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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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 NO. 0-19591
CYTEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-0245076
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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9393 Towne Centre Drive
San Diego, California 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 450-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 Par Value
(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 (Section 229.405 of this chapter) 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 voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the Registrant as of March 31,
1999 was approximately $13.7 million, based on the closing price on that date of
Common Stock on the Nasdaq National Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 4,997,322 as of March 31, 1999.
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* Excludes 339,641 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding
on March 31, 1999. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the Registrant, or that such person is controlled by or under common control
with the Registrant.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in the description of the Company's business below
and the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed in any documents incorporated herein by reference.
Unless otherwise indicated, all references to "Cytel" are to Cytel Corporation,
all references to "Epimmune" are to Epimmune Inc., a majority-owned subsidiary
of Cytel, and all references to the "Company" are to the combined entity of
Cytel and Epimmune.
Epimmune(TM), PADRE(TM), EpiGene(TM) and Cylexin(R) are trademarks of the
Company.
GENERAL
Cytel was founded in 1987 to develop therapeutic products for treatment of
immunological diseases. The Company's core business is the development of
vaccines to treat and prevent infectious diseases and cancer conducted by
Epimmune. Epimmune was formed in October 1997 and, as of March 31, 1999, Cytel
owned approximately 75% of the outstanding stock of Epimmune. Cytel's business
also included a therapeutic anti-inflammatory program based on cell adhesion
inhibitors and its Glytec business unit, encompassing proprietary manufacturing
technology for the enzymatic synthesis of bioactive complex carbohydrates. In
the first quarter of 1999, Cytel sold or discontinued its non-vaccine programs,
resulting in a significant modification to Cytel's focus of operations. This
modification resulted in significant adjustments to the Company's financial
results for both December 31, 1998 and March 31, 1999.
Epimmune's core technology capitalizes on the knowledge of how the immune system
is stimulated and which arms of the immune system need to be stimulated for
treatment or prevention of different infectious diseases and cancer. G.D. Searle
& Co. ("Searle"), a wholly-owned subsidiary of Monsanto Co., entered a
collaborative relationship with Epimmune in February 1998 to develop novel
vaccines for cancer. The collaborative efforts of Epimmune and Searle are
focused initially on the treatment of breast, colon and lung cancer. Epimmune
has received $16.5 million in equity financing from Searle and Cytel and, under
its agreement with Searle, may receive additional preclinical and clinical
milestone payments from Searle as products from the collaboration are developed
and launched.
Cytel completed its Phase II/III clinical trial of Cylexin, its lead cell
adhesion inhibitor compound, in March 1999. Cylexin showed no benefit over
placebo in the 138 patient trial for the treatment of reperfusion injury in
infants undergoing cardiopulmonary bypass ("CPB") to facilitate the surgical
repair of life threatening heart defects. Cytel has another class of cell
adhesion blockers, VLA-4 integrin blockers, directed toward the treatment of
chronic inflammatory diseases. This class of cell adhesion blockers has been
shown to be effective in accepted animal models of chronic inflammatory disease.
Cytel's lead integrin blocker exhibits potential for bronchial and oral
administration, essential for a chronic-use drugs. In light of the disappointing
results of the Phase II/III trial of Cylexin, Cytel has ended its pursuit of
cell adhesion therapeutics and expects to sell or dispose of its remaining cell
adhesion related assets.
Cytel's Glytec business unit was established to manufacture or enable the
manufacture by its partners of bioactive carbohydrates for consumer products and
medical products. Cytel recently announced the sale of its Glytec carbohydrate
synthesis and manufacturing intellectual property assets to Neose Technologies,
Inc. ("Neose") for an upfront cash payment of $3.5 million and certain
additional contingent cash consideration. Neose has acquired Cytel's
carbohydrate technology subject to
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Cytel's license to Baxter Healthcare Corporation's Nextran unit for
xenotransplantation completed in February 1999. Cytel received $4.0 million in
consideration for the Nextran transaction, which included the sale of certain
fixed assets, assignment of certain liabilities and license to certain Glytec
technology. Cytel expects to use the proceeds from the Glytec sale, together
with existing cash resources, to meet its financial obligations, including
corporate restructuring and termination costs of all of its non-vaccine
programs. There can be no assurance, however, that Cytel's cash resources will
be sufficient to satisfy all of its financial obligations.
None of the products under development by the Company have been approved for
their intended use, and the Company does not anticipate that such products will
be available for a number of years, if at all.
EPIMMUNE
BACKGROUND
Epimmune, established in October 1997, is currently a majority-owned subsidiary
of Cytel, operating under separate management and financing. Based on the
Company's substantial immunology expertise and scientific leadership in the
field of T-cell recognition and stimulation, Epimmune is focused on developing
novel vaccines to treat and prevent infectious diseases and cancer. Epimmune's
unique capabilities include a rapid Epitope Identification System ("EIS") for
identifying, from the sequences of tumor-associated antigens and infectious
agents, those antigen fragments ("epitopes") which are capable of eliciting a
potent immune response. Additionally, Epimmune has established a broad
proprietary position covering the EIS, numerous epitopes for cancer and
infectious disease vaccine targets and other vaccine technology.
In February 1998, Epimmune entered a collaborative research and development
agreement with Searle to develop immune stimulating products for the treatment
of cancer. The parties' collaborative cancer program is focused initially on the
treatment of breast, colon and lung cancer, and the first clinical trial is
expected to be initiated in 2000. Outside the Searle collaboration, Epimmune's
product targets include prophylactic vaccines for hepatitis C virus ("HCV"), HIV
and malaria and therapeutic vaccines for hepatitis B virus ("HBV"), HCV, human
papilloma virus ("HPV") and HIV.
TECHNOLOGY PLATFORM
Overview. For treatment and prevention of certain infectious diseases and
tumors, eliciting a strong cellular immune response is critical. It has been
shown in individuals who spontaneously clear chronic viral infection, and in
cancer patients who respond to immunotherapy, that the cellular immune response
is associated with viral clearance and tumor regression. This cellular response
is comprised of activated cytotoxic T cells ("CTL") and helper T cells ("HTL")
which are directed toward multiple discrete and specific antigen fragments,
known as antigen-specific epitopes. Recreating this "multi-specific" CTL and HTL
response is the objective of a number of groups in the immunotherapy and vaccine
fields. Many have taken the approach of using whole antigens or genes and
letting the immune system "decide" which epitopes to recognize. This approach
has been successful for many prophylactic vaccines but has not been successful
for stimulating a sufficiently strong or broad cellular immune critical to treat
chronic infectious diseases and cancer and prevent certain diseases such as HCV,
HIV and malaria. By selecting and immunizing with an EpiGene vaccine, a DNA
vaccine encoding a set of specific epitopes to which the immune system is
capable of responding, Epimmune has shown that it can achieve a broader and
stronger cellular immune response than that obtained by using whole antigens or
genes.
Antigen-Specific Epitopes. Epimmune's approach to vaccine development is to
rationally create a multi-specific cellular response, causing the immune system
to be specifically stimulated against multiple, select epitopes which meet
stringent criteria. Accordingly, Epimmune has developed its EIS to rapidly
identify these antigen-specific epitopes from the genetic information of
tumor-associated antigens or infectious agents (viruses, bacteria and
parasites). Using EIS, Epimmune has
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already identified epitopes for a number of indications, including breast, lung
and colon cancers, as well as HCV, HBV, HPV, HIV and malaria. The identified
epitopes include CTL epitopes that bind MHC-I and are recognized by cytotoxic T
cells, and HTL epitopes that bind MHC-II and are recognized by helper T cells.
Antigen-specific epitopes, or synthetic genes encoding these epitopes, are
believed to offer a number of benefits over traditional vaccine approaches.
- - First, the epitopes are selected from conserved regions of viral or
tumor-associated antigens, reducing the likelihood of escape mutants. When
using whole antigens, there is evidence that the immune response is
directed largely toward variable regions of the antigen, allowing immune
escape due to mutations.
- - Second, the ability to combine selected epitopes (CTL and HTL) and to alter
their composition to enhance immunogenicity allows for manipulation of the
immune response, as appropriate, for the target disease. Similar
engineering of the response is not possible with traditional approaches.
- - Third, a major benefit of epitope-based, immune-stimulating vaccines is
their safety. The possible pathological side effects caused by infectious
agents or whole protein antigens, which might have their own intrinsic
biological activity, is eliminated.
- - Finally, in order to develop the most effective vaccines, multiple antigens
should be targeted. Combining multiple epitopes into a single vaccine
offers a simple alternative to traditional combination vaccines and enables
the design of a well-characterized product which contains minimal
extraneous biological material.
Rapid Epitope Identification System. Epimmune's EIS was developed and optimized
by the Company's scientists based on extensive work over the past 10 years
in the field of T-cell recognition and stimulation. Numerous patent
applications owned or licensed by Epimmune cover the methods employed by
the EIS, as well as the epitope compositions which result from its use.
With the genetic sequence of a tumor-associated antigen, virus, bacteria or
parasite as input, the EIS performs the following analysis to rapidly
identify the antigen-specific epitopes which meet pre-determined criteria
for conservancy, binding, population coverage and immunogenicity.
- - Computer algorithms analyze the sequence of all known antigens associated
with the target indication for the presence of peptides which contain
epitope motifs and meet sequence conservancy requirements (epitopes from
variable regions of the antigen are avoided).
- - Peptides meeting the requirements of the computer screen are synthesized
and in vitro HLA binding assays are performed.
- - Peptides are evaluated for superfamily binding (assessing their ability to
bind broadly within a family of HLA molecules). Identifying epitopes which
bind broadly within three superfamilies enables broad population coverage
for the ultimate vaccine.
- - Peptides are then tested for immunogenicity, both in vivo in transgenic
mice which express human MHC and in vitro against infected or transfected
cells.
PADRE Carrier / Adjuvant. The PADRE technology consists of a family of
proprietary molecules which are potent, synthetic, "universal" immunostimulants.
When combined with epitopes, PADRE induces important "co-stimulatory" signals
which potentiate the antigen-specific immune response. If the epitopes are CTL
epitopes, PADRE increases the magnitude and duration of the immune response. If
the epitopes are antibody (or B-cell) epitopes, PADRE serves as an antigen
"carrier," inducing a long-term, high-titer antibody response. PADRE molecules
are easy to
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manufacture and provide many potential advantages over common antigen carriers
and broad immunostimulants.
PRODUCT CANDIDATE VACCINES
Epimmune has a number of vaccine product opportunities as described in the
following table:
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Indication Product Development Stage Commercialization Rights
Cancer
Therapeutic Vaccines
Breast Preclinical Searle
Colon Preclinical Searle
Lung Preclinical Searle
Prostate Epitope/Antigen Searle
Identification
Ex Vivo Preclinical Takara/Searle
Infectious Diseases
Therapeutic Vaccines
Hepatitis B Preclinical Epimmune
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Papilloma virus Epitope/Antigen Epimmune
Identification
Prophylactic
Vaccines
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Malaria Preclinical Epimmune
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INTELLECTUAL PROPERTY
Epimmune was founded with the vaccine technology patent estate developed by
Cytel over approximately 10 years. The scientific founders of Epimmune are
recognized leaders in the fields of T-cell recognition, epitope identification
and immune stimulation. With 10 issued United States patents, 19 issued foreign
patents, more than 160 pending applications worldwide and licenses to other
intellectual property relevant to epitope discovery, Epimmune has established a
broad intellectual property position directed toward processes of epitope
identification, epitope compositions and uses.
CORPORATE COLLABORATIONS
Epimmune expects to enter into research and development collaborations with
multiple pharmaceutical and biotechnology companies to commercialize therapeutic
and prophylactic vaccines in select infectious disease fields. Epimmune's unique
capabilities include expertise in identifying those epitopes from viral and
tumor-associated antigens which elicit the desired immune response and creating
and evaluating product candidates which elicit a potent immune response. The
Company's current partners include:
G.D. Searle & Co. The scope of the collaboration, established in February 1998,
is the treatment of cancer worldwide, excluding ex vivo cellular therapy in
Japan. The parties are combining Epimmune's proprietary cancer-specific epitope
and PADRE technologies with Searle's cytokine technology to develop a new class
of cancer therapies designed to induce highly specific immune responses. In
addition to the $15 million investment made to date in Epimmune and Cytel,
Searle will fund product development, make milestone payments upon achievement
of certain preclinical and clinical milestones which could exceed $100 million,
and pay royalties on product sales.
Takara Shuzo Co., Ltd. ("Takara"). In 1994, Cytel established a collaboration
with Takara, focused on ex vivo cellular therapy for treatment of cancer.
Cytel's rights and obligations were transferred to Epimmune during its formation
in October 1997. Takara, who is collaborating with Japanese investigators on the
evaluation and optimization of ex vivo cellular therapies, has rights to
Epimmune technology for ex vivo treatment of cancer in Japan. Under the terms of
the collaboration, Epimmune has a license to any patents or know-how developed
by Takara in the field. Takara will make payments upon achievement of certain
clinical milestones and pay Epimmune royalties on sales of any products
resulting from the collaboration.
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CELL ADHESION THERAPEUTIC PROGRAM
BACKGROUND
Cytel's cell adhesion therapeutic program was directed toward treating acute and
chronic inflammatory conditions by blocking specific cell adhesion molecules
responsible for the recruitment of white blood cells to sites of inflammation.
Cytel's scientists have been at the forefront in the identification and
characterization of cell adhesion molecules, including the receptors present on
one cell that bind to ligands on another cell and mediate cell adhesion. The
receptors and ligands operate in a lock-and-key manner to initiate an
inflammatory response. The adhesion of white blood cells to the cells lining the
blood vessel wall is a pivotal event in acute and chronic inflammatory
responses. Cytel pursued development of Cylexin, its lead cell-adhesion blocker,
for the prevention of reperfusion injury in infants undergoing CPB and has a
second class of cell adhesion blockers, VLA-4 integrin blockers, directed toward
the treatment of chronic inflammatory diseases. In March 1999, Cytel
discontinued its cell adhesion program based on disappointing results from its
Phase II/III clinical trial of Cylexin.
CYLEXIN
Cylexin, is a carbohydrate that blocks both P and E selectins. Based on results
from two relevant animal studies conducted with Cylexin by Harvard Medical
School researchers, together with clinical data from Cytel's Phase II trial of
Cylexin in reperfusion injury following CPB in adult patients undergoing surgery
to remove chronic blood clots from their lungs, Cytel initiated a Phase II/III
clinical trial of Cylexin for the prevention of reperfusion injury in infants
undergoing CPB to facilitate surgical repair of life threatening heart defects.
The Phase II/III trial was designed as a 250-patient double-blind,
placebo-controlled efficacy and safety study and was conducted at 11 leading
centers for pediatric cardiac surgery in the United States and Canada, including
Boston Children's Hospital, Children's Hospital of Philadelphia, The Cleveland
Clinic Foundation, Children's Hospital of Los Angeles and Cincinnati Children's
Hospital Medical Center. It was designed to evaluate efficacy and safety in two
groups of infants undergoing surgery to correct congenital heart defects. The
groups (a high-risk and a low-risk group) were defined based on expected
peri-operative mortality rates. The efficacy parameters that Cytel studied in
the trial included improvement in post-operative cardiac, pulmonary and renal
function and reduction in neurological sequelae. Cytel also focused on important
measures of pharmacoeconomic value, including reduction in ventilator time,
reduction in the use of drugs for cardiac stabilization, reduction in days in
the intensive care unit and reduction in overall hospital stay.
In March 1999, the trial was completed for the low-risk group and the data were
analyzed. One hundred thirty-eight patients were included in the analysis. There
were no clinically meaningful or statistically significant outcomes for any of
the primary endpoints (time in ICU, time to removal from ventilatory support or
amount of cardiac support drugs used) nor in any of the secondary endpoints
evaluated. Side effects were essentially equivalent in the Cylexin and placebo
treatment groups. Once this analysis was completed, the trial was halted.
From March 1991 through January 1997, Cytel and Sumitomo Pharmaceuticals Co.,
Ltd. ("Sumitomo") worked together to develop drugs based on Cytel's selectin
technology for the treatment of white blood cell-mediated diseases pursuant to
the terms of a technology development agreement. Sumitomo has licensed rights to
develop and commercialize compounds resulting from the collaboration in Pacific
Rim countries. Although Sumitomo has rights to Cylexin in the Pacific Rim, it
has informed Cytel that it will not pursue Cylexin for the CPB indication and
may not pursue Cylexin for any indication.
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INTEGRIN BLOCKERS
The migration of certain classes of white blood cells (lymphocytes, eosinophiles
and monocytes) into organs or tissues is central to the pathogenesis of a
variety of chronic inflammatory diseases. Integrins are a group of adhesion
receptors on the surface of these white blood cells which bind to ligands on
epithelial cells lining blood vessels in a lock-and-key manner and thereby
initiate a chronic inflammatory response. Integrin blockers should therefore
inhibit white blood cell infiltration and the resulting pathology in the target
tissues. Cytel scientists selected the VLA-4 integrin as the most relevant
molecular target for its integrin blocker program based on the Company's own
work and supporting data reported in the literature from a variety of animal
models of chronic inflammation including asthma, colitis, diabetes,
transplantation, multiple sclerosis and arteriopathy. Cytel has demonstrated
that its lead VLA-4 inhibitor compound is effective in several animal models
including multiple models of asthma. In vivo studies have shown: (i) a
protective effect against antigen-induced late responses and airway hyper
responsiveness in allergic sheep; (ii) a significant reduction in eosinophil
recruitment to the airways and airway hyperresponsiveness in antigen-challenged
mice; and (iii) an improvement in pulmonary function and reduction in white
blood cell recruitment in antigen-challenged rabbits.
Cytel has an exclusive license from the Fred Hutchinson Cancer Research Center
("FHCRC") to lymphocyte adhesion technology related to blocking the VLA-4/CS-1
interaction. A United States patent was granted to FHCRC covering the use of
antibodies directed at VLA-4 to treat or prevent inflammation. Additional claims
from this application are in prosecution for peptides and other agents. Cytel is
obligated to make milestone and royalty payments to FHCRC during the development
and commercialization of products that are covered by FHCRC patents. In July
1998, Cytel signed an exclusive sublicensing and option agreement with Elan
Corporation's subsidiary Elan International Services, Ltd. ("Elan"), granting it
rights under the FHCRC antibody patent. In addition, Elan has the option to
enter into a non-exclusive sublicense for rights to future patents resulting
from the FHCRC application. As part of the agreement, Elan made a $4 million
equity investment in Cytel and will make future milestone and royalty payments.
In conjunction with the announcement that clinical trials of Cylexin have been
halted, Cytel decided to end its pursuit of cell adhesion therapeutics and will
pursue the sale of its remaining cell adhesion related assets. The company
believes it may still get revenues from Elan due to Elans development of the
Licensed technology.
GLYTEC MANUFACTURING BUSINESS
In February 1999, Cytel licensed its proprietary carbohydrate synthesis and
manufacturing technology to Baxter Healthcare Corporation's Nextran unit for
exclusive use in xenotransplantation and sold Nextran certain related fixed
assets. Cytel received $4 million of consideration in the transaction. This
licensing arrangement replaced Cytel's exclusive agreements with Nextran for the
supply of a specific bioactive carbohydrate for use in xenotransplantion. In
connection with the license of rights to Cytel's carbohydrate synthesis and
manufacturing technology to Nextran for xenotransplantation and upon Cytel's
announcement that it halted clinical trials of Cylexin, Nextran assumed the
facility lease and certain personnel related to this manufacturing operation.
In March 1999, Cytel announced the sale of its carbohydrate synthesis and
manufacturing business assets to Neose Technologies, Inc. Neose paid Cytel $3.5
million in cash and paid an additional $1.5 million into escrow, the release of
which is conditioned on Cytel's satisfaction of certain matters relating to the
patents and licenses acquired by Neose. Neose may pay Cytel up to an additional
$1.6 million contingent on potential payments and revenues realized by Neose in
connection with certain future corporate collaborations. Under the agreement,
Neose acquired all of Cytel's carbohydrate synthesis and manufacturing
technology, including patent rights and rights under license agreements with The
Scripps Research Institute, The University of Michigan, The University of
Alberta, The University of California, Los Angeles and The University of
Arkansas and National Research Council of Canada. Neose acquired such technology
subject to the rights and licenses granted to Nextran in the field of
xenotransplantation. Cytel retains a license to pursue research and development
of glycosyltransferase inhibitors.
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PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. The Company files
patent applications as appropriate covering its proprietary technology.
EPIMMUNE
Epimmune was founded with the vaccine patent estate developed by Cytel over
approximately 10 years. With 10 issued United States patents, 19 issued foreign
patents, more than 160 pending applications worldwide, and licenses to other
intellectual property relevant to epitope discovery, Epimmune has established a
broad intellectual property position directed toward processes of epitope
identification, epitope compositions and uses. Epimmune's intellectual property
covers thousands of CTL and HTL epitopes relevant to stimulating a cellular
immune response to breast, lung, prostate, cervical and colorectal cancers and
melanoma, as well as HBV, HCV, HIV, malaria, HPV and tuberculosis. Covered in
the claims are peptide and nucleic acid compositions and related methods of use.
Epimmune's intellectual property also covers numerous processes of epitope
identification, including methods for identifying motif-bearing epitopes,
methods for modifying epitopes to increase population coverage and/or enhance
immunogenicity, in vitro MHC binding assays, methods of inducing CTL ex vivo,
transgenic animals and computer programs to identify epitopes and generate
analogs of motif-bearing molecules. Many of these methods, developed by Epimmune
scientists, have become standard practice in the field. Epimmune has issued
patents and pending applications covering the PADRE family of universal T helper
epitopes.
CYTEL
As of March 31, 1999, following the sale of certain assets to Neose, Cytel's
patent estate consisted of 28 United States and 70 international pending patent
applications, and 12 United States and 16 international issued patents.
These patent applications and patents are either owned by or are under exclusive
license to Cytel or Epimmune. There can be no assurance that patents will issue
from any of the applications the Company has filed or licensed; or that if
patents do issue, that claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection to the
Company.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. Failure by the Company to obtain a license to any
technology that it requires to commercialize its products, or to develop an
alternative compound and obtain FDA approval within an acceptable period of time
if required to do so, may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, would also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of others' proprietary rights. In addition, the Company may
have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office which could result in substantial costs to the Company.
The Company also protects its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. 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 be independently
discovered by competitors.
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MANUFACTURING
In June 1998, Cytel completed construction of a manufacturing facility that
complies with current Good Manufacturing Practices ("cGMP") regulations
promulgated by FDA and is licensed by the State of California for production of
carbohydrate products for use in clinical trials. The new facility is a 10,000
square foot cGMP manufacturing facility that meets regulatory requirements for
cGMP production of products. In connection with the license of rights to Cytel's
carbohydrate synthesis and manufacturing technology to Nextran for
xenotransplantation and upon Cytel's announcement that it has halted clinical
trials of Cylexin, Nextran has assumed the operations and the lease to this
facility.
To be successful, the Company's products and products of its partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. The Company has not commercialized any pharmaceutical
products, nor has it demonstrated its ability to manufacture commercial
quantities of its or its partners' product candidates in accordance with
regulatory requirements. If the Company is unable to develop itself or contract
with a third-party manufacturing capabilities to produce suitable quantities of
its or its partners' products in accordance with regulatory standards, the
ability of the Company or its partners to conduct clinical trials, obtain
regulatory approvals and market such products may be adversely affected, which
could adversely affect the Company's competitive position and its chances of
achieving profitability. There can be no assurance that such products can be
manufactured by the Company or any other party at a cost or in quantities which
are commercially viable.
GOVERNMENT REGULATION
The Company's research and development activities and any future manufacturing
and marketing of products by the Company are subject to regulation for safety
and efficacy by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation by
FDA. The Federal Food, Drug and Cosmetic Act and the Public Health Service Act
govern the testing, manufacture, safety, efficacy, labeling, storage,
record-keeping, approval, advertising and promotion of the Company's products.
In addition to FDA regulations, the Company is also subject to other federal and
state regulations such as the Occupational Safety and Health Act and the
Environmental Protection Act. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development which may affect
approval or delay an application or require additional expenditures by the
Company.
The steps required before a pharmaceutical agent may be marketed in the United
States include (i) preclinical laboratory and animal tests, (ii) the submission
to the FDA of an application for an Investigational New Drug Application
("IND"), which must become effective before human clinical trials may commence
in the United States, (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug, (iv) the submission of a New
Drug Application ("NDA") or Product License Application ("PLA") to the FDA and
(v) the FDA approval of the NDA or PLA prior to any commercial sale or shipment
of the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and approved
by, the FDA. Drug product manufacturing establishments located in California
also must be licensed by the State of California in compliance with separate
regulatory requirements.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to assess the safety and efficacy of the product and its formulation.
The results of the preclinical tests are submitted to the FDA as part of an IND
(and subsequently when additional non-clinical work is completed), and unless
the FDA objects, the IND will become effective 30 days following its receipt by
the FDA.
Clinical trials involve the administration of the drug under the supervision of
a qualified principal investigator to healthy volunteers or to patients
identified as ones with the condition for which the
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drug is being tested. Clinical trials are conducted in accordance with protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol is submitted to
the FDA as part of the IND. Each clinical study is conducted under the auspices
of an independent Institutional Review Board ("IRB") at the institution at which
the study will be conducted. Prior to its approval for the study to be
conducted, the IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases prior to
product approval, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects and often into patients as
well, the drug is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion and clinical pharmacology. Phase II involves
studies in a limited patient population to (i) determine the efficacy of the
drug for specific targeted indications, (ii) determine dosage tolerance and
optimal dosage and regimen and (iii) identify possible adverse side-effects and
safety risks. When a compound is found to be effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
evaluate clinical efficacy further and to test further for safety within an
expanded patient population at multiple clinical study sites. Even after the NDA
approval, the FDA may require additional Phase IV clinical trials. The FDA
reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to the
FDA in the form of an NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The approval process is affected by a number of factors, including the severity
of the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to the
FDA and may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to good manufacturing practices prescribed by the FDA. Domestic manufacturing
facilities are subject to biennial FDA inspections and foreign manufacturing
facilities are subject to periodic FDA inspections or inspections by the foreign
regulatory authorities with reciprocal inspection agreements with the FDA.
The Prescription Drug Act of 1992 requires companies engaged in pharmaceutical
development, such as the Company, to pay user fees in the amount of at least
$100,000 upon submission of an NDA. The Company does not believe that this
requirement will have a material adverse effect on the Company's business.
For marketing outside the United States, the Company also is subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
The time required for completing such testing and obtaining such approvals is
uncertain and approval itself may not be obtained. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA and/or HPB regulatory review of each submitted
new drug application or product license application. Similar delays may also be
encountered in foreign countries. There can be no assurance that even after such
time and expenditures regulatory approval will be obtained for any drugs
developed by the Company. Moreover, if regulatory approval of a drug is granted,
such approval may entail
Page 9 of 41
<PAGE> 11
limitations on the indicated uses for which the drug may be marketed. Further,
even if such regulatory approval is obtained, a marketed drug, its manufacturer
and the facilities in which the drug is manufactured are subject to continual
review and periodic inspections. Later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
COMPETITION
The Company is engaged in a highly competitive industry. The Company competes
with many public and private companies, including pharmaceutical companies,
chemical companies, specialized biotechnology companies and academic
institutions. Many of the Company's competitors have substantially greater
financial, scientific and technical resources, and manufacturing and marketing
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience conducting preclinical studies and
clinical trials of new pharmaceutical products, and in obtaining regulatory
approvals for pharmaceutical products. Competitors of the Company and its
collaborators may develop and commercialize such products more rapidly than the
Company and its collaborators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive.
For some indications, the Company anticipates developing products which will be
competing with existing therapies for market share. In addition, a number of
companies are pursuing the development of novel pharmaceuticals which target the
same diseases that the Company is targeting. These companies include
pharmaceutical and biotechnology companies. Furthermore, academic institutions,
government agencies and other public and private organizations conducting
research may seek patent protection with respect to potentially competing
products or technologies and may establish collaborative arrangements with
competitors of the Company. The development by others of new treatment methods
for those indications for which the Company is developing pharmaceuticals could
render such pharmaceuticals noncompetitive or obsolete.
The Company's products under development are expected to address a range of
markets. The Company's competition will be determined in part by the potential
indications for which the Company's compounds are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or competitive products. Accordingly, the relative speed
with which the Company or its collaborative partners can develop products,
complete the clinical trials and approval processes and supply commercial
quantities of the products to the market are expected to be important
competitive factors. The Company expects that competition among products
approved for sale will be based, among other things, on product effectiveness,
safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the often substantial period between technological conception and commercial
sales.
EMPLOYEES
As of April 1, 1999, the Company employed 51 individuals full-time, of whom 26
were engaged in research and development, including 37 full-time employees of
Epimmune, 13 of whom hold Ph.D. or M.D. degrees. A significant number of the
Company's management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical product companies. The Company believes
it has been highly successful in attracting skilled and experienced scientific
personnel; however, competition for such personnel is intensifying. None of the
Company's employees are covered by collective bargaining agreements, and
management considers relations with its employees to be good.
Page 10 of 41
<PAGE> 12
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of March 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Virgil Thompson 59 President, Chief Executive Officer
and Director
Robert L. Roe, M.D., F.A.C.P. 58 Executive Vice President, Chief
Operating Officer, Acting Chief
Financial Officer and Director
Jennifer L. Lorenzen 45 Vice President of Business
Development
Deborah A. Schueren 35 Vice President of Cytel and
President of Epimmune
</TABLE>
BUSINESS EXPERIENCE
Mr. Thompson joined Cytel in January 1996 as President and Chief Executive
Officer, and member of the Board of Directors. Previously he was President and
Chief Executive Officer for CIBUS Pharmaceutical, Inc., a privately held oral
drug delivery company from July 1994 to December 1995. He served as a consultant
to the pharmaceutical industry from 1993 to 1994. From 1969 to 1993, Mr.
Thompson was employed by Syntex Corporation ("Syntex"). During his tenure with
Syntex, he held several key executive positions including President, Syntex
Laboratories, Inc., Chief Operating Officer, Syntex Laboratories, Inc. and Vice
President, Corporate Regulatory Affairs. Mr. Thompson earned a Bachelor of
Science degree in Pharmacy from Kansas University and a Juris Doctor degree from
the George Washington University Law School. He also serves on the boards of
directors of Biotechnology General Corporation, Cypros Pharmaceutical
Corporation and Aradigm Corporation.
Dr. Roe joined Cytel in January 1996 as Executive Vice President and Chief
Operating Officer, and member of the Board of Directors. He was appointed as
Acting Chief Financial Officer and Secretary in December 1998. In his most
recent position prior to joining the Company, Dr. Roe served as Executive Vice
President, Chief Operating Officer, and member of the Board of Directors of
Chugai Biopharmaceuticals, Inc. ("CBI"), a San Diego based subsidiary of Chugai
Pharmaceuticals Co., Ltd. of Japan, from August 1995 to January 1996. From 1976
to 1995, Dr. Roe was employed by Syntex in senior-level positions in medical
research, pharmaceutical development and regulatory affairs, prior to becoming
President of Development Research and Senior Vice President of the corporation.
Dr. Roe earned his Doctor of Medicine degree from the University of California
at San Francisco, School of Medicine, and his Bachelor of Arts degree with
Honors from Stanford University, in Biological Sciences. He is a Fellow of the
American College of Physicians and the American College of Rheumatology. He
serves on the board of directors of CoCensys, Inc.
Ms. Lorenzen was elected Vice President of Business Development in February
1998. She joined Cytel in August 1996 as Director, Strategic Marketing and
Program Management and was elected Vice President and Development Program
Director in April 1997. Prior to joining Cytel, Ms. Lorenzen was with CBI where
she held the position of Vice President and Development Program Director. Before
joining CBI in 1995, she spent 10 years at Syntex, USA, Inc. where she held a
variety of marketing and management positions, including Vice President and
Program Director of
Page 11 of 41
<PAGE> 13
Syntex' Ganciclovir Program. Ms. Lorenzen received her Bachelor of Arts degree
in Biological Sciences from the University of California at Davis. Ms. Lorenzen
resigned from Cytel effective March 31, 1999.
Ms. Schueren was elected President of Epimmune in October 1997 and has also
served as a Vice President of Cytel Corporation since March 1997. She joined
Cytel in October 1992 and has had responsibility at different times during that
period for a variety of functions including investor relations, business
development and finance. She served as Director, Business Development from 1994
until March 1997 and as Vice President, Finance and Chief Financial Officer from
March 1997 until October 1997. Prior to joining Cytel, Ms. Schueren was a
consultant with The Boston Consulting Group, a management consulting firm, from
1990 to 1992 and was with Lehman Brothers Investment Banking Division, Health
Care Corporate Finance from 1986 to 1988. She received her Bachelor of Science
in Chemical Engineering from Texas A&M University and an MBA from the Harvard
Business School.
All officers are elected annually by the Board of Directors. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among any of the directors, officers or key employees of the Company.
RISK FACTORS
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected the Company's results and in the
future could cause actual results and needs of the Company to vary materially
from forward-looking statements made from time to time by the Company on the
basis of management's then-current expectations. The business in which the
Company is engaged is in rapidly changing and competitive markets and involves a
high degree of risk, and accuracy with respect to forward-looking projections is
difficult.
Disappointing results of the Phase II/III clinical trial of Cylexin, Cytel's
lead cell adhesion inhibitor compound, has led to the termination of the cell
adhesion therapeutic business. Accordingly, Cytel is terminating its employees,
selling its fixed assets and intellectual property, and focusing all subsequent
development efforts on Epimmune's vaccine technology. During the first quarter
of 1999, Cytel sold its Glytec carbohydrate synthesis and manufacturing business
and plans to use the proceeds from such sale, together with existing cash
resources, to meet its financial obligations, including corporate restructuring
and termination costs of all of its non-vaccine programs. There can be no
assurance, however, that Cytel's cash resources will be sufficient to satisfy
all of its financial obligations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Excluding Epimmune, as of March 31, 1999, Cytel had approximately $5.2 million
of cash available. As of March 31, 1999, Epimmune had $10.3 million in cash,
cash equivalents, restricted cash and short-term investments. The Company is
considering various alternatives in light of its financial position and the
recent sale of its carbohydrate synthesis and manufacturing business and
decision to terminate the cell adhesion therapeutic anti-inflammatory program.
The Company's future capital requirements will depend on many factors,
including: the ability of the Company to establish and maintain collaborative
arrangements; progress with preclinical testing 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; changes in its existing research relationships; continued
scientific progress in its drug discovery programs; the magnitude of these
programs; the cost of manufacturing scale-up; and effective commercialization
activities and arrangements. Epimmune intends to seek additional funding through
collaborative arrangements or equity or debt financings. If additional financing
is not available, Epimmune anticipates its existing
Page 12 of 41
<PAGE> 14
available cash, cash equivalents, restricted cash and short-term investments
will be adequate to fund its operations through the end of 2000. The estimate
for the period for which Epimmune expects its available cash balances,
investment income and estimated cash flow from collaborative agreements and
research grants to be sufficient to meet its capital requirements is a
forward-looking statement that involves risks and uncertainties as set forth
herein and in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report on Form 10-K.
There can be no assurance that any financing or transaction through which the
Company seeks to obtain additional funding will be available on favorable terms,
if at all, or that any collaboration agreements to which the Company is or may
become a party will successfully reduce the Company's funding requirements. The
suspension or termination of the Company's collaborations with its existing
corporate partners or the inability to enter into new collaborations, the
failure of any such collaborations to be successful or the delay in their
development or commercialization of products could have a material adverse
effect on the Company's business, financial condition and results of operations.
If additional funds are raised by issuing securities, further dilution to
existing stockholders may result. If adequate funds are not available, the
Company will be required to delay, scale back or eliminate one or more of its
drug discovery or development programs; obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to or sell certain of its technologies, product candidates or products
that the Company would not otherwise relinquish or sell; sell itself or certain
of its technologies or other assets to a third party; cease operations; or
declare bankruptcy.
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is a research and development focused company. It has not completed
the development of any product and, accordingly, has not begun to market or
generate revenues from the commercialization of products. The Company does not
expect to market any therapeutic or prophylactic products for a number of years.
The Company's products under development will require significant time-consuming
and costly research, development, preclinical studies, clinical testing,
regulatory approval and significant additional investment prior to their
commercialization, which may never occur. There can be no assurance that the
Company's research and development programs will be successful. In particular,
Cytel completed its Phase II/III clinical trial of Cylexin, its lead cell
adhesion inhibitor compound, in March 1999. Based on disappointing results from
this Phase II/III clinical trial, Cytel announced that it has halted clinical
trials of Cylexin and is discontinuing its cell adhesion programs. Further,
there can be no assurance that the Company will be able to manufacture any
products in commercial quantities in compliance with regulatory requirements at
an acceptable cost, that any of its products under development will be
successfully commercialized or will prove to be safe and efficacious in clinical
trials or that the Company or its collaborators will be successful in obtaining
market acceptance of any of its products. The Company or its collaborators may
encounter problems and delays relating to research and development, regulatory
approval, manufacturing and marketing. The failure by the Company to address
such problems and delays successfully would have a material adverse effect on
the Company's business, financial condition and results of operations.
RELIANCE ON COLLABORATIVE PARTNERS
The Company expects to rely on collaborative arrangements both to develop and
commercialize pharmaceutical products. The Company has relied on certain
established pharmaceutical companies interested in its technology to fund a
portion of its research and development expenses for pharmaceutical product
candidates. There can be no assurance that the Company will be able to enter
into collaborative arrangements in the future, that any such collaborative
arrangements or its existing collaborative arrangements will continue or be
successful or that the Company will receive royalty revenues, license fees or
milestone payments from any of such collaborative arrangements. In addition,
collaborative partners may pursue alternative technologies or develop
alternative compounds either on their own or in collaboration with others,
including the Company's competitors, as a means of developing treatments for the
disease targeted by any collaborative program of the Company.
Page 13 of 41
<PAGE> 15
Epimmune has entered into a research and development collaboration with Searle
with respect to the production, use and sale of pharmaceutical products derived
from Epimmune's cancer epitopes and the use thereof in ex vivo therapies and
therapeutic vaccines. Such collaboration is Epimmune's only significant
collaboration to date, and Epimmune is substantially dependent upon it. The
success of the collaboration will depend, in significant part, on Searle's
development, competitive marketing and strategic considerations, including the
relative advantages of alternative products being developed or marketed by
competitors. Epimmune expects that substantially all of its revenues for the
foreseeable future will result from payments under its existing, and any future,
collaborations, including royalties on product sales, and interest income. There
can be no assurance that Searle will perform its obligations as expected or that
any future milestone payments or other amounts will be received by Epimmune. The
suspension or termination of the Epimmune collaboration with Searle, the failure
of such collaboration to be successful or the delay in the development or
commercialization of pharmaceutical products pursuant to such collaboration
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Company may be required to enter into licenses or other
collaborative agreements with third parties in order to access technologies that
may be necessary to successfully develop certain of its products. There can be
no assurance that the Company will be able to successfully negotiate acceptable
licenses or other collaborative arrangements that allow it to access such
technology. In addition, there can be no assurance that any technology accessed
through such licenses or other collaborations will successfully meet the
Company's requirements.
CONTINUING OPERATING LOSSES; ACCUMULATED DEFICIT
The Company has experienced significant operating losses since its inception in
1987. As of December 31, 1998, the Company had an accumulated deficit of
approximately $128.7 million. The Company expects to incur substantial
additional operating losses as the Company's research and development and
clinical trial efforts continue. All of the Company's revenues to date have
consisted of contract research and development revenues, license and milestone
payments, research grants and interest income. To achieve profitable operations,
the Company, alone or with others, must identify, develop, register, manufacture
and market proprietary products. There can be no assurance that the Company will
be successful in its efforts to achieve profitable operations.
MANUFACTURING LIMITATIONS
To be successful, the Company's products and products of its partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. The Company has not commercialized any products, nor
has it demonstrated its ability to manufacture commercial quantities of its or
its partners' product candidates in accordance with regulatory requirements. If
the Company is unable to develop itself or contract with a third-party
manufacturing capabilities to produce suitable quantities of its or its
partners' products in accordance with regulatory standards, the ability of the
Company or its partners to conduct clinical trials, obtain regulatory approvals
and market such products may be adversely affected, which could adversely affect
the Company's competitive position and its chances of achieving profitability.
There can be no assurance that such products can be manufactured by the Company
or any other party at a cost or in quantities which are commercially viable.
GOVERNMENT REGULATION; UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS
The production and marketing of the Company's products and its ongoing research
and development activities are subject to regulation by numerous governmental
authorities in the United States, Canada and other countries. Before any drug
developed by the Company can be marketed, it will undergo rigorous preclinical
and clinical testing and an extensive regulatory approval process mandated by
the FDA and equivalent foreign authorities, including the Canadian HPB. These
processes can take a number of years and require the expenditure of substantial
resources. The time required for completing such testing and obtaining such
approvals is uncertain and approval itself
Page 14 of 41
<PAGE> 16
may not be obtained. The FDA, the HPB or the Company and its collaborators may
decide to discontinue or suspend clinical trials at any time if the subjects or
patients who are participating in such trials are being exposed to unacceptable
health risks or if the results show no or limited benefit in patients treated
with the drug compared to patients in the control group. In particular, Cytel
completed its Phase II/III clinical trial of Cylexin, its lead cell adhesion
inhibitor compound, in March 1999. Cytel announced that it halted clinical
trials of Cylexin based on disappointing results that indicated that Cylexin
showed no benefit over placebo for the treatment of reperfusion injury in
infants undergoing CPB to facilitate the surgical repair of heart defects.
Cytel has recently discontinued human clinical testing of its lead product
candidate, Cylexin, in infants undergoing surgery to correct congenital heart
defects. This trial was terminated in March 1999 after a determination that the
drug was safe, but that there was no increased efficacy seen in patients treated
with Cylexin compared to those patients in the placebo control group. Testing of
the Company's other product candidates in research and development may reveal
undesirable and unintended side effects or other characteristics that may
prevent or limit their commercial use. There can be no assurance that the
Company will not encounter problems in clinical trials of other product
candidates that will cause the FDA, or the Company to delay or suspend clinical
trials. Furthermore, there can be no assurance that any of the Company's
products will be approved by the FDA or foreign regulatory agency for any
indication. Products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years. Even if regulatory approval of a drug is granted, such approval may
entail limitations on the indicated uses for which the drug may be marketed. In
addition, a marketed drug, its manufacturer and the facilities in which the drug
is manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
TECHNOLOGICAL CHANGE AND COMPETITION
The Company is engaged in a highly competitive industry. The Company competes
with many public and private companies, including pharmaceutical companies,
chemical companies, specialized biotechnology companies and academic
institutions. Many of the Company's competitors have substantially greater
financial, scientific and technical resources, and manufacturing and marketing
experience and capabilities than the Company. In addition, many of the Company's
competitors have significantly greater experience conducting preclinical studies
and clinical trials of new pharmaceutical products, and in obtaining regulatory
approvals for pharmaceutical products. Competitors of the Company and its
collaborators may develop and commercialize such products more rapidly than the
Company and its collaborators. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive. The Company is
aware of companies that are pursuing the development of novel pharmaceuticals
which target the same diseases that the Company is targeting. There can be no
assurance that these and other efforts by potential competitors will not be
successful, or that other technologies will not be developed to compete with the
Company's technologies.
The Company's products under development address a range of markets. The
Company's competition will be determined in part by the potential indications
for which the Company's compounds are developed and ultimately approved by
regulatory authorities. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or competitive products. Accordingly, the relative speed with which the Company
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market are expected to be
important competitive factors. The Company expects that competition among
products approved for sale will be based, among other things, on product
effectiveness, safety, reliability, availability, price and patent position.
Page 15 of 41
<PAGE> 17
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, both in the United States and other
countries. The patent position of biotechnology and pharmaceutical companies is
highly uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The Company intends to file applications and pursue patent prosecution
as appropriate for patents covering both its products and processes. There can
be no assurance that patents will issue from any of the patent applications
owned or licensed by the Company or that, if patents do issue, that claims
allowed will be sufficiently broad to protect the Company's products and
processes. In addition, there can be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection to the Company.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. Failure by the Company to obtain a license to any
technology that it requires to commercialize its products, or to develop an
alternative compound and obtain FDA approval within an acceptable period of time
if required to do so, would have a material adverse effect on the Company.
Litigation, which could result in substantial costs to the Company, may also be
necessary to enforce any patents issued to the Company or to determine the scope
and validity of others' proprietary rights. In addition, the Company may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office which could result in substantial costs to the Company to
determine the priority of inventions.
The Company also protects its proprietary technology and processes in part by
confidentiality agreements with its collaborative partners, employees and
consultants. 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 be independently
discovered by competitors.
ABSENCE OF SALES AND MARKETING EXPERIENCE
The Company has no experience in sales, marketing or distribution. Before it can
market any of its products directly, the Company must develop a substantial
marketing and sales force with technical expertise and supporting distribution
capability. Alternatively, the Company may obtain the assistance of a
pharmaceutical company with a large distribution system and a large direct sales
force. Other than its agreements with Searle and Takara, the Company does not
have any existing distribution arrangements with any pharmaceutical company for
its products under development. There can be no assurance that the Company will
be able to establish sales and distribution capabilities or be successful in
gaining market acceptance for its products.
DEPENDENCE ON REIMBURSEMENT
The Company's ability to commercialize its products successfully may depend in
part on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health insurers and other organizations. Third-party payors
are increasingly challenging the price of medical products and services.
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 to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development.
Page 16 of 41
<PAGE> 18
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the principal members of its scientific and
management staff. The Company does not maintain key person life insurance on the
life of any employee. The Company's future success also will depend in part on
the continued service of its key scientific personnel and its ability to
identify, hire and retain additional qualified personnel.
There is intense competition for qualified personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to attract and retain such personnel necessary for the
development of the Company's business. Because of the intense competition, there
can be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of additional
collaborative relationships. Failure to attract and retain key personnel could
have a material adverse effect on the Company.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. While the Company currently has product liability insurance, there can
be no assurance that it will be able to maintain such insurance on acceptable
terms or that insurance will provide adequate coverage against potential
liabilities.
USE OF HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal 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 damage that results, which liability could exceed the resources of the
Company. The Company may incur substantial cost to comply with environmental
regulations if the Company develops commercial manufacturing capacity.
Although the Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations and currently does not expect
to make material capital expenditures for environmental control facilities in
the near term, there can be no assurance that it will not be required to incur
significant costs to comply with environmental laws and regulations in the
future, or that the operations, business or assets of the Company will not be
materially, adversely affected by current or future environmental laws or
regulations.
VOLATILITY OF COMMON STOCK PRICE
The market price for securities of biotechnology companies, including the
Company, have historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations that are
unrelated to the operating performance of such companies. Factors such as
announcements of technological innovations or new commercial therapeutic
products by the Company or others, governmental regulation, developments in
patent or other proprietary rights, developments in the Company's relationships
with its collaborative partners, public concern as to the clinical results
and/or, the safety of drugs developed by the Company or others and general
market conditions may have a significant effect on the market price of the
Company's common stock. Fluctuations in financial performance from period to
period also may have a significant impact on the market price of the common
stock.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends and does not anticipate paying
cash dividends in the foreseeable future.
Page 17 of 41
<PAGE> 19
ITEM 2. PROPERTIES
The Company's administrative offices, research laboratory, manufacturing and
warehouse facilities are located in San Diego, California.
Cytel currently occupies three facilities for a total of 59,200 square feet. The
manufacturing and warehouse operations are in two buildings for a total of
17,200 square feet. In connection with the license of certain carbohydrate
synthesis and manufacturing technology to Nextran in February 1999, Nextran has
assumed the manufacturing and warehousing facility leases from Cytel and certain
equipment loan liabilities and related assets. Cytel has subleased approximately
23,000 square feet of its remaining office and research laboratory facility. The
sublease expires concurrent with the lease in 2000. As a result of Cytel's
restructuring announcement in March 1999, Cytel intends to sublease the
remainder of its existing office and laboratory space.
Epimmune currently occupies an 8,600 square foot facility in San Diego under a
lease which expires in 2002. In November 1998, Epimmune entered into a 10-year
lease of a new 24,000 square foot laboratory facility which it plans to occupy
in April 1999. Epimmune intends to sublease its current facility after
relocating to the new facility.
The Company believes its existing facilities will be adequate to meet the
Company's needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cytel held a Special Meeting of Stockholders (the "Special Meeting") on October
30, 1998. At the Special Meeting, the stockholders of Cytel approved an
amendment to Cytel's Amended and Restated Certificate of Incorporation to
effect, at any time prior to the 1999 Annual Meeting of Stockholders, a reverse
stock split, whereby Cytel would issue one new share of Common Stock of Cytel in
exchange for between four and seven shares of outstanding Common Stock. Cytel
had 34,909,187 shares of Common Stock outstanding as of September 21, 1998, the
record date for the Special Meeting. At the Special Meeting, holders of a total
of 25,421,692 shares of Common Stock were present in person or represented by
proxy. In addition, 258,378 shares of a total 258,378 shares of Series B
Convertible Preferred Stock entitled to vote were represented in person or by
proxy at the meeting. The following sets forth information regarding the results
of the voting at the Annual Meeting:
Proposal 1: Approval of an Amendment of Cytel's Amended and Restated Certificate
of Incorporation
<TABLE>
<S> <C>
Votes in favor: 24,146,796
Votes against: 1,389,930
Withheld: 88,567
</TABLE>
Page 18 of 41
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (NASDAQ symbol "CYTL") is traded publicly through the
National Market System. The following table presents quarterly information on
the price range of Cytel's common stock. This information indicates the high and
low sale prices reported by the National Market System. These prices do not
include retail markups, markdowns or commissions. All information set forth
below has been adjusted to reflect a one-for-seven reverse stock split of
Cytel's common stock effected on November 13, 1998.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1998 1st Quarter $17.50 $ 8.75
2nd Quarter $15.47 $ 9.17
3rd Quarter $10.50 $ 2.66
4th Quarter $ 3.88 $ 2.25
1997 1st Quarter $27.02 $14.91
2nd Quarter $19.25 $ 9.66
3rd Quarter $19.67 $10.08
4th Quarter $17.92 $ 9.87
</TABLE>
As of March 31, 1999, there were approximately 235 stockholders of record of the
Company's common stock. The Company has never declared or paid dividends on its
common stock and does not anticipate the payment of dividends in the foreseeable
future.
Page 19 of 41
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
(in millions except for net loss per share)
Years Ended December 31 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 3.7 $ 5.1 $ 10.9 $ 16.8 $ 6.3
Net loss (21.5) (14.4) (12.5) (8.00) (17.0)
Net loss per share (4.48) (3.92) (3.50) (2.52) (6.86)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
(in millions)
As of December 31 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 9.8 $ 17.8 $ 21.6 $ 34.6 $ 32.2
Total assets 21.0 28.1 34.3 48.1 45.0
Long-term obligations
under capital leases, 1.6 0.7 1.1 1.8 1.2
equipment notes payable
and line of credit
Stockholders' equity $ 14.0 $ 24.4 $ 27.5 $ 38.5 $ 35.5
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, without
limitation, those discussed below and in the section entitled "Risk Factors".
Since its inception in July 1987, The Company has devoted substantially all of
its resources to the discovery and development of its potential therapeutic
products. To date, the Company has not received any revenues from the sale of
products. The Company has funded its research and development primarily from
equity-derived working capital and through strategic alliances with other
companies. The Company has been unprofitable since its inception and expects to
incur substantial operating losses for the next several years. As of December
31, 1998, the Company's accumulated deficit was approximately $128.7 million.
Disappointing results of the Phase II/III clinical trial of Cylexin, Cytel's
cell adhesion inhibitor compound, has led to the termination of the cell
adhesion therapeutic business. Accordingly, Cytel is terminating its employees,
selling its fixed assets and intellectual property, and focusing all subsequent
development efforts on Epimmune's vaccine technology. During the first quarter
of 1999, Cytel sold its Glytec carbohydrate synthesis and manufacturing business
and plans to use the proceeds from such sale, together with existing cash
resources, to meet its financial obligations, including corporate restructuring
and termination costs of all of its non-vaccine programs. There can be no
assurance, however, that Cytel's cash resources will be sufficient to satisfy
all of its financial obligations
Page 20 of 41
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Cytel and Epimmune on a Consolidated Basis
The following discussion reflects financial information for Cytel and Epimmune
on a consolidated basis. Financial information for Epimmune alone is provided in
the section entitled "Epimmune" below.
The Company has financed operations since inception primarily through private
placements of its equity securities, two public common stock offerings, revenues
under collaborative research and development agreements, grant revenues and
interest income. Through December 1998, the Company has raised approximately
$144.9 million from the sale of equity securities. The Company has financed its
laboratory equipment and research and office facilities primarily through
capital and operating lease arrangements.
The Company had net working capital of $9.8 million as of December 31, 1998
compared to $17.8 million as of December 31, 1997. As of December 31, 1998, the
Company's cash, cash equivalents, restricted cash and short-term investments
decreased to $12.3 million from $18.8 million at December 31, 1997. The decrease
was due to an increase in cash used in operations that resulted from reduced
research and development revenues from collaborators relative to expenditures
for the development of the Company's priority drug candidates and the Company's
research programs offset by the net proceeds from the sale of common and
preferred stock. Excluding Epimmune, as of March 31, 1999, Cytel had $5.2
million of cash available to fund its operations, which it plans to use to meet
its financial obligations, including corporate restructuring and termination
costs of all its non-vaccine programs. There can be no assurance, however, that
Cytel's cash resources will be sufficient to satisfy all of its financial
obligations.
Capital expenditures, primarily for manufacturing and laboratory equipment,
totaled $2.3 million in 1998 compared to $0.6 million in 1997. The increase was
due primarily to manufacturing and laboratory equipment expenditures for the
Company's carbohydrate manufacturing facility. The Company has sold its Glytec
carbohydrate synthesis and manufacturing business and has decided to terminate
its cell adhesion therapeutic business and will focus all resources on Epimmune.
The Company's cash, cash equivalents and short-term investments are expected to
decline primarily due to Epimmune's ongoing vaccine research programs and the
payments associated with the termination of Cytel's cell adhesion therapeutics
business. The Company raised approximately $6.2 million in the first quarter of
1999 through the sale of fixed and intangible assets, the proceeds of which will
be used to fund the restructuring efforts of the Company. While the Company's
investments may periodically reflect unrealized losses, management attempts to
schedule the maturities of the Company's investments to coincide with the
Company's expected cash requirements.
Epimmune
The following discussion reflects financial information for Epimmune alone.
Epimmune's financial information is also included on a consolidated basis with
Cytel in the preceding section.
Since inception in October 1997, Epimmune has financed its operations through
private offerings of its equity securities, NIH grant revenues, capital and
operating lease transactions and investment income. From inception through
December 1998, Epimmune has raised approximately $16.5 million from sales of
equity securities. Total cash proceeds of sales of private equity securities
since inception were $10.4 million and $6.1 million from Cytel and Searle,
respectively.
In February 1998, Epimmune and Searle entered into a collaborative research and
development agreement. As part of the agreement Searle purchased 1,032,149
shares of Epimmune's Series B convertible preferred stock for $6.1 million and
659,898 shares of Cytel's Series B convertible preferred stock for $3.9 million.
Cytel, simultaneously, purchased 659,898 shares of Epimmune's
Page 21 of 41
<PAGE> 23
Series B-1 convertible preferred stock for $3.9 million. Searle has the right to
convert the Cytel Series B convertible preferred stock into Cytel common stock
after three years, or at any time to exchange the Cytel Series B convertible
preferred stock for Epimmune Series B-1 Preferred Stock owned by Cytel.
In August 1998, Epimmune entered into a $750,000 term credit Facility with
Silicon Valley Bank to provide secured financing for future laboratory, office
and tenant improvement additions. As of December 31, 1998, Epimmune had $511,000
available to finance future capital equipment and tenant improvements by August
1999. In addition, Epimmune leases its laboratory and office facilities under
operating leases. In November 1998, Epimmune entered into a 10-year lease
related to the construction of a new laboratory and office facility, which is
expected to be completed and occupied in April 1999.
Working capital balance increased to $10.7 million as of December 31, 1998 from
$5.0 million at the end of 1997. The increase is attributable to a $10.0 million
private equity sales transaction with Searle and Cytel partially offset by an
increase in accrued liabilities relating to the increase in operating expenses.
Cash, cash equivalents, short-term investments and restricted cash increased to
$11.1 million at December 31, 1998 from $5.0 million at December 31, 1997, due
to cash received from the Searle transaction partially offset by increases in
operating expenses. Epimmune primarily invests its cash in United States
government and investment grade corporate debt securities.
Epimmune believes that its available cash, cash equivalents, marketable
securities and existing sources of funding will be adequate to satisfy its
anticipated capital requirements through December 31, 2000. The estimate for the
period for which Epimmune expects its available cash balances, investment income
and estimated cash flow from collaborative agreements and research grants to be
sufficient to meet its capital requirements is a forward-looking statement that
involves risks and uncertainties as set forth herein and elsewhere in this
Report on Form 10-K.
Future Capital Needs
The Company expects to incur substantial additional research and development
expenditures, including costs related to preclinical testing, clinical trials
and manufacturing, as well as marketing and distribution expenses. It is the
Company's intention to seek additional collaborative research and development
relationships with suitable corporate partners. There can be no assurance that
any agreements that may result from these discussions will successfully reduce
the Company's funding requirements. Additional equity or debt financing will be
required, and there can be no assurance that these funds will be available on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its drug discovery
or development programs or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products that the Company would not
otherwise relinquish obligations, including restructuring costs, in terminating
its non-vaccine operations.
The Company's future capital requirements depend on many factors, including
continued scientific progress in its drug discovery programs, the magnitude of
these programs, progress with preclinical testing 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, changes in the existing collaborative research
relationships, the ability of the Company to establish and maintain development
arrangements, the cost of manufacturing scale-up and effective commercialization
activities and arrangements.
As is typical in the biotechnology industry, the commercial success of the
Company will depend in part on the Company neither infringing patents issued to
competitors nor breaching the technology licenses upon which the Company's
products might be based. The Company's business is also subject to other
significant risks, including the uncertainties associated with the lengthy
regulatory
Page 22 of 41
<PAGE> 24
approval process and with potential competition from other products. Even if the
Company's products appear promising at an early stage of development, they may
not reach the market for a number of reasons. Such reasons include, but are not
limited to the Company's inability to fund clinical development of such
products, or the possibilities that the potential products will be found
ineffective during clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, or be uneconomical to
market.
RESULTS OF OPERATIONS
The Company had total revenues of $3.7 million for the year ended December 31,
1998, compared to $5.1 million in 1997 and $10.9 million in 1996. Total revenues
decreased $1.4 million or 27% in 1998 from 1997 and decreased $5.8 million or
53% in 1997 from 1996, primarily due to a decline in research and development
revenues in each year. Revenues in each year consisted mainly of research and
development revenues, which were $2.0 million in 1998, $3.5 million in 1997 and
$8.6 million in 1996. Research and development revenues for 1998 consisted of
funding received under the Company's collaborative research and license
agreements with Elan and Nextran. Research grant revenues were $1.7 million in
1998, $1.6 million in 1997, and $2.3 million in 1996.
The Company had total operating expenses for the year ended December 31, 1998 of
$22.9 million, compared to $20.3 million in 1997 and $24.8 million in 1996.
Operating expenses increased $2.6 million or 13% in 1998 from 1997 and decreased
$4.5 million or 18% in 1997 from 1996.
Research and development expenses increased $1.9 million or 12% to $18.4 million
in 1998 from $16.5 million in 1997, and decreased $4.4 million or 21% to $16.5
million in 1997 from $20.9 million in 1996. The increase in 1998 from 1997 was
due to increased research activity performed by the Company's subsidiary,
Epimmune, and the decrease in 1997 from 1996 was due to a company-wide effort to
control costs and a reduction in the number of clinical trials the Company was
conducting.
General and administrative expenses increased to $4.6 million in 1998 from $3.7
million in 1997 and $3.9 million in 1996. The increase was due to the increase
in operating activity at Epimmune.
Net interest income was $0.9 million in 1998 compared to $0.8 million in 1997
and $1.4 million in 1996. Average cash balances were roughly comparable in 1998
and 1997 resulting in level net interest income year over year. The decreases in
1997 compared to 1996 were primarily attributable to lower average cash
balances.
The Company expects to incur operating losses over the next several years due to
continuing expenses associated with its research and development programs,
including preclinical testing and clinical trials. Operating losses may
fluctuate from quarter to quarter as a result of differences in the timing of
revenues received and expenses incurred, and such fluctuations may be
substantial. As a result of Cytel's announcements in March 1999 regarding the
sale of the Glytec carbohydrate synthesis and manufacturing business and the
decision to terminate the cell adhesion therapeutic business, the Company
expects to record in early 1999 a restructuring charge to operations of
approximately $3.7 million and will record a $3.3 million in gains from the
sales of assets. The restructuring charge primarily represents costs to be
incurred by Cytel for severance, write-off of unrealizable fixed assets and
remaining financial obligations under facility and operating leases held by
Cytel.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with year 2000
requirements. The impact of the year 2000 issue may affect other systems that
utilize imbedded
Page 23 of 41
<PAGE> 25
computer chip technology, including building controls, security systems or
laboratory equipment. It may also impact the ability to obtain products or
services if the provider encounters and fails to resolve year 2000 related
problems.
In 1999, the Company established an active program to identify and resolve year
2000 related issues. This program includes the review and assessment of our
information technology and non-information technology systems, as well as third
parties with whom we have a material relationships. This program consists of
four phases: inventory, risk assessment, problem validation and problem
resolution. The inventory phase identified potential risks we face. They include
among others computer software, computer hardware, telecommunications systems,
laboratory equipment, facilities systems (security, environment control, alarm),
service providers, and other third parties. The risk assessment phase
categorized and prioritizes each risk by its potential impact. The problem
validation phase tests each potential risk, according to priority, to determine
if an action risk exists. In the case of critical third parties, this step will
include a review of their year 2000 plans and activities. The problem resolution
phases will, for each validated risk, determine the method/strategy for
alleviating the risk. It may include anything from replacement of hardware or
solftware to process modification to selection of alternative vendors. This step
also includes the development of contingency plans.
The inventory and risk assessment phases will be completed in second calendar
quarter 1999. The problem validation phase will be completed in third calendar
quarter 1999 for all areas, except for evaluating specific pieces of research
equipment and the assessment of some protocol third parties. We expect that we
will complete the last portion of the problem validation and resolution phase by
the end of the third calendar quarter of 1999. Contingency plans are being
developed. We expect to have those plans completed by the end of the third
quarter 1999.
We are actively correcting problems as we identify them. These corrections
include the replacement of hardware and software systems, the identification of
alternative service providers and the creation of contingency plans. We
currently estimate that the cost of identified problems will be approximately
$130,000 for hardware and software upgrades or modifications. In addition, we
will incur approximately $10,000 of internal personnel costs to complete the
remaining phases of the project. We do not believe that the costs of these
actions will have a material adverse affect on our business. We expect to be
able to resolve any problems we identify of the project as part of normal
operating expenses.
Any failure to be year 2000 compliant within our internal computer systems or of
third party equipment or software we use, or of systems maintained by our
suppliers, may adversely affect our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's investment portfolio consists of money market funds and
short-term, high quality debt securities. These securities are subject to
interest rate risk, and will decline in value if interest rates increase. An
immediate 10% change in interest rates would not have a material impact on our
financial condition or results of operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Report of Ernst & Young LLP, Independent Auditors, the Consolidated
Financial Statements and Notes to Consolidated Financial Statements are included
in the report on pages F-1 through F-34.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Page 24 of 41
<PAGE> 26
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The names of Cytel's current directors and certain information about
them are set forth below:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION/POSITION
NAME AGE HELD WITH CYTEL
---- --- -----------------------------
<S> <C> <C>
Howard E. Greene, Jr. 56 Director and founder of Amylin Pharmaceuticals, Inc.
and Chairman of the Board of Directors
Virgil Thompson 59 President, Chief Executive Officer and Director
Robert L. Roe, M.D., 58 Executive Vice President, Chief Operating Officer,
F.A.C.P. Acting Chief Financial Officer, Secretary and Director
David L. Anderson 55 Managing Director, Sutter Hill Ventures/Director
William T. Comer, Ph.D. 63 President and Chief Executive Officer of SIBIA
Neurosciences, Inc./Director
Nicole Vitullo 42 Senior Vice President, Rothschild Asset Management
Ltd./Director
David L. Mahoney 44 Group President, Pharmaceutical Services and
International Group, McKesson HBOC/Director
Nancy D. Rasmussen 41 Vice President, Global New Business Franchise, G.D.
Searle & Co./Director
Lisabeth F. Murphy 42 Executive Vice President, Intellectual Property and
Legal Affairs of Elan Corporation, plc/Director
</TABLE>
Mr. Greene, a founder of Cytel, has served as a director since the
Company's inception. He was elected Chairman of the Board in January 1989 and
served as President from July 1987 to January 1989. Mr. Greene is a director and
founder of Amylin Pharmaceuticals, Inc., a biotechnology company involved in
research and development of medicines for treating diabetes and served as
Chairman of the Board from 1987 to 1998. He was a general partner of Biovest
Partners, a seed venture capital firm specializing in medical technology
companies from 1986 until 1993. Prior to Biovest, he was Chief Executive Officer
of Hybritech Incorporated, a biotechnology company acquired by Eli Lilly &
Company in 1986. Mr. Greene is a director of Amylin Pharmaceuticals, Inc,
Biosite Diagnostics Incorporated and International Biotechnology Trust plc.
Mr. Thompson has served as a director and as President and Chief
Executive Officer since January 1996. From July 1994 to December 1995, he was
President and Chief Executive Officer of CIBUS Pharmaceutical, Inc. ("CIBUS"), a
drug delivery company. For the 25 years preceding his employment with CIBUS, he
was employed by Syntex Corporation, most recently as President, Syntex
Laboratories, Inc. Mr. Thompson is a director of Biotechnology General
Corporation, Cypros Pharmaceutical Corporation and Aradigm Corporation.
Dr. Roe has served as a director and as Executive Vice President and
Chief Operating Officer since January 1996 and as Acting Chief Financial Officer
and Secretary since December 18, 1998. During 1995, Dr. Roe was Executive Vice
President and Chief Operating Officer of Chugai Biopharmaceuticals, Inc.
("Chugai"), a biopharmaceutical company. Prior to joining Chugai, Dr. Roe was
employed by Syntex Corporation from 1976 to 1995, most recently as President,
Development Research Division and as Senior Vice President. Dr. Roe is a member
of the Board of Directors of CoSensys.
Mr. Anderson has been a director of Cytel since May 1988. He has been
managing director or general partner of the general partner of Sutter Hill
Ventures, a California Limited Partnership ("Sutter Hill"), a venture capital
investment firm, since 1974. Mr. Anderson is also a director of Dionex
Corporation, BroadVision, Inc., and Molecular Devices Corporation.
Page 25 of 41
<PAGE> 27
Dr. Comer has served as a director of Cytel since January 1994. He has
been President and Chief Executive Officer of SIBIA Neurosciences, Inc.
("SIBIA"), a biotechnology company, since April 1991. Dr. Comer is a member of
the Board of Directors of SIBIA.
Ms. Vitullo has served as a director of Cytel since January 1995. Ms.
Vitullo has been with Rothschild Asset Management Ltd. ("Rothschild") since
November 1992, most recently serving as Senior Vice President. Rothschild
advises and manages two publicly traded biotechnology funds: Biotechnology
Investments Limited and International Biotechnology Trust plc. Ms. Vitullo is
also a member of the Board of Directors of Cadus Pharmaceuticals, Corvas
International and Onyx Pharmaceuticals.
Mr. Mahoney has served as a director of Cytel since September 1996. He
has been Group President, Pharmaceutical Services and International Group,
McKesson HBOC ("McKesson") since September 1997 and served as President of
Pharmaceutical and Retail Services, McKesson from August 1996 to August 1997.
Mr. Mahoney served as President of Healthcare Delivery System ("HDS") from
September 1994 until December 1995, and as Vice President of strategic planning
at McKesson from July 1990 to September 1994.
Ms. Rasmussen has served as a director of Cytel since March 1998. She
has been with G.D. Searle & Co. ("Searle") since 1985, most recently as Vice
President, Global New Business Franchise. Ms. Rasmussen's responsibilities
include membership on Searle's Priority Committee, Operations Management Team
and Portfolio Steering Committee. She is active in management of Searle's
collaborations serving on the Board of Directors of Lorex, a joint venture with
Synthelabo.
Ms. Murphy has served as a director of Cytel since March 1999. She has
been with Elan Corporation, plc since July 1996, most recently as Executive Vice
President, Intellectual Property and Legal Affairs. From May 1991 to July 1996,
Ms. Murphy served as Vice President, General Counsel and Secretary.
MANAGEMENT
For a list and biography of the Company's management, see
"Business-Executive Officers".
Page 26 of 41
<PAGE> 28
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Cytels
officers and directors and persons who own more than 10% of a registered class
of Cytel's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and Nasdaq
National Market System. Officers, directors and greater than 10% beneficial
owners are required by SEC regulations to furnish Cytel with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to Cytel or
written representations from certain reporting persons that no Forms 5 were
required, Cytel believes that, during the 1998 calendar year, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors of Cytel who are not employees of Cytel are paid $2,000
per meeting attended in person and $500 per meeting attended by phone as
compensation for their service on the Board of Directors. Directors are not
compensated for actions taken by written consent. The members of the Board of
Directors are eligible for reimbursement of expenses incurred in connection with
their service on the Board. Under the Directors' Deferred Compensation Plan,
participating directors may elect on an annual basis, to defer all of their cash
compensation in a deferred stock account pursuant to which the deferred fees are
credited in the form of shares of Cytel's Common Stock, based on the market
price of the stock at the time the deferred fees are earned. Cytel will continue
to credit shares of Cytel's Common Stock to the participants' deferred stock
accounts on a quarterly basis. When a participant ceases serving as a director,
the participant shall be entitled to receive the value of his or her account
either in a single lump-sum payment or in equal annual installments, as
determined by Cytel in its sole discretion. No participant entitled to receive a
payment of benefits shall receive payment in the form of Cytel's Common Stock.
Under the 1994 Non-Employee Directors' Stock Option Plan, on January 1
of each year, each director who is not an employee of Cytel and has served on
the Board for at least three months, is granted an option to acquire 714 shares
of Cytel's Common Stock. In addition, each new Non-Employee Director will be
granted an option to acquire 3,571 shares of Cytel's Common Stock upon initial
election to the Board of Directors. The exercise price of all such stock options
granted is equivalent to the fair market value on the date of each grant.
Page 27 of 41
<PAGE> 29
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1998,
1997 and 1996, compensation awarded or paid to, or earned by Cytel's Chief
Executive Officer, its other four most highly compensated executive officers at
December 31, 1998 and one former executive officer who departed from Cytel
during the last fiscal year (collectively, the "Named Executive Officers").
During the last three fiscal years, none of the executive officers received any
restricted stock awards or long-term incentive payouts.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS OPTIONS COMPENSATION
POSITION YEAR ($) ($) (#)(1) ($)(2)
- ---------------------- -------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Mr. Virgil Thompson 1998 325,900 0 114,463 5,644
President and Chief 1997 315,000 0 28,571 5,426
Executive Officer 1996 300,000 78,580(3) 71,428 4,950
Dr. Robert L. Roe 1998 294,862 0 95,399 5,082
Executive Vice President 1997 286,000 0 25,714 4,874
Chief Operating Officer, 1996 205,354 23,000(4) 57,142 3,525
Acting Chief Financial
Officer and Secretary
Ms. Deborah Schueren 1998 185,000 30,000 26,391 360
Vice President, Cytel and 1997 133,572 0 17,142(5) 295
President, Epimmune 1996 0 0 0 0
Jennifer Lorenzen(6) 1998 185,000 0 13,678 1,160
Vice President, Business 1997 134,055 0 12,857 691
Development 1996 0 0 0 0
Dr. James C. Paulson(7) 1998 266,500 0 63,339 2,898
Former Vice President and 1997 257,578 0 0 1,674
General Manager, 1996 216,324 28,988 11,428 1,333
Glytec(TM)
Mr. Edward C. Hall (8) 1998 115,696 0 14,285 1,594
Former Vice President, 1997 0 0 0 0
Finance, Chief Financial 1996 0 0 0 0
Officer and Secretary
</TABLE>
- ------------
(1) Options granted pursuant to an option exchange program approved by the
stockholders on June 11, 1998 and implemented on June 15, 1998 in which
employees were given the opportunity to exchange outstanding
out-of-the-money stock options for a lesser number of new options priced at
the market price of Cytel's common stock at the time of exchange (the
"Exchange Program"). All option numbers and prices in this table Cytel's
1-for-7 reverse stock split which occurred on November 13, 1998.
(2) Consists of life insurance premiums paid by Cytel.
(3) Represents relocation payments made by Cytel to Mr. Thompson.
(4) Represents reimbursement of Dr. Roe's relocation expenses which were paid by
Cytel to Dr. Roe's previous employer.
(5) Does not include certain options to purchase shares of Epimmune Common Stock
granted to Ms. Schueren. See "- Employment Agreements."
Page 28 of 41
<PAGE> 30
(6) Ms. Lorenzen resigned from Cytel effective March 31, 1999.
(7) Dr. Paulson resigned from Cytel effective February 15, 1999.
(8) Mr. Hall resigned from Cytel effective November 20, 1998.
STOCK OPTION GRANTS AND EXERCISES
Cytel grants options to its executive officers under Cytel's 1989 Stock
Option Plan (the "1989 Plan"). As of April 1, 1999, options to purchase a total
of 558,258 shares had been granted and were outstanding under the 1989 Plan, and
options to purchase 275,514 shares remained available for grant thereunder.
Material terms of options granted under the 1989 Plan are described generally in
footnotes 2 and 5 below.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
OPTIONS GRANTED IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OR OPTION TERM(4)
GRANTED IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME (2) YEAR(3) ($/SH) DATE 5%($) 10%($)
---- --------- ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Virgil Thompson. 28,571 6.5% 11.15630 2/2/08 $200,458.05 $ 508,000.07
85,892(5) 19.6% 10.71880 6/15/08 578,997.61 1,467,293.61
Dr. Robert L. Roe... 25,714 5.9% 11.15630 2/2/08 180,412.95 457,201.84
69,685(5) 15.9% 10.71880 6/15/08 469,746.28 1,190,429.32
Dr. James C. Paulson 11,428 2.6% 11.15630 2/2/08 80,180.42 203,192.91
51,911(5) 11.9% 10.71880 6/15/08 349,931.83 886,795.96
Ms. Deborah Schueren 26,391(5) 6.0% 10.71880 6/15/08 177,901.62 450,837.63
Ms. Jennifer Lorenzen 6,536(5) 1.5% 10.71880 6/15/08 44,059.15 111,654.53
7,142 1.6% 11.15630 2/2/08 50,109.25 126,986.68
Mr. Edward C. Hall(6) 14,285(6) 3.3% 11.15630 2/2/08 100,225.52 253,991.14
</TABLE>
(1) All numbers and prices in this table reflect Cytel's 1-for-7 reverse stock
split which occurred on November 13, 1998.
(2) Options granted prior to 1996 generally vested 20% at the end of the first
year of the optionee's employment and thereafter daily at the rate of 20%
per year during such period of employment. Options granted after November
1996 generally vest 25% at the end of the first year of the optionee's
employment and thereafter daily at the rate of 25% per year during such
period of employment. Upon certain corporate events resulting in a change
of control, at the discretion of Cytel's Board of Directors, (i) the
acquiring company will assume the options or substitute similar options,
(ii) the options will continue in full force and effect, or (iii) Cytel
will pay a cash settlement for or accelerate such options.
(3) Based on 437,671 options granted in 1998, including grants to executive
officers. This figure includes 303,145 options granted to employees and
executive officers in connection with the
Page 29 of 41
<PAGE> 31
Exchange Program approved by the stockholders on June 11, 1998 and
implemented on June 15, 1998.
(4) The potential realizable value is calculated based on the terms of the
option at its time of grant (10 years in the case of all options). It is
calculated by assuming that the stock price on the date of grant
appreciates at the indicated annual rate, compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. These amounts
represent certain assumed rates of appreciation, in accordance with rules
of the SEC, and do not reflect Cytel's estimate or projection of future
stock price performance. Actual gains, if any, are dependent on the actual
future performance of Cytel's Common Stock, and no gain to the optionee is
possible unless the stock price increases over the option term, which will
benefit all stockholders.
(5) Options granted pursuant to the Exchange Program approved by the
stockholders on June 11, 1998 and implemented on June 15, 1998. These
options vest over a six year period according to a schedule developed by
the State of Wisconsin Investment Board, a major stockholder of Cytel (the
"Wisconsin Board")
(6) Mr. Hall's options were terminated in connection with his resignation from
Cytel on November 20, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FY-END(#) IN-THE-MONEY OPTIONS
EXERCISABLE/ AT FY-END($)(1)
SHARES VALUE ---------------------- ---------------------
ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
---- -------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Mr. Virgil Thompson -- -- 16,425/98,038 ----
Dr. Robert L. Roe -- -- 11,840/83,559 ----
Dr. James C. Paulson -- -- 25,840/39,885 ----
Ms. Deborah Schueren -- -- 9,621/16,770 ----
Ms. Jennifer Lorenzen -- -- 7,331,19,204 ----
Mr. Edward C. Hall -- -- ---- ----
</TABLE>
- ------------
(1) Fair market value of Cytel's Common Stock at December 31, 1998 ($2.25 per
share) minus the exercise price of the options. As of December 31, 1998, all
unexercised options held by the Named Executive Officers were
out-of-the-money.
EMPLOYMENT AGREEMENTS
In March 1990, Cytel entered into an employment agreement with Dr.
Paulson. The agreement may be terminated by either Cytel or Dr. Paulson. The
terms of the employment agreement are consistent with Cytel's executive
compensation policies. Mr. Paulson resigned from Cytel effective February 15,
1999.
In January 1996, Cytel entered into an employment agreement with Mr.
Thompson. The agreement may be terminated by either Cytel or Mr. Thompson. The
terms of the employment agreement are consistent with Cytel's executive
compensation policies.
In January 1996, Cytel entered into an employment agreement with Dr.
Roe. The agreement may be terminated by either Cytel or Dr. Roe. The terms of
the employment agreement are consistent with Cytel's executive compensation
policies.
In October 1997, Cytel and Epimmune entered into an employment agreement
with Ms. Schueren. The agreement guaranteed Ms. Schueren a base salary of
$185,000 and a cash bonus of up to $50,000 at the discretion of the Board, if
certain objectives are met. In addition, pursuant to the agreement, Ms. Schueren
was granted an incentive stock option to purchase 385,000 shares of Epimmune
Common Stock at the fair market value as determined by the board of directors of
Epimmune. Shares subject to such option vest equally over 48 months, provided
that said option will be subject to acceleration with respect to up to two years
of vesting upon achievement of certain objectives. The option issued to Ms.
Schueren represents approximately 4% of the outstanding Epimmune Common Stock on
an as-converted, fully-diluted basis, assuming exercise of all options
outstanding and available for issuance under Epimmune's stock option plan. The
agreement may be terminated by either Cytel or Ms. Schueren.
Page 30 of 41
<PAGE> 32
In February 1998, Cytel entered into severance benefits agreements
covering the following officers of Cytel: Mr. Thompson, Dr. Roe, Dr. Paulson and
Ms. Lorenzen (collectively, the "Officers" and individually, the "Officer").
Under the agreements, in the event that an Officer is either terminated without
cause or within one year of a change of control of Cytel such Officer shall
receive a lump-sum payment equal to six months of such Officer's annual base
salary. If such Officer is terminated other than for cause, all unvested stock
options held by such Officer shall immediately accelerate by six months. If such
Officer is terminated following a change of control, 50% of all unvested stock
options held by such Officer shall immediately vest and become exercisable. Ms.
Schueren's employment agreement provides for similar severance benefits except
in the event of termination following a change in control all unvested Epimmune
stock options held by Ms. Schueren shall immediately vest and become
exercisable. In addition, generally, if Ms. Schueren is terminated without cause
or if Ms. Schueren terminates her employment under certain conditions, all
unvested stock options held by Ms. Schueren shall accelerate by six months
In December of 1998, Cytel and Dr. Paulson entered into a agreement
regarding Dr. Paulson's severance arrangement. Cytel agreed to extend the
exercise period of Dr. Paulson's options for one year, and agreed that Dr.
Paulson would be entitled to accelerated vesting of his outstanding stock
options equal to 1) six months if his termination occurred on or after February
15, 1999 and Cytel had not sold its Glytec business unit by such date, or 2) 50%
of his outstanding unvested shares as of the date of his termination if the
termination followed the sale of Cytel's Glytec business unit. Dr. Paulson
voluntarily terminated his employment with Cytel on February 15, 1999, at which
time Cytel had not sold its Glytec business unit.
COMPENSATION COMMITTEE REPORT(1)
The Compensation Committee of the Board of Directors (the "Committee")
consists of Mr. Howard E. Greene, Jr., Mr. David L. Anderson and Mr. David L.
Mahoney. The Committee is responsible for setting and administering the
Company's policies governing annual executive salaries, bonuses (if any) and
stock ownership programs. The Committee evaluates the performance of management
and determines the compensation of the Chief Executive Officer ("CEO") and the
other executive officers of Cytel based upon the accomplishment of defined
objectives in the Company's research and product development programs and
achievement of financial targets. The full Board of Directors reviews the
Committee's recommendations regarding the compensation of the CEO and the other
executive officers.
EXECUTIVE OFFICER COMPENSATION PROGRAM
The Company's executive officer compensation program consists of base
salary and long-term compensation in the form of stock options. The Company's
executive officer compensation program is designed to achieve the following
objectives:
- Attract, retain and motivate quality executives who possess the
necessary leadership and management skills.
- Provide an incentive to advance the research and development of
the Company's therapeutic products.
- Emphasize stock-based compensation to provide longer-term
motivation by aligning the executives' interests with those of
the Company and its stockholders.
Compensation is based on the level of job responsibility and the level
of the individual's performance as well as the Company's performance. The
Committee endeavors to set executive compensation within a range which the
Committee believes is comparable to the average range of compensation set by
companies of comparable size in the biotechnology industry. The group of
comparable companies is not necessarily the same as the companies reflected in
the market indices included in the performance graph on page 35 of this Annual
Report on Form 10-K.
The Committee believes that the Company's executive compensation program
reflects the principles described above and provides executives strong
incentives to maximize Company performance and enhance stockholder value. The
Committee believes that a stock option program to reward performance is an
appropriate method of executive compensation, with relatively modest increases
in base compensation.
Page 31 of 41
<PAGE> 33
BASE SALARY
Base salary levels for each of the Company's executive officers are
reviewed annually. The Company applies various subjective criteria, including
performance of the individual and the Company and relative responsibility and
experience, to determine appropriate base salaries. In evaluating Company
performance, the Committee considers the meeting of certain product milestones,
achieving certain corporate objectives (related to financings and
collaborations) and organizational effectiveness. In addition, the Company
compares its executives' base salaries to management salaries at companies in
the biotechnology industry, comparable geographic areas and at similar stages of
growth and considers industry surveys regarding executive compensation. The
Committee uses
- --------
(1) The material in this report is not "soliciting material," is not deemed
filed with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended (the
"1933 Act") or the 1934 Act, whether made before or after the date hereof
and irrespective of any general incorporation language contained in such
filing.
these criteria as a frame of reference for annual salary adjustments although
other factors are considered, as appropriate, and no specific weights are
ascribed to the factors considered by the Committee.
LONG-TERM INCENTIVE COMPENSATION
The Company's long-term incentive program includes stock options and
other awards granted under the 1989 Plan, other stock options and the Company's
Employee Stock Purchase Plan. Stock options are an important part of the
Company's performance-based compensation. Option grants include vesting periods
(generally over four years) to encourage key employees to continue in the employ
of the Company. In 1998, the Company implemented a performance management system
(the "Performance Management System") for members of certain employee teams
organized under the Performance Management System. Under the Performance
Management System, options are subject to acceleration of vesting upon the
achievement of certain performance-based objectives by such teams. Prior to
December 1996, the time-based vesting period of option grants was five years,
but the Board of Directors changed such vesting schedule to four years to
facilitate the recruitment and retention of key employees. Through option
grants, executives receive significant equity incentives to build long-term
stockholder value Grants are generally made at 100% of fair market value on the
date of grant. Section 4(c) of the 1989 Plan limits the number of shares that
can be granted to any person in any calendar year to ensure that any income
recognized in connection with the exercise of options under the 1989 Plan would
qualify as "performance-based compensation" under Section 162(m) of the Code. As
set forth in Proposal 3, the Board has approved, and the stockholders are being
asked to approve, an amendment to the 1989 Plan to increase the limit on the
number of shares underlying options that can be granted to any person in a
calendar year from 500,000 shares to 950,000 shares.
The Committee believes that providing management a substantial economic
interest in the long-term appreciation of the Company's Common Stock further
aligns the interests of stockholders and management. The size of option grants
to an individual is primarily determined by such individual's position within
management of the Company, as well as competitive practices at biotechnology
companies of comparable size. The Committee also considered the size of grants
to individuals in previous years and internal relativity.
Section 162(m) of the Code limits the Company to a deduction for federal
income tax purposes of no more than $1 million paid to certain Named Executive
Officers in a taxable year. Compensation above $1 million may be deducted if it
is "performance-based compensation" within the meaning of the Code. The statute
containing this law and the applicable Treasury regulations offer a number of
transitional exceptions to this deduction limitation for preexisting
compensation plans, arrangements and binding contracts. As a result, the
Compensation Committee believes that at the present time it is unlikely that the
compensation paid to any Named Executive Officer in a taxable year which is
subject to the deduction limit will exceed $1 million. Therefore, the
Compensation Committee has not yet established a policy for determining which
forms of incentive compensation awarded to Named Executive Officers will be
designed to qualify as performance-based compensation.
In each of fiscal 1998, 1997 and 1996 a pool of grants to a defined
management group was approved. Individual awards were based on an evaluation of
previous awards, vested status and retention goals.
<PAGE> 34
CEO COMPENSATION
The total compensation program for Mr. Virgil Thompson, Chief Executive
Officer of the Company, is largely based on the same components as for other
senior executives. Each year the Committee reviews the Chief Executive Officer's
existing compensation arrangement, the individual performance for the calendar
year under review, as well as the Company's performance relative to its peers.
In February 1998, the Committee reviewed the achievement of objectives
for 1997, and, based on the Company's performance in 1997 and Mr. Thompson's
significant efforts in planning and implementing strategic and financial
initiatives, the Committee approved a base salary for Mr. Thompson of $326,000
for 1998, an increase of 3.5% over Mr. Thompson's 1997 base salary. In addition,
based on such factors, the Board of Directors also granted Mr. Thompson an
option to purchase 28,571 shares of the Company's Common Stock under the 1989
Plan at an exercise price of $11.15630, the fair market value on the date of
grant.
In June 1998, the Board approved the grant of options to purchase a
total of 85,892 shares of the Company's Common Stock at an exercise price of
$10.71880, the fair market value on the date of grant, in connection with the
option exchange program more fully described below in the "Report on Repricing
of Options."
In December 1998, the Committee reviewed the achievement of objectives
for 1998 and determined not to increase Mr. Thompson's base salary for 1999.
REPORT ON REPRICING OF OPTIONS
On June 11, 1998, at the 1998 Annual Meeting of Stockholders, the
stockholders approved an option exchange program whereby employees were given
the opportunity to exchange outstanding out-of-the-money stock options for a
lesser number of new options priced at the market price of the Company's Common
Stock at the time of exchange (the "Exchange Program"). All employees who held
out-of-the-money stock options were entitled to participate in the Exchange
Program. On June 15, 1998 the Company implemented the Exchange Program.
Under the Exchange Program., outstanding out-of-the-money options were
exchanged for new options with an exercise price of $10.71880 (the fair market
value of the Company's Common Stock on June 15, 1998). The number of shares of
Common Stock underlying the new options was based on a formula developed by the
Wisconsin Board, and depended upon the exercise price of the out-of-the-money
options which were cancelled in conjunction with the exchange. Vesting of the
new options occurs over a six year period according to a formula developed by
the Wisconsin Board.
The Board of Directors believes that out-of-the-money stock options have
little incentive value to employees and in fact undermine morale and motivation.
In addition, virtually all companies in the biotechnology industry use stock
options to attract and retain outstanding employees, and there is substantial
competition to obtain and/or retain skilled and experienced scientists and
managers in the industry. Many biotechnology companies also offer cash bonuses
to its employees, but Cytel does not. Accordingly, stock option-based
performance incentives are a particularly important part of a competitive
overall compensation package for employees of the Company.
The Board of Directors approved the Exchange Program because it was
concerned that the Company may have been at risk of losing valued employees
because most of the then outstanding stock options were not providing incentives
to the Company's management team and other employees. After careful
consideration of market conditions, employee turnover, employee morale and the
challenges and opportunities facing the Company, the Board of Directors believed
that this situation was likely to be more damaging to the Company and its
stockholders than the effect of an option exchange program. As a result, in the
good faith judgment of the Board of Directors, it was in the best interests of
the stockholders of the Company to replace underwater stock options with options
having an exercise price equal to the then current fair market value of the
stock, thus restoring the opportunity for employees to receive value in the near
term by building the Company and causing the market value of the stock to
increase.
No options held by members of the Compensation Committee were repriced
in the Exchange Program.
<PAGE> 35
TEN-YEAR OPTION REPRICINGS(1)
<TABLE>
<CAPTION>
Number of Market Length of
Securities Price of Exercise Original
Underlying Stock at Price at Option Term
Options Time of time of New Remaining
Repriced Repricing Repricing Exercise at Date of
Name Date (#) ($) ($) Price ($) Repricing
- ----------------------- ------- ------ -------- ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Virgil Thompson.... 6/15/98 60,235 10.71880 42.875 10.71880 7 yrs 202 days
President and Chief 6/15/98 25,657 10.71880 28.00 10.71880 8 yrs 202 days
Executive Officer
Dr. Robert L. Roe...... 6/15/98 46,594 10.71880 52.50 10.71880 7 yrs 232 days
Executive Vice 6/15/98 23,091 10.71880 28.00 10.71880 8 yrs 202 days
President, Chief
Operating Officer,
Chief Financial
Officer and Secretary
Ms. Deborah Schueren... 12/15/94 4,285 18.816 43.75 18.816 7 yrs 355 days
Vice President, Cytel 12/15/94 184 18.816 54.25 18.816 8 yrs 7 days
and President, 6/15/98 1,885 10.71880 32.375 10.71880 5 yrs 190 days
Epimmune 6/15/98 1,640 10.71880 31.50 10.71880 7 yrs 184 days
6/15/98 1,923 10.71880 28.00 10.71880 8 yrs 181 days
6/15/98 3,331 10.71880 18.816 10.71880 6 yrs 185 days
6/15/98 1,203 10.71880 21.875 10.71880 6 yrs 202 days
6/15/98 16,409 10.71880 16.625 10.71880 8 yrs 280 days
Jennifer Lorenzen...... 6/15/98 1,923 10.71880 28.00 10.71880 8 yrs 181 days
Vice President, 6/15/98 4,613 10.71880 22.750 10.71880 8 yrs 60 days
Business Development
Dr. James C. Paulson... 12/15/94 10,714 18.816 42.00 18.816 6 yrs 300 days
Former Vice President 12/15/94 8,738 18.816 54.25 18.816 8 yrs 5 days
and General Manager, 6/15/98 7,572 10.71880 31.50 10.71880 7 yrs 184 days
Glytec(TM) 6/15/98 10,262 10.71880 28 10.71880 8 yrs 181 days
6/15/98 18,363 10.71880 18.816 10.71880 6 yrs 185 days
6/15/98 15,714 10.71880 32.375 10.71880 5 yrs 190 days
Mr. Edward C. Hall..... -- -- -- -- -- --
Former Vice
President, Finance,
Chief Financial
Officer and Secretary
</TABLE>
- ------------
(1) All numbers and prices in this table reflect the Company's 1:7 reverse stock
split which occurred on November 13, 1998.
From the members of the Compensation Committee of Cytel:
Howard E. Greene, Jr.
David L. Anderson
David L. Mahoney
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Greene, a member of the Compensation Committee, is Chairman of the
Board of the Company.
<PAGE> 36
PERFORMANCE MEASUREMENT COMPARISON (1)
The following chart shows total shareholder return of the Nasdaq CRSP
Total Return Index ("Nasdaq Broad Index") for the Nasdaq Stock Market (US
Companies) and the Nasdaq CRSP Pharmaceutical Index ("Nasdaq Pharmaceutical
Index")(2) and for the Company as of the end of each year since December 31,
1993.
COMPARISON OF TOTAL CUMULATIVE RETURN ON INVESTMENT(3)
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
12/93 12/94 12/95 12/96 12/97 12/98
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CYTEL CORPORATION 100 66 129 72 32 7
NASDAQ STOCK MARKET (U.S.) 100 98 138 170 208 294
NASDAQ PHARMACEUTICAL 100 75 138 138 143 183
</TABLE>
- -------------
(1) This Section is not "soliciting material," is not deemed filed with the SEC,
and is not to be incorporated by reference into any filing of the Company
under the 1933 Act or the 1934 Act, whether made before or after the date
hereof and irrespective of any general incorporation language in such
filing.
(2) The Nasdaq Pharmaceutical Index is made up of all companies with the
Standard Industrial Classification (SIC) code 283 (category description
"Drugs"). Information regarding the companies comprising this index is
available upon written request to Secretary, Cytel Corporation, 9390 Towne
Centre Drive, San Diego, California 92121.
(3) The total return on investment (including investment of dividends) assumes
$100 invested on December 31, 1993 in Cytel's Common Stock, the Nasdaq CRSP
Total Return Index for the Nasdaq Stock (U.S. Companies) Index and the
NASDAQ CRSP Pharmaceutical Index.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of Common Stock of Cytel as of April 1, 1999 by (i) each director and
nominee; (ii) each Named Executive Officer (as defined below); (iii) all
executive officers and directors as a group; and (iv) all those known by Cytel
to be beneficial owners of more than five percent of its Common Stock:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL
---------------- ---------- ----------
<S> <C> <C>
International Biotechnology Trust plc
Five Arrows House, St. Swithin's Lane,
London, England................................ 467,992 6.93%
State of Wisconsin Investment Board
121 East Wilson Street
Madison, WI 53702.............................. 346,290 6.93%
G.D. Searle & Co. (2)
5200 Old Orchard Road
Skokie, IL 60077............................... 317,460 6.35%
Novartis Holding AG
Lichstrasse 35, Basel Switzerland.............. 309,528 6.19%
Elan International Services Ltd.
102 St. James Court
Flatts Smiths, FL04 Bermuda..................... 285,714 5.72%
Howard E. Greene, Jr. (3)(5)..................... 113,817 2.28%
Virgil Thompson (5).............................. 56,082 1.11%
James C. Paulson (5)............................. 54,987 1.09%
Robert L. Roe (5)................................ 34,727 *
David L. Anderson (4)(5)......................... 34,487 *
Deborah Schueren (5)............................. 17,198 *
Jennifer Lorenzen (5)............................ 14,729 *
William T. Comer (5)............................. 7,255 *
David L. Mahoney................................. 5,474 *
Nicole Vitullo (5)............................... 670 *
Nancy D. Rasmussen (5)........................... 0 *
Lisabeth F. Murphy............................... 215 *
Edward C. Hall................................... 0 *
All executive officers and directors
as a group (12 persons)(6)..................... 339,641 6.6%
</TABLE>
- ------------
* Less than one percent.
<PAGE> 37
(1) This table is based upon information supplied by officers, directors and
principal stockholders and on any Schedules 13D or 13G filed with the SEC.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each stockholder named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentage ownership is based
on 4,997,322 shares of Common Stock outstanding on April 1, 1999.
(2) Does not include 659,898 shares of Series B Preferred Stock issued to
Searle in February 1998 pursuant to a collaboration between Epimmune and
Searle. Searle has the right to convert the Series B Preferred Stock into
Cytel Common Stock after three years, at a conversion rate of 0.1126 shares
of Common Stock for each share of Series B Preferred Stock (for an
aggregate of 74,285 shares of Common Stock) or to convert to Epimmune
Common Stock at any time. In addition, Searle has the option to deliver
shares of the Series B Preferred Stock in lieu of up to 50% of certain
milestone payments to Epimmune.
(3) Includes 109,745 shares held in trust for the benefit of Mr. Greene's
family and 2,285 shares held in trust for the benefit of Mr. Greene's
children. Mr. Greene is a trustee of both trusts. Mr. Greene acting as
trustee has voting and investment power with respect to such shares and may
be deemed to be the beneficial owner of such shares. In addition, Mr.
Greene is a director of International Biotechnology Trust plc and disclaims
beneficial ownership of shares held by such entity.
(4) Includes 1,428 shares held by Anvest, L.P. of which Mr. Anderson is the
general partner. Also includes 19,637 shares held of record by Sutter Hill,
over which Mr. Anderson exercises voting and investing power as a managing
director of Sutter Hill Ventures LLC, the general partner of Sutter Hill.
Mr. Anderson disclaims beneficial ownership of shares held by Anvest, L.P.
and Sutter Hill except to his proportionate partnership interest therein.
(5) Includes shares which certain executive officers and directors of Cytel
have the right to acquire within 60 days after the date of this table
pursuant to outstanding options, as follows: Howard E. Greene, 1,787
shares; Virgil Thompson, 38,337 shares; Robert L. Roe, 29,328 shares; David
L. Anderson, 1,787 shares; Deborah Schueren, 16,921 shares; Jennifer
Lorenzen, 14,729 shares; Lisabeth Murphy, 215 shares; James C. Paulson,
35,628 shares; William T. Comer, 6,341 shares; David L. Mahoney, 2,617
shares; Nicole Vitullo, 670 shares; and all executive officers and
directors as a group, 148,360 shares.
(6) Includes shares described in notes (3) through (5) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cytel's Bylaws provide that Cytel will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. Cytel is also empowered
under its Bylaws to enter into indemnification contracts with its directors and
officers and to purchase insurance on behalf of any person whom it is required
or permitted to indemnify. Pursuant to this provision, Cytel has entered into
indemnity agreements with each of its directors and officers.
In addition, Cytel's Certificate of Incorporation provides that to the
fullest extent permitted by Delaware law, Cytel's directors will not be liable
for monetary damages for breach of the directors' fiduciary duty of care to
Cytel and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Delaware law. Each director will continue to be subject
to liability for breach of the director's duty of loyalty to Cytel, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for acts or omissions that the director believes to be
contrary to the best
Page 32 of 41
<PAGE> 38
interests of Cytel or its stockholders, for any transaction from which the
director derived an improper personal benefit, for acts or omissions involving a
reckless disregard for the director's duty to Cytel or its stockholders when the
director was aware or should have been aware of a risk of serious injury to
Cytel or its stockholders, for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
Cytel or its stockholders, for improper transactions between the director and
Cytel, and for improper distributions to stockholders and loans to directors and
officers. This provision also does not affect a director's responsibilities
under any other laws, such as the federal securities laws or state or federal
environmental laws.
Cytel has entered into certain additional transactions with its
directors and officers, as described under the captions "Executive Compensation"
and "Employment Agreements."
Page 33 of 41
<PAGE> 39
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to 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>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997......................F-2
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998.......................................F-3
Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1998.................................F-4
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998.......................................F-5 - F-6
Notes to Consolidated Financial Statements........................................F-7 - F-28
</TABLE>
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this item are omitted
because they are not applicable or the required information is shown in the
Financial Statements or the notes thereto.
(3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.(A)
3.2 Bylaws of the Registrant.(A)
3.3 Preferred Share Purchase Rights Plan.(B)
3.4 Form of Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.(E)
3.5 Certificate of Designation of the Series B Convertible Preferred
Stock.(J)
3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(L)
3.7 Certificate of Increase of Series A Junior Participating Preferred
Stock.(L)
3.8 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(M)
4.1 Reference is made to Exhibits 3.1 through 3.8.
4.2 Specimen certificate of the Common stock.(A)
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(A)
10.3 Letter Agreement, between the Registrant and James C. Paulson, dated
March 2, 1990.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12, 1998 (the
"1989 Plan").(L)
</TABLE>
Page 34 of 41
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan.(A)
10.8 Employee Stock Purchase Plan, as amended through June 12, 1998.(L)
10.16 Industrial Lease, between the Registrant and COAST/USC I, dated as
of May 17, 1990, as amended June 27, 1990 and July 13, 1990.(A)
10.19 Research Agreement, between the Registrant and The Scripps Research
Institute, formerly Scripps Clinic and Research Foundation
("Scripps"), dated as of September 1, 1990, as amended August 5,
1991 (with certain confidential portions deleted).(A)(1)
10.24 License Agreement, between the Registrant and Scripps, dated as of
September 23, 1991 (with certain confidential portions
deleted).(A)(1)
10.25 Research and Option Agreement, between the Registrant and Scripps,
dated October 1, 1991 (with certain confidential portions
deleted).(A)(1)
10.28 Technology Development Agreement, between the Registrant and
Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo") dated as of October
30, 1991 (with certain confidential portions deleted).(A)(1)
10.29 Letter Agreement, between the Registrant and Sumitomo, dated as of
October 30, 1992.(A)
10.35 Amendment to License Agreement between the Registrant and Scripps
dated as of June 17, 1992 (with certain confidential portions
deleted).(C)(2)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
through June 12, 1998.(L)
10.38 Investment Agreement, between the Registrant and Sumitomo, dated as
of December 22, 1993.(D)
10.43 Amended and Restated Technology Development Agreement between the
Registrant and Sumitomo, dated February 17, 1995 (with certain
confidential portions deleted).(F)(2)
10.48 Second Amendment to License Agreement between the Registrant and
Scripps dated as of June 17, 1992 (with certain confidential
portions deleted).(G)(2)
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995.(G)
</TABLE>
Page 35 of 41
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996.(G)
10.51 Directors' Deferred Compensation Plan, effective as of March 17,
1995, as amended September 20, 1996.(H)
10.52 Letter of Intent between the Registrant and G.D. Searle & Co., dated
September 5, 1997 (with certain confidential portions
deleted).(I)(3)
10.53 Stock Purchase Agreement between Registrant and G.D. Searle & Co.,
dated September 18, 1997.(I)
10.54 Employment agreement between Registrant, Epimmune Inc. ("Epimmune")
and Deborah A. Schueren dated October 1, 1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and the
following executive officers: Virgil D. Thompson; Robert L. Roe,
M.D.; James C. Paulson, Ph.D; Edward C. Hall; Jennifer Lorenzen.(K)
10.56 License and Collaboration Agreement between Epimmune and Searle,
dated February 27, 1998 (with certain confidential portions
deleted).(K)(4)
10.57 Series B Preferred Stock Purchase Agreement between Epimmune and
Searle, dated February 27, 1998.(K)
10.58 Series B-1 Preferred Stock Purchase Agreement between Registrant and
Epimmune, dated February 27, 1998.(K)
10.59 Stock Purchase Agreement between Registrant and Searle, dated
February 27, 1998.(K)
10.60 Sublease Agreement, between the Registrant and Amylin
Pharmaceuticals, Inc., dated as of June 1, 1998.(M)
10.61 Amended and Restated Sublicense and Option Agreement, between the
Registrant and Elan International Services Ltd. ("Elan"), dated
November 10, 1998 (the "Sublicense Agreement"), and side letter
entered between the Registrant and Elan, dated November 10, 1998
(with certain confidential portions of the Sublicense Agreement
deleted).(M)(5)
10.62 Two Letter Agreements between the Registrant and James C. Paulson,
Ph.D. dated December 2, 1998 and December 23, 1998.
10.63 Lease Agreement between Epimmune, Inc. and Nexus Equity LLC VIII,
dated as of November 1, 1998, as amended February 1, 1999
21.1 Subsidiaries of the Registrant.(J)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to the signature page of this
report on Form 10-K.
</TABLE>
Page 36 of 41
<PAGE> 42
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- --------------------
<S> <C>
27.1 Financial Data Schedule
(4) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(A)
10.3 Letter agreement, between the Registrant and James C. Paulson, dated
March 2, 1990.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12, 1998 (the
"1989 Plan").(L)
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan.(A)
10.8 Employee Stock Purchase Plan, as amended through June 12, 1998.(L)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
through June 12, 1998.(L)
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995.(G)
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996.(G)
10.51 Directors' Deferred Compensation Plan, effective as of March 17,
1995 as amended September 20, 1996.(H)
10.54 Employment agreement between Registrant, Epimmune and Deborah A.
Schueren dated October 1, 1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and the
following executive officers: Virgil D. Thompson; Robert L. Roe,
M.D.; James C. Paulson, Ph.D; Edward C. Hall; Jennifer Lorenzen.(K)
10.62 Letter Agreement between the Registrant and James C. Paulson, Ph.D.
</TABLE>
------------------------
(A) Incorporated by reference to the Company's Form S-1 Registration Statement
and Amendments thereto (File No. 33-43356)
(B) Incorporated by reference to the Company's Form 8-K, dated March 19, 1993.
(C) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1992, filed on March 26, 1993.
Page 37 of 41
<PAGE> 43
(D) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1993, filed on March 29, 1994.
(E) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1994, filed on March 31, 1995.
(F) Incorporated by reference to the Company's Quarterly Report on Form
10-Q/A, Amendment No. 1, for the quarterly period ended March 31, 1995,
filed on August 17, 1995.
(G) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995, filed on March 22, 1996.
(H) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1996, filed on March 31, 1997.
(I) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended September 30, 1997, filed on November 14,
1997.
(J) Incorporated by reference to the Company's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1997, filed on March 31, 1998.
(K) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended March 31, 1998, filed on May 15, 1998.
(L) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended June 30, 1998, filed on August 14, 1998.
(M) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period ended September 30, 1998, filed on November 16,
1998.
(1) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933 and Rule 406 Thereunder
Respecting Confidential Treatment dated November 21, 1991.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated May 15, 1996.
(3) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated December 17, 1997.
Page 38 of 41
<PAGE> 44
(4) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated July 15, 1998.
(5) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated December 17, 1998.
(B) REPORT ON FORM 8-K
None
(C) EXHIBITS
The response to this portion of Item 14 is submitted as a separate section
of his report.
(D) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
Page 39 of 41
<PAGE> 45
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, on this 15 day of April,
1999.
CYTEL CORPORATION
By /s/ Virgil Thompson
--------------------------------------
Virgil Thompson
President and Chief Executive Officer
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Virgil Thompson and Robert L. Roe, and each of them,
his attorney-in-fact, with the 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
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
/s/ David L. Anderson April 15, 1999 /s/ Robert L. Roe April 15, 1999
---------------------------- ----------------------------------
David L. Anderson Robert L. Roe, M.D., F.A.C.P.
Director Executive Vice President, Chief
Operating Officer, Chief Financial
Officer and Director
/s/ William T. Comer April 15, 1999 /s/ David L. Mahoney April 15, 1999
---------------------------- ----------------------------------
William T. Comer, Ph.D. David L. Mahoney
Director Director
/s/ Lisabeth F. Murphy April 15, 1999 /s/ Nancy D. Rasmussen April 15, 1999
---------------------------- ----------------------------------
Lisabeth F. Murphy Nancy D. Rasmussen
Director Director
/s/ Virgil Thompson April 15, 1999 /s/ Howard E. Greene, Jr. April 15, 1999
---------------------------- ----------------------------------
Virgil Thompson Howard E. Greene, Jr.
President, Chief Executive Chairman of the Board and Director
Officer and Director
/s/ Nicole Vitullo April 15, 1999
----------------------------
Nicole Vitullo
Director
</TABLE>
Page 40 of 41
<PAGE> 46
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Cytel Corporation
We have audited the accompanying consolidated balance sheets of Cytel
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cytel Corporation
at December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 5, 1999
except for Notes 5, 9 and 11, as
to which the date is
March 29, 1999
F-1
<PAGE> 47
Cytel Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,594,000 $ 6,187,000
Short-term investments 9,217,000 11,616,000
Current portion of restricted cash -- 375,000
Prepaids and other current assets 1,657,000 1,312,000
------------- -------------
Total current assets 13,468,000 19,490,000
Restricted cash 472,000 656,000
Property and equipment, net 2,879,000 1,704,000
Patents 4,055,000 5,235,000
Deposits and other assets 156,000 1,062,000
------------- -------------
$ 21,030,000 $ 28,147,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,289,000 $ 755,000
Deferred contract revenues 515,000 78,000
Accrued payroll and related expenses 416,000 463,000
Current portion of note payable to bank -- 375,000
Current portion of obligations under equipment
loans and notes payable 493,000 40,000
------------- -------------
Total current liabilities 3,713,000 1,711,000
Deferred rent -- 1,388,000
Equipment loans and notes payable 1,606,000 656,000
Commitments
Minority interest in consolidated subsidiary 1,735,000 --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 659,898 7,000 --
shares and zero shares issued and outstanding at December 31, 1998 and
1997, respectively
Common stock, $.01 par value, 75,000,000 and 50,000,000 shares authorized 50,000 46,000
at December 31, 1998 and 1997, respectively; 4,987,453 shares and
4,603,214 shares issued and outstanding at December 31, 1998 and 1997,
respectively
Additional paid-in capital 142,642,000 131,564,000
Accumulated deficit (128,723,000) (107,188,000)
Unrealized (loss) on available-for-sale securities -- (30,000)
------------- -------------
Total stockholders' equity 13,976,000 24,392,000
============= =============
$ 21,030,000 $ 28,147,000
============= =============
</TABLE>
See accompanying notes.
F-2
<PAGE> 48
Cytel Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Research and development $ 2,005,000 $ 3,428,000 $ 8,641,000
Research grants and other income 1,692,000 1,623,000 2,251,000
------------ ------------ ------------
3,697,000 5,051,000 10,892,000
COSTS AND EXPENSES:
Research and development 18,352,000 16,537,000 20,861,000
General and administrative 4,587,000 3,735,000 3,919,000
Loss on permanent impairment of
intangible assets 3,400,000 -- --
------------ ------------ ------------
Total costs and expenses 26,339,000 20,272,000 24,780,000
------------ ------------ ------------
Loss from operations (22,642,000) (15,221,000) (13,888,000)
Minority interest in net loss of
consolidated subsidiary 441,000 -- --
Interest income, net 860,000 825,000 1,437,000
Loss on sales and disposal
of assets (194,000) -- --
------------ ------------ ------------
Net loss $(21,535,000) $(14,396,000) $(12,451,000)
============ ============ ============
Net loss per share-basic and
diluted $ (4.48) $ (3.92) $ (3.50)
============ ============ ============
Shares used in computing net
loss per share-basic and
diluted 4,801,872 3,668,221 3,552,258
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 49
Cytel Corporation
Consolidated Statements of Stockholders' Equity
For each of the three years in the period ended December 31, 1998
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount capital Deficit
--------- -------- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - - 3,508,057 $35,000 $118,960,000 $(80,341,000)
Issuance of common stock - - 76,416 1,000 1,367,000 -
Amortization of deferred
compensation, net - - - - (17,000) -
Unrealized losses on
available-for-sale - -
securities - - - -
Net loss - - - - - (12,451,000)
------- ------- --------- ------- ------------ -------------
Balance at December 31, 1996 - - 3,584,473 36,000 120,310,000 (92,792,000)
Issuance of common stock - - 1,018,741 10,000 11,254,000 -
Unrealized gains on
available-for-sale - - - - - -
securities
Net loss - - - - - (14,396,000)
------- ------- --------- ------- ------------ -------------
Balance at December 31, 1997 - - 4,603,214 46,000 131,564,000 (107,188,000)
Issuance of common stock - - 299,764 3,000 2,692,000 -
for cash
Issuance of common stock - - -
for technology 84,475 1,000 899,000
Issuance of Cytel Series B 659,898 7,000 - - 3,593,000 -
preferred stock, net of
issuance costs
Investment by Searle in - - 3,894,000 -
Epimmune
Unrealized gains on
available-for-sale - - - - - -
securities
Net loss - - - - - (21,535,000)
------- ------- --------- ------- ------------ -------------
Balance at December 31, 1998 659,898 $7,000 4,987,453 $50,000 $142,642,000 $(128,723,000)
======= ======= ========= ======= ============ =============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gains (losses)
On available- Total
Deferred For-sale stockholders' Comprehensive
Compensation Securities equity Income
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $(161,000) $ 31,000 $ 38,524,000
Issuance of common stock - 1,368,000
Amortization of deferred
compensation, net 161,000 144,000
Unrealized losses on
available-for-sale -
securities (95,000) (95,000) (95,000)
Net loss - (12,451,000) (12,451,000)
------- ------------ -------------
Balance at December 31, 1996 - (64,000) 27,490,000 (12,546,000)
=============
Issuance of common stock - 11,264,000
Unrealized gains on
available-for-sale
securities - 34,000 34,000 34,000
Net loss (14,396,000) (14,396,000)
------- ------------ -------------
Balance at December 31, 1997 - (30,000) 24,392,000 (14,362,000)
=============
Issuance of common stock - 2,695,000
for cash
Issuance of common stock
for technology - 900,000
Issuance of Cytel Series B - 3,600,000
preferred stock, net of
issuance costs
Investment by Searle in - 3,894,000
Epimmune
Unrealized gains on
available-for-sale - 30,000 30,000 30,000
securities
Net loss - (21,535,000) (21,535,000)
---------- -------- ------------ -------------
Balance at December 31, 1998 $ - $ - $13,976,000 $(21,505.000)
========== ======== ============ =============
</TABLE>
See accompanying notes.
F-4
<PAGE> 50
Cytel Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (21,535,000) $ (14,396,000) $ (12,451,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 811,000 786,000 1,620,000
Deferred rent (225,000) (252,000) (192,000)
Amortization of deferred compensation -- -- 144,000
Deferred revenue 437,000 (654,000) (2,025,000)
Loss on permanent impairment of intangible assets 3,400,000 -- --
Minority interest in consolidated subsidiary (441,000) -- --
(Gain) loss on sale of equipment 194,000 -- --
Changes in operating assets and liabilities:
Receivable under collaborative agreement -- -- 2,000,000
Other current assets (375,000) 110,000 135,000
Accounts payable and accrued liabilities 1,534,000 (1,236,000) 371,000
Accrued payroll and related expense (47,000) (187,000) (7,000)
------------- ------------- -------------
Net cash used in operating activities (16,247,000) (15,829,000) (10,405,000)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (18,909,000) (33,612,000) (110,774,000)
Maturities of available-for-sale securities 14,145,000 21,875,000 64,787,000
Sales of available-for-sale securities 7,193,000 20,800,000 53,143,000
Proceeds from the sale of equipment 109,000 55,000 --
Proceeds from the sale of assets of subsidiary -- 161,000 --
Principal payments on note receivable 100,000 50,000 --
Purchases of property and equipment (2,274,000) (644,000) (2,067,000)
Assets transferred to subsidiary at net book value -- 84,000 --
Expenditures related to early lease termination (226,000) -- --
Patents (1,320,000) (878,000) (1,186,000)
Deposits and other assets 574,000 (29,000) 163,000
------------- ------------- -------------
Net cash provided by (used in) investing activities (608,000) 7,862,000 4,066,000
FINANCING ACTIVITIES
Principal payments under equipment notes payable (176,000) (341,000) (841,000)
Principal payments on note payable to bank (1,031,000) (375,000) (94,000)
Restricted cash released as note payable collateral 1,031,000 375,000 94,000
Restricted cash for building lease agreement (472,000) -- --
Proceeds from the issuance of equipment notes payable 1,515,000 -- --
Net proceeds from issuance of Cytel Series B preferred stock 3,600,000 -- --
Net proceeds from Searle investment in Epimmune 6,100,000 -- --
Net proceeds from issuance of common stock 2,695,000 11,264,000 1,368,000
------------- ------------- -------------
Net cash provided by financing activities 13,262,000 10,923,000 527,000
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (3,593,000) 2,956,000 (5,812,000)
Cash and cash equivalents at beginning of year 6,187,000 3,231,000 9,043,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,594,000 $ 6,187,000 $ 3,231,000
============= ============= =============
</TABLE>
F-5
<PAGE> 51
Cytel Corporation
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 122,000 $ 119,000 $ 199,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of common stock for patent rights $ 900,000 $ -- $ --
============= ============= =============
Early lease termination - net debt
extinguishment and asset abandonment
$ 153,000 $ -- $ --
============= ============= =============
Promissory note and stock received for
sale of assets of subsidiary $ -- $ 800,000 $ --
============= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE> 52
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Cytel Corporation was incorporated in Delaware on July 10, 1987. Cytel was
established to design and develop a new class of drugs for the more effective
treatment of acute and chronic inflammatory diseases, infectious diseases and
cancer.
Unless otherwise indicated, all references to "Cytel" are to Cytel Corporation,
all references to "Epimmune" are to Epimmune Inc., a majority-owned subsidiary
of Cytel, and all references to the "Company" are to the combined entity of
Cytel and Epimmune.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cytel, Cytel
Acquisition Subsidiary, Inc. from its inception in October 1991 through its
dissolution in June 1996, Receptor Laboratories, Inc. from its purchase in July
1995 to its sale in January 1997 and Epimmune Inc. (Epimmune) from its formation
in October 1997. All significant intercompany accounts and transactions have
been eliminated.
F-7
<PAGE> 53
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The minority interest calculation is based on G.D. Searle & Co.'s (Searle), a
wholly-owned subsidiary of Monsanto Co., actual ownership percentage in Epimmune
of 13.4% at December 31, 1998. The calculation does not include the potential
additional ownership interest that would result from the conversion of Searle's
investment in Cytel's preferred stock which is convertible into Epimmune common
stock.
MANAGEMENT'S PLAN FOR FUTURE OPERATIONS
As more fully disclosed in Note 11, disappointing results of the Phase II/III
clinical trial of Cylexin, Cytel's cell adhesion inhibitor compound, have led to
the termination of its anti-inflammatory therapeutics business. Accordingly,
Cytel is terminating its employees, selling its fixed assets and intellectual
property, and focusing all subsequent development efforts on Epimmune's vaccine
technology. During the first quarter of 1999, Cytel sold its Glytec carbohydrate
synthesis and manufacturing business. Cytel plans to use the proceeds from such
sales, together with existing cash resources, to meet its financial obligations,
including corporate restructuring and termination costs of all of its
non-vaccine programs. There can be no assurance, however, that Cytel's available
cash will be sufficient to satisfy all of its financial obligations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of primarily of cash, certificates of deposit,
treasury securities and repurchase agreements with original maturities at the
date of acquisition of less than three months.
F-8
<PAGE> 54
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
The Company has classified its investments as available-for-sale and accordingly
carries them at fair value. Unrealized holding gains or losses on these
securities are carried as a separate component of stockholders' equity. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are also
included in interest income. The cost of securities sold is based on the
specific identification method.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. 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.
Management attempts to schedule the maturities of the Company's investments to
coincide with the Company's expected cash requirements.
PROPERTY AND EQUIPMENT
Furniture and equipment is stated at cost and depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the assets or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. As more fully disclosed in Note 11, management determined that certain
patent assets were impaired, and recorded a $3.4 million loss on permanent
impairment of these assets in 1998.
F-9
<PAGE> 55
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the terms of the
leases. Accordingly, rent expense incurred in excess of rent paid is reflected
as deferred rent.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board ("APB") 25, Accounting for Stock Issued to Employees. In 1997,
the Company adopted the disclosure requirements of SFAS 123, Accounting for
Stock-Based Compensation. Under APB 25, compensation expense relating to
employee stock options is determined based on the excess of the market price of
the Company's stock over the exercise price on the date of grant and does not
require the recognition of compensation expense for stock issued under plans
defined as noncompensatory. Adoption of SFAS 123 requires recognition of
compensation expense for virtually all options based on their computed "fair
value" on the date of the grant.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Research and development revenues are recorded as earned based on the
performance requirements of the contracts. Research and development costs are
expensed as incurred. Expenses under research and development contracts were
approximately $4,500,000, $3,500,000 and $13,100,000 for 1998, 1997 and 1996,
respectively.
RESEARCH GRANTS
Research grants represent research and development revenues primarily from
National Institutes of Health.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. All potential common
shares have been excluded from the diluted net loss per share calculations as
they are antidilutive to earnings.
F-10
<PAGE> 56
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income".
SFAS No. 130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign currency
translation adjustments and unrealized gains and losses on investments shall be
reported, net of their related tax effect, to arrive at comprehensive income.
Effective January 1, 1998, the Company adopted the Statement of Standards No.
131, (SFAS No. 131), "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined by SFAS No. 131, are components of an
enterprise for which financial information is available and evaluated regularly
by the Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the basis
that is used internally for evaluating the segment performance. The adoption of
SFAS No. 131 did not affect results of operations or financial position, but
does require disclosure of segment information.
F-11
<PAGE> 57
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
2. SHORT-TERM INVESTMENTS
The following tables summarize available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government Securities $ 2,018,000 $ 2,000 $ (1,000) $ 2,019,000
Corporate Obligations 7,199,000 5,000 (6,000) 7,198,000
----------- ----------- ----------- -----------
$ 9,217,000 $ 7,000 $ (7,000) $ 9,217,000
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. Government Securities $ 2,523,000 $ 1,000 $ (5,000) $ 2,519,000
Corporate Obligations 9,123,000 3,000 (29,000) 9,097,000
----------- ----------- ----------- -----------
$11,646,000 $ 4,000 $ (34,000) $11,616,000
=========== =========== =========== ===========
</TABLE>
The above tables exclude an aggregate of $1,000,000 and $5,477,000 in U.S.
government securities and corporate obligations which are classified as cash
equivalents in the accompanying balance sheets at December 31, 1998 and 1997,
respectively, due to the contractual maturity of these assets.
The amortized cost and estimated fair value of debt securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- -----------------------------
STIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,037,000 $ 4,037,000 $10,127,000 $10,096,000
Due after one year
Through three years 5,180,000 5,180,000 1,519,000 1,520,000
----------- ----------- ----------- -----------
$ 9,217,000 $ 9,217,000 $11,646,000 $11,616,000
=========== =========== =========== ===========
</TABLE>
F-12
<PAGE> 58
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
3. ARGONEX HOLDINGS, INC.
In January 1997, Cytel sold certain assets to Argonex Holdings, Inc. (Argonex)
for aggregate consideration valued at approximately $950,000. In conjunction
with the sale, Cytel maintained certain nonexclusive rights to technology
licensed from the University of Virginia, which license has been assigned to
Epimmune.
In January 1999, Cytel and Argonex completed a Stock Purchase Agreement whereby
Argonex bought back their Class C Preferred Stock and paid in full their
promissory note and accrued interest for $525,000. Cytel recorded a loss of
$231,000 based on the net realizable value of the assets in 1998.
4. BALANCE SHEET INFORMATION
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
Investment income and grant revenue receivable $ 864,000 $ 852,000
Prepaid expenses 268,000 360,000
Note receivable - current portion 525,000 100,000
---------- ----------
$1,657,000 $1,312,000
========== ==========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
Furniture and equipment $7,344,000 $6,362,000
Leasehold improvements 1,451,000 1,597,000
Construction in progress 23,000 138,000
---------- ----------
8,818,000 8,097,000
Less accumulated depreciation and amortization (5,939,000) (6,393,000)
---------- ----------
$2,879,000 $1,704,000
========== ==========
</TABLE>
F-13
<PAGE> 59
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
4. BALANCE SHEET INFORMATION (CONTINUED)
Deposits and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
Note receivable - long-term portion $ -- $ 750,000
Deposits 156,000 312,000
---------- ----------
$ 156,000 $1,062,000
========== ==========
</TABLE>
5. ADDITIONAL SEGMENT AND RELATED INFORMATION
As a result of the subsequent events described in Note 11, the Company is
presenting additional information related to the operations and financial
position of Epimmune and Cytel.
F-14
<PAGE> 60
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
5. SEGMENT AND RELATED INFORMATION (CONTINUED)
Epimmune was formed in October 1997 as a wholly-owned subsidiary with separate
management and financing. As of March 31, 1999 Cytel owns approximately 75% of
the outstanding stock of Epimmune.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
CYTEL CONSOLIDATING
CORPORATION EPIMMUNE INC. ENTRIES TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Research and development revenues $ 2,013,000 $ 1,684,000 $ -- $ 3,697,000
Intersegment revenues -- -- -- --
------------ ------------ ------------ ------------
2,013,000 1,684,000 -- 3,697,000
COSTS AND EXPENSES:
Research and development 13,540,000 4,812,000 -- 18,352,000
General and administrative 3,429,000 1,158,000 -- 4,587,000
Loss on permanent impairment of
intangible assets 3,400,000 -- -- 3,400,000
------------ ------------ ------------ ------------
Total costs and expenses 20,369,000 5,970,000 -- 26,339,000
------------ ------------ ------------ ------------
Loss from operations (18,356,000) (4,286,000) -- (22,642,000)
Minority interest in net loss of
consolidated subsidiary -- -- 441,000 441,000
Interest income, net 262,000 598,000 -- 860,000
Loss on sales and disposal
of assets (194,000) -- -- (194,000)
------------ ------------ ------------ ------------
Net loss $(18,288,000) $ (3,688,000) $ 441,000 $(21,535,000)
============ ============ ============ ============
</TABLE>
F-15
<PAGE> 61
Cytel Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 1998
5. SEGMENT AND RELATED INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CYTEL CONSOLIDATING
CORPORATION EPIMMUNE INC. ENTRIES TOTAL
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Assets
Cash, cash equivalents and short-term $ 1,191,000 $ 10,620,000 $ 0 $ 11,811,000
investments
Other current assets 1,098,000 593,000 (33,000) 1,657,000
Restricted cash 0 472,000 0 472,000
Property and equipment, net 2,412,000 467,000 0 2,879,000
Investment in consolidated subsidiary 11,742,000 0 (11,742,000) 0
Patents and other non-current assets 1,999,000 2,211,000 0 4,211,000
------------ ------------ ------------ ------------
Total assets 18,442,000 14,363,000 (11,775,000) 21,030,000
Liabilities and stockholders' equity
Current Liabilities
Accounts payable and accrued liabilities 1,705,000 1,033,000 (33,000) 2,705,000
Deferred revenue 500,000 15,000 0 515,000
Current portion of obligations under equipment 465,000 28,000 0 493,000
loans and notes payable
------------ ------------ ------------ ------------
Total current liabilities 2,670,000 1,076,000 (33,000) 3,713,000
Long-term obligations under equipment loans and 1,395,000 211,000 0 1,606,000
notes payable
Minority interest in consolidated subsidiary 0 0 1,735,000 1,735,000
Stockholders equity 14,377,000 13,076,000 (13,477,000) 13,976,000
------------ ------------ ------------ ------------
Total liabilities and stockholders equity $ 18,442,000 $ 14,363,000 $(11,775,000) $ 21,030,000
============ ============ ============ ============
</TABLE>
F-16
<PAGE> 62
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
6. STOCKHOLDERS' EQUITY
CHANGES IN CAPITALIZATION
A one-for-seven reverse split of Cytel's common stock was effected on November
13, 1998. The reverse split was approved by Cytel's Board of Directors on
November 2, 1998 pursuant to authority granted to the Board of Directors by
Cytel's stockholders at a special meeting held on October 30, 1998. All common
share balances and net loss per share amounts presented in these financial
statements have been retroactively adjusted to reflect the reverse stock split.
EMPLOYEE STOCK PURCHASE PLAN
In October 1991, Cytel adopted an Employee Stock Purchase Plan (the Stock Plan)
whereby employees, at their option, can purchase shares of Cytel common stock
through payroll deductions at the lower of 85% of the fair market value on the
plan offering date or 85% of the fair market value of the common stock at the
purchase date. The aggregate number of shares that may be issued under the Stock
Plan is set at 107,142. As of December 31, 1998, 76,671 shares of common stock
have been purchased under the Plan.
STOCK PLANS
In November 1989, Cytel adopted a Stock Plan (the Plan), under which options may
be granted to employees, directors, consultants or advisors of Cytel. The Plan
provides for the grant of both incentive stock options and nonstatutory stock
options. The exercise price of an incentive stock option is not less than the
fair market value of the common stock on the date of grant. The exercise price
of nonstatutory options is not less than 85% of the fair market value of the
common stock on the date of grant. No options granted under the Plan have a term
in excess of ten years from the date of grant. Shares and options issued under
the Plan vest over varying periods of one to six years. For certain options
granted prior to Cytel's initial public offering, Cytel recognized deferred
compensation expense for the excess of the deemed value for accounting purposes
of the common stock issuable upon exercise of such options over the aggregate
exercise price of such options. This deferred compensation expense was amortized
ratably over the vesting period of each option.
In June 1994, Cytel adopted the 1994 Non-Employee Directors' Stock Option Plan
(the Directors' Plan). On January 1 of each year beginning January 1, 1995, each
Non-Employee Director who has been a Non-Employee Director for at least three
months shall be granted an option to purchase 714 shares of common stock of
Cytel. In addition, each person who becomes a Non-Employee Director of Cytel
after the adoption of the Directors' plan shall be granted an option to purchase
3,571 shares of common stock of Cytel. The exercise price of
F-17
<PAGE> 63
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
options issued under the Directors' Plan shall be equal to 100% of the fair
market value of the common stock on the date of grant. Options issued under the
Directors' Plan vest over four and five years. No options issued under the
Directors' Plan have a term in excess of ten years from the date of grant. An
aggregate of 1,064,263 shares of common stock have been reserved for issuance
under both plans.
STOCK OPTION REPRICING
In June 1998, the stockholders approved an Option Exchange Program for certain
options under the 1989 Plan. These options vest over a six year period in
accordance with a schedule developed by management, in conjunction with the
State of Wisconsin Investment Board, a major stockholder of Cytel. On the date
of approval, all current employees were eligible to participate; however options
granted to outside directors and consultants to the Company were excluded from
the exchange. There were 546,962 options eligible for participation, of which
303,145 options were repriced. The effective exchange price was $10.7188.
Eligible employees who elected to participate forfeited a total of 42,879
shares. These shares were permanently canceled and not returned to the 1989 Plan
for future grants. The Option Exchange Program imposes restrictive vesting
provisions. If the holder exercises vested options before the sixth year, then
the remaining unvested options vest at 0% until the end of the sixth year, at
which time all remaining shares will be fully vested.
The following table summarizes stock option activity for the three years ended
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE PRICE
-------- -------------
<S> <C> <C>
Balance at December 31, 1995 417,288 $26.60
Granted 235,378 40.18
Exercised (40,128) 15.47
Cancelled (23,758) 29.47
--------
Balance at December 31, 1996 588,780 32.55
Granted 133,788 19.95
Exercised (1,931) 2.10
Cancelled (180,044) 27.79
--------
Balance at December 31, 1997 540,593 30.94
Granted 437,671 10.82
Exercised (1,997) 1.50
Cancelled (418,009) 32.84
--------
Balance at December 31, 1998 558,258 $13.88
========
</TABLE>
F-18
<PAGE> 64
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1998, 275,514 shares are available for future issuance under
these option plans. Following is a summary of the options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
AVERAGE EXERCISE
REMAINING WEIGHTED AVERAGE PRICE OF
LIFE IN EXERCISE OPTIONS OPTIONS
RANGE OF EXERCISE PRICES OPTIONS OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- ------------------------ ------------------- --------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.40 - $10.72 30,335 7.20 $7.53 14,696 $5.85
$10.72 - $10.72 303,357 9.45 10.72 70,047 10.72
$10.94 - $18.82 149,267 8.35 12.48 30,541 16.44
$20.13 - $84.00 75,299 6.10 31.94 59,974 33.17
-------- -------
558,258 8.58 $13.88 175,258 $18.99
======== =======
</TABLE>
Adjusted pro forma information regarding net income or loss is required by SFAS
123, and has been determined as if Cytel had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the "Black-Scholes" method for
option pricing with the following weighted average assumptions for 1998, 1997
and 1996: risk-free interest rates of 6%; dividend yield of 0; and a weighted
average expected life for all options of six years. The volatility factor
assumptions of the expected market price Cytel's common stock were 105%, 105%
and 94% for 1998, 1997 and 1996, respectively.
For purposes of adjusted pro forma disclosures, the estimated fair value of the
option is amortized to expense over the option's vesting period. Cytel's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Pro forma net loss $(23,895,000) $(17,273,000) $ (14,316,000)
Pro forma net loss per share $ (4.98) $ (4.69) $ (4.03)
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and 1996
was $8.11, $14.49 and $31.78, respectively.
F-19
<PAGE> 65
Cytel Corporation
Notes to Consolidated Financial Statements (Continued)
December 31, 1998
6. STOCKHOLDERS' EQUITY (CONTINUED)
In March 1993, Cytel adopted a Stockholder Rights Plan. The Plan provides for
the distribution of a preferred stock purchase right (Rights) as a dividend for
each share of Cytel's common stock held as of the record date at the close of
business on April 8, 1993. 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 one one-hundredth of a share of
Series A Preferred Stock at a price of $80 per one one-hundredth of a preferred
share per Right. Each one one-hundredth of a share of preferred stock has
rights, privileges and preferences which make its value approximately equal to
the value of a common share. In addition, in the event of certain business
combinations, the Rights permit the purchase of the common stock of an acquirer
at a 50% discount. Under certain conditions, the Rights may be redeemed by the
Board of Directors at a price of $.01 per Right. The Rights have no voting
privileges and are attached to and automatically trade with Cytel's common
stock. The Rights will expire on March 19, 2003.
F-20
<PAGE> 66
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
7. EQUIPMENT LOANS AND NOTES PAYABLE
In July 1998, Cytel entered into a $2.5 million secured term line of credit
agreement which requires monthly payments through December 2002. The carrying
value of the secured equipment and leasehold improvements under this agreement
at December 31, 1998 was $1,801,000. Accumulated depreciation at December 31,
1998 was $187,000. At December 31, 1998 the unused commitments totaling
$1,225,000 expired.
In August 1998, Epimmune entered into a $750,000 term credit facility for
capital equipment purchases and certain tenant improvements, which require
monthly payments beginning August 1999 through July 2002. The carrying value of
equipment advances under this agreement at December 31, 1998 was $239,000.
Accumulated depreciation at December 31, 1998 was $22,600. At December 31, 1998,
$511,000 is available for fixed asset acquisitions and will expire in August
1999.
Equipment loans and notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Equipment loan payable in monthly installments of
principal and interest of $20,600, due July 2002
with a balloon payment of $182,000 $ 846,000 $-
Equipment loan payable in monthly installments of
principal and interest of $3,500, due September
2002 with a balloon payment of $31,000 147,000 --
Equipment loan payable in monthly installments of
principal and interest of $4,800, due December
2002 with a balloon payment of $42,000 209,000 --
Equipment loan payable in monthly installments of
principal and interest of $7,600 beginning August
1999, due July 2002 240,000 --
Unsecured note payable in monthly installments of
principal and 10% imputed interest of $24,900,
due June 2001 657,000 --
Bank loan payable in quarterly installments of
principal of $93,800, loan paid off in September
1998 -- 1,031,000
Equipment loan payable in monthly installments of
principal and interest of $8,000, loan paid off
in May 1998 -- 40,000
---------- ----------
$2,099,000 $1,071,000
========== ==========
</TABLE>
F-21
<PAGE> 67
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
7. EQUIPMENT LOANS AND NOTES PAYABLE (CONTINUED)
Future annual payments on equipment loans and notes payable are as follows at
December 31, 1998:
<TABLE>
<S> <C>
1999 $ 493,000
2000 593,000
2001 505,000
2002 508,000
Thereafter -
----------
$2,099,000
==========
</TABLE>
In February 1999, Cytel sold some of the assets, which were collateralized by
the term line, to Nextran. Portions of the unpaid notes related to the sold
assets were assumed by Nextran as partial consideration for the transaction as
more thoroughly disclosed in Note 11.
F-22
<PAGE> 68
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
8. COMMITMENTS
The Company leases its offices, research and manufacturing facilities under
operating leases which expire at various dates through March 2009. Under these
operating leases, the Company pays taxes, insurance and maintenance expenses
related to the premises. Epimmune's facility lease requires a letter of credit
of $472,000 to secure the performance of the Company's lease obligation and is
reflected as restricted cash. Included in deposits and other assets is $113,000
and $303,000 deposited under these agreements at December 31, 1998 and 1997,
respectively.
Rent expense for 1998, 1997 and 1996 was $1,772,000, $1,783,000 and $1,842,000,
respectively.
Future minimum lease payments under operating leases at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
TOTAL
OPERATING
YEAR CYTEL EPIMMUNE LEASES
- ---------- ----------- ----------- ------------
<S> <C> <C> <C>
1999 $1,200,000 $ 366,000 $1,566,000
2000 756,000 495,000 1,251,000
2001 378,000 507,000 885,000
2002 309,000 519,000 828,000
2003 - 531,000 531,000
Thereafter - 3,059,000 3,059,000
---------- ---------- ----------
Total minimum lease payments $2,643,00 $5,477,000 $8,120,000
========== ========== ==========
</TABLE>
F-23
<PAGE> 69
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Elan Corporation, plc.
In July 1998, Cytel entered into an exclusive sublicense and option agreement
with Elan International Services Ltd. (Elan), a subsidiary of Elan Corporation
plc, granting Elan rights to a patent involving use of antibodies that bind
VLA-4 integrin for the treatment of inflammatory conditions. In connection with
this agreement, which included the grant of an exclusive sublicense, Elan made a
$4.0 million equity investment in Cytel, based on the fair value of the stock,
of which $2.6 million was allocated to the purchase price of 285,714 shares of
the Company's common stock and $1.4 million was allocated to the rights granted
under the exclusive sublicense and option agreement. Elan will make additional
payments upon achievement of certain milestones as well as royalty payments on
sales. In addition, Elan has an option to enter into a nonexclusive sublicense
for patent rights to other VLA-4 blocking compounds.
G.D. Searle & Co.
In September 1997 as part of a letter of intent, Searle purchased 317,460 shares
of Cytel common stock for $5.0 million for an exclusive right to negotiate a
definitive agreement. Cytel then invested $6.5 million in cash and transferred
$1.5 million in other assets to capitalize Epimmune.
In February 1998, Epimmune entered into a collaborative research and development
agreement with Searle to develop immune-stimulating products for the treatment
of cancer. Under the terms of the agreement, Epimmune has granted Searle
exclusive worldwide rights to its epitope and PADRE technologies in the cancer
field, excluding rights previously granted to Takara Shuzo Co., Ltd. Biomedical
Group (Takara) for the ex vivo treatment of cancer in Japan. As part of the
February 1998 agreement, Searle purchased 1,032,149 shares of Epimmune's Series
B convertible preferred stock for $6.1 million and 659,898 shares of Cytel's
Series B convertible preferred stock for $3.9 million. Cytel simultaneously
purchased 659,898 shares of Epimmune's Series B-1 convertible preferred stock
for $3.9 million. Searle has the right to convert the Cytel Series B convertible
preferred stock into Cytel common stock after three years, or to exchange the
Cytel Series B convertible preferred stock for Epimmune Series B-1 convertible
preferred stock owned by Cytel at any time. In addition to the $15 million
investment made to date, Searle will make milestone payments to Epimmune upon
achievement of certain preclinical and clinical milestones, and will pay
royalties on product sales. Searle has the option to deliver shares of the Cytel
convertible preferred stock in lieu of up to 50% of certain milestone payments.
In addition, Searle has rights of first refusal with respect to newly-issued
securities of Cytel, enabling Searle to maintain its percentage ownership in
Cytel. As of March 29, 1999, Cytel owned 74.7%, Epimmune employees owned 13.6%,
and Searle owned 11.7%. of the outstanding capital stock of Epimmune.
F-24
<PAGE> 70
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Glycomed Incorporated
In February 1998, Cytel entered into a nonexclusive licensing agreement with
Glycomed Incorporated (Glycomed), a wholly-owned subsidiary of Ligand
Pharmaceuticals Incorporated, under which Cytel received rights to a family of
Glycomed patents relating to certain carbohydrate compounds for the treatment of
acute inflammation, including Cytel's most advanced product, Cylexin. Cytel paid
a license fee of $900,000 consisting of 84,475 shares of Cytel's common stock at
$10.65 per share. Glycomed would be entitled to receive milestone payments upon
the first New Drug Application and the first FDA approval of each licensed
product. These payments may also be made in Cytel stock, at Cytel's option.
Glycomed would also be entitled to receive royalties on worldwide net sales of a
licensed or sublicensed product. However, Cytel has terminated its therapeutic
anti-inflammatory business with respect to which milestones and royalties were
to be paid.
Baxter Healthcare Corporation
In September 1996, Cytel entered into a collaborative agreement with Baxter
Healthcare Corporation's Nextran unit (Nextran) to develop a carbohydrate
product for use in xenotransplantation. Under the agreement, Cytel was to
manufacture and sell a carbohydrate which Nextran would incorporate into a
xenotransplantation product. Nextran made an up-front payment and purchased
shares of the Cytel's common stock for the right to enter into an exclusive
supply agreement. In January 1997, Cytel achieved a milestone with delivery of
the initial batch of a bioactive carbohydrate to Nextran. As a result, Nextran
made the first milestone payment. In December 1997, Nextran paid an option fee
and purchased additional shares of the Company's common stock for the right to
extend and expand the original agreement. In October 1998, Nextran made a
payment upon exercise of an option to enter into a second exclusive supply
agreement with Cytel. As disclosed in Note 11, in February 1999, Cytel entered
into a new license agreement that supersedes Cytel's existing manufacturing
supply agreements with Nextran.
Abbott Laboratories
In December 1995, Cytel entered into a collaborative agreement with Abbott
Laboratories (Abbott) to develop manufacturing processes for the production of
certain carbohydrates for use in nutritional products. Abbott paid a $2 million
nonrefundable fee in January 1996 for an option to obtain a worldwide license
for limited applications under Cytel's patents and know-how in the area of
carbohydrate synthesis. In December 1996, Abbott made the first milestone
payment to Cytel in the amount of $2 million. An additional option fee of
$250,000 was earned in August 1997 and paid in two equal installments in
September 1997 and January 1998.
Abbott's option to license certain of Cytel's technology under its collaboration
with Cytel expired and the collaboration terminated as of July 31, 1998.
F-25
<PAGE> 71
Cytel Corporation
Notes to Consolidated Financial Statements (Continued)
December 31, 1998
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Takara Shuzo Co., Ltd
Under two agreements with Takara Shuzo Co., Ltd. (Takara), which were assigned
to Epimmune in October 1997, Epimmune's technology is being applied to fungal
disease targets and ex-vivo cellular therapy for the treatment of cancer. Under
the anti-fungal collaboration initiated in June 1994, Takara obtained rights to
any anti-fungal products resulting from the collaboration for commercialization
in Japan. Epimmune has the right to develop products in North America, and the
companies share rights in the rest of the world. Research in the anti-fungal
field, using Epimmune technology is now being conducted independently by Takara
in Japan. Under the ex-vivo cellular therapy collaboration initiated in October
1994, Takara obtained rights to Epimmune's technology relevant to the
development of ex vivo cellular therapies for the treatment of cancer in Japan.
Takara will make payments upon achievement of certain clinical milestones and
pay royalties to Epimmune on sales from products resulting from the
collaboration under both agreements.
10. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1998 and 1997 are shown below. At December 31, 1998, a valuation allowance of
$54,291,000 of which $6,448,000 is related to 1998, has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Patents expensed for tax $ 2,586,000 $ 2,146,000
------------ ------------
Total deferred tax liabilities 2,586,000 2,146,000
Deferred tax assets:
Capitalized research expenses 3,376,000 4,207,000
Net operating loss carryforwards 44,849,000 35,641,000
Research and development credits 8,574,000 7,211,000
Other, net 78,000 2,930,000
------------ ------------
Total deferred tax assets 56,877,000 49,989,000
Valuation allowance for deferred tax assets (54,291,000) (47,843,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
F-26
<PAGE> 72
Cytel Corporation
Notes to Consolidated Financial Statements
December 31, 1998
10. INCOME TAXES (CONTINUED)
At December 31, 1998, the Company has federal and California net operating loss
carryforwards of approximately $120,164,000 and $46,521,000, respectively. The
difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards prior to 1999. The federal tax loss carryforwards
will begin expiring in 2002, unless previously utilized. The California tax loss
carryforwards will continue to expire in 1999. The Company also has federal and
California research and development tax credit carryforwards of $6,523,000 and
$3,155,000, respectively, which will begin expiring in 2002 unless previously
utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss and credit carryforwards will be limited because of
greater than 50% cumulative changes in ownership which occurred during 1989 and
1994. However, the Company believes that these limitations will not have a
material impact on the financial statements.
11. SUBSEQUENT EVENTS
Results of Cylexin clinical trial
On March 29, 1999, Cytel announced the results from its Cylexin clinical trials.
The results of these trials indicated that Cylexin, Cytel's lead therapeutic
compound, showed no benefit over placebo in the clinical trial. Accordingly,
Cytel has made the decision to terminate its therapeutic anti-inflammatory
business, and Cytel recorded a charge of $3.4 million as of December 31, 1998,
representing the book value of its cell adhesion patent portfolio. This charge
was recorded in accordance with SFAS 121, after Cytel determined that its
intangible assets were permanently impaired. Cytel has not recorded a charge for
intangible assets related to the Glytec carbohydrate synthesis and manufacturing
business, which were licensed or sold to third parties in February and March
1999 because the sales resulted in a gain of $3.3 million. Cytel analyzed its
remaining fixed assets for impairment under SFAS 121, but determined no
impairment existed due to proposals to purchase the assets that indicated
impairment did not exist.
Additionally, in February and March of 1999, Cytel completed sales of its Glytec
carbohydrate synthesis and manufacturing business, including the sale of fixed
assets and license of intellectual property, and assignment of certain
liabilities and personnel relating to this business. In the future, the Company
will focus all resources on Epimmune, a majority-owned subsidiary of Cytel.
Epimmune is developing novel vaccines that stimulate the body's immune system to
treat and prevent infectious diseases and cancer.
F-27
<PAGE> 73
Cytel Corporation
Notes to Consolidated Financial Statements (Continued)
December 31, 1998
11. SUBSEQUENT EVENTS (CONTINUED)
Cytel plans to use the proceeds from the disposition of the Glytec carbohydrate
synthesis and manufacturing business, together with its existing cash resources,
to meet its financial obligations, including corporate restructuring and
termination costs of the therapeutic anti-inflammatory business. There can be no
assurance, however, that Cytel's available cash will be sufficient to satisfy
all of its financial obligations. Cytel will record a restructuring charge to
operations of approximately $3.7 million in early 1999 to record the expenses
relating to the corporate restructuring and discontinuing its therapeutic
anti-inflammatory business, and will record gains on the sales of the fixed and
intangible assets of approximately $3.3 million.
F-28
<PAGE> 1
EXHIBIT 10.62
[CYTEL LETTERHEAD]
December 2, 1998
James C. Paulson, Ph.D.
Vice President, Chief Scientific Officer
And General Manager/Glytec
Cytel Corporation
9393 Towne Centre Drive
San Diego, CA 92121
Dear Jim:
This letter will confirm our conversation of November 24, 1998 and respond to
your letter dated November 23, 1998. Cytel accepts the withdrawal of your
resignation as an employee and accepts the resignation that you have tendered as
a member of the Board of Directors of Cytel, effective December 4, 1998.
Although we do not agree on the series of events that have transpired since May
of this year as set forth in your November 24th letter, we have discussed and
agreed upon several matters relating to your prospective separation from Cytel.
This letter serves to memorialize our agreement with respect to these matters.
With regard to your right to receive severance benefits under your Severance
Benefits Agreement ("Agreement") dated February 2, 1998, Cytel agrees that you
will be entitled to receive the severance benefits specified in the Agreement
upon the earlier of (i) the closing of a Glytec transaction, or (ii) February
15, 1999.
You have also previously requested through your counsel that Cytel agree to
extend the period of time that you have to exercise your stock options upon your
separation from the company so that you have a two-year period from your last
day of employment at Cytel. I believe that this is a reasonable request and
agree that I will recommend this proposal for approval by the Compensation
Committee at its December meeting.
Previously, you had requested that Cytel pay the legal expenses that you are
incurring with Larry Sherman, but I cannot recommended this to the Compensation
Committee. Finally, this will confirm that Cytel is not prepared to transfer
rights to the GTI program as part of your severance arrangement. We would, of
course, be willing to consider the terms of any proposal you might make for
acquiring rights to the GTI program from Cytel.
<PAGE> 2
If you have any questions or comments regarding the matters set forth in this
letter, please do not hesitate to contact me. Otherwise, please countersign this
letter as indicated below and return it to my attention. You make keep the
second executed copy enclosed herewith for your records.
Very truly yours,
Cytel Corporation
Virgil Thompson
President and Chief Executive Officer
cc: Lawrence M. Sherman
/s/ James C. Paulson, Ph.D
- ---------------------------------- -----------------------
James C. Paulson, Ph.D Date
<PAGE> 3
[CYTEL LETTERHEAD]
December 23, 1998
James C. Paulson, Ph.D.
Vice President, Chief Scientific Officer
and General Manager/Glytec
Cytel Corporation
9393 Towne Centre Drive
San Diego, CA 92121
Dear Jim:
In follow-up to my letter of December 2, 1998, this letter will further clarify
our agreement regarding certain outstanding issues related to your separation of
employment with Cytel Corporation (the "Company").
As I previously informed you, the Compensation Committee has met and approved an
extension of the period of time that you have to exercise your stock options
such that you will have a period of one year from your last day of employment at
the Company. You understand that this will be an amendment to your stock option
agreement and will convert your stock options from incentive stock options to
non-qualified stock options, which will affect their tax treatment.
With regard to your right to receive accelerated vesting of your stock options
under your Severance Benefits Agreement dated February 2, 1998 ("Agreement"),
the Company has determined that you will only be eligible to receive accelerated
vesting as follows: (i) if your termination occurs no earlier than February 15,
1999 and a Glytec Transaction has not yet occurred, you shall be entitled to
receive six months of accelerated vesting; or (ii) if your termination occurs
following a Glytec Transaction, the vesting of each outstanding stock option
that you currently hold shall be accelerated as to fifty percent (50%) of your
then unvested shares. For purposes of this letter agreement and the letter
agreement of December 2, 1998, a "Glytec Transaction" shall mean a sale of all,
or substantially all, of the assets of Cytel's carbohydrate manufacturing
business (known as the Glytec Business Unit) to a third-party, whether through a
merger, sale of a stock or sale of assets.
If you have any questions or comments regarding the matters, please contact me.
Otherwise, please countersign this letter as indicated below and return it to my
attention. You make keep the second executed copy enclosed herewith for your
records.
Very truly yours,
CYTEL CORPORATION
<PAGE> 4
Virgil Thompson
President and Chief Executive Officer
cc: Lawrence M. Sherman
/s/ James C. Paulson, Ph.D
- -------------------------------------- -----------------------
James C. Paulson, Ph.D Date
<PAGE> 1
EXHIBIT 10.63
FIRST AMENDMENT TO LEASE
(Nexus/Epimmune)
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is effective as of
February 1, 1999, by and between NEXUS EQUITY VIII LLC, a California limited
liability company, and EPIMMUNE INC., a Delaware corporation, "Landlord" and
"Tenant", respectively, under that certain Lease (the "Lease") dated as of
November 1, 1998, for the Premises described in the Lease.
The Lease is hereby amended as set forth herein.
Section 1.1 is revised to correct the street address of the Premises
from 5880 Nancy Ridge Drive to 5820 Nancy Ridge Drive, San Diego, California.
Section 2.1.1 is amended to correct the street address of the Project
from 5880 Nancy Ridge Drive to 5810 and 5820 Nancy Ridge Drive, San Diego,
California.
Section 2.1.3 is amended to correct the approximate Rentable Area of
the Premises from 24,000 square feet to 24,299 square feet.
Section 2.1.4 is amended to correct the Basic Annual Rent from $471,744
to $475,152 ($1.638 per square foot per month for the approximately 24,000
square feet of Rentable Area occupied by Tenant, and $.95 per square foot per
month for the approximately 299 square feet of the electrical room included in
the Rentable Area, subject to adjustment pursuant to Sections 4.3, 6.1, and
8.3).
Section 2.1.5 is amended to correct the Monthly Installment of Basic
Annual Rent from $39,312 to $39,596 ($1.638 per square foot per month for the
approximately 24,000 square feet of Rentable Area occupied by Tenant, and $.95
per square foot per month for the approximately 299 square feet of the
electrical room included in the Rentable Area, subject to adjustment pursuant to
Sections 4.3, 6.1, and 8.3).
Section 2.1.6 and Section 7.3 are amended to correct Tenant's Pro Rata
Share from 29.2% to 29.526%.
Section 2.1.10 is amended to correct the address for notices to Tenant
after occupancy from 5880 Nancy Ridge Drive to 5820 Nancy Ridge Drive, San
Diego, California.
<PAGE> 2
In all other respects, the Lease shall remain in full force and effect
as originally written.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Lease as of the date first above written.
LANDLORD:
NEXUS EQUITY VIII LLC
A California limited liability company
By Nexus Properties, Inc.
A California corporation
Manager
By: /s/ Miechael J. Reidy
------------------------------
Michael J. Reidy
Chief Executive Officer
TENANT:
EPIMMUNE INC.
A Delaware corporation
By: /s/ Peter C. Wulff
-------------------------------
Peter C. Wulff
Vice President, Finance and Secretary
<PAGE> 3
LEASE
(Nexus/Epimmune)
THIS LEASE ("Lease") is made as of November 1, 1998, by and between
Nexus Equity VIII LLC, a California limited liability company ("Landlord"), and
Epimmune Inc., a Delaware corporation ("Tenant").
1. LEASE PREMISES.
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain premises ("Premises") consisting of approximately 24,000
square feet of Rentable Area in Building One (the "Building") located at 5880
Nancy Ridge Drive, San Diego, California, on real property legally described as
Lot 101 of Lusk Industrial Park Unit No. 4, in the City of San Diego, County of
San Diego, State of California, according to Map thereof No. 10819, filed in the
office of the County Recorder of San Diego County, January 13, 1984. Building
One consists of approximately 34,080 square feet of Rentable Area, and Building
Two consists of approximately 48,218 square feet of Rentable Area. The two
buildings, the real property upon which the buildings are located, and all
landscaping, parking facilities, and other improvements and appurtenances
related thereto are hereinafter collectively referred to as the "Project." The
site plan for the Project is attached hereto as Exhibit "A", and the Premises
are outlined on Exhibit "B". All exterior portions of the Project which are for
the non-exclusive use of tenants of the Project, including without limitation
roadways, driveways, sidewalks, parking areas, and landscaped areas, are
hereinafter referred to as "Common Areas".
2. BASIC LEASE PROVISIONS.
2.1 For convenience of the parties, certain basic provisions of this
Lease are set forth herein, which provisions are subject to the remaining terms
and conditions of this Lease and are to be interpreted in light of such
remaining terms and conditions.
2.1.1 Address of the Project:
5880 Nancy Ridge Drive
San Diego, California
2.1.2 Designation of Tenant's Building:
Building One
2.1.3 Rentable Area:
Approximately 24,000 square feet
2.1.4 Basic Annual Rent:
$471,744 ($1.638 per square foot per month of Rentable
Area, subject to adjustment pursuant to Sections 4.3,
6.1, and 8.3)
- 1 -
<PAGE> 4
2.1.5 Monthly Installment of Basic Annual Rent: $39,312 ($1.638
per square foot per month of Rentable Area, subject to
adjustment pursuant to Sections 4.3, 6.1 and 8.3)
2.1.6 Tenant's Pro Rata Share: 29.2% of the Project (subject to
adjustment pursuant to Section 8.3)
2.1.7 (a) Term Commencement Date: April 1, 1999 (subject to
adjustment pursuant to Section 3.2)
(b) Term Expiration Date: April 1, 2009
2.1.8 Security Deposit: $471,744 Letter of Credit or
Certificate of Deposit (subject to adjustment pursuant to
Article 9)
2.1.9 Permitted Use: Any lawful use permitted in the MIB Zone
2.1.10 Address for Rent Payment and Notices to Landlord:
Nexus Properties, Inc.
4350 La Jolla Village Drive, Suite 930
San Diego, CA 92122
Address for Notices to Tenant Prior to Occupancy:
Epimmune Inc.
6555 Nancy Ridge Drive, Suite 200
San Diego, CA 92121
Address for Notices to Tenant After Occupancy:
Epimmune Inc.
5880 Nancy Ridge Drive
San Diego, California
2.2. The following exhibits are attached hereto and incorporated
herein by this reference:
Exhibit "A" Site Plan of the Project
Exhibit "B" Outline of the Premises
- 2 -
<PAGE> 5
Exhibit "C" Description of Building Shell and Site
Improvements
Exhibit "D" Floor Plan of Tenant Improvements
Exhibit "E" Description and Budget of Tenant Improvements
Exhibit "F" Rules and Regulations
Exhibit "G" Property Removable by Tenant
Exhibit "H" Disbursement Instructions
2.3 Capitalized terms not defined when first used in this Lease
shall have the meaning ascribed to them in Article 42 below.
3. TERM.
3.1 This Lease shall take effect upon the date of execution hereof
by each of the parties hereto, and each of the provisions hereof shall be
binding upon and inure to the benefit of Landlord and Tenant from the date of
execution hereof by each of the parties hereto.
3.2 The term of this Lease will be that period from the earlier of
(i) the date Tenant commences conduct of its business on the Premises after the
completion of Tenant Improvements or (ii) April 1, 1999, through April 1, 2009,
subject to earlier termination of this Lease or extension of the term as
provided herein.
4. CONSTRUCTION AND POSSESSION.
4.1 Landlord shall construct the Site Improvements and Building
Shell in accordance with the Site Plan and Building Shell Plans at Landlord's
expense, including but not limited to all construction necessary to allow the
issuance of a certificate of occupancy upon completion of the Tenant
Improvements.
4.2 Tenant shall construct the Tenant Improvements in accordance
with the Tenant Improvements Plans at Tenant's expense, including the expense of
design, permitting and construction, subject to Landlord providing the Tenant
Improvement Allowance described in Section 4.3 below. In that part of the
Premises to be left in "shell" condition pursuant to the Tenant Improvement
Plans, which shall consist of no more than 7,000 square feet of Rentable Area,
Tenant shall install at a minimum the mechanical equipment for the anticipated
future load capacity of the space (but not the duct work and distribution
system), a fully operational fire sprinkler system, a demising wall to separate
the "shell" space from the balance of the Premises, and lighting, exiting and
other improvements required by applicable law for health and safety reasons. The
Tenant Improvement Plans, and any revisions and supplements thereto, shall be
subject to the approval of Landlord, which approval shall not be unreasonably
withheld or delayed. In the event of any unresolved dispute between Landlord and
Tenant regarding approval of the Tenant Improvement Plans, the dispute shall be
promptly resolved by binding arbitration under the Commercial Rules of the
American Arbitration Association. Tenant shall obtain and provide to Landlord a
certificate of occupancy upon completion of the Tenant Improvements.
- 3 -
<PAGE> 6
4.3 Landlord shall contribute for the cost of Tenant Improvements
the amount of $1,465,000. By written notice given to Landlord prior to February
28, 1999, Tenant may require Landlord to contribute for the cost of Tenant
Improvements up to an additional $65.00 per square foot to fully improve some or
all of the no more than 7,000 square feet left in "shell" condition, in which
event the monthly installment of Basic Annual Rent will be increased by the
following formula: Divide the amount of Landlord's additional contribution by
the amount of additional space so improved, and multiply the quotient by $0.0127
divided by the ratio of the additional improved space to the total 24,000 square
feet of the Premises, rounded up to the nearest 1/10th of one percent. By way of
example, if Landlord contributes an additional $130,000 to improve 2,000 square
feet of the 7,000 square feet left in "shell" space, the Basic Annual Rent will
be increased an additional $0.069 per square foot per month, from $1.638 to
$1.707 per square foot, calculated as follows: ($130,000/2,000) x $0.0127 =
$0.8255, $0.8255 / (2,000/24,000) = $0.069. In addition, if the no more than
7,000 square feet left in "shell" condition are improved with Tenant
Improvements costing at least $15.00 per square foot, and the balance of the
Premises are improved with Tenant Improvements costing at least $80.00 per
square foot, Tenant may require Landlord, by written notice given to Landlord
prior to February 28, 1999, to contribute up to an additional $5.00 per square
foot for the fully-improved space, in which event the monthly installment of
Basic Annual Rent shall be increased in the ratio of $.01 per square foot for
every $24,000 so contributed by Landlord. Should Tenant use less than the
initial $1,465,000 Landlord is obligated to contribute for Tenant Improvements,
the monthly installment of Basic Annual Rent shall be reduced in the ratio of
$0.0123 per square foot for each $24,000 not contributed by Landlord, but to no
less than $1.534 per square foot. By way of example, if Landlord contributes
only $1,400,000, the monthly installment of Basic Annual Rent would be reduced
$0.033 per square foot, from $1.638 to $1.605 per square foot, calculated as
follows: $65,000/24,000 x $0.0123 = $0.033. The cost of Tenant Improvements in
excess of the costs to be borne by Landlord as set forth herein shall be paid by
Tenant (except that Tenant shall be required to pay for only Tenant's half of
any demising walls separating the Premises from space occupied by another tenant
in the Building). The entire amount to be contributed by Landlord for the cost
of Tenant Improvements under this Section 4.1 shall hereinafter be called the
"Tenant Improvement Allowance". The Tenant Improvement Allowance shall be
disbursed by Landlord as work progresses pursuant to the requirements of its
construction lender as set forth in Exhibit "H", concurrently with Tenant's
progress payments of its pro rata share of the Tenant Improvement budget
attached as Exhibit "E".
4.4 Landlord shall tender possession of the Premises to Tenant for
construction of the Tenant Improvements, and for occupancy by Tenant thereafter,
promptly upon execution of this Lease. Tenant agrees that in the event
possession of the Premises is not promptly tendered to Tenant, this Lease shall
not be void or voidable and Landlord shall not be liable to Tenant for any loss
or damage resulting therefrom. However, if possession of the Premises is not
tendered to Tenant by December 1, 1998, the Term Commencement Date set forth in
Section 2.1.7(a) shall be postponed one day for each day of such delay after
December 1, 1998. Without limiting the generality of the foregoing, Tenant
expressly waives any right to terminate this Lease because of delays in
completion of construction of the Premises.
- 4 -
<PAGE> 7
4.5 Tenant understands that the Site Improvements and Building
Shell will not be complete at the time possession of the Premises is tendered to
Tenant for construction of the Tenant Improvements, but will be in a condition
such that construction of the Tenant Improvements can commence. Landlord shall
complete construction of the Site Improvements and Building Shell no later than
the date Tenant completes construction of the Tenant Improvements. In the event
that the Site Improvements and Building Shell are not completed by the date
Tenant completes the Tenant Improvements, neither the term of this Lease nor
Tenant's obligation to pay Rent shall commence until the date a certificate of
occupancy for the Premises would have been issued but for such delay. If the
delay persists for more than four (4) months after the completion of the Tenant
Improvements, Tenant at its election may terminate this Lease.
4.6 Landlord and Tenant shall diligently and in good faith
cooperate with one another, and shall cause their architects and contractors to
cooperate with one another, to insure timely and cost effective design,
permitting and construction of the Project Work.
5. RENT.
5.1 Tenant agrees to pay Landlord as Basic Annual Rent for the
Premises the sum set forth in Section 2.1.4, subject to adjustment as set forth
in Section 6.1. Basic Annual Rent shall be paid in the equal monthly
installments set forth in Section 2.1.5, subject to adjustment as set forth in
Sections 4.3, 6.1 and 8.1, each in advance on the first day of each and every
calendar month during the term of this Lease.
5.2 In addition to Basic Annual Rent, Tenant agrees to pay to
Landlord as additional rent ("Additional Rent"), at the times hereinafter
specified in this Lease (i) Tenant's Pro Rata Share (as defined in Section
7.3(a) and as set forth in Section 2.1.6, subject to adjustment pursuant to
Section 8.3) of Operating Expenses as provided in Section 7 and (ii) all other
amounts that Tenant assumes or agrees to pay under the provisions of this Lease,
including but not limited to any and all other sums that may become due by
reason of any default of Tenant or failure on Tenant's part to comply with the
agreements, terms, covenants and conditions of this Lease to be performed by
Tenant.
5.3 Basic Annual Rent and Additional Rent shall together be
denominated "Rent." Except as expressly set forth in this Lease, Rent shall be
paid to Landlord, without notice, demand, abatement, suspension, deduction,
setoff, counterclaim, or defense, in lawful money of the United States of
America, at the office of Landlord as set forth in Section 2.1.10 or to such
other person or at such other place as Landlord may from time to time designate
in writing.
5.4 In the event the term of this Lease commences or ends on a day
other than the first day of a calendar month, then the Rent for such fraction of
a month shall be prorated for such period on the basis of a thirty (30) day
month and shall be paid at the then current rate for such fractional month prior
to the commencement of the partial month.
6. RENTAL ADJUSTMENTS.
6.1 The Basic Annual Rent then in effect (and as previously
increased pursuant to this Section 6.1) shall be increased each year by three
percent (3%) on each annual anniversary of the Term Commencement Date for so
long as this Lease continues in effect.
7. OPERATING EXPENSES.
7.1 As used herein, the term "Operating Expenses" shall include:
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(a) Government impositions including, without limitation, real
and personal property taxes and assessments (but excluding personal property
taxes and assessments of other tenants of the Project) levied upon the Project
or any part thereof; amounts due under any improvement bond upon the Project and
assessments levied in lieu thereof (except to the extent they represent costs
related to the construction of the Project); any tax on or measured by gross
rentals received from the rental of space in the Project or tax based on the
square footage of the buildings in the Project to the extent such tax is in lieu
of or in the nature of a property tax; and any utilities surcharges or any other
costs levied, assessed or imposed by, or at the direction of, or resulting from
statutes or regulations, or interpretations thereof promulgated by, any federal,
state, regional, municipal or local government authority in connection with the
use or occupancy of the Building or Project, and any expenses, including the
cost of attorneys or experts, reasonably incurred by Landlord in seeking
reduction by the taxing authority of the applicable taxes not to exceed the
amount of any such reduction, less tax refunds obtained as a result of an
application for review thereof.
(b) Except as set forth in Section 7.2 below, all other costs
paid or incurred by Landlord which, in accordance with accepted principles of
sound accounting practice as applied to the operation and maintenance of first
class buildings, are properly chargeable to the maintenance and operation of the
Project including, by way of examples and not as a limitation upon the
generality of the foregoing, costs of (i) maintenance, repairs and replacements
to improvements within the Project as appropriate to maintain the Project in
first class condition; (ii) utilities furnished to the Project (except those
utilities which are separately metered and paid by individual tenants); (iii)
sewer fees; (iv) trash collection; (v) cleaning (including windows); (vi)
maintenance of landscape and grounds; (vii) maintenance of drives and parking
areas, including periodic resurfacing; (viii) reasonable and customary security
services; (ix) maintenance, repair, and replacement of reasonable and customary
security devices; (x) building supplies; (xi) maintenance, repair, and
replacement of equipment utilized for operation and maintenance of the Project;
(xii) costs of maintenance, repairs and replacements of mechanical, plumbing,
electrical and other systems which are part of the Building Shell; (xiii)
insurance premiums; (xiv) portions of insured losses attributable to Tenant
Improvements deductible by reason of insurance policy terms; (xv) service
contracts for work of a nature before referenced; (xvi) costs of services of
independent contractors retained to do work of nature before referenced at
reasonable and customary rates; (xvii) costs of compensation (including
employment taxes and fringe benefits) of all persons who perform regular and
recurring duties connected with the day-to-day operation and maintenance of the
Project at reasonable and customary rates; and (xviii) reasonable costs of
management services equal to three percent (3.0%) of the Basic Annual Rent.
7.2 Notwithstanding the foregoing, Tenant shall not be
responsible for the payment of the following costs and expenses:
(a) costs incurred for the initial construction of the Project,
except for the costs of the Tenant Improvements in excess of Landlord's
contributions pursuant to Section 4.3;
(b) costs incurred for the repair, maintenance or replacement of
the structural components of the footings, foundation, ground floor slab, and
load bearing walls of the buildings in the Project (but excluding painting and
ordinary maintenance and repair of exterior surfaces, which are Operating
Expenses under Section 7.1(b));
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(c) costs of a capital nature, as defined by generally accepted
accounting principles, incurred for the replacement of all other components of
the Site Improvements and Building Shell, except to the extent caused by
Tenant's negligence;
(d) costs incurred to correct any defects in design, materials
or construction of the Project other than the Tenant Improvements;
(e) costs, expenses and penalties (including without limitation
attorneys fees) incurred as a result of the use, storage, removal or remediation
of any toxic or hazardous substances or other environmental contamination not
caused by Tenant or its employees, contractors, agents, representatives, or
invitees;
(f) rentals and other payments by Landlord under any ground
lease or other lease underlying the Lease, and interest, principal, points and
other fees on debt or amortization of any debt secured in whole or part by all
or any portion of the Project (provided that interest upon a government
assessment or improvement bond payable in installments is an Operating Expense
under Section 7.1(a));
(g) costs incurred in connection with the financing, sale or
acquisition of the Project or any portion thereof;
(h) costs, expenses, and penalties (including without limitation
attorneys' fees) incurred due to the violation by Landlord of any underlying
deed of trust, mortgage or ground lease affecting the Project or any portion
thereof;
(i) depreciation and amortization of any type (provided this
exclusion is not intended to delete from Operating Expenses actual costs of
maintenance, repairs and replacements which are otherwise included within
Operating Expenses);
(j) any costs incurred as a result of Landlord's violation of
any statute, ordinance or other source of applicable law, or breach of contract
or tort liability to any other party, including without limitation, any
unrelated third party, or Landlord's employees, contractors, agents or
representatives;
(k) costs incurred in leasing or procuring tenants (including,
without limitation, lease commissions, advertising expenses, attorneys' fees and
expenses of renovating space for tenants);
(l) advertising, marketing, media and promotional expenditures
regarding the Project and costs of signs identifying the owner, lender or any
contractor thereof;
(m) any fees or salaries of the principals of Landlord;
(n) any rentals and related expenses incurred in leasing
equipment which may be classified as capital expenditures under generally
accepted accounting principles;
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(o) any net income, franchise, capital stock, estate or
inheritance taxes or taxes which are the personal obligation of Landlord or of
another tenant of the Project;
(p) expenses which relate to preparation of rental space for a
tenant;
(q) legal expenses arising out of the initial construction of
the Project or any tenant improvements or for the enforcement of the provisions
of any tenant leases other than this Lease;
(r) the cost of any work or service performed for or facilities
furnished to a tenant at such tenant's cost;
(s) any interest or penalties imposed upon Landlord by any
taxing authority for late payment or otherwise; and
(t) any other expense otherwise chargeable as part of the cost
of operation and maintenance but which is not of general benefit to the Project
but is primarily for the benefit of one or more specific tenants.
7.3 Tenant shall pay to Landlord on the first day of each calendar
month of the term of this lease, as Additional Rent, Landlord's good faith
estimate of Tenant's Pro Rata Share (as set forth in 2.1.6) of Operating
Expenses with respect to the Project for such month.
(a) "Tenant's Pro Rata Share" under this Lease shall mean 29.2%,
determined by dividing the Rentable Area of the Premises by the total Rentable
Area of the Project. In the event that Landlord divides the Project into more
than one lot, "Tenant's Pro Rata Share" shall be adjusted so that Tenant shall
pay its fair share, and no more than its fair share, of Operating Expenses for
Building One and the lot on which Building One is located, and for any Common
Areas located on another lot which are shared by the occupants of Building One.
(b) Within sixth (60) days after the conclusion of each calendar
year, Landlord shall furnish to Tenant a statement (the "Annual Operating
Expense Statement") showing in reasonable detail the actual Operating Expenses
and Tenant's Pro Rata Share of Operating Expenses for the previous calendar
year. Any additional sum due from Tenant to Landlord shall be due and payable
within thirty (30) days of Tenant's receipt of such statement. If the amounts
paid by Tenant pursuant to this Section 7.3 exceed Tenant's Pro Rata Share of
Operating Expenses for the previous calendar year, the difference shall be
credited by Landlord against the Rent next due and owing from Tenant; provided
that, if the Lease term has expired, Landlord shall accompany said statement
with payment for the amount of such difference.
(c) Any amount due under this Section 7.3 for any period which
is less than a full month shall be prorated for such fractional month.
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(d) Notwithstanding this Section 7.3, Operating Expenses which
can fairly and reasonably be allocated to one or more tenants of the Project
shall be so allocated, and shall be separately scheduled on the Annual Operating
Expense Statement.
7.4 Tenant shall have the right, at Tenant's expense, upon
reasonable notice during reasonable business hours, to inspect that portion of
Landlord's books which are relevant to preparation of the Annual Operating
Expense Statement provided any request for such review shall be furnished within
one hundred eight (180) days after Tenant's receipt of such statement as to a
prior year's Operating Expenses.
7.5 Operating Expenses for the calendar year in which Tenant's
obligation to pay them commences and in the calendar year in which such
obligation ceases shall be prorated. Expenses such as taxes, assessments and
insurance premiums which are incurred for an extended time period shall be
prorated based upon time periods to which applicable so that the amounts
attributed to the Premises relate in a reasonable manner to the time period
wherein Tenant has an obligation to pay Operating Expenses.
8. RENTABLE AREA.
8.1 The Rentable Area of the Project is determined by making
separate calculations of the Rentable Area of each floor of both buildings and
totalling the Rentable Area of all floors within the buildings. The Rentable
Area of a floor is calculated by measuring to the outside finished surface of
each permanent outer building wall where it intersects the floor, or where it
would have intersected the floor except for recessed entryways, windows and the
like (also known as the "drip line", measured from where the outside finished
surface of the second floor wall intersects the roof). The full area calculated
as set forth above is included as Rentable Area of the Project without deduction
for (i) columns or projections, (ii) vertical penetrations including stairs,
elevator shafts, flues, pipe shafts, vertical ducts, and the like, and their
enclosing walls, (iii) corridors, equipment rooms, rest rooms, entrance ways,
elevator lobbies, and the like, and their enclosing walls, and (iv) any other
unusable area of any nature.
8.2 The term "Rentable Area" when applied to Tenant is the
approximate area to be occupied by Tenant plus an equitable allocation of
Rentable Area within the Project which is not then utilized or expected to be
utilized by Tenant or other tenants of the Project, including but not limited to
the portions of the buildings devoted to corridors, equipment rooms, rest rooms,
elevator lobbies and mailrooms. In making such allocations, consideration will
be given to tenants benefited by space allocated such that areas which primarily
serve tenants of only one floor, such as corridors and rest rooms upon such
floor, shall be allocated to that tenant's Rentable area. If the Premises are
separated from space occupied by another tenant, the Rentable Area shall be
measured to the center of any interior demising walls.
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8.3 The Rentable Area as set forth in Section 2.1.3 is an estimate
of the area which constitutes the Rentable Area of the Premises, which, at the
request of either Landlord or Tenant made within ninety (90) days after the Term
Commencement Date, shall be adjusted in accordance with measurement and
certification of the Project architect. If the Rentable Area as determined
hereunder is more or less than the Rentable Area set forth in Section 2.1.3,
Basic Annual Rent and the monthly installments of Basic Annual Rent shall be
adjusted upward or downward, as the case may be, based on the actual Rentable
Area of the Premises. Rentable Area as adjusted shall also be utilized for
computation of Tenant's Pro Rata Share of Operating Expenses among tenants of
the Project.
9. SECURITY DEPOSIT.
9.1 Within thirty (30) days after the execution of this Lease,
Tenant shall deposit with Landlord an irrevocable stand-by letter of credit
("Letter of Credit"), or grant to Landlord a security interest in a certificate
of deposit ("Certificate of Deposit"), in favor of Landlord in the principal
amount of $471,744 in a form reasonably acceptable to Landlord, to be held by
Landlord as security for the faithful performance by Tenant of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term and any extension term hereof. If Tenant defaults with respect
to any provision of this Lease, including but not limited to any provision
relating to the payment of Rent, and subject to any notice requirements and cure
periods for Tenant's benefit set forth in Article 24, Landlord may (but shall
not be required to) draw from the Letter of Credit the amount required to cure
the default, or foreclose on and take possession of the Certificate of Deposit,
and to use, apply or retain the proceeds thereof for the payment of any Rent or
any other sum in default, or to compensate Landlord for any other loss or damage
which Landlord may suffer by reason of Tenant's default.
9.2 The amount of the Letter of Credit or Certificate of Deposit
shall be reduced to $117,938 during any period Tenant has achieved a Standard &
Poor's investment-grade rating of BBB or better, or during any period Tenant's
obligations under this Lease are guaranteed by a parent or affiliate of Tenant
with such an investment grade, the form and substance of any such guaranty to be
reasonably satisfactory to Landlord. Tenant shall replenish the Letter of Credit
or Certificate of Deposit to the full amount of $471,744 during any period the
Standard & Poor's investment-grade rating of Tenant or the guarantor falls below
BBB.
9.3 At the commencement of the sixth year of the term, if the amount
of the Letter of Credit or Certificate of Deposit is not then reduced pursuant
to Section 9.2, the amount shall be reduced to $353,808, on the conditions that
(i) Tenant has not been in default under Section 24.4(a) on more than three (3)
separate occasions for failure to make a payment of Rent, and (ii) Tenant then
has cash on hand, including cash equivalents and marketable securities, in an
amount in excess of Tenant's net loss, as determined under generally accepted
accounting principles, for the combined two (2) most recent calendar years.
9.4 At the commencement of the ninth year of the term, if the amount
of the Letter of Credit or Certificate of Deposit is not then reduced pursuant
to Section 9.2, the amount shall be reduced to $235,872.
9.5 Tenant shall be responsible for any expenses in obtaining and
maintaining the Letter of Credit or Certificate of Deposit. All interest earned
on any Certificate of Deposit shall belong to Tenant.
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9.6 The Letter of Credit, and any replacement Letter of Credit,
shall be issued by a financial institution reasonably acceptable to Landlord,
with an office in San Diego County authorized to disburse funds upon a draw
request. Should the institution be placed in conservatorship or receivership by
the Federal Deposit Insurance Corporation or any other state of federal
regulatory agency, Tenant shall, within thirty (30) days after written request
by Landlord, provide a replacement Letter of Credit from a financial institution
reasonably acceptable to Landlord, and in the event Tenant fails to do so,
Landlord may draw on the Letter of Credit and use the proceeds thereof as a
security deposit in accordance with the provisions of Section 9.1.
9.7 The Letter of Credit shall provide (i) that the issuer of the
Letter of Credit shall pay to Landlord the amount in default immediately upon
presentation in San Diego County of a sight draft by Landlord accompanied by a
certified statement signed by an officer of the manager of Landlord (or, if any
successor Landlord is a corporation or a partnership, by any officer of the
corporation or general partner of the partnership, as the case may be) stating
that a default has occurred under the Lease as a result of which Landlord is
entitled to collect the amount specified in the site draft in order to cure the
default, and (ii) that the issuer shall have no obligation to confirm that a
default has occurred, or the amount which Landlord is entitled to draw, or that
notice of the default has been given to Tenant.
9.8 The initial Letter of Credit shall be for a period of not less
than one (1) year, and any replacement Letter of Credit shall be for a period of
not less than one (1) year. The initial Letter of Credit (or any later
replacement Letter of Credit) shall be replaced by Tenant by delivering to
Landlord a replacement Letter of Credit at least thirty (30) days prior to the
expiration of the then current Letter of Credit. If Tenant fails to deliver a
replacement Letter of Credit at least thirty (30) days prior to the expiration
of the then current Letter of Credit, Landlord shall have the right to draw the
total amount of the then current Letter of Credit and hold the proceeds thereof
as a security deposit pursuant to the provisions of Section 9.1. The Letter of
Credit shall be successively renewed or replaced until that date which is
forty-five (45) days after the expiration of the initial or any extended term of
this Lease.
9.9 In the event of a partial draw on the Letter of Credit, or the
use of any proceeds of the Certificate of Deposit, Tenant shall immediately
replenish the Letter of Credit or substitute a new Letter of Credit, or
replenish the Certificate of Deposit, to the full amount set forth above.
9.10 Any Letter of Credit or security interest in a Certificate of
Deposit shall be transferable by Landlord to a successor Landlord or mortgagee
or beneficiary of a deed of trust encumbering the Premises, or, in the case of a
Letter of Credit, a substitute Letter of Credit shall be issued to any such
entity at the request of Landlord; provided, however, that Landlord shall pay
any expenses incurred by Tenant on account of any such transfer or issuance.
9.11 In the event of bankruptcy or other debtor/creditor proceedings
against Tenant, the proceeds of the Letter of Credit or Certificate of Deposit
shall be deemed to be applied first to the payment of Rent and other charges due
Landlord for all periods prior to the filing of such proceedings.
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9.12 Landlord shall deliver the Letter of Credit or security
interest in the Certificate of Deposit, and any proceeds thereof, to any
purchaser of Landlord's interest in the Premises, and thereupon Landlord shall
be discharged from any further liability with respect thereto provided that such
purchaser has agreed to assume in writing the obligations of Landlord hereunder.
This provision shall also apply to any subsequent transfers.
9.13 The Letter of Credit or Certificate of Deposit, and any
proceeds thereof, shall be returned to Tenant within thirty (30) days following
the expiration of this Lease, except for amounts which are needed by Landlord to
cure any default by Tenant.
10. USE.
10.1 Tenant may use the Premises for any use permitted by (i) the
MIB Zone, (ii) any other applicable laws, regulations, ordinances, requirements,
permits and approvals applicable to the Premises, and (iii) all covenants,
conditions and restrictions recorded against the property, and shall not use the
Premises, or permit or suffer the Premises to be used for any other purpose
without the prior written consent of Landlord.
10.2 Tenant shall conduct its business operations and use the
Premises in compliance with all federal, state, and local laws, regulations,
ordinances, requirements, permits and approvals applicable to the Premises.
Tenant shall not use or occupy the Premises in violation of any law or
regulation or the certificate of occupancy issued for the Building, and shall,
upon five (5) days' written notice from Landlord, discontinue any use of the
Premises which is declared by any governmental authority having jurisdiction to
be a violation of law or the certificate of occupancy. Tenant shall comply with
any direction of any governmental authority having jurisdiction which shall, by
reason of the nature of Tenant's use or occupancy of the Premises, impose any
duty upon Tenant or Landlord with respect to the Premises or with respect to the
use or occupation thereof, including any duty to make structural or capital
improvements, alterations, repairs and replacements to the Premises; provided,
however, if the costs thereof exceed an amount equal to six (6) monthly
installments of the Basic Annual Rent then payable, Tenant may elect to
terminate the Lease if Landlord, after notice from Tenant, declines to pay such
excess.
10.3 Tenant shall not do or permit to be done anything which will
invalidate or increase the cost (unless Tenant agrees to pay such increased
cost) of any fire, extended coverage or any other insurance policy covering the
Premises, or which will make such insurance coverage unavailable on commercially
reasonable terms and conditions, and shall comply with all rules, orders,
regulations and requirements of the insurers of the Premises.
10.4 Subject to the warranty of Landlord in Section 14.3, Tenant
shall comply with the Americans with Disabilities Act of 1990 ("ADA"), and the
regulations promulgated thereunder, as amended from time to time. All
responsibility for compliance with the ADA relating to the Premises and the
activities conducted by Tenant within the Premises shall be exclusively that of
Tenant and not of Landlord, including any duty to make structural or capital
improvements, alterations, repairs and replacements to the Premises. Any
alterations to the Premises made by Tenant for the purpose of complying with the
ADA or which otherwise require compliance with the ADA shall be done in
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accordance with Article 17; provided, that Landlord's consent to such
alterations shall not constitute either Landlord's assumption, in whole or in
part, of Tenant's responsibility for compliance with the ADA, or representation
or confirmation by Landlord that such alterations comply with the provisions of
the ADA. However, nothing in this Lease shall be construed to require Tenant to
make structural or capital improvements, alterations, repairs or replacements to
comply with ADA unless and until required to do so by order of any government
entity or court of law exercising proper jurisdiction with regard thereto,
subject to any right to appeal or otherwise contest any such order. Furthermore,
Landlord shall be responsible for compliance with ADA to the extent of a
violation of Landlord's warranty in Section 14.3.
10.5 Tenant may install signage on and about the Premises to the
extent permitted by, and in conformity with, applicable provisions of the City
of San Diego Sign Ordinance, and to the extent approved by Landlord. Tenant
acknowledged that it understands that other tenants will occupy space in the
Project, and that the maximum allowable signage is to be shared among all of the
tenants on a fair and reasonable basis. Tenant further acknowledges it is
familiar with the restrictions of the City of San Diego Sign Ordinance, and is
not relying on any representations or warranty of Landlord regarding the number,
size or location of any signage. The expense of design, permits, purchase and
installation of any signs shall be the responsibility of Tenant and the cost
thereof shall be borne by Tenant. At the termination of the Lease, all signs
shall be the property of Tenant and may be removed from the Premises by Tenant,
subject to the provisions of Article 36. Any relocation of Tenant's signage
required by Landlord's division of the Project into more than one lot shall be
with the consent of Tenant and at Landlord's consent.
10.6 No equipment shall be placed at a location within the Building
other than a location designed to carry the load of the equipment. Equipment
weighing in excess of floor loading capacity shall not be placed in the
Building.
10.7 Tenant shall not use or allow the Premises to be used for any
unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance or
waste in, on, or about the Premises.
11. BROKERS.
11.1 Landlord and Tenant represent and warrant one to the other
that there have been no dealings with any real estate broker or agent in
connection with the negotiation of this Lease other than CB Richard Ellis, whose
commission shall be paid by Landlord. Each shall indemnify, defend, protect, and
hold harmless the other from any claim of any other broker as a result of any
act or agreement of the indemnitor.
11.2 Tenant represents and warrants that no broker or agent has
made any representation or warranty relied upon by Tenant in Tenant's decision
to enter into this Lease other than as contained in this Lease.
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12. HOLDING OVER.
12.1 If, with Landlord's consent, Tenant holds possession of all or
any part of the Premises after the expiration or earlier termination of this
Lease, Tenant shall become a tenant from month to month upon the date of such
expiration or earlier termination, and in such case Tenant shall continue to pay
in accordance with Article 5 the Basic Annual Rent as adjusted from the Term
Commencement Date in accordance with Article 6, together with Operating Expenses
in accordance with Article 7 and other Additional Rent as may be payable by
Tenant, and such month-to-month tenancy shall be subject to every other term,
covenant and condition contained herein.
12.2 If Tenant remains in possession of all or any portion of the
Premises after the expiration or earlier termination of the term hereof without
the express written consent of Landlord, Tenant shall become a tenant at
sufferance upon the terms of this Lease except that monthly rental shall be
equal to one hundred twenty five percent (125%) of the Basic Annual Rent in
effect during the last twelve (12) months of the Lease term.
12.3 Acceptance by Landlord of Rent after such expiration or
earlier termination shall not result in a renewal or reinstatement of this
Lease.
12.4 The foregoing provisions of this Article 12 are in addition to
and do not affect Landlord's right to re-entry or any other rights of Landlord
under Article 24 or elsewhere in this Lease or as otherwise provided by law.
13. TAXES ON TENANT'S PROPERTY
13.1 Tenant shall pay not less than ten (10) days before
delinquency taxes levied against any personal property or trade fixtures placed
by Tenant in or about the Premises. Tenant shall not be responsible for taxes
levied against any personal property or trade fixtures of other tenants.
13.2 If any such taxes on Tenant's personal property or trade
fixtures are levied against Landlord or Landlord's property or, if the assessed
valuation of the Project is increased by the inclusion therein of a value
attributable to Tenant's personal property or trade fixtures, and if Landlord
after written notice to Tenant pays the taxes based upon such increase in the
assessed value, then Tenant shall upon demand repay to Landlord the taxes so
levied against Landlord.
13.3 If any improvements in or alterations to the Premises, whether
owned by Landlord or Tenant and whether or not affixed to the real property so
as to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which improvements in other spaces in the
Project are assessed, then the real property taxes and assessments levied
against Landlord or the Project by reason of such excess assessed valuation
shall be deemed to be taxes levied against personal property to Tenant and shall
be governed by the provisions of Section 13.2 above. Any such excess assessed
valuation due to improvements in or alterations to space in the Project leased
by other tenants of Landlord shall not be included in the Operating Expenses
defined in Section 7, but shall be treated, as to such other tenants, as
provided in this Section 13.3, and shall be allocated to such other tenants. If
the records of the County assessor are available and sufficiently detailed to
serve as a basis for determining whether said Tenant improvements or alterations
are assessed at a higher valuation than improvements in other spaces in the
Project, such records shall be binding on both Landlord and Tenant.
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13.4 To the extent Tenant fails to make any payment required by
this Article 13 and Landlord does so on Tenant's behalf, Tenant shall reimburse
Landlord for the cost thereof pursuant to the provisions of Sections 7.1 and
24.3.
14. CONDITION OF PREMISES.
14.1 Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty, express or implied, with
respect to the condition of the Premises, or to the Project, except as set forth
herein, or with respect to their suitability for the conduct of Tenant's
business.
14.2 Landlord warrants to Tenant that the Project (other than the
Tenant Improvements, which are the responsibility of Tenant), will be built in a
good and workmanlike manner and in substantial compliance with the project plans
and all applicable building code requirements, laws, rules, orders, ordinances,
directions, regulations, permits, approvals, and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction, and with the rules, orders, directions, regulations, and
requirements of any applicable fire rating bureau, and will be free of patent
and latent defects in design, materials and construction.
14.3 Landlord warrants to Tenant that the Project (other than the
Tenant Improvements, which are the responsibility of Tenant) will be in
compliance with ADA, and the regulations promulgated thereunder, at such time as
the Site Improvements and Building Shell are completed.
15. COMMON AREAS AND PARKING FACILITIES.
15.1 Tenant shall have the nonexclusive right, in common with
others, to use the Common Areas, subject to the rules and regulations adopted by
Landlord and attached hereto as Exhibit "F" together with such other reasonable
and nondiscriminatory rules and regulations as are hereafter promulgated by
Landlord (the "Rules and Regulations").
15.2 Tenant shall not place any equipment, storage containers or
any other property on the surface parking area or otherwise outside of the
Premises without the consent of Landlord. In the event Tenant elects to locate
Hazardous Material storage facilities, water systems, mechanical equipment,
emergency generators, or other Tenant Improvements in the parking area, the
space used for such facilities shall be deducted from Tenant's Pro Rata Share of
parking described below.
15.3 As an appurtenance to the Premises, Tenant, and its employees
and invitees, shall be entitled to use a Pro Rata Share of the available
parking, which is approximately four (4) spaces per 1,000 square feet of
Rentable Area. Tenant shall be assigned ten (10) "reserved" parking spaces near
the entrance to Building One at locations mutually approved by Landlord and
Tenant, which spaces shall be included within Tenant's Pro Rata Share of
parking.
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16. UTILITIES AND SERVICES.
16.1 Tenant shall pay for all water, gas, electricity, telephone,
cable television, and other utilities which may be furnished to the Premises
during the term of this Lease, together with any taxes thereon. If any such
utility is not separately metered to Tenant, Tenant shall pay a reasonable
proportion to be determined by Landlord of all charges jointly metered with
tenants of other premises as part of its share of Operating Expenses. Utilities
and services provided to the Premises which are separately metered shall be paid
by Tenant directly to the supplier of such utility or service, and Tenant shall
pay for such utilities and services prior to delinquency during the term of this
Lease.
16.2 Landlord shall not be liable for, nor shall any eviction of
Tenant result from, any failure of any such utility or service, and in the event
of such failure Tenant shall not be entitled to any abatement or reduction of
Rent, nor be relieved from the operation of any covenant or agreement of this
Lease, and Tenant waives any right to terminate this Lease on account thereof.
However, notwithstanding the foregoing, in the event any such failure persists
for more than twelve (12) months, Tenant at its election may terminate this
Lease.
16.3 Tenant shall provide and pay for janitors, maintenance
personnel, and other persons who perform duties connected with the operation and
maintenance of the interior of the Premises.
17. ALTERATIONS.
17.1 Tenant shall make no alterations, additions or improvements
(hereinafter in this section, "improvements") in or to the Premises, except for
non-structural improvements costing less than $50,000, without Landlord's prior
written consent, which shall not be unreasonably withheld. Tenant shall deliver
to Landlord final plans and specifications and working drawings for the
improvements to Landlord, and Landlord shall have ten (10) days thereafter to
grant or withhold its consent. If Landlord does not notify Tenant of its
decision within the ten (10) days, Landlord shall be deemed to have given its
approval.
17.2 If a permit is required to construct the improvements, Tenant
shall deliver a completed, signed-off inspection card to Landlord within ten
(10) days of completion of the improvements, and shall promptly thereafter
obtain and record a notice of completion and deliver a copy thereof to Landlord.
17.3 The improvements shall be constructed only by licensed
contractors. All contractors, except those constructing non-structural
improvements costing less than $50,000, shall be approved by Landlord, which
approval shall not be unreasonably withheld. Any such contractor must have in
force a general liability insurance policy of not less than $2,000,000 or such
higher limits as Landlord may reasonably require, which policy of insurance
shall name Landlord as an additional insured. Tenant shall provide Landlord with
a copy of the contract with the contractor prior to the commencement of
construction.
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17.4 Tenant agrees that any work by Tenant shall be accomplished in
such a manner as to permit any fire sprinkler system and fire water supply lines
to remain fully operable at all times except when minimally necessary for
building reconfiguration work.
17.5 Tenant covenants and agrees that all work done by Tenant shall
be performed in full compliance with all laws, rules, orders, ordinances,
directions, regulations, permits, approvals, and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction, and in full compliance with the rules, orders, directions,
regulations, and requirements of any applicable fire rating bureau. Tenant shall
provide Landlord with "as-built" plans showing any change in the Premises within
thirty (30) days after completion.
17.6 Before commencing any work (other than interior non-structural
alterations, additions or improvements), Tenant shall give Landlord at least
five (5) days' prior written notice of the proposed commencement of such work
and, for any such work which exceeds $25,000.00 in cost, if required by
Landlord, secure at Tenant's own cost and expenses a completion and lien
indemnity bond approved by Landlord, which approval will not be unreasonably
withheld.
18. REPAIRS AND MAINTENANCE.
18.1 Landlord shall repair and maintain the structural and exterior
portions and Common Areas of the Building and Project, including foundations,
exterior walls, load bearing walls, windows, plate glass, roofing, and roofing
covering materials, and plumbing, fire sprinkler system, heating, ventilating,
air conditioning, elevator, and electrical systems installed or furnished by
Landlord (and not part of the Tenant Improvements), subject to reimbursement by
Tenant as its Pro Rata Share of Operating Expenses to the extent provided by
Section 7. However, if such maintenance or repairs are required because of any
act, neglect, fault of or omissions of any duty by Tenant, its agents, servants,
employees or invitees, Tenant shall pay to Landlord the costs of such
maintenance and repairs attributable to Tenant's act, neglect, fault or
omission.
18.2 Except as otherwise set forth in Section 18.1, Tenant shall,
throughout the term of this Lease, at Tenant's sole cost and expense keep the
Premises and every part thereof in good condition and repair, including
plumbing, fire sprinkler, heating, ventilating, air conditioning, elevator, and
electrical systems installed as part of the Tenant Improvements, except for
damage thereto from causes beyond the reasonable control of Tenant and ordinary
wear and tear. Tenant shall upon the expiration or earlier termination of the
term hereof surrender the Premises to Landlord in the same condition as when
received, ordinary wear and tear and damage from causes beyond the reasonable
control of Tenant excepted. Notwithstanding the foregoing, Tenant may elect not
to replace major components of the heating, ventilating, and air conditioning
system installed as part of the Tenant Improvements which fail after the first
eight (8) years of the term, except to the extent required by applicable law for
health and safety reasons; however, Landlord shall not be required to replace
such major components either, and there shall be no abatement or reduction of
Rent, nor shall Tenant be relieved from the operation of any covenant or
agreement of this Lease, in the event such components are not replaced. In the
event Tenant elects to replace such major components, Tenant may remove the
components at the termination of the Lease, subject to the provisions of Section
30.3. Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof.
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18.3 Tenant hereby waives Civil Code Sections 1941 and 1942
relating to a landlord's duty to maintain the Premises in a tenantable
condition, and the under said sections or under any law, statute or ordinance
now or hereafter in effect to make repairs at Landlord's expense.
18.4 There shall be no abatement of Rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the Premises, or in or to improvements, fixtures, equipment and
personal property therein. If repairs or replacements become necessary which by
the terms of this Lease are the responsibility of Tenant and Tenant fails to
make the repairs or replacements, Landlord may do so pursuant to the provisions
of Section 24.3.
19. LIENS.
19.1 Tenant shall keep the Premises, the Building and the property
upon which the Building is situated free from any liens arising out of work
performed, materials furnished or obligations incurred by Tenant. Tenant further
covenants and agrees that any mechanic's lien filed against the Premises for
work claimed to have been done for, or materials claimed to have been furnished
to, Tenant, will be discharged by Tenant, by bond or otherwise, within thirty
(30) days after the filing thereof (or within ten (10) days after the filing
thereof if requested by Landlord as necessary to facilitate a pending sale or
refinancing), at the cost and expense of Tenant.
19.2 Should Tenant fail to discharge any lien of the nature
described in Section 19.1, Landlord may at Landlord's election pay such claim or
post a bond or otherwise provide security to eliminate the lien as a claim
against title and the cost thereof shall be immediately due from Tenant as
Additional Rent.
19.3 In the event Tenant shall lease or finance the acquisition of
office equipment, furnishings, or other personal property utilized by Tenant in
the operation of Tenant's business, Tenant warrants that any Uniform Commercial
Code financing statement executed by Tenant will upon its face or by exhibit
thereto indicate that such financing statement is applicable only to personal
property of Tenant specifically described in the financing statement, and that
such property is subject to the provisions of Section 30 regarding the removal
of property on the expiration or earlier termination of this Lease. In no event
shall the address of the Building be furnished on the financing statement
without qualifying language as to applicability of the lien only to personal
property of Tenant described in the financing statement. Should any holder of a
security agreement executed by Tenant record or place of record a financing
statement which appears to constitute a lien against any interest of Landlord,
Tenant shall within ten (10) days after the filing of such financing statement
cause (i) copies of the security agreement or other documents to which the
financing statement pertains to be furnished to Landlord to facilitate
Landlord's being in a position to show such lien is not applicable to any
interest of Landlord, and (ii) the holder of the security interest to amend
documents of record so as to clarify that such lien is not applicable to any
interest of Landlord in the Premises.
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20. INDEMNIFICATION AND EXCULPATION.
20.1 Except to the extent of the responsibility of Landlord
pursuant to Section 20.2 hereof, Tenant agrees to indemnify Landlord, and its
partners and affiliates, and their respective shareholders, directors, officers,
agents, contractors and employees (collectively, "Landlord's Agents"), against,
and to protect, defend, and save them harmless from, all demands, claims, causes
of action, liabilities, losses and judgments, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), for death of or injury to person or damage to property arising out of (i)
any occurrence in, upon or about the Premises during the term of this Lease,
(ii) Tenant's use, occupancy, repairs, maintenance, and improvements of the
Premises and all improvements, fixtures, equipment and personal property
thereon, and (iii) any act or omission of Tenant, its shareholders, directors,
officers, agents, employees, servants, contractors, invitees and subtenants,
except to the extent caused by the negligence or willful misconduct of Landlord.
Tenant's obligation under this Section 20.1 shall survive the expiration or
earlier termination of the term of this Lease.
20.2 Landlord agrees to indemnify Tenant and Tenant's shareholders,
directors, officers, agents, and employees (collectively "Tenant's Agents")
against and save them harmless from all demands, claims, causes of action and
judgments, and all reasonable expenses incurred in investigating or resisting
the same (including reasonable attorneys' fees), for death of, or injury to, any
person or damage to property arising from or out of any occurrence in, upon, or
about the Premises during the term of this Lease if caused by the negligence or
willful misconduct of Landlord or Landlord's directors, officers, agents,
employees, servants, contractors, invitees and subtenants, unless caused in part
by the negligence or willful misconduct of Tenant or Tenant's Agents. Landlord's
obligations under this Section 20.2 shall survive the expiration or earlier
termination of the term of this Lease.
20.3 Notwithstanding any provision of Sections 20.1 and 20.2 to the
contrary, Landlord shall not be liable to Tenant and Tenant assumes all risk of
damage to any fixtures, goods, inventory, merchandise, equipment, records,
research, experiments, animals and other living organisms, computer hardware and
software, leasehold improvements, and other personal property of any nature
whatsoever, and Landlord shall not be liable for injury to Tenant's business or
any loss of income therefrom relative to such damage, unless caused by
Landlord's or Landlord's Agents' willful misconduct or gross negligence.
20.4 The indemnity obligations of both Landlord and Tenant under
this Section 20 shall be satisfied to the extent of proceeds of applicable
insurance maintained by the indemnifying party to the extent thereof, and
thereafter to proceeds of any applicable insurance maintained by the other
party; Landlord and Tenant shall be required to satisfy any such obligation only
to the extent it is not satisfied by proceeds of applicable insurance as set
forth above.
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20.5 Security devices and services, if any, while intended to deter
crime may not in given instances prevent theft or other criminal acts and it is
agreed that Landlord shall not be liable for injuries or losses caused by
criminal acts of third parties and the risk that any security device or service
may malfunction or otherwise be circumvented by a criminal is assumed by Tenant.
Tenant shall at Tenant's cost obtain insurance coverages to the extent Tenant
desires protection against such criminal acts.
20.6 Landlord shall not be liable for any damages arising from any
act or neglect of any other tenant in the Building or Project.
21. INSURANCE - WAIVER OF SUBROGATION.
21.1 Commencing prior to Tenant's first entry onto the Premises for
purposes of installing any improvements, fixtures or personal property, but no
later than the Term Commencement Date, and continuing at all times during the
term of this Lease, Tenant shall maintain, at Tenant's expense, commercial
general liability insurance, on an occurrence basis, insuring Tenant and
Tenant's agents, employees and independent contractors against all bodily
injury, property damage, personal injury and other covered loss arising out of
the use, occupancy, improvement and maintenance of the Premises and the business
operated by Tenant, or any other occupant, on the Premises. Such insurance shall
have a minimum combined single limit of liability per occurrence of not less
than $1,000,000.00 and a general aggregate limit of $2,000,000.00. Such
insurance shall: (i) name Landlord, and Landlord's lenders if required by such
lenders, and any management company retained to manage the Premises if requested
by Landlord, as additional insureds; (ii) include a broad form contractual
liability endorsement insuring Tenant's indemnity obligations under Section
20.1; (iii) include a products liability coverage endorsement (with limits of
$2,000,000.00 on a "claims made" basis), a boiler and machinery liability
endorsement, and a products completed operations coverage endorsement; (iv)
provide that it is primary coverage and noncontributing with any insurance
maintained by Landlord or Landlord's lenders, which shall be excess insurance
with respect only to losses arising out of Tenant's negligence; and (v) provide
for severability of interests or include a cross-liability endorsement, such
that an act or omission of an insured shall not reduce or avoid coverage of
other insureds.
21.2 At all times during the term of this Lease, Landlord shall
maintain, subject to reimbursement by Tenant as an Operating Expense under
Section 7.1(b), "all risk" insurance, including, but not limited to, coverage
against loss or damage by fire, vandalism, and malicious mischief covering the
Project (exclusive of excavations, foundations and footings), the Tenant
Improvements, and all other improvements and fixtures that may be constructed or
installed on the Premises, in an amount equal to one hundred percent (100%) of
the full replacement value thereof. If any boilers or other pressure vessels or
systems are installed on the Premises, Landlord shall maintain, subject to
reimbursement by Tenant as an Operating Expense under Section 7.1(b), boiler and
machinery insurance in an amount equal to one hundred percent (100%) of the full
replacement value thereof. At all times during the course of any major
demolition or construction permitted hereunder, or any restoration pursuant to
Articles 22 or 23, Tenant shall maintain, at Tenant's expense, "all risk"
builder's risk insurance, including, but not limited to, coverage against loss
of damage by fire, vandalism and malicious mischief, covering improvements in
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place and all material and equipment at the job site furnished under contract,
in an amount equal to one hundred percent (100%) of the full replacement value
thereof. The insurance described in this Section 21.2 shall: (i) insure
Landlord, and Landlord's lenders if required by such lenders, as their interests
may appear; (ii) contain a Lender's Loss Payable Form (Form 438 BFU or
equivalent) in favor of Landlord's lenders and name Landlord, or Landlord's
lender if required by such lender, as the loss payee; (iii) provide for
severability of interests or include a cross-liability endorsement, such that an
act or omission of an insured shall not reduce or avoid coverage of other
insureds; (iv) include a building ordinance endorsement, an agreed amount
endorsement and an inflation endorsement; and (v) provide that it is primary
coverage and noncontributing with any insurance maintained by Landlord or
Landlord's lenders, which shall be excess insurance. The full replacement value
of the Project, the Tenant Improvements and other improvements and fixtures
insured thereunder shall, for the purpose of establishing insurance limits and
premiums only, be determined by the company issuing the insurance policy and
shall be redetermined by said company within six (6) months after completion of
any material alterations or improvements to the Premises and otherwise at
intervals of not more than three (3) years. Landlord shall promptly increase the
amount of the insurance carried pursuant to this Section 21.2 to the amount so
redetermined. The proceeds of the insurance described in this Section shall be
used for the repair, replacement and restoration of the Premises and the Tenant
Improvements and other improvements and fixtures insured thereunder, as further
provided in Article 22; provided, however, if this Lease is terminated after
damage or destruction, the insurance policy or policies, all rights thereunder
and all insurance proceeds shall be assigned to Landlord.
21.3 At all times during the term of this Lease, Tenant shall
maintain, at Tenant's expense, business interruption insurance in order to
insure that the Basic Annual Rent and Operating Expenses provided for hereunder
will be paid for a period of up to one (1) year after any casualty insured
against by all risk policy of insurance described in Section 21.2 above or any
restriction of access to the Premises as a result of such casualty.
21.4 At all times during the term of this Lease, Tenant shall
maintain, at Tenant's expense, "all risk" insurance against all other personal
property, including trade fixtures, equipment and merchandise, of Tenant or any
subtenant of Tenant that may be occupying the Premises, or any portion thereof,
from time to time, in an amount equal to the full replacement value thereof.
21.5 At all times during the term of this Lease, Tenant shall
maintain workers' compensation insurance in accordance with California law, and
employers' liability insurance with limits typical for companies similar to
Tenant.
21.6 All of the policies of insurance referred to in this Article
21 shall be written by companies authorized to do business in California and
rated A+VII or better in Best's Insurance Guide. Each insurer referred to in
this Article 21 shall agree, by endorsement on the applicable policy or by
independent instrument furnished to Landlord, that it will give Landlord, and
Landlord's lenders if required by such lenders, at least ten (10) days' prior
written notice by registered mail before the applicable policy shall be
cancelled for non-payment of premium, and thirty (30) days' prior written notice
by registered mail before the applicable policy shall be cancelled or altered in
coverage, scope, amount or other material term for any other reason (although
any failure of an insurer to give notice as provided herein shall not be a
breach of this Lease by Tenant). No policy shall provide for a deductible amount
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in excess of $100,000, unless approved in advance in writing by Landlord, which
approval shall not be unreasonably withheld. Tenant shall deliver to Landlord,
and to Landlord's lenders if required by such lenders, copies of the insurance
policies required to be carried by Tenant, certified by the insurer, or
certificates evidencing such insurance policies, issued by the insurer, together
with evidence of payment of the required premiums, prior to the required date
for commencement of such coverage. At least thirty (30) days prior to expiration
of any such policy, Tenant shall deliver to Landlord, and Landlord's lenders if
required by such lenders, a certificate evidencing renewal, or a certified copy
of a new policy or certificate evidencing the same, together with evidence of
payment of the required premiums. If Tenant fails to provide to Landlord any
such policy or certificate by the required date for commencement of coverage, or
within fifteen (15) days prior to expiration of any policy, or to pay the
premiums therefor when required, Landlord shall have the right, but not the
obligation, to procure said insurance and pay the premiums therefor. Any
premiums so paid by Landlord shall be repaid by Tenant to Landlord with the next
due installment of rent, and failure to repay the same shall have the same
consequences as failure to pay any installment of Rent.
21.7 Landlord may provide the property insurance required under
this Article 21 pursuant to a so-called blanket policy or policies of property
insurance maintained by Landlord.
21.8 Landlord and Tenant each hereby waive any and all rights of
recovery against the other or against the officers, directors, partners,
employees, agents, and representatives of the other, on account of loss or
damage to such waiving party's property or the property of others under its
control, to the extent that such loss or damage is caused by or results from
risks insured against under any insurance policy which insures such waiving
party's property at the time of such loss or damage, which waiver shall continue
in effect as long as the parties' respective insurers permit such waiver under
the terms of their respective insurance policies or otherwise in writing. Any
termination of such waiver shall be by written notice as hereinafter set forth.
Prior to obtaining policies of insurance required or permitted under this Lease,
Landlord and Tenant shall give notice to the insurers that the foregoing mutual
waiver is contained in this Lease, and each party shall use its best efforts to
cause such insurer to approve such waiver in writing and to cause each insurance
policy obtained by it to provide that the insurer waives all right of recovery
by way of subrogation against the other party. If such written approval of such
waiver of subrogation cannot be obtained from any insurer or is obtainable only
upon payment of an additional premium which the party seeking to obtain the
policy reasonably determines to be commercially unreasonable, the party seeking
to obtain such policy shall notify the other thereof, and the latter shall have
twenty (20) days thereafter to either: (i) identify other insurance companies
reasonably satisfactory to the other party that will provide the written
approval and waiver of subrogation; or (ii) agree to pay such additional
premium. If neither (i) nor (ii) are done, the mutual waiver set forth above
shall not be operative, and the party seeking to obtain the policy shall be
relieved of the obligation to obtain the insurer's written approval and waiver
of subrogation with respect to such policy during such time as such policy is
not obtainable or is obtainable only upon payment of a commercially unreasonable
additional premium as described above. If such policies shall at any subsequent
time be obtainable or obtainable upon payment of a commercially reasonable
additional premium, neither party shall be subsequently liable for failure to
obtain such insurance until a reasonable time after notification thereof by the
other party. If the release of either Landlord or Tenant, as set forth in the
first sentence of this Section 21.8, shall contravene any law with respect to
exculpatory agreements, the liability of the party in question shall be deemed
not released but shall be secondary to the other's insurer.
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22. DAMAGE OR DESTRUCTION.
22.1 In the event of damage to or destruction of all or any portion
of the Premises or the improvements and fixtures thereon (collectively,
"improvements") arising from a risk covered by the insurance described in
Section 21.2, Landlord shall within a reasonable time commence and proceed
diligently to repair, reconstruct and restore (collectively, "restore") the Site
Improvements and Building Shell to substantially the same condition as they were
in immediately prior to the casualty, and Tenant shall within a reasonable time
commence and proceed diligently to restore the Tenant Improvements to
substantially the same condition as they were in immediately prior to the
casualty, whether or not the insurance proceeds are sufficient to cover the
actual cost of restoration. Landlord shall be responsible for all insurance
deductibles attributable to the Site Improvements and Building Shell, and for
all costs of restoration of the Site Improvements and Building Shell in excess
of insurance proceeds for the Site Improvements and Building Shell. Tenant shall
be responsible for all insurance deductibles attributable to the Tenant
Improvements, and for all costs of restoration in excess of insurance proceeds
for the Tenant Improvements, as an Operating Expense under Section 7.1(b).
Except as expressly set forth below, this Lease shall continue in full force and
effect, notwithstanding such damage or destruction.
22.2 In the event of any damage to or destruction of all or any
portion of the improvements arising from a risk which is not covered by the
insurance described in Section 21.2, Landlord shall within a reasonable time, at
its expense, commence and proceed diligently to restore the Site Improvements
and Building Shell to substantially the same condition as they were in
immediately prior to the casualty, and Tenant shall within a reasonable time, at
its expense, commence and proceed diligently to restore the Tenant Improvements
to substantially the same condition as they were in immediately prior to the
casualty. This Lease shall continue in full force and effect notwithstanding
such damage or destruction; provided, however, that if the damage or destruction
(i) occurs during the last two years of the term and the expense of restoration
to either Landlord or Tenant exceeds $200,000, or (ii) occurs at any other time
and the expense of restoration to either Landlord or Tenant exceeds $500,000,
the party responsible for the cost may at its election terminate the Lease
unless the other party elects to pay the full cost of restoration.
22.3 In satisfying its obligations under this Article 22, neither
party shall be required to fulfill its restoration responsibilities with
improvements identical to those which were damaged or destroyed; rather, with
the consent of the other party, which consent will not be unreasonably withheld,
the restoring party may restore the damage or destruction with improvements
reasonably equivalent or of reasonably equivalent value to those damaged or
destroyed.
22.4 In the event of damage, destruction and/or restoration as
herein provided, there shall be no abatement of Rent, and Tenant shall not be
entitled to any compensation or damages occasioned by any such damage,
destruction or restoration. Notwithstanding the foregoing, in the event
restoration of the Site Improvements and Building Shell cannot reasonably be
completed within nine (9) months following the damage or destruction, Landlord
will give notice thereof to Tenant within sixty (60) days following such damage
or destruction, and Tenant at its election may by written notice to Landlord
terminate this Lease effective nine (9) months following such damage or
destruction. In the event of such termination, Tenant shall have no
responsibility for contributing to the expense of restoration.
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22.5 Notwithstanding anything to the contrary contained in this
Article, should Landlord be delayed or prevented from completing the restoration
of the improvements after the occurrence of such damage or destruction by reason
of acts of God, war, government restrictions, inability to procure the necessary
labor or materials, strikes, or other causes beyond the control of Landlord (but
excluding economic conditions or financial inability to perform), the time for
Landlord to commence or complete restoration shall be extended for the time
reasonably required as a result of such event.
22.6 If an insured casualty occurs, Landlord shall make the loss
adjustment with the insurance company, which adjustment shall be subject to the
approval of Tenant, which approval shall not be unreasonably withheld, and the
proceeds shall be paid to a fund control escrow established by Landlord and
Tenant for the purpose of paying for the restoration required by this Article
22.
22.7 Tenant waives the provisions of Civil Code Section 1932(2) and
1933(4) or any similar statute now existing or hereafter adopted governing
destruction of the Premises, so that the parties' rights and obligations in the
event of damage or destruction shall be governed by the provisions of this
Lease.
23. EMINENT DOMAIN.
23.1 In the event the whole of the Premises shall be taken for any
public or quasi-public purpose by any lawful power or authority by exercise of
the right of appropriation, condemnation or eminent domain, or sold to prevent
such taking, Tenant or Landlord may terminate this Lease effective as of the
date possession is required to be surrendered to said authority.
23.2 In the event of a partial taking of the Premises for any
public or quasi-public purpose by any lawful power or authority by exercise of
right of appropriation, condemnation, or eminent domain, or sold to prevent such
taking, then Landlord may elect to terminate this Lease if such taking is of a
material nature such as to make it uneconomical to continue use of the
unappropriated portions for the purposes for which they were intended, and
Tenant may elect to terminate this Lease if such taking is of material detriment
to, and substantially interferes with, Tenant's use and occupancy of the
Premises. In no event shall this Lease be terminated when such a partial taking
does not have a material adverse effect upon Landlord or Tenant or both.
Termination by either party pursuant to this section shall be effective as of
the date possession is required to be surrendered to said authority.
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23.3 If upon any taking of the nature described in this Article 23
this Lease continues in effect, then Landlord shall promptly proceed to restore
the remaining portion of the Premises, and all improvements and fixtures located
thereon, to substantially their same condition prior to such partial taking;
provided, however, Landlord's obligation hereunder shall be limited to the
amount of the condemnation proceeds. Basic Annual Rent shall be abated
proportionately on the basis of the rental value of the Premises, including
improvements and fixtures, as restored after such taking compared to the rental
value of the Premises prior to such taking.
24. DEFAULTS AND REMEDIES.
24.1 Late payment by Tenant to Landlord of Rent and other sums due
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult and impracticable to ascertain. Such
costs include, but are not limited to, processing and accounting charges and
late charges which may be imposed on Landlord by the terms of any mortgage or
trust deed covering the Premises. Therefore, if any installment of Rent due from
Tenant is not received by Landlord within ten (10) days of the date such payment
is due, Tenant shall pay to Landlord an additional sum of five percent (5%) of
the overdue rent as a late charge. The parties agree that this late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of late payment by Tenant. In addition to the late charge, Rent not
paid within thirty (30) days of the date such payment is due shall bear interest
from thirty (30) days after the date due until paid at the lesser of (i) ten
percent (10%) per annum or (ii) the maximum rate permitted by law.
24.2 No payment by Tenant or receipt by Landlord of a lesser amount
than the rent payment herein stipulated shall be deemed to be other than on
account of the rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
provided. If at any time a dispute shall arise as to any amount or sum of money
to be paid by Tenant to Landlord, Tenant 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 Tenant to institute suit for
recovery of the payment paid under protest.
24.3 If Tenant fails to pay any sum of money (other than Basic
Annual Rent) required to be paid by it hereunder, or shall fail to perform any
other act on its part to be performed hereunder, Landlord may, without waiving
or releasing Tenant from any obligations of Tenant, but shall not be obligated
to, make such payment or perform such act; provided, that such failure by Tenant
continued for ten (10) days after written notice from Landlord demanding
performance by Tenant was delivered to Tenant, or that such failure by Tenant
unreasonably interfered with the use or efficient operation of the Premises, or
resulted or could have resulted in a violation of law or the cancellation of an
insurance policy maintained by Landlord. All sums so paid or incurred by
Landlord, together with interest thereon, from the date such sums were paid or
incurred, at the annual rate equal to ten percent (10%) per annum or highest
rate permitted by law, whichever is less, shall be payable to Landlord on demand
as Additional Rent.
24.4 The occurrence of any one or more of the following events
shall constitute a default hereunder by Tenant:
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(a) The failure by Tenant to make any payment of Rent, as and
when due, where such failure shall continue for a period of ten (10) days after
written notice thereof from Landlord to Tenant. Such notice shall be in lieu of,
and not in addition to, any notice required under California Code of Civil
Procedure Section 1161;
(b) The failure by Tenant to observe or perform any obligation
other than described in Section 24.4(a) to be performed by Tenant, where such
failure shall continue for a period of thirty (30) days after written notice
thereof from Landlord to Tenant; provided, however, that if the nature of
Tenant's default is such that more than thirty (30) days are reasonably required
to cure the default, then Tenant shall not be deemed to be in default if Tenant
shall commence such cure within said thirty (30) day period and thereafter
diligently prosecute the same to completion. Such notice shall be in lieu of,
and not in addition to, any notice required under California Code of Civil
Procedure Section 1161;
(c) Tenant makes an assignment for the benefit of creditors;
(d) A receiver, trustee or custodian is appointed to, or does,
take title, possession or control of all, or substantially all, of Tenant's
assets;
(e) An order for relief is entered against Tenant pursuant to
a voluntary or involuntary proceeding commenced under any chapter of the
Bankruptcy Code;
(f) Any involuntary petition is filed against the Tenant under
any chapter of the Bankruptcy Code and is not dismissed within ninety (90) days;
or
(g) Tenant's interest in this Lease is attached, executed
upon, or otherwise judicially seized and such action is not released within
ninety (90) days of the action.
Notices given under this Section shall specify the alleged
default and shall demand that Tenant perform the provisions of this Lease or pay
the Rent that is in arrears, as the case may be, within the applicable period of
time, or quit the Premises. No such notice shall be deemed a forfeiture or a
termination of this Lease unless Landlord elects otherwise in such notice, and
in no event shall a forfeiture or termination occur without such written notice.
24.5 In the event of a default by Tenant, and at any time
thereafter, and without limiting Landlord in the exercise of any right or remedy
which Landlord may have, Landlord shall be entitled to terminate Tenant's right
to possession of the Premises by any lawful means, in which case this Lease
shall terminate and Tenant shall immediately surrender possession of the
Premises to Landlord. In such event Landlord shall have the immediate right to
re-enter and remove all persons and property, and such property may be removed
and stored in a public warehouse or elsewhere at the cost of, and for the
account of Tenant, all without service of notice and without being deemed guilty
of trespass, or becoming liable for any loss or damage which may be occasioned
thereby. In the event that Landlord shall elect to so terminate this Lease, then
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including:
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(a) The worth at the time of award of any unpaid Rent which
had been earned at the time of such termination; plus
(b) 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 which Tenant proves could have been
reasonably avoided; plus
(c) 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 which Tenant proves could have been reasonably
avoided; plus
(d) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligation
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 restoring the
Premises to the condition required under the terms of this Lease; plus
(e) At Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted from time to time by applicable
law.
As used in Subsections (a), (b) and (c), the "time of award"
shall mean the date upon which the judgment in any action brought by Landlord
against Tenant by reason of such default is entered or such earlier date as the
court may determined. As used in Subsections (a) and (b), the "worth at the time
of award" shall be computed by allowing interest at the rate specified in
Section 24.1. As used in Subsection (c) above, the "worth at the time of award"
shall be computed by taking the present value of such amount using the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percentage point.
24.6 In the event of a default by Tenant, and if Landlord does not
elect to terminate this Lease as provided in Section 24.5 or otherwise terminate
Tenant's right to possession of the Premises, Landlord shall have the remedy
described in Section 1951.4 of the Civil Code. Landlord may continue this Lease
in effect for so long as Landlord does not terminate Tenant's right to
possession of the Premises, and may enforce all of its rights and remedies under
the Lease, including the right from time to time to recover Rent as it becomes
due under the Lease. At any time thereafter, Landlord may elect to terminate
this Lease and to recover damages to which Landlord is entitled.
24.7 Notwithstanding anything herein to the contrary, Landlord's
reentry to perform acts of maintenance or preservation of, or in connection with
efforts to relet, the Premises, or any portion thereof, or the appointment of a
receiver upon Landlord's initiative to protect Landlord's interest under this
Lease, shall not terminate Tenant's right to possession of the Premises or any
portion thereof and, until Landlord does elect to terminate this Lease, this
Lease shall continue in full force and Landlord may pursue all its remedies
hereunder, including, without limitation, the right to recover from Tenant as
they become due hereunder all Rent and other charges required to be paid by
Tenant under the terms of this Lease.
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24.8 All rights, options, and remedies of Landlord contained in
this Lease shall be construed and held to be nonexclusive and cumulative.
Landlord shall have the right to pursue any one or all of such remedies or any
other remedy or relief which may be provided by law, whether or not stated in
this Lease. No waiver of any default of Tenant hereunder shall be implied from
any acceptance by Landlord of any rent or other payments due hereunder or by any
omission by Landlord to take any action on account of such default if such
default persists or is repeated, and no express waiver shall affect defaults
other than as specified in said waiver.
24.9 Termination of this Lease or Tenant's right to possession by
Landlord shall not relieve Tenant from any liability to Landlord which has
theretofore accrued or shall arise based upon events which occurred prior to the
last to occur of (i) the date of Lease termination or (ii) the date possession
of Premises is surrendered.
24.10 Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after written notice by Tenant specifying
wherein Landlord has failed to perform such obligation; provided, however, that
if the nature of Landlord's obligation is such that more than thirty (30) days
are required for performance, then Landlord shall not be in default if Landlord
commences performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion.
24.11 In the event of any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed of
trust or mortgagee of a mortgage covering the Premises whose address shall have
been furnished and shall offer such beneficiary and/or mortgagee a reasonable
opportunity to cure the default, including time to obtain possession of the
Premises by power of sale or a judicial action if such should prove necessary to
effect a cure.
25. ASSIGNMENT OR SUBLETTING.
25.1 Except as hereinafter provided, Tenant shall not, either
voluntarily or by operation of law, sell, hypothecate or transfer this Lease, or
sublet the Premises or any part thereof, or permit or suffer the Premises or any
part thereof to be used or occupied as work space, storage space, concession or
otherwise by anyone other than Tenant or Tenant's employees, without the prior
written consent of Landlord in each instance, which consent shall not be
unreasonably withheld or delayed.
25.2 If Tenant desires to assign this Lease to any entity into
which Tenant is merged, with which Tenant is consolidated, or which acquires all
or substantially all of the assets of Tenant, provided that the assignee first
executes, acknowledges and delivers to Landlord an agreement whereby the
assignee agrees to be bound by all of the covenants and agreements in this Lease
arising after the effective date of the transfer, then Landlord upon receipt of
proof of foregoing, will consent to the assignment.
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25.3 In the event Tenant desires to assign, hypothecate or
otherwise transfer this Lease or sublet the Premises or any part thereof to a
transferee other than one set forth in Section 25.2, then at least ten (10)
days, but not more than forty-five (45) days, prior to the date when Tenant
desires the assignment or sublease to be effective (the "Assignment Date"),
Tenant shall give Landlord a notice (the "Assignment Notice") which shall set
forth the name, address and business of the proposed assignee or sublessee,
information (including references and financial statements) concerning the
reputation and financial ability of the proposed assignee or sublessee, the
Assignment Date, any ownership or commercial relationship between Tenant and the
proposed assignee or sublessee, and the consideration and all other material
terms and conditions of the proposed assignment or sublease, all in such detail
as Landlord shall reasonably require.
25.4 Landlord in making its determination as to whether consent
should be given to a proposed assignment or sublease, may give consideration to
the reputation of a proposed successor, the financial strength of such successor
(notwithstanding the assignor remaining liable for Tenant's performance), and
any use which such successor proposes to make of the Premises. If Landlord fails
to deliver written notice of its determination to Tenant within fifteen (15)
days following receipt of the Assignment Notice and the information required
under Section 25.3, Landlord shall be deemed to have approved the request. As a
condition to any assignment or sublease to which Landlord has given consent, any
such assignee or sublessee must execute, acknowledge and deliver to Landlord an
agreement whereby the assignee or sublessee agrees to be bound by all of the
covenants and agreements in this Lease.
25.5 Any sale, assignment, hypothecation or transfer of this Lease
or subletting of Premises that is not in compliance with the provisions of this
Article 25 shall be void and shall, at the option of Landlord, terminate this
Lease.
25.6 The consent by Landlord to an assignment or subletting shall
not relieve Tenant or any assignee of this Lease or sublessee of the Premises
from obtaining the consent of Landlord to any further assignment or subletting
or as releasing Tenant or any assignee or sublessee of Tenant from full and
primary liability.
25.7 If Tenant shall sublet the Premises or any part thereof Tenant
hereby immediately and irrevocably assigns to Landlord, as security for Tenant's
obligations under this Lease, all rent from any subletting of all or a part of
the Premises, and Landlord as assignee of Tenant, or a receiver for Tenant
appointed on Landlord's application, may collect such rent and apply it toward
Tenant's obligations under this Lease; except that, until the occurrence of an
act of default by Tenant, Tenant shall have the right to collect such rent.
25.8 Notwithstanding any subletting or assignment Tenant shall
remain fully and primarily liable for the payment of all Rent and other sums
due, or to become due hereunder, and for the full performance of all other
terms, conditions, and covenants to be kept and performed by Tenant. The
acceptance of rent or any other sum due hereunder, or the acceptance of
performance of any other term, covenant, or condition hereof, from any other
person or entity shall not be deemed to be a waiver of any of the provisions of
this Lease or a consent to any subletting or assignment of the Premises.
Landlord shall not withhold consent to an assignment back to the original Tenant
hereunder from a subsequent assignee.
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25.9 Any sublease of the Premises shall be subject and subordinate
to the provisions of this Lease, shall not extend beyond the term of this Lease,
and shall provide that the sublessee shall attorn to Landlord, at Landlord's
sole option, in the event of the termination of this Lease. Landlord and any
lender shall upon Tenant's request provide any subtenant of the entirety of the
Premises with a recognition and nondisturbance agreement in the form set forth
in Article 35 hereof on the condition that the sublessee agrees to attorn to
Landlord on exactly the same terms and conditions as this Lease.
25.10 In the event Tenant assigns, hypothecates or otherwise
transfers this Lease or sublets the Premises to a transferee other than one set
forth in Section 25.2, Tenant shall pay to Landlord, as Additional Rent, fifty
percent (50%) of the rent and other consideration received from the transferee
during the term of this Lease in excess of Rent payable to Landlord under this
Lease, after Tenant has recouped any reasonable commission, legal, improvement
and other out-of-pocket expenses occasioned by such transfer and payable to
third parties, and after Tenant has recouped any expenses incurred for tenant
improvements to the transferred space constructed after the Term Commencement
Date.
26. ATTORNEY'S FEES.
26.1 If either party becomes a party to any action or proceeding
concerning this Lease, the Premises, or the Building or Project in which the
Premises are located, by reason of any act or omission of the other party or its
authorized representatives, and not by any act or omission of the party that
becomes a party to that litigation or any act or omission of its authorized
representatives, the party that causes the other party to become involved in the
litigation shall be liable to that party for reasonable attorneys' fees, expert
witness fees, and court costs incurred by it in the litigation.
26.2 If either party commences an action or proceeding against the
other party arising out of or in connection with this Lease, the prevailing
party shall be entitled to have and recover from the other party reasonable
attorneys' fees, expert witness fees and costs of suit.
27. BANKRUPTCY.
27.1 In the event a debtor or trustee under the Bankruptcy Code, or
other person with similar rights, duties and powers under any other law,
proposes to cure any default under this Lease or to assume or assign this Lease,
and is obliged to provide adequate assurance to Landlord that (i) a default will
be cured, (ii) Landlord will be compensated for its damages arising from any
breach of this Lease, or (iii) future performance under this Lease will occur,
then adequate assurance shall include any or all of the following, as determined
by the Bankruptcy Court: (a) those acts specified in the Bankruptcy Code or
other law as included within the meaning of adequate assurance; (b) a cash
payment to compensate Landlord for any monetary defaults or damages arising from
a breach of this Lease; (c) the credit worthiness and desirability, as a tenant,
of the person assuming this Lease or receiving an assignment of this Lease, at
least equal to Landlord's customary and usual credit worthiness requirements and
desirability standards in effect at the time of the assumption or assignment, as
determined by the Bankruptcy Court; and (d) the assumption or assignment of all
of Tenant's interest and obligations under this Lease.
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28. DEFINITION OF LANDLORD.
28.1 The term "Landlord" as used in this Lease, so far as covenants
or obligations on the part of Landlord are concerned, shall be limited to mean
and include only Landlord or the successor-in-interest of Landlord under this
Lease at the time in question. In the event of any transfer, assignment or
conveyance of Landlord's title or leasehold, the Landlord herein named (and in
case of any subsequent transfers or conveyances, the then grantor and any prior
grantors) shall be automatically freed and relieved from and after the date of
such transfer, assignment or conveyance of all liability for the performance of
any covenants or obligations contained in this Lease thereafter to be performed
by Landlord and, without further agreement, the transferee of such title or
leasehold shall be deemed to have assumed and agreed to observe and perform any
and all obligations of Landlord hereunder, during its ownership of the Premises.
Landlord may transfer its interest in the Premises or this Lease without the
consent of Tenant and such transfer or subsequent transfer shall not be deemed a
violation on the part of Landlord or the then grantor of any of the terms or
conditions of this Lease.
29. ESTOPPEL CERTIFICATE.
29.1 Each party shall, within fifteen (15) days of written notice
from the other party, execute, acknowledge and deliver to the other party a
statement in writing on a form reasonably requested by a proposed lender,
purchaser, assignee or subtenant (i) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease as so modified is in full force and
effect) and the dates to which the rental and other charges are paid in advance,
if any, (ii) acknowledging that there are not, to each party's knowledge, any
uncured defaults on the part of Landlord or Tenant hereunder (or specifying such
defaults if any are claimed) and (iii) setting forth such further information
with respect to this Lease or the Premises as may be reasonably requested
thereon. Any such statement may be relied upon by any prospective lender,
purchaser, assignee or subtenant of all or any portion of the Premises.
30. REMOVAL OF PROPERTY.
30.1 Except as provided below, all fixtures and personal property
owned by Tenant shall be and remain the property of Tenant, and may be removed
by Tenant at the expiration or earlier termination of the term of this Lease;
however, only those major items of equipment which are built in to the Premises
listed on Exhibit "G" ("Tenant's Removable Property"), and any HVAC package
units Tenant elects to install after the first eight (8) years of the term
pursuant to Section 18.2, may be removed by Tenant. Other equipment, such as
fume hoods, chemistry hoods, cabling for telecom and computers, package HVAC
units, and case work, including lab benches and sinks, may not be removed by
Tenant.
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30.2 The Project, Building and Tenant Improvements, and all
fixtures and personal property owned by Landlord, shall be and remain the
property of Landlord, and shall, upon the expiration or earlier termination of
this Lease, remain upon and be surrendered with the Premises as a part thereof.
30.3 Notwithstanding Sections 30.1, Tenant may not remove any
property if such removal would cause material damage to the Premises, unless
such damages can be and is repaired by Tenant. Furthermore, Tenant shall repair
any damage to the Premises caused by Tenant's removal of any such property, and
shall, prior to the expiration or earlier termination of this Lease, restore and
return the Premises to the condition they were in when first occupied by Tenant,
reasonable wear and tear excepted. At a minimum, even if they are determined to
be fixtures or personal property owned by Tenant, Tenant shall leave in place
and repair any damage to the interior floors, walls, doors and ceilings of the
Premises, and the heating, ventilation, air conditioning, plumbing, and
electrical systems; all such property shall become the property of Landlord upon
the expiration or earlier termination of this Lease, and shall remain upon and
be surrendered with the Premises as a part thereof. The provisions of Article 17
shall apply to any restoration work under this Article as if the restoration was
an alteration, addition or improvement thereunder. Should Tenant require any
period beyond the expiration or earlier termination of the Lease to complete
such restoration, Tenant shall be a tenant at sufferance subject to the
provisions of Section 12.2 hereof.
30.4 If Tenant shall fail to remove any fixtures or personal
property which it is entitled to remove under this Article 30 from the Premises
prior to termination of this Lease, then Landlord may dispose of the property
under the provisions of Section 1980 et seq. of the California Civil Code, as
such provisions may be modified from time to time, or under any other applicable
provisions of California law.
31. LIMITATION OF LANDLORD'S LIABILITY.
31.1 If Landlord is in default of this Lease, and as a consequence,
Tenant recovers a money judgment against Landlord, the judgment shall be
satisfied only out of the proceeds of sale received on execution of the judgment
and levy against the right, title, and interest of Landlord in the Project of
which the Premises are a part, and out of rent or other income from the Project
receivable by Landlord or out of the consideration received by Landlord from the
sale or other disposition of all or any part of Landlord's right, title, and
interest in the Building and Project of which the Premises are a part, or by
offsetting Rent under this Lease.
31.2 Neither Landlord nor Landlord's Agents shall be personally
liable for any deficiency except to the extent liability is based upon willful
and intentional misconduct. If Landlord is a partnership or joint venture, the
partners of such partnership shall not be personally liable and no partner of
Landlord shall be sued or named as a party in any suit or action, or service of
process be made against any partner of Landlord, except as may be necessary to
secure jurisdiction of the partnership or joint venture or to the extent
liability is caused by willful and intentional misconduct. If Landlord is a
corporation, the shareholders, directors, officers, employees, and/or agents of
such corporation shall not be personally liable and no shareholder, director,
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officer, employee, or agent of Landlord shall be sued or named as a party in any
suit or action, or service of process be made against any shareholder, director,
officer, employee, or agent of Landlord, except as may be necessary to secure
jurisdiction of the corporation. If Landlord is a limited liability company, the
members, managers, officers, employees, and/or agents of such limited liability
company shall not be personally liable and no member, manager, officer,
employee, or agent of Landlord shall be sued or named as a party in any suit or
action, or service of process be made against any member, manager, officer,
employee, or agent of Landlord, except as may be necessary to secure
jurisdiction of the corporation. No partner, shareholder, director, member,
manager, employee, or agent of Landlord shall be required to answer or otherwise
plead to any service of process and no judgment will be taken or writ of
execution levied against any partner, shareholder, director, member, manager,
employee, or agent of Landlord.
31.3 Each of the covenants and agreements of this Article 31 shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or by common law.
32. CONTROL BY LANDLORD.
32.1 Landlord reserves full control over the Building and Project
to the extent not inconsistent with Tenant's quiet enjoyment and use of
Premises. This reservation includes the right to establish ownership of the
buildings separate from fee title to the real property underlying the Buildings,
and to divide the Project into more than one lot.
32.2 Tenant shall, should Landlord so request, promptly join with
Landlord in execution of such documents as may be appropriate to assist Landlord
to implement any such action provided Tenant need not execute any document which
is of a nature wherein liability is created in Tenant or if by reason of the
terms of such document Tenant will be deprived of the quiet enjoyment and use of
the Premises as granted by this Lease.
33. QUIET ENJOYMENT.
33.1 So long as Tenant is not in default, Landlord covenants that
Landlord or anyone acting through or under Landlord will not disturb Tenant's
occupancy of the Premises except as permitted by the provisions of this Lease
and that Landlord shall use reasonable efforts to enforce the lease obligations
of tenants of the balance of the Building and Project to the extent they might
otherwise disturb Tenant's occupancy.
34. QUITCLAIM DEED.
34.1 Tenant shall execute and deliver to Landlord on the expiration
or termination of this Lease, immediately on Landlord's request, a quitclaim
deed to the Premises and Project or other document in recordable form suitable
to evidence of record termination of this Lease and the right of first refusal
and option contained herein.
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35. SUBORDINATION AND ATTORNMENT.
35.1 Unless the mortgagee or beneficiary elects otherwise at any
time prior to or following a default by Tenant, this Lease shall be subject to
and subordinate to the lien of any mortgage or deed of trust now or hereafter in
force against the Project and Building of which the Premises are a part, and to
all advances made or hereafter to be made upon the security thereof without the
necessity of the execution and delivery of any further instruments on the part
of Tenant to effectuate such subordination, provided that the lienholder,
beneficiary, or mortgagee has previously executed and delivered to Tenant a
non-disturbance, attornment, and subordination agreement in such form as the
lienholder, beneficiary, or mortgagee may request and as the Tenant may approve,
which approval will not be unreasonably withheld, setting forth that so long as
Tenant is not in default hereunder, Landlord's and Tenant's rights and
obligations hereunder shall remain in force and Tenant's right to possession
shall be upheld. Furthermore, Landlord shall provide to Tenant, within
forty-five (45) days after execution of this Lease by both parties, such a
nondisturbance agreement from the beneficiary of any mortgage presently
encumbering the Project.
35.2 Notwithstanding the foregoing, Tenant shall execute and
deliver upon demand such further instrument or instruments evidencing such
subordination of this Lease to the lien of any such mortgage or deed of trust as
may be required by Landlord and in a form reasonably satisfactory to Tenant,
provided that the lienholder, beneficiary, or mortgagee has previously executed
and delivered to Tenant a non-disturbance agreement in recordable form. However,
if any such mortgagee or beneficiary so elects at any time prior to or following
a default by Tenant, this Lease shall be deemed prior in lien to any such
mortgage or deed of trust regardless of date and Tenant will execute a statement
in writing to such effect at Landlord's request in a form reasonably
satisfactory to Tenant.
35.3 In the event any proceedings are brought for foreclosure, or
in the event of the exercise of the power of sale under any mortgage or deed of
trust made by the Landlord covering the Premises, the Tenant shall at the
election of the purchaser at such foreclosure or sale attorn to the purchaser
upon any such foreclosure or sale and recognize such purchaser as the Landlord
under this Lease in accordance with the terms of the non-disturbance Agreement.
36. SURRENDER.
36.1 No surrender of possession of any part of the Premises shall
release Tenant from any of its obligations hereunder unless accepted by
Landlord.
36.2 The voluntary or other surrender of this Lease by Tenant shall
not work a merger, unless Landlord consents, and shall, at the option of
Landlord, operate as an assignment to it of any or all subleases or
subtenancies.
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37. WAIVER AND MODIFICATION.
37.1 No provision of this Lease may be modified, amended or added
to except by an agreement in writing. The waiver by Landlord of any breach of
any term, covenant or condition herein contained shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant or
condition herein contained.
38. WAIVER OF JURY TRIAL.
38.1 The parties hereto shall and they hereby do waive trial by
jury in any action, proceeding or counterclaim brought by either of the parties
hereto against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and/or any claim of injury or damage.
39. HAZARDOUS MATERIAL.
39.1 During the term, Tenant, at its sole cost, shall comply with
all federal, state and local laws, statutes, ordinances, codes, regulations and
orders relating to the receiving, handling, use, storage, accumulation,
transportation, generation, spillage, migration, discharge, release and disposal
of Hazardous Material (as defined below) in or about the Premises. Tenant shall
not cause or permit any Hazardous Material to be brought upon, kept or used in
or about the Premises by Tenant, its agents, employees, contractors, invitees or
subtenants, in a manner or for a purpose prohibited by any federal, state or
local agency or authority. The accumulation of Hazardous Material shall be in
approved containers and removed from the Premises by duly licensed carriers.
39.2 Tenant shall immediately provide Landlord with telephonic
notice, which shall promptly be confirmed by written notice, of any and all
spillage, discharge, release and disposal of Hazardous Material onto or within
the Premises, including the soils and subsurface waters thereof, which by law
must be reported to any federal, state or local agency, and any injuries or
damages resulting directly or indirectly therefrom. Further, Tenant shall
deliver to Landlord each and every notice or order, when said order or notice
identifies a violation which may have the potential to adversely impact the
Premises, received from any federal, state or local agency concerning Hazardous
Material and the possession, use and/or accumulation thereof promptly upon
receipt of each such notice or order by Tenant. Landlord shall have the right,
upon reasonable notice, to inspect and copy each and every notice or order
received from any federal, state or local agency concerning Hazardous Material
and the possession, use and/or accumulation thereof.
39.3 Tenant shall be responsible for and shall indemnify, protect,
defend and hold harmless Landlord and Landlord's Agents from any and all
liability, damages, injuries, causes of action, claims, judgments, costs,
penalties, fines, losses, and expenses which arise during or after the term of
this Lease and which result from Tenant's (or from Tenant's Agents, assignees,
subtenants, employees, agents, contractors, licensees, or invitees) receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Premises, including without limitation (i) diminution in value of the
Premises or any portion of the Project, (ii) damages for the loss or restriction
on use of any portion or amenity of the Premises or Project, (iii) damages
arising from any adverse impact on marketing of space in the Premises or the
Project, (iv) damages and the costs of remedial work to other property in the
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vicinity of the Project owned by Landlord or an affiliate of Landlord, and (v)
consultant fees, expert fees, and attorneys' fees. Landlord shall be responsible
for and shall indemnify, protect, defend and hold harmless Tenant on the same
basis as above for any claims which result from Landlord's or from Landlord's
Agents receiving, handling, use, storage, accumulation, transportation,
generation, spillage, migration, discharge, release or disposal of Hazardous
Material in, upon or about the Premises.
39.4 The indemnification of Landlord and Landlord's Agents by
Tenant pursuant to the preceding Section 39.3 includes, without limiting the
generality of Section 39.3, reasonable costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material present in the soil,
subsoil, ground water, or elsewhere on, under or about the Premises, or on,
under or about any other property in the vicinity of the Project owned by
Landlord or an affiliate of Landlord. Without limiting the foregoing, if the
presence of any Hazardous Material on the Premises caused or permitted by Tenant
results in any contamination of the Premises, or underlying soil or groundwater,
Tenant shall promptly take all actions at its sole expense as are necessary to
return the Premises to that condition required by applicable law, provided that
Landlord's approval of such action shall first be obtained, which approval shall
not be unreasonably withheld, except that Tenant shall not be required to obtain
Landlord's prior approval of any action of an emergency nature reasonably
required or any action mandated by a governmental authority, but Tenant shall
give Landlord prompt notice thereof.
39.5 Landlord acknowledges that it is not the intent of this
Article 39 to prohibit Tenant from operating its business as described in
Article 10 or to unreasonably interfere with the operation of Tenant's business.
Tenant may operate its business according to the custom of the industry so long
as the use or presence of Hazardous Material is strictly and properly monitored
according to all applicable governmental requirements. As a material inducement
to Landlord to allow Tenant to use Hazardous Material in connection with its
business, Tenant agrees to make available to Landlord upon reasonable request a
list identifying each type of Hazardous Material to be present in or upon the
Premises and setting forth any and all governmental approvals or permits
required in connection with the presence of Hazardous Material on the Premises
("Hazardous Material Summary") and a copy of the Hazardous Material business
plan prepared pursuant to Health and Safety Code Section 25500 et seq. At
Landlord's request, and at reasonable times, Tenant shall make available to
Landlord the latest available Hazardous Materials Summary and true and correct
copies of the following documents (hereinafter referred to as the "Hazardous
Material Documents") relating to the handling, storage, disposal and emission of
Hazardous Material: permits; approvals; reports and correspondence; storage and
management plans; notice of violations of any laws; plans relating to the
installation of any storage tanks to be installed in or under the Premises
(provided said installation of tanks shall be permitted only after Landlord has
given Tenant its written consent to do so, which consent may not be unreasonably
withheld); and all closure plans or any other documents required by any and all
federal, state and local governmental agencies and authorities for any storage
tanks installed in, on or about the Premises for the closure of any such tanks.
Tenant shall not be required, however, to provide Landlord with that portion of
any document which contains information of a proprietary nature and which, in
and of itself, does not contain a reference to any Hazardous Material which are
not otherwise identified to Landlord in such documentation, unless any such
Hazardous Material Document names Landlord as an "owner" or "operator" of the
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<PAGE> 39
facility in which Tenant is conducting its business. It is not the intent of
this subsection to provide Landlord with information which could be detrimental
to Tenant's business should such information become possessed by Tenant's
competitors. Landlord shall treat all information furnished by Tenant to
Landlord pursuant to this Section 39.5 as confidential and shall not disclose
such information to any person or entity without Tenant's prior written consent,
which consent shall not be unreasonably withheld or delayed, except as required
by law.
39.6 Notwithstanding other provisions of this Article 39, it shall
be a default under this Lease, and Landlord shall have the right to terminate
the Lease and/or pursue its other remedies under Article 24, in the event that
(i) Tenant's use of the Premises for the generation, storage, use, treatment or
disposal of Hazardous Material is in a manner or for a purpose prohibited by
applicable law unless Tenant is diligently pursuing compliance with such law,
(ii) Tenant has been required by any governmental authority to take remedial
action in connection with Hazardous Material contaminating the Premises if the
contamination resulted from Tenant's action or use of the Premises, unless
Tenant is diligently pursuing compliance with such requirement, or (iii) Tenant
is subject to an enforcement order issued by any governmental authority in
connection with Tenant's use, disposal or storage of a Hazardous Material on the
Premises, unless Tenant is diligently seeking compliance with such enforcement
order.
39.7 Notwithstanding the provisions of Article 25, if (i) any
anticipated use of the Premises by a proposed assignee or subtenant involves the
generation or storage, use, treatment or disposal of Hazardous Material in any
manner or for a purpose prohibited by any applicable law, (ii) the proposed
assignee or sublessee has been required by any governmental authority to take
remedial action in connection with Hazardous Material contaminating a property
if the contamination resulted from such party's action or use of the property in
question and has failed to take such action, or (iii) the proposed assignee or
sublessee is subject to a final, unappealable enforcement order issued by any
governmental authority in connection with such party's use, disposal or storage
of Hazardous Material of a type such proposed assignee or sublessee intends to
use in the Premises and shall have failed to comply with such order, it shall
not be unreasonable for Landlord to withhold its consent to an assignment or
subletting to such proposed assignee or sublessee.
39.8 Landlord represents that, to the best of its knowledge, as of
the date of this Lease, there is no Hazardous Material on the Premises. Landlord
shall provide Tenant with a Phase I Environmental Site Assessment, and any Phase
II Environmental Site Assessment recommended therein, as of the date Landlord
completes the Building Shell. Should the environmental site assessment(s)
disclose the presence of Hazardous Material beyond legally permissible levels,
Landlord shall correct the deficiencies to Tenant's reasonable satisfaction and
shall cause updates to the environmental site assessment(s) to be issued
reflecting the remedy. The environmental site assessment(s) and all updates
thereto are hereinafter referred to as the "Base Line Report," and shall be
deemed conclusive as to the condition of the Premises, unless, within ninety
(90) days of receipt, Tenant causes an inspection of its own to be conducted,
which inspection discloses the presence of Hazardous Material materially
different from that disclosed in the Base Line Report.
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<PAGE> 40
39.9 At any time prior to the expiration or earlier termination of
the term of the Lease, Landlord shall have the right to enter upon the Premises
at all reasonable times and at reasonable intervals in order to conduct
appropriate tests regarding the presence, use and storage of Hazardous Material,
and to inspect Tenant's records with regard thereto. Tenant will pay the
reasonable costs of any such test which demonstrates that contamination in
excess of permissible levels has occurred and such contamination was caused by
Tenant's use of the Premises during the term of the Lease. Tenant shall correct
any deficiencies identified in any such tests in accordance with its obligations
under this Article 39 to the extent the result of Tenant's use of the Premises
during the term of this Lease.
39.10 Tenant shall at its own expense cause an environmental site
assessment of the Premises to be conducted and a report thereof delivered to
Landlord upon the expiration or earlier termination of the Lease, such report to
be as complete and broad in scope as is necessary to identify any impact on the
Premises Tenant's operations might have had (hereinafter referred to as the
"Exit Report"). In order to facilitate the Exit Report, Tenant shall install, as
part of the Tenant Improvements, a sampling port on the sewer drain from the
Premises. Tenant shall correct any deficiencies identified in the Exit Report in
accordance with its obligations under this Article 39 prior to the expiration or
earlier termination of this Lease. This Article 39 is the exclusive provision in
this Lease regarding clean-up, repairs or maintenance arising from receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Premises, and the provisions of Articles 7, 10, 18, and 20 shall not
apply thereto.
39.11 Tenant's obligations under this Article 39 shall survive the
termination of the Lease.
39.12 As used herein, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous Material" includes, without limitation, any
material or substance which is (i) defined as a "hazardous waste," "extremely
hazardous waste" or "restricted hazardous waste" under Sections 25515, 25117 or
25122.7, or listed pursuant to Section 25140, of the California Health and
Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii)
defined as a "hazardous substance" under Section 25316 of the California Health
and Safety Code, Division 2, Chapter 6.8 (Carpenter-Presly-Tanner Hazardous
Substance Account Act), (iii) defined as a "hazardous material," hazardous
substance" or "hazardous waste" under Section 25501 of the California Health and
Safety Code, Division 20, Chapter 6.95 (Hazardous Substances), (v) petroleum,
(vi) asbestos, (vii) listed under Article 9 and defined as hazardous or
extremely hazardous pursuant to Article 11 of Title 22 of the California
Administrative Code, Division 4, Chapter 20, (viii) designated as a "hazardous
substance" pursuant to Section 311 of the Federal Water Pollution Control Act
(33 U.S.C. Section 1317), (ix) defined as a "hazardous waste" pursuant to
Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et. seq. (42 U.S.C. Section 6903), or (x) defined as a "hazardous
substance" pursuant to Section 101 of the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C.
Section 9601).
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<PAGE> 41
40. RIGHT OF FIRST REFUSAL TO LEASE ADDITIONAL SPACE.
40.1 If at any time during the term of this Lease Landlord
determines to lease all or any part of the balance of the space in Building One
(approximately 10,080 square feet of Rentable Area), Landlord shall give written
notice to Tenant ("Right of First Refusal Notice") of the economic terms and
conditions on which Landlord would be willing to lease all or any part of the
balance of the space. If Tenant, within fifteen (15) days after receipt of
Landlord's Right of First Refusal Notice, agrees in writing to lease all or any
part of the balance of the space in Building One on the terms and conditions
stated in the notice, Landlord shall lease the space to Tenant on the economic
terms and conditions stated in the notice.
40.2 If Tenant does not agree in writing to lease all or any part
of the balance of the space in Building One within fifteen (15) days after
receipt of Landlord's Right of First Refusal Notice, or if Landlord and Tenant
have not entered into a lease agreement within thirty (30) days thereafter,
Landlord shall have the right to lease the space to a third party on economic
terms and conditions no more favorable than the economic terms and conditions
stated in the Right of First Refusal Notice. If Landlord does not lease such
space to the prospective tenant within one hundred eighty (180) days after the
Right of First Refusal Notice, any lease transaction thereafter shall be deemed
a new determination by Landlord to lease the space and the provisions of this
Section shall again be applicable.
40.3 The Right of First Refusal herein granted to Tenant is not
assignable separate and apart from this Lease.
40.4 Tenant shall not have the right to exercise the Right of First
Refusal, notwithstanding anything set forth above to the contrary: (a) During
the time commencing from the date Landlord gives to Tenant a written notice that
Tenant is in default under any provision of this Lease and continuing until the
default alleged in said notice is cured; (b) During the period of time
commencing on the day after a monetary obligation to Landlord is due from Tenant
and unpaid without any necessity for notice thereof to Tenant and continuing
until the obligation is paid; or (c) After the expiration or earlier termination
of this Lease. The period of time within which the Right of First Refusal may be
exercised shall not be extended or enlarged by reason of the Tenant's inability
to exercise the Right of First Refusal because of the foregoing provisions. At
the election of Landlord, all rights of Tenant under the provisions of this
Article 40 shall terminate and be of no further force or effect even after
Tenant's due and timely exercise of the Right of First Refusal, if, after such
exercise, but prior to the execution of said lease, (1) Tenant fails to pay to
Landlord a monetary obligation of Tenant for a period of thirty (30) days after
such obligation becomes due (without necessity of Landlord to give notice to
Tenant), or (2) Tenant fails to commence to cure a default within thirty (30)
days after the date Landlord gives notice to Tenant of such default.
40.5 The Right of First Refusal is continuing, in that if Tenant
fails to exercise the Right of First Refusal with regard to any particular
space, the Right of First Refusal shall nevertheless apply to that particular
space if Landlord determines to lease all or any part of such space at any later
time, and to any other space which Landlord determines to lease in the Building.
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<PAGE> 42
41. MISCELLANEOUS.
41.1 TERMS AND HEADINGS. Where applicable in this Lease, the
singular includes the plural and the masculine or neuter includes the masculine,
feminine and neuter. The section headings of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.
41.2 EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.
41.3 TIME. Time is of the essence with respect to the performance
of every provision of this Lease in which time of performance is a factor.
41.4 COVENANTS AND CONDITIONS. Each provision of this Lease
performable by Tenant shall be deemed both a covenant and a condition.
41.5 CONSENTS. Whenever consent or approval of either party is
required, that party shall not unreasonably withhold or delay such consent or
approval, except as may be expressly set forth to the contrary.
41.6 ENTIRE AGREEMENT. The terms of this Lease are intended by the
parties as a final expression of their agreement with respect to the terms as
are included herein, and may not be contradicted by evidence of any prior or
contemporaneous agreement.
41.7 SEVERABILITY. Any provision of this Lease which shall prove to
be invalid, void, or illegal in no way affects, impairs or invalidates any other
provision hereof, and such other provisions shall remain in full force and
effect.
41.8 RECORDING. Within ten (10) days from the execution of this
Lease, Landlord and Tenant shall record a short form memorandum hereof, which
includes references to the right of first refusal contained herein, subject to
the requirement to execute and deliver a quitclaim deed pursuant to the
provisions of Section 34.1 hereof.
41.9 IMPARTIAL CONSTRUCTION. The language in all parts of this
Lease shall be in all cases construed as a whole according to its fair meaning
and not strictly for or against either Landlord or Tenant.
41.10 INUREMENT. Each of the covenants, conditions, and agreements
herein contained shall inure to the benefit of and shall apply to and be binding
upon the parties hereto and their respective heirs, legatees, devisees,
executors, administrators, successors, assigns, sublessees, or any person who
may come into possession of said Premises or any part thereof in any manner
whatsoever. Nothing in this Section 41.10 contained shall in any way alter the
provisions against assignment or subletting in this Lease provided.
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<PAGE> 43
41.11 FORCE MAJEURE. If either party cannot perform any of its
obligations (other than Tenant's obligation to pay Rent), or is delayed in such
performance (other than Tenant's obligation to pay Rent), due to events beyond
such party's control, the time provided for performing such obligations shall be
extended by a period of time equal to the delay attributable to such events.
Events beyond a party's control include, but are not limited to, acts of God
(including earthquake), war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortage of labor or material, government regulation or
restriction and weather conditions, but do not include financial inability to
perform.
41.12 NOTICES. Any notice, consent, demand, bill, statement, or
other communication required or permitted to be given hereunder must be in
writing and may be given by personal delivery, by facsimile transmission, or by
mail, and if given by personal delivery or facsimile transmission shall be
deemed given on the date of delivery or transmission, and if given by mail shall
be deemed sufficiently given three (3) days after time when deposited in United
States Mail if sent by registered or certified mail, addressed to Tenant at the
Premises, or to Tenant or Landlord at the addresses shown in Section 2.1.10
hereof. Either party may, by notice to the other given pursuant to this Section,
specify additional or different addresses for notice purposes.
41.13 AUTHORITY TO EXECUTE LEASE. Landlord and Tenant each
acknowledge that it has all necessary right, title and authority to enter into
and perform its obligations under this Lease, that this Lease is a binding
obligation of such party and has been authorized by all requisite action under
the party's governing instruments, that the individuals executing this Lease on
behalf of such party are duly authorized and designated to do so, and that no
other signatories are required to bind such party.
42. DEFINITIONS. Capitalized terms not defined elsewhere in this Lease
shall have the meaning set forth below:
42.1 "PREMISES" shall have the meaning ascribed to it in Section
1.1.
42.2 "SITE IMPROVEMENTS". The exterior improvements, to include
surface parking areas, landscaping, drainage, irrigation, gutters, sidewalks,
exterior lighting, walkways, driveways and other improvements and appurtenances
relating to ingress and egress described in the plans and specifications of the
Building Shell and Site Improvements described on Exhibit "C".
42.3 "SITE PLAN". The site plan attached hereto as Exhibit "A".
42.4 "BUILDING". The Building Shell and the Tenant Improvements.
42.5 "BUILDING SHELL". The shell of the Building, as described in
the plans and specifications of the Building Shell and Site Improvements
described on Exhibit "C", consisting of a two story concrete tilt-up structure,
footings, foundations, floors, exterior walls, and roof, with building
electrical service, natural gas, telephone, water, plumbing, and other utilities
necessary for the Tenant Improvements extended from the street and stubbed to
the Building.
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<PAGE> 44
42.6 "TENANT IMPROVEMENTS". The initial improvements within the
Building Shell desired by Tenant for occupancy and use of the entire Premises by
Tenant, described on Exhibits "D" and "E".
42.7 "BUILDING SHELL PLANS". The plans and specifications for the
Building Shell described on Exhibit "C".
42.8 "TENANT IMPROVEMENT PLANS". The plans and specifications for
the Tenant Improvements described on Exhibits "D" and "E".
42.9 "PROJECT". The Site Improvements, the Building Shell, and the
Tenant Improvements.
42.10 "TENANT IMPROVEMENT ALLOWANCE" shall have the meaning
ascribed to it in Section 4.3.
42.11 "TENANT'S REMOVABLE PROPERTY" shall have the meaning ascribed
to it in Section 30.3 and as described on Exhibit "G".
-42-
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the date first above written.
LANDLORD:
NEXUS EQUITY VIII LLC
A California limited liability company
By Nexus Properties, Inc.
A California corporation
Manager
By: /s/ Michael J. Reidy
-------------------------------
Michael J. Reidy
Chief Executive Officer
TENANT:
EPIMMUNE INC.
A Delaware corporation
By: /s/ Peter C. Wulff
-------------------------------
Name: Peter C. Wulff
Its: Vice President, Finance and Secretary
-43-
<PAGE> 46
EXHIBIT "A"
SITE PLAN OF THE PROJECT
------------------------
<PAGE> 47
EXHIBIT "B"
OUTLINE OF THE PREMISES
-----------------------
<PAGE> 48
EXHIBIT "C"
DESCRIPTION OF THE BUILDING SHELL AND SITE IMPROVEMENTS
-------------------------------------------------------
<PAGE> 49
EXHIBIT "D"
FLOOR PLAN OF TENANT IMPROVEMENTS
---------------------------------
<PAGE> 50
EXHIBIT "E"
DESCRIPTION AND BUDGET OF TENANT IMPROVEMENTS
---------------------------------------------
<PAGE> 51
EXHIBIT "F"
RULES AND REGULATIONS
---------------------
<PAGE> 52
EXHIBIT "G"
TENANT'S REMOVABLE PROPERTY
---------------------------
Security System
Autoclave
Cage Washer
Animal Caging/Holding System
<PAGE> 53
EXHIBIT "H"
DISBURSEMENT INSTRUCTIONS
-------------------------
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statement (Form
S-3 and Form S-8) of Cytel Corporation of our report dated February 5, 1998,
except for Notes 5, 9 and 11, as to which the date is March 29, 1999, with
respect to the consolidated financial statements of Cytel Corporation included
in its Annual Report (Form 10-K) for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
April 13, 1999
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,594
<SECURITIES> 9,217
<RECEIVABLES> 0
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<CURRENT-ASSETS> 13,468
<PP&E> 8,818
<DEPRECIATION> 5,939
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0
0
<COMMON> 142,693
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<TOTAL-LIABILITY-AND-EQUITY> 21,030
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