLIGATIONS. The obligations of Lessor under the Lease
shall be joint and several obligations of the entities comprising Lessor.
66. DEFINITION OF APPLICABLE REQUIREMENTS. The use of the term "Applicable
Requirements" in the Lease and this Addendum shall mean those laws, statutes,
codes, ordinances, regulations, covenants and restrictions applicable to the
matter to which such Applicable Requirements are stated to apply in the Lease
and this Addendum.
-16-
<PAGE>
SCHEDULE 1.2
LIST OF LESSOR'S PLANS
[OMITTED]
-17-
<PAGE>
SCHEDULE 5
FORM OF LETTER OF CREDIT
[OMITTED]
-18-
<PAGE>
SCHEDULE 6.2
FORM OF HAZARDOUS MATERIALS QUESTIONAIRE
[OMITTED]
-19-
<PAGE>
SCHEDULE 50
PROPOSED ROOF SCREENING REQUIREMENTS
[4 PAGES OF GRAPHICS OF SCREENING OMITTED]
-20-
<PAGE>
SCHEDULE 56
MARKET RENTAL VALUE CALCULATION
[OMITTED]
-21-
<PAGE>
AMENDMENT NO. 1 TO LEASE
This AMENDMENT NO. 1 TO LEASE ("Amendment") is made as of January 31, 1998 by
and between The Childs Family Investment Partnership, L.P. and The A. J.
Gardner Family Trust u/t/a 3/5/81, general partners doing business as "Darwin
Court" but holding title as tenants-in-common (collectively, "Lessor") and
The Immune Response Corporation, a Delaware corporation ("Lessee") and shall
amend and supplement that certain Standard Industrial/Commercial
Single-Tenant Lease Net between Lessor and Lessee dated as of December 15,
1997, together with the Exhibits and a certain Addendum to Lease attached
thereto (collectively, the "Lease"). All defined terms used in this
Amendment, unless specifically defined in this Amendment, shall have the same
meaning as such terms have in the Lease.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. AMENDMENTS TO LEASE. The following amendments to the Lease shall become
effective upon full execution of this Amendment:
1.1 EARLY POSSESSION. Early Possession shall be deemed to have
occurred on February 1, 1998 (the "Early Possession Date"). Notwithstanding
such Early Possession, Lessee shall have no liability for claims or
liabilities that arise out of any items of construction comprising any
portion of the Building Shell to the extent such items were not completed as
required under this Lease by Lessor as of the Early Possession Date. Early
Possession by Lessee of such incomplete items shall not occur until such
items are completed by Lessor in accordance with the requirements of the
Lease.
1.2 COMMENCEMENT DATE. The Commencement Date of the Lease shall be the
first to occur of: (i) Lessee's completion of the Tenant Improvements in
accordance with the requirements of the Lease; and (ii) May 1, 1998.
2. EFFECT OF AMENDMENT; COUNTERPARTS. All references in the Lease and in
this Amendment shall be construed to mean the Lease, as amended and
supplemented by this Amendment. In the event of a conflict between the
provisions of the Lease and this Amendment, this Amendment shall control.
This Amendment may be executed in multiple counterparts, each of which shall
be deemed an original, but all of which, together, shall constitute one and
the same Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment No.1 to
Lease as of the date first set forth above.
LESSOR LESSEE
The Childs Family The Immune Response Corporation
Investment Partnership, L.P.
By: /s/ ROLAND A. CHILDS By: /s/ PAULA ATKINS
-------------------------- -------------------------------
Roland A. Childs Name: Paula Atkins
Its: General Partner ----------------------------
Title: Vice-President
----------------------------
/s/ ALLAN J. GARDNER
- ---------------------------
Allan J. Gardner, Trustee
of the A.J. Gardner Family
Trust, Under Declaration of
Trust Dated March 5, 1981
-1-
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
I.R.C. Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
CONSENT OF ARTHUR ANDERSEN, LLP, INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of
our report in this Form 10-K into The Immune Response Corporation's
previously filed Registration Statements on Form S-8 pertaining to the 1989
Stock Plan, the Amended and Restated 1990 Directors' Stock Plan and the
Special Nonstatutory Stock Option Agreement of The Immune Response
Corporation.
Arthur Andersen, LLP
San Diego, California
March 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F2 AND F3 OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
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<TOTAL-LIABILITY-AND-EQUITY> 37,375
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<TOTAL-REVENUES> 4,437
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