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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28782
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NEOTHERAPEUTICS, INC.
(Name of Small Business Issuer in its charter)
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COLORADO 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE TECHNOLOGY DRIVE, SUITE I-821
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
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Issuers telephone number: (714) 788-6700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, no par value
Common Stock Purchase Warrants
__________________________________
Check whether the issuer (1) has all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Revenues for the issuer's most recent fiscal year were $0.
The aggregate market value of the voting stock held by non-affiliates as of
December 31, 1996 was $16,652,307.
As of March 24, 1997, there were 5,361,807 shares of the issuer's common stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
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PART I
Item 1 Description of Business . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . 22
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 24
Item 7. Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 27
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 46
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . 46
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . 54
Item 13. Exhibits, List and Reports on Form 8-K . . . . . . . . . . . . . . . . . 56
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
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This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may
differ materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "ITEM 1 - "Description of Business", including the section
therein entitled "Risk Factors," and in "ITEM 6 - Discussion and Analysis of
Financial Condition and Results of Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was incorporated in Colorado in December 1987. On August
7, 1996, the Company changed its name from Americus Funding Corporation to
NeoTherapeutics, Inc. Advanced Immunotherapeutics, Inc. ("AIT"), was
incorporated as a California corporation in June 1987. In July 1989, all of
the shareholders of AIT exchanged all of their shares of AIT Common Stock for
shares of the Company's Common Stock, and AIT became a wholly-owned subsidiary
of the Company. Unless the context otherwise requires, all references to the
"Company" and "NeoTherapeutics" refer to NeoTherapeutics, Inc., a Colorado
corporation, and AIT. The Company's executive offices are located at One
Technology Drive, Suite I-821, Irvine, CA 92618, and its telephone number is
(714) 788-6700.
The Company is a development stage biopharmaceutical company engaged
in the discovery and development of novel therapeutic drugs intended to treat
neurodegenerative diseases and conditions, such as memory deficits associated
with Alzheimer's disease and aging, stroke, spinal cord injuries and
Parkinson's disease. The Company's initial product candidate, AIT-082, and its
other compounds under development are based on the Company's patented
technology. This technology uses small synthetic molecules to create non-toxic
compounds, intended to be administered orally or by injection, that are capable
of passing through the blood-brain barrier to rapidly act upon specific target
cells in specific locations in the central nervous system, including the brain.
Animal and laboratory tests have shown that the Company's AIT-082 compound
appears to selectively increase the production of certain neurotrophins, a type
of large protein, in the hippocampus and frontal cortex, which are the areas of
the brain implicated in memory. These neurotrophins regulate nerve cell growth
and function. The Company's technology has been developed to capitalize on the
beneficial effects of these proteins, which have been widely acknowledged to be
closely involved in the early formation and differentiation of the central
nervous system. The Company believes that AIT-082 could have prophylactic,
therapeutic and regenerative effects.
The Company's developmental activities to date have benefited from a
close association with the National Institutes of Health ("NIH"). The NIH's
National Institute on Aging ("NIA") has funded a portion of the pre-clinical
studies on the Company's AIT-082 compound, including toxicity studies. The NIA
has committed to fund and conduct two Phase I clinical trials under the
auspices of its Alzheimer's Disease Cooperative Study Unit ("ADCSU"), a
consortium of approximately 35 highly regarded clinical centers throughout the
United States. The NIH's National Institute for Mental Health ("NIMH") has
also supported the Company's development efforts by providing funds, along with
the NIA, for the production of sufficient quantities of the AIT-082 compound to
complete pre-clinical testing and Phase I human clinical trials.
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An application has been filed with the Canadian Ministry of Health to
test AIT-082 in humans, and Dr. D. W. Molloy of the Geriatric Research Group
received authorization from that agency on March 6, 1997 to conduct Phase I/II
clinical trials in Alzheimer's patients. These clinical trials commenced on
March 24, 1997.
INTRODUCTION TO THE CENTRAL NERVOUS SYSTEM
The human brain contains some 10 billion nerve cells, or neurons, each
of which has connections with many other neurons. Sensory, motor and cognitive
activities are all governed by this complex network of neurons, each member of
which communicates with other neurons across junctions known as "synapses."
Communication between neurons involves chemical "messengers" known as
neurotransmitters, which are released by the sending neuron, diffuse across a
small gap, and bind to corresponding receptors on the receiving neuron.
Abnormal neuronal communication has been implicated in a range of psychiatric
and neurological disorders, including memory deficits, schizophrenia,
depression, anxiety, Parkinson's disease and eating disorders.
The treatment of most diseases is facilitated by cell regeneration, a
natural component of human healing. However, in the highly complex realm of
neurological diseases, treatment is more difficult because neurons do not
naturally regenerate after maturity. Currently available drugs for the
treatment of such significant neurological disorders as Alzheimer's and
Parkinson's diseases act by increasing or replacing supplies of critical
neurotransmitters, but provide time-limited benefits at best. These benefits
are limited because the eventual loss of neuronal cells without regeneration
means there is eventually nothing for those neurotransmitters to activate.
Much of the early neuroscience-oriented biotechnology research
centered on the investigation of certain proteins, known as neurotrophins or
neurotrophic factors, which are necessary to the early development of neurons
as well as their long-term maintenance and survival. These substances are
involved in the fundamental formation and shaping of the nervous system. Given
their role in the early neuron development and maintenance, it has been
hypothesized that these neurotrophic factors could be used in the treatment of
neurodegenerative diseases.
Since neurons do not naturally regenerate following damage or disease,
substantial research has been conducted by academic researchers and by the
pharmaceutical industry in developing these factors as possible treatments for
a variety of neurological disorders. To date, the usefulness of these factors
has been limited by their inability to pass the blood-brain barrier, which
serves as a "filter" to keep molecules larger than a certain size from leaving
the bloodstream and entering the brain and spinal cord. Therefore,
neurotrophic factors, which are large molecules, cannot be administered orally
or through injection into the bloodstream.
There are currently three alternative approaches to achieving
blood-brain barrier access. One approach is to introduce neurotrophic factors
by direct injection into the brain through a catheter inserted into a hole
drilled into the skull. While this treatment has achieved some success in
alleviating some of the symptoms of Alzheimer's disease, the prospect for
infection and the inconvenience and expense of the procedure have limited its
practical usefulness to date. The second approach is to temporarily break down
the blood-brain barrier, which would allow molecules of all sizes (including
therapeutic as well as toxic or infectious agents) to enter into the central
nervous system. This approach is in the early stage of development, and its
utility has not been established.
The third approach, the one taken by the Company, is to find small
molecules which can pass through the blood-brain barrier, which can be
administered orally or
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through injection into the bloodstream. The small-molecule approach taken by
the Company, if successful, could lead to the development of compounds which
can either mimic the actions of the larger molecule neurotrophic factors or
stimulate the production of such factors within the brain, through
administration either orally or through injection. The Company believes that
such a development could represent a major advance in the treatment of
neurological disorders.
Neurotrophic Factors
A number of the Company's compounds modify biological processes that
involve neurotrophic factors. In the past, research on neurotrophic factors
has been greatly hampered by the fact that such factors naturally exist only in
small quantities. However, advances in cloning these factors over the past few
years have made them more available for research. The neurotrophic factors of
greatest research interest to the Company are:
o NGF (Nerve Growth Factor): NGF has been shown to be essential
to the development and maintenance of peripheral sensory and
sympathetic system neurons, as well as central cholinergic
neurons that are clustered in the hippocampus and cortex areas
of the brain. These sites of activity imply possible
relevance to Alzheimer's disease degeneration, since it is the
loss of cholinergic neurons in those areas which is believed
integral to the loss of memory functions characteristic of
that disease. Animal studies have shown that NGF can reverse
neuronal functional deficits induced by natural aging and by
experimental surgical lesions of the brain. Direct
administration of NGF into the brain through a catheter
inserted into a hole drilled into the skull has led to an
improvement in spatial memory in aged rats. Similarly, the
direct administration of NGF into the brain of a limited
number of Alzheimer's disease patients has been shown to cause
an improvement in short-term memory.
o NT-3 (Neurotrophin-3): like NGF , NT-3 stimulates neurite
fiber growth. NT-3 appears potentially useful in the
treatment of some sensory neuropathies, which are impairments
of an individual's subjective awareness of his or her own
muscle motion and body positioning, and are encountered in
diabetics and in patients receiving chemotherapy for cancer.
Infusion of NT-3 directly into the brain has led to
improvement in spatial memory in aged rats.
o bFGF (Fibroblast Growth Factor, basic): bFGF is
neuroprotective and may promote the proliferation of certain
immature neurons. While the exact relevance of bFGF to
disease is currently being established, it appears to be the
only neurotrophin that causes proliferation of neurons. Based
on these observations, the long-held belief that new neurons
cannot be generated in adults is being reconsidered. The
ability to produce new neurons could have implications in a
variety of diseases where neurons have been destroyed, such as
Alzheimer's disease, spinal cord injuries and stroke.
THE COMPANY'S DRUG DEVELOPMENT STRATEGY
The Company is engaged in research that has primarily focused on the
development of new drugs that act on the nervous system to treat diseases and
conditions characterized by a memory impairment, such as Alzheimer's disease,
impairment associated with the dementia of aging, stroke, spinal cord injuries,
as well as Parkinson's disease.
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The technical strategy employed by the Company is the synthesis of
proprietary chemical molecules that modify specific biological processes in the
body. The methods by which the molecules are synthesized are proprietary and
specific molecules and their methods of use have been patented by the Company.
The Company's drug design methods are based upon the use of hypoxanthine, a
natural non-toxic purine compound which is contained in the genetic material of
all living matter. Hypoxanthine is chemically linked to a variety of other
molecules in order to produce the Company's proprietary AIT series of
compounds. The various molecules that are linked to hypoxanthine are selected
from known drugs that have established therapeutic activity, producing a
bi-functional compound. These compounds exhibit certain functional features of
both hypoxanthine (including its ability to facilitate passage through the
blood-brain barrier) and the linked therapeutic drugs. Chemical and behavioral
studies have given the Company reason to believe that this compound synthesis
and selection process increases the probability that the new AIT compounds will
retain the efficacy exhibited by their "parent" drugs.
The Company conducts the synthesis and early testing to establish
therapeutic potential necessary to obtain patents on new compounds. In that
regard, the Company has conducted pre-clinical testing of the safety and
efficacy of certain of its compounds and intends to file an Investigational New
Drug Application ("IND") for each such compound. With respect to the Company's
AIT-082 compound, some Phase I clinical trials will be conducted by the ADCSU,
and the Company intends to conduct all other clinical trials necessary to
obtain FDA approval. The Company intends to seek out large pharmaceutical
companies as partners for the development, manufacture and marketing of certain
of its other compounds.
PRODUCTS IN DEVELOPMENT
The Company has discovered, synthesized and tested a series of new
compounds. These compounds have been tested in the Company's own former
laboratories, at adjunct laboratories at Olive View/UCLA Medical Center, at
U.C. Irvine and other independent universities, at other industry research
centers and at the NIH. These compounds are all currently in pre-clinical
testing. The Company's lead compound, AIT-082, has also begun Phase I/II
clinical studies. The following table summarizes the activity and potential
use for some of the compounds currently under development. A number of other
compounds have been synthesized and are awaiting further biological evaluation.
No assurance can be made that any of the Company's compounds will prove to be
effective treatments for the indicated diseases or conditions or for any other
purposes, or that any such compounds will receive FDA approval.
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COMPOUND POTENTIAL INDICATIONS DEVELOPMENT STATUS
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AIT-082 Alzheimer's disease, spinal cord injury, amyotrophic lateral Phase I/II clinical studies
sclerosis, memory impairment of aging, stroke began in March 1997;
Pre-clinical studies
AIT-097 Parkinson's disease Pre-clinical studies; toxicity
studies expected to begin in
1997
AIT-034 Alzheimer's disease, severe memory impairment Pre-clinical studies; toxicity
studies expected to begin in
1997
AIT-083 Memory impairment, immune impairment, AIDS dementia Pre-clinical studies
AIT-084 Anti-anxiety and antispasmodic agent Pre-clinical studies
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COMPOUND POTENTIAL INDICATIONS DEVELOPMENT STATUS
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AIT-110 Immune system disorders, angina, arrhythmias Pre-clinical studies
AIT-111 Hypertension, angina, arrhythmias, altered central nervous Pre-clinical studies
system impulse transmission
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AIT-082
The Company's AIT-082 compound is the most extensively studied
compound in the AIT series and has been the primary focus of the Company's
research efforts. AIT-082 is a small synthetic molecule that incorporates the
chemical structural features of hypoxanthine (the only purine which passes the
blood-brain barrier) and procainamide, which is a drug marketed for the
treatment of cardiac arrhythmias and has been shown to have memory-enhancing
activity. AIT-082 has been shown in animal studies to enhance working (or
recent) memory, the type of memory which is deficient in patients suffering
from Alzheimer's disease. In addition, the Company believes that AIT-082 has
potential as a treatment for memory impairments that are seen in children, aged
and stroke patients, as well as in patients with nerve damage such as stroke
and spinal cord injury.
Pre-clinical testing involving laboratory animals conducted by the
Company and independent research institutions has indicated that AIT-082
exhibits the following properties and/or effects:
o Memory: Shown to reduce, delay and prevent memory
deficits in aged animals; shown to enhance
memory function in young and aged animals.
o Toxicity: Shown to be non-toxic at the highest testable
dosage in dogs (1,000 mg/kg) and rats
(3,000 mg/kg).
o Dosage: Effective over a wide range of doses, with
effectiveness observed at doses as low as
0.5 mg/kg and up to 60 mg/kg; a single dose
has been observed to have measurable effects
for more than seven days.
o Administration: Active both orally and through injection.
o Tolerance: Tolerance to AIT-082 has not developed even
after daily treatment in mice for a period
of 11 months.
o Side effects: Has no measured effect in mice on
neurological parameters such as learning
rate, motivation, performance or ocomotor
activity.
Until completion of human clinical trials, there can be no assurance
that these properties and/or effects can be replicated in humans.
The Company has shown that when administered to neurons in tissue
culture, AIT-082 can induce the same effects as NGF when administered alone.
The Company has also shown that AIT-082 causes the production of NGF, NT-3 and
bFGF in tissue culture. In addition, the Company has demonstrated that oral
administration of AIT-082 increases the levels of NGF, NT-3 and bFGF in the
hippocampus and frontal cortex of aged mice. Other researchers have shown that
administration of multiple neurotrophins may be more effective as a treatment
method than the administration of a single neurotrophin. The Company believes
that AIT-082's mechanism of action (after it has passed through the blood-brain
barrier) involves activating the genes that lead to the production of a number
of different neurotrophins. Neurotrophins themselves are not orally active and
do not
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pass the blood-brain barrier. Therefore, should oral AIT-082 prove to be an
effective treatment for neurological disorders, it could have two distinct
practical advantages over NGF, NT-3 or bFGF administered alone directly into
the brain as a treatment for such disorders: (i) it can be administered
orally; and (ii) it induces the production of multiple neuotrophins in those
areas of the brain associated with memory.
The NIA and the NIMH have contracted for production of sufficient
quantities of AIT-082 to conduct animal toxicity studies and early human
clinical trials and have committed funding for this contract. In addition, the
NIA has contracted with an independent laboratory to conduct the toxicology
studies required by the FDA for an IND and has committed funding for this
contract. The initial production of AIT-082 and the first toxicity studies
necessary to prepare and submit an IND have been completed. Additional
toxicity studies in animals are expected to commence in the second quarter of
1997. The Company anticipates that the IND for AIT-082 will be submitted to
the FDA within the first six months of 1997. There can be no assurance that
the Company will be able to file or obtain approval of an IND for AIT-082
during such period, if at all.
The first phase of human clinical evaluation in the United States will
begin shortly after approval of the IND. The Company anticipates that these
clinical studies should take approximately three to six months to complete;
however, there can be no assurance that these studies will not take longer to
complete. Two Phase I human clinical studies will be paid for and conducted in
the United States by the ADCSU. The ADCSU is a consortium of approximately 35
United States clinical centers funded by the NIA to conduct human Alzheimer's
disease research. The ADCSU has reviewed the Company's pre-clinical test data
and has approved conducting such clinical trials with AIT-082 after FDA
approval of the Company's IND. The Company expects that it will have to fund
two Phase II human clinical studies prior to submitting AIT-082 to the FDA for
marketing approval. There can be no assurance, however, that clinical trials
of AIT-082 will be successful, that the marketing of AIT-082 will be approved
by the FDA, or that AIT-082 can be successfully marketed to its targeted
population. See "- Drug Approval Process and Government Regulation."
An application has been filed with the Canadian Ministry of Health to
test AIT-082 in humans, and Dr. D. W. Molloy of the Geriatric Research Group
received authorization from that agency on March 6, 1997 to conduct Phase I/II
clinical trials in Alzheimer's patients. These clinical trials commenced on
March 24, 1997.
Other Compounds in Development
Due to the historically limited resources available to the Company and
the Company's decision to focus those resources on the development of its
AIT-082 compound, its other compounds are in an earlier stage of development.
These compounds include:
AIT-097. AIT-097 is a chemical derivative of hypoxanthine and
dopamine that has been demonstrated in animal studies to improve motor
function. The Company believes that AIT-097 has the potential of being
developed as a product for the treatment of Parkinson's disease. The Company
plans to expand pre-clinical testing and initiate toxicity studies on AIT-097
in 1997.
AIT-034. AIT-034 is a chemical analog of AIT-082 that has been
demonstrated in animal studies to enhance memory and to reverse memory deficits
in severely impaired animals that do not respond to AIT-082. AIT-034 does not
induce the production of NGF, and its mechanism of action is therefore believed
to be different than AIT-082. The Company believes that AIT-034 could be a
practical complementary product for Alzheimer's disease. The Company expects
initial toxicity studies on AIT-034 to commence in 1997.
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AIT-083. AIT-083 has been demonstrated in animal studies to
enhance memory and is a mild stimulant of the central nervous system. AIT-083
has also been shown to be a stimulant of the T-cells of the immune system,
making it a candidate for evaluation in the treatment of the dementia
associated with HIV infection.
AIT-084. AIT-084 has been shown in animal studies to interact
with the brain receptor for gamma-aminobutyric acid (GABA), which is a
neurotransmitter, and may have potential as an anti-anxiety and antispasmodic
agent.
AIT-110. AIT-110 has been shown to interact with calcium
channel proteins in laboratory tests and the Company believes that it has
potential use as a treatment of angina and arrhythmias. AIT-110 has also been
shown in laboratory tests to have activity as an immunomodulator for the
B-cells of the immune system, and the Company believes it has potential for the
treatment of a variety of immune system disorders.
AIT-111. AIT-111 has been shown in laboratory tests to
interact with calcium channel proteins and protein kinase C, and the Company
believes that it has potential for the treatment of hypertension, angina,
arrhythmias and a number of conditions associated with altered central nervous
system impulse transmissions.
Until extensive further development and testing is completed, which
will take many years if undertaken at all, the therapeutic and other effects of
these compounds cannot be established.
PRIMARY THERAPEUTIC TARGETS
Alzheimer's Disease. Alzheimer's disease is a neurodegenerative
brain disorder that leads to progressive memory loss and dementia. Alzheimer's
disease generally follows a course of deterioration over eight years or more,
with the earliest symptom being impairment of short- term memory. Alzheimer's
disease is now recognized as the most common cause of severe intellectual
impairment in persons over the age of 65 in the United States, with
approximately four million Americans diagnosed as suffering from Alzheimer's
disease. The number of Alzheimer's disease patients is expected to reach 14
million by 2050. Alzheimer's disease is the fourth leading cause of death in
the United States with approximately 100,000 deaths per year. The National
Alzheimer's Association has estimated that the overall care costs for the
treatment and care of the estimated four million United States Alzheimer's
disease patients is $100 billion per year.
To date, advanced chronological age appears to be the most significant
factor associated with the development of Alzheimer's disease. The incidence
of Alzheimer's disease is estimated to be approximately 5-10% in the over-65
age group. Current estimates are that one-third of the entire population in
the developed countries will survive to at least 80 years of age, when the risk
of contracting Alzheimer's disease increases to approximately 20%. In
addition, approximately 50% of the population over 85 years of age has been
estimated to be suffering from Alzheimer's disease. The Company is testing two
compounds, AIT-082 and AIT-034, which have shown preliminary indications in
animals of enhancing or restoring memory, and have potential to be used to
treat Alzheimer's disease patients.
Memory Impairment Associated with Aging. Because the populations
of developed countries are increasingly becoming older, the costs and social
burden of medical care and housing of aged persons suffering from mentally
deteriorative diseases is increasing. The availability of a drug to reduce the
memory impairments associated with aging would not only have a significant
economic impact but would also greatly improve the quality of life for the
elderly population. Both AIT-082 and AIT-034 have shown to be effective in
ameliorating memory loss associated with aging in mice.
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Stroke. Among older Americans, stroke ranks as the third leading
cause of death. An estimated 500,000 people in the United States suffer
strokes each year. The costs associated with the treatment and care of stroke
patients are estimated to be approximately $25 billion per year. Most
therapeutic approaches to treating strokes are directed towards correcting the
circulatory deficit or to blocking the toxic effects of chemicals released in
the brain at the time of the stroke. The Company is focusing its emphasis in
the treatment of strokes on protecting the cells from injury or degeneration
caused by strokes. Since AIT-082 has the potential to enhance nerve
regeneration, the Company believes that AIT-082 may prove useful in the
treatment of stroke.
Spinal Cord Injury. There are an estimated 200,000 severely
disabled survivors of spinal cord trauma in the United States with
approximately 10,000 new injuries each year. The cost of care and services for
these individuals is estimated to exceed $10 billion per year. Significant
research efforts are currently being focused on the neurotrophic factors that
can initiate and support new cell development, guide new or damaged nerves to
appropriate targets and maintain neuronal function. Animal studies have shown
that all these functional restorations are possible with appropriate
neurotrophic factors. A major obstacle to the effective use of these
neurotrophic factors is the delivery of the appropriate neurotrophin to the
site of damage. AIT-082 has been shown in mice to cause the production of
several neurotrophic factors in the brain after oral administration,
demonstrating that it can effectively penetrate the blood-brain barrier;
therefore, the Company believes that AIT-082 could potentially be used to
stimulate the regeneration of nerves damaged by spinal cord injury. The
Company has committed $100,000 for the establishment of a NeoTherapeutics
Fellowship as part of the Reeve-Irvine-Smith Research Center for spinal cord
injury.
MARKETING AND SALES STRATEGY
The Company has no experience in the marketing of pharmaceutical
products and, with the exception of the marketing of AIT-082 in the United
States, the Company does not expect to develop the resources to distribute and
market any products it might develop. With respect to any products it may
develop (other than AIT-082), the Company intends to license to, or enter into
strategic alliances with, larger pharmaceutical companies which could market
such products through their already developed distribution networks.
The Company's marketing strategy for AIT-082 differs from its
marketing strategy for its other future products because the Company believes
the development history (i.e. the technical and financial support provided by
the NIA, NIMH and ADCSU) and potential market (i.e. Alzheimer's disease, for
which there currently are only limited treatment options) for AIT-082 present
certain marketing advantages that its other proposed products do not have at
this time. The Company intends to market AIT-082 in the United States by
developing its own internal marketing organization. The Company believes this
approach for the United States sales is feasible since the Company expects to
market AIT-082 to a focused niche market primarily composed of psychiatrists
and neurologists at major Alzheimer's disease treatment centers. Furthermore,
the Company believes that, should AIT-082 ultimately be approved for marketing
by the FDA, the involvement by members of the ADCSU in conducting human
clinical trials of AIT-082 could provide the Company with an advantage in
marketing AIT-082. The Company believes the technical and financial support
provided to the Company by the NIA, NIMH and ADCSU for the development of
AIT-082 will also make the marketing of AIT-082 in the United States more
feasible for the Company. The Company expects to begin to build a marketing
organization in the Unites States after it makes a determination as to whether
the clinical results are sufficient to satisfy FDA requirements for marketing
approval. If, in the judgment of the Company, such approval is likely, then
the Company
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will begin to implement a marketing plan for AIT-082. The Company may consider
granting a co-marketing license to a larger pharmaceutical company in the
United States.
The Company currently intends to conduct its own synthesis and early
testing of new compounds to establish therapeutic potential necessary to obtain
patents. Thereafter, the Company may decide to enter into strategic alliances
or licensing arrangements with larger pharmaceutical companies that could then
provide for the continued development of certain of its compounds, including
obtaining all necessary FDA approvals for the marketing of drugs derived from
these compounds. The Company may decide to enter into strategic alliances at
various steps in the drug approval process, depending upon its evaluation of
various factors pertaining to the development and marketing of its compounds.
These factors may include the expense of obtaining FDA approval of the
compound, the size of the target market for drugs derived from a compound, the
potential difficulties in marketing drugs derived from a compound and the
possibility of obtaining assistance from scientific and government entities in
developing a compound.
As part of the Company's overall marketing strategy, it intends to
enter into strategic alliances or licensing arrangements with respect to
overseas distribution of all of the products it develops, including AIT-082.
The Company believes that the complexities of the various regulatory and
marketing procedures in foreign countries make it inadvisable for the Company
to undertake any such regulatory or marketing efforts by itself. With respect
to AIT-082, the Company may wait until Phase I clinical trials are successfully
completed in the United States before licensing AIT-082 in Europe and Japan as
well as granting a co-marketing license in the United States.
If the Company enters into strategic alliances or licensing
arrangements with respect to any of its compounds, it may retain the rights to
co-market certain of these products in the United States.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of the Company's products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in the United States
and other countries. In the United States, drugs are subject to rigorous
regulation. The Federal Food, Drug and Cosmetics Act, as amended, and the
regulations promulgated thereunder, as well as other federal and state statutes
and regulations, govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's proposed products. Product development and approval
within this regulatory framework take a number of years and involve the
expenditure of substantial resources. In addition to obtaining FDA approval
for each product, each drug manufacturing establishment must be registered
with, and approved by, the FDA. Domestic manufacturing establishments are
subject to regular inspections by the FDA and must comply with Good
Manufacturing Practices ("GMP"). To supply products for use in the United
States, foreign manufacturing establishments must also comply with GMP and are
subject to periodic inspection by the FDA or by regulatory authorities in
certain of such countries under reciprocal agreements with the FDA. Drug
product and drug substance manufacturing establishments located in California
also must be licensed by the State of California in compliance with local
regulatory requirements.
New Drug Development and Approval. The United States system of new
drug approval is one of the most rigorous in the world. According to a
February 1993 report by the Congressional Office of Technology Assessment, it
costs an average of $359 million and takes an average of 15 years from
discovery of a compound to bring a single new pharmaceutical product to market.
Approximately one in 1,000 compounds that enter the pre-clinical testing stage
eventually makes it to human testing and only one-fifth of those are ultimately
approved for commercialization. In recent years, societal and
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governmental pressures have created the expectation that drug discovery and
development costs can be reduced without sacrificing safety, efficacy and
innovation. The need to significantly improve or provide alternative
strategies for successful pharmaceutical discovery, research and development
remains a major health care industry challenge.
Drug Discovery. In the initial stages of drug discovery before a
compound reaches the laboratory, typically tens of thousands of potential
compounds are randomly screened for activity in an assay assumed to be
predictive of a particular disease process. This drug discovery process can
take several years. Once a "screening lead" or starting point for drug
development is found, isolation and structural determination is initiated.
Numerous chemical modifications are made to the screening lead (called
"rational synthesis") in an attempt to improve the drug properties of the lead.
After a compound emerges from the above process, it is subjected to further
studies on the mechanism of action, further in vitro screening against
particular disease targets and finally, in vivo animal screening. If the
compound passes these evaluation points, animal toxicology is performed to
begin to analyze the potential toxic effects of the compound, and if the
results indicate acceptable toxicity findings, the compound emerges from the
basic research mode and moves into the pre-clinical phase.
Pre-clinical Testing. During the pre-clinical testing stage,
laboratory and animal studies are conducted to show biological activity of the
compound against the targeted disease, and that the compound is evaluated for
safety. These tests can take up to three years or more to complete.
Investigational New Drug Application (IND). After pre-clinical
testing, an IND is submitted to the FDA to begin human testing of the drug.
The IND becomes effective if the FDA does not reject it within 30 days. The
IND must indicate the results of previous experiments, how, where and by whom
the new studies will be conducted, how the chemical compound is manufactured,
the method by which it is believed to work in the human body, and any toxic
effects of the compound found in the animal studies. In addition, the IND must
be reviewed and approved by an Institutional Review Board comprised of
physicians at the hospital or clinic where the proposed studies will be
conducted. Progress reports detailing the results of the clinical trials must
be submitted at least annually to the FDA.
Phase I Clinical Trials. After an IND becomes effective, Phase I
human clinical trials can begin. These studies, involving usually between 20
and 80 healthy volunteers, can take up to one year or more to complete. The
studies determine a drug's safety profile, including the safe dosage range.
The Phase I clinical studies also determine how a drug is absorbed,
distributed, metabolized and excreted by the body, as well as the duration of
its action.
Phase II Clinical Trials. In Phase II clinical trials, controlled
studies of approximately 100 to 300 volunteer patients with the targeted
disease assess the drug's effectiveness. These studies are designed primarily
to evaluate the effectiveness of the drug on the volunteer patients as well as
to determine if there are any side effects on these patients. These studies
can take up to two years or more. In addition, PhaseI/II clinical trials may
be conducted that evaluate not only the efficacy but also the safety of the
drug on the targeted patient population.
Phase III Clinical Trials. This phase typically lasts up to three
years or more and usually involves 1,000 to 3,000 patients with the targeted
disease. During the Phase III clinical trials, physicians monitor the patients
to determine efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug.
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New Drug Application (NDA). After completion of all three clinical
trial phases, the data is analyzed and, if the data indicates that the drug is
safe and effective, a NDA is filed with the FDA. The NDA must contain all of
the information on the drug that has been gathered to date, including data from
the clinical trials. NDAs are often over 100,000 pages in length. The average
NDA review time for new pharmaceuticals approved in 1995 was 19.2 months.
Fast Track Review. In December 1992, the FDA formalized procedures
for accelerating the approval of drugs to be marketed for the treatment of
certain serious diseases for which no satisfactory alternative treatment
exists, such as Alzheimer's disease and AIDS. If it is demonstrated that the
drug has a positive effect on survival or irreversible morbidity during Phase
II clinical trials, then the FDA may approve the drug for marketing without
completion of Phase III testing. At the present time, the Company believes
that AIT-082 may be able to qualify for "fast-track" FDA review; however, no
assurance can be made that AIT-082 will ultimately be demonstrated to meet the
requirements for such "fast-track" review.
Approval. If the FDA approves the NDA, the drug becomes available
for physicians to prescribe. The Company must continue to submit periodic
reports to the FDA, including descriptions of any adverse reactions reported.
For certain drugs which are administered on a long-term basis, the FDA may
request additional clinical studies (Phase IV) after the drug has begun to be
marketed to evaluate long-term effects.
In addition to regulations enforced by the FDA, the Company is also
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and future federal, state or
local regulations. The Company's research and development activities involves
the controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standard
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
damages that result, and any such liability could exceed the resources of the
Company.
For marketing outside the United States, the Company or its
prospective licensees will be subject to foreign regulatory requirements
governing human clinical trials and marketing approval for drugs and devices.
The requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. The Company
does not currently have any facilities or employees outside of the United
States.
MANUFACTURING
The Company has only limited capability at present to chemically
synthesize compounds for its research, testing and development programs for
AIT-082 or any of its other compounds. The NIMH and NIA have agreed to fund
the production of AIT-082 by an FDA-certified drug manufacturer in quantities
sufficient to conduct toxicity testing and early human clinical trials. The
Company believes that the quantities of AIT-082 being produced under this
funding should be sufficient to conduct these Phase I human clinical trials.
The Company will need to ensure the production of additional amounts of AIT-082
if, and when, additional clinical programs for AIT-082 are initiated.
Therefore, the Company plans to establish a pilot plant or to establish a
contractual relationship with an FDA-certified drug manufacturer for the
production of AIT-082 and its other compounds under development.
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PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are vital to the Company's
business. The Company's policy is to seek patent protection for its
proprietary compounds and technology, and it intends to protect its technology,
inventions and improvements to inventions that are commercially important to
the development of its business. The Company also intends to rely on trade
secrets, know-how, continuing technology innovations and licensing arrangements
to develop and maintain its competitive position.
On February 25, 1992, Dr. Alvin Glasky was issued a United States
patent (No. 5,091,432) which establishes proprietary rights for a series of
compounds whose chemistry is based upon a purine, hypoxanthine, and for the use
of these compounds in the treatment of neuroimmunologic disorders. This patent
expires on March 28, 2010. These compounds are bi-functional drugs that
combine the ability of hypoxanthine to be absorbed rapidly into the body with
the pharmacological activity of a second molecular component. These second
components were selected to provide a wide variety of potential therapeutic
applications including the treatment of schizophrenia, Parkinson's disease and
memory deficits. On September 5, 1995, Dr. Glasky was issued a second United
States patent (No. 5,447,939) which covers the treatment of neurological and
neurodegenerative diseases through modification of certain biochemical
processes in cells. This patent expires on July 25, 2014. This second patent
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
Both patents have been assigned to the Company by Dr. Glasky. In
connection with these assignments, Dr. Glasky has been granted a royalty of two
percent of all revenues derived by the Company from the use and sale by the
Company of any products which are covered by either of the aforementioned
patents or any subsequent derivative patents, in each case for the life of the
patent. However, Dr. Glasky will not receive any royalties with respect to
sales of products which utilize patent rights licensed to the Company by
McMaster University. In the event the Company terminates Dr. Glasky's
employment without cause, the royalty rate shall be increased to five percent,
and in the event Dr. Glasky dies, his estate or family shall be entitled to
continue to receive royalties at the rate of two percent.
With respect to the second United States patent, the Company and
McMaster University have entered into a license agreement whereby McMaster
University has licensed to the Company all patent rights belonging to McMaster
University contained in such patent. This agreement calls for minimum payments
by the Company of $25,000 per year to McMaster University, with the first
payment due in July of 1997, and for the Company to pay to McMaster University
a royalty of five percent of the net sales of all products sold by the Company
which incorporate the patent rights licensed to the Company by McMaster
University.
The Company also currently has two United States and a number of
corresponding foreign patent applications on file. There can be no assurance,
however, that the scope of the coverage claimed in the Company's patent
applications will not be significantly reduced prior to a patent being issued.
Corresponding foreign patent applications with respect to the Company's issued
patents have been filed in numerous foreign countries.
The patent positions of pharmaceutical and drug development companies
are generally uncertain and involve complex legal and factual issues. There
can be no assurance that third parties will not assert patent or other
intellectual property infringement claims against the Company with respect to
its products or technology or other matters. There may be third-party patents
and other intellectual property relevant to the Company's products and
technology which are not known to the Company. Patent
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litigation is becoming more common in the biopharmaceutical industry.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company, to protect trade secrets owned by the
Company or to determine the scope and validity of proprietary rights of third
parties. Although no third party has asserted that the Company is infringing
such third party's patent rights or other intellectual property, there can be
no assurance that litigation asserting such claims will not be initiated, that
the Company would prevail in any such litigation or that the Company would be
able to obtain any necessary licenses on reasonable terms, if at all. Any such
claims against the Company, whether meritorious or not, as well as claims
initiated by the Company against third parties, can be time consuming and
expensive to defend or prosecute and to resolve. If competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in
interference proceedings declared by the Patent and Trademark Office to
determine priority of invention, which could result in substantial cost to the
Company, even if the outcome were to ultimately be favorable to the Company.
The results of such proceedings are highly unpredictable and, as a result of
such proceedings, the Company may have to obtain licenses in order to continue
to conduct clinical trials, manufacture or market certain of its products. No
assurance can be made that the Company will be able to obtain any such licenses
on favorable terms, if at all.
The Company also relies upon unpatented trade secrets and
improvements, unpatented know-how and continuing technological innovation to
develop and maintain its competitive position, which it seeks to protect in
part, by confidentiality agreements with its employees and consultants and with
corporate partners and/or collaborators as such relationships are formed in the
future. The agreements provide that all confidential information developed or
made known to an individual during the course of the employment or consulting
relationship shall be kept confidential and not disclosed to third parties
except in specified circumstances. In the case of employees, the agreements
provide that all inventions conceived by the individual while employed by the
Company shall be the exclusive property of the Company. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are engaged in activities similar to that of the
Company. The Company's larger competitors include Amgen, Inc., Chiron Corp.,
Bristol-Myers Squibb Company, Glaxo Wellcome PLC, Regeneron Pharmaceuticals,
Inc., Cephalon, Inc., Warner-Lambert Co., Hoechst Marion Roussel Ltd. and
Pfizer, Inc., among others. In addition, colleges, universities, governmental
agencies and other public and private research institutions will continue to
conduct research and are becoming more active in seeking patent protection and
licensing arrangements to collect license fees, milestone payments and
royalties in exchange for license rights to technologies that they have
developed, some of which will be directly competitive with that of the Company.
These companies and institutions also compete with the Company in recruiting
highly qualified scientific personnel. Most of the Company's competitors have
substantially greater financial, research and development, human and other
resources than the Company. Furthermore, large pharmaceutical companies have
significantly more experience than the Company in pre-clinical testing, human
clinical trials and regulatory approval procedures.
Although the Company has just begun to conduct clinical trials with
respect to AIT-082, the Company has not conducted clinical trials with respect
to any of its other
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compounds under development nor has it sought the approval of the FDA for any
product based on such compounds. Furthermore, if the Company is permitted to
commence commercial sales of products based on compounds it develops, including
AIT-082, and decides to manufacture such products itself, then the Company will
also be competing with respect to manufacturing efficiency and marketing
capabilities, which are areas in which the Company has no prior experience.
Any product for which the Company obtains FDA approval must also
compete for market acceptance and market share. A number of drugs intended for
the treatment of Alzheimer's disease, memory loss associated with aging, stroke
and other neurodegenerative diseases and disorders are on the market or in the
later stages of clinical testing. Two drugs have been approved the FDA for
marketing in the United States as treatments for memory impairment associated
with Alzheimer's disease. One is currently being marketed by Warner-Lambert
Co. under the name Cognex(R). The other drug, which has recently been approved
by the FDA for Alzheimer's disease, is being marketed by Pfizer, Inc. under the
name of Aricept(R). Certain technologies under development by other
pharmaceutical companies could result in treatments for Alzheimer's disease and
other diseases and disorders for which the Company is developing its own
treatments. Several other companies are engaged in research and development of
compounds which use neurotrophic factors in a manner similar to that of the
Company's compounds. In the event that one or more of these programs were
successful, the market for the Company's products could be reduced or
eliminated.
The Company expects technological developments in the
neuropharmacology field to continue to occur at a rapid rate and expects
competition will remain intense as advances continue to be made. Although the
Company believes, based on the preliminary pre-clinical test results involving
certain of its compounds, that it will be able to continue to compete in the
discovery and early clinical development of compounds for neurological
disorders, there can be no assurance that the Company will be able to do so,
and the Company does not presently have sufficient resources to compete with
major pharmaceutical companies in the areas of later-stage clinical testing,
manufacturing and marketing.
EMPLOYEES
As of December 31, 1996, the Company had nine full-time employees of
which four hold Ph.D. degrees, one part-time employee, four part- time research
assistants and three consultants. There can be no assurance that the Company
will be able to attract and retain qualified personnel in sufficient numbers to
meet its needs. The Company's employees are not subject to any collective
bargaining agreements, and the Company regards its relations with its employees
to be good.
RISK FACTORS
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may
differ materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to, the
following:
History of Operating Losses: Future Profitability Uncertain
The Company is a development stage biopharmaceutical company. From
its inception in 1987 through December 31, 1996, the Company incurred losses of
approximately $6.1 million, substantially all of which consisted of research
and development and general and administrative expenses. The Company has not
generated any revenues from product sales to date, and there can by no
assurance that revenues
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from product sales will ever be achieved. Moreover, even if the Company
eventually generates revenues from product sales, the Company nevertheless
expects to incur significant operating losses over the next several years. The
Company's ability to achieve profitable operations in the future will depend in
large part on completing development of its products, obtaining regulatory
approvals for such products and bringing several of these products to market.
The likelihood of the long-term success of the Company must be considered in
light of the expenses, difficulties and delays frequently encountered in the
development and commercialization of new pharmaceutical products, competitive
factors in the marketplace as well as the burdensome regulatory environment in
which the Company operates. There can be no assurance that the Company will
ever achieve significant revenues or profitable operations.
Technological Uncertainty; Early Stage of Product Development; No Assurance of
Regulatory Approvals
The Company's proposed products are in the pre-clinical stage of
development and will require significant further research, development,
clinical testing and regulatory clearances. The Company has no products
available for sale and does not expect to have any products resulting from its
research efforts commercially available for at least several years. As of
March 24, 1997, one of the Company's proposed products, AIT-082, has started
clinical studies in Alzheimer's patients in Canada. The Company has not filed
an Investigational New Drug Application ("IND") with the United States Food and
Drug Administration ("FDA") on any of its products currently under research and
development. Although the Company plans to file an IND in the United States
with respect to its AIT-082 compound for the treatment of Alzheimer's disease
by mid-1997, there can be no assurance that the Company will be successful in
achieving the IND filing by this date, if at all. Moreover, the Company's
AIT-082 compound is the only product for which the Company expects to file an
IND in the foreseeable future. The Company's proposed products are subject to
the risks of failure inherent in the development of products based on
innovative technologies. These risks include the possibilities that some or
all of the proposed products could be found to be ineffective or toxic, or
otherwise fail to receive necessary regulatory clearances, that the proposed
products, although effective, will be uneconomical to manufacture or market,
that third parties may now or in the future hold proprietary rights that
preclude the Company from marketing them, or that third parties will market a
superior or equivalent product. Accordingly, the Company is unable to predict
whether its research and development activities will result in any commercially
viable products or applications. Furthermore, due to the extended testing and
regulatory review process required before marketing clearance can be obtained,
the Company does not expect to be able to commercialize any therapeutic drug
for a least several year, either directly or through any potential corporate
partners or licensees. There can be no assurance that the Company's proposed
products will prove to be safe or effective in humans or will receive
regulatory approval that are required for commercial sale. The Company's
primary area of therapeutic focus, disorders of the central nervous system
("CNS"), is not thoroughly understood and there can be no assurance that the
products the Company is seeking to develop will prove to be safe and effective
in treating CNS disorders or any other diseases.
Need for Additional Funding; Uncertainty of Access to Capital
The Company will require substantial funds for further development of
its potential products and to commercialize any products that may be developed.
The Company's capital requirements depend on numerous factors, including the
progress of its research and development programs, the progress of pre-clinical
and clinical testing, the time and cost involved in obtaining regulatory
approvals, the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, competing technological and
market developments and the ability of the Company to establish collaborative
arrangements. The Company has no current anticipated sources of
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additional funding. The Company believes that its existing capital resources
will be sufficient to satisfy its current and projected funding requirements
for at least the next 12 months. The Company anticipates that after the next
12 months, it may require substantial additional capital. Moreover, if the
Company experiences unanticipated cash requirements during the next 12 months,
the Company could require additional capital to fund its operations, continue
research and development programs as well as to continue the pre-clinical and
clinical testing of its potential products and to commercialize any products
that may be developed. The Company may seek such additional funding through
public or private financings or collaborative or other arrangements with third
parties. There can be no assurance that additional funds will be available on
acceptable terms, if at all. The Company may receive additional funds upon the
exercise from time to time of its Common Stock Purchase Warrants (the
"Warrants") and other outstanding warrants and stock options, but there can be
no assurance that any such warrants or stock options will be exercised or that
the amounts received will be sufficient for the Company's purposes. If
additional funds are raised by issuing equity securities, further substantial
dilution to existing shareholders may result. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its development programs, or to obtain funds by entering into
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its products or technologies that the
Company would not otherwise relinquish.
Dependence on Third Parties for Clinical Testing, Manufacturing and Marketing
The Company does not have the resources and, except with respect to
its AIT-082 compound, does not presently intend to conduct later- stage human
clinical trials itself or to manufacture any of its proposed products for
commercial sale. The Company therefore presently intends to seek larger
pharmaceutical company partners to conduct such activities for most or all of
its proposed products. In connection with its efforts to secure corporate
partners, the Company will seek to retain certain co-marketing rights to
certain of its proposed products, so that it may promote such products to
selected medical specialists while its corporate partner promotes these
products to the general medical market. There can be no assurance that the
Company will be able to enter into any such partnering arrangements on this or
any other basis. In addition, there can be no assurance that either the
Company or its prospective corporate partners can successfully introduce its
proposed products, that they will achieve acceptance by patients, health care
providers and insurance companies, or that they can be manufactured and
marketed at prices that would permit the Company to operate profitably.
The National Institute on Aging ("NIA") and the National Institute for
Mental Health ("NIMH") have agreed to fund the production of the Company's
AIT-082 compound for animal toxicity studies and early human clinical trials,
and the Alzheimer's Disease Cooperative Study Unit ("ADCSU"), a consortium of
approximately 35 United States clinical centers which receives funding from the
NIA, has agreed to fund and conduct two Phase I human clinical trials of
AIT-082. Should any of the NIA, NIMH or the ADCSU withdraw such support, the
Company would be forced to use a portion of its capital to fund such clinical
trials.
Lack of Operating Experience
To date, the Company has engaged exclusively in the development of
pharmaceutical technology and products. Although members of the Company's
management have substantial experience in pharmaceutical company operations,
the Company has no experience in manufacturing or procuring products in
commercial quantities or marketing pharmaceutical products and has only limited
experience in negotiating, setting up and maintaining strategic relationships,
conducting clinical trials and other later-stage phases of the regulatory
approval process. There can be no assurance that the Company will successfully
engage in any of these activities with
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respect to AIT-082 or any other products which it may choose to distribute. In
the event the Company decides to establish a commercial-scale manufacturing
facility for AIT-082, the Company will require substantial additional funds and
personnel and will be required to comply with extensive regulations applicable
to such a facility. The Company presently intends to establish its own sales
and marketing capabilities to market its AIT-082 compound in the United States
once it is certain of obtaining FDA approval of AIT-082. There can be no
assurance that the Company will be able to develop adequate manufacturing or
marketing capabilities either on its own or through third parties.
Need to Comply with Governmental Regulation and to Obtain Product Approvals
The testing, manufacturing, labeling, distribution, marketing and
advertising of products such as the Company's proposed products and its ongoing
research and development activities are subject to extensive regulation by
governmental regulatory authorities in the United States and other countries.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through lengthy
and detailed clinical testing procedures, sampling activities and other costly
and time consuming compliance procedures. The Company's proprietary compounds
require substantial clinical trials and FDA review as new drugs. The Company
cannot predict with certainty when it might submit many of its proprietary
products currently under development for regulatory review. Once the Company
submits its potential products for review, there can be no assurance that FDA
or other regulatory approvals for any pharmaceutical products developed by the
Company will be granted on a timely basis or at all. A delay in obtaining or
failure to obtain such approvals would have a material adverse effect on the
Company's business and results of operations. Failure to comply with
regulatory requirements could subject the Company to regulatory or judicial
enforcement actions, including, but not limited to, product recalls or
seizures, injunctions, civil penalties, criminal prosecution, refusals to
approve new products and withdrawal of existing approvals, as well as
potentially enhanced product liability exposure. Sales of the Company's
products outside the United States will be subject to regulatory requirements
governing clinical trials and marketing approval. These requirements vary
widely from country to country and could delay introduction of the Company's
products in those countries.
Dependence on Key Personnel
The Company's success is dependent on its key management and
scientific personnel, especially Dr. Alvin Glasky, the loss of whose services
could significantly delay the achievement of the Company's planned development
objectives. Although the Company has obtained key man life insurance on Dr.
Glasky in the face amount of $2 million, there can be no assurance that the
proceeds of such policy will be sufficient to compensate the Company for any
disruptions resulting from the loss of Dr. Glasky's services. Achievement of
the Company's business objectives will require substantial additional expertise
in such areas as finance, manufacturing and marketing, among others.
Competition for qualified personnel among pharmaceutical companies is intense,
and the loss of key personnel, or the inability to attract and retain the
additional, highly skilled personnel required for the expansion of the
Company's activities, could have a material adverse effect on the Company's
business and results of operations.
Uncertainty Regarding Patents and Proprietary Rights
The Company actively pursues a policy of seeking patent protection for
its proprietary products and technologies. The Company owns two United States
patents and currently has two United States patent applications on file. In
addition, corresponding patent applications with respect to the Company's
United States patents and pending United States applications have been filed in
a number of foreign jurisdictions. However, there can be no assurance that the
Company's patents will
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provide it with significant protection against competitors. Litigation could
be necessary to protect the Company's patents, and there can be no assurance
that the Company will have the financial or personnel resources necessary to
pursue such litigation or otherwise to protect its patent rights. In addition
to pursuing patent protection in appropriate cases, the Company also relies on
trade secret protection for its unpatented proprietary technology. However,
trade secrets are difficult to protect. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets, that
such trade secrets will not be disclosed or that the Company can effectively
protect its rights to unpatented trade secrets. The Company pursues a policy
of having its employees and consultants execute proprietary information
agreements upon commencement of employment or consulting relationships with the
Company, which agreements provide that all confidential information developed
or made known to the individual during the course of the relationship shall be
kept confidential except in specified circumstances. There can be no
assurance, however, that these agreements will provide meaningful protection
for the Company's trade secrets or other proprietary information.
Furthermore, there can be no assurance that claims against the Company
will not be raised in the future based on patents held by others or that, if
raised, such claims will not be successful. Such claims, if brought, could
seek damages as well as an injunction prohibiting clinical testing,
manufacturing and marketing of the affected product. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license in order to continue to manufacture or
market the affected product. There can be no assurance that the Company would
prevail in any such action or that any license required under any such patent
would be made available under acceptable terms, if at all. There has been, and
the Company believes that there will continue to be, significant litigation in
the pharmaceutical industry regarding patent and other intellectual property
rights. If the Company becomes involved in any litigation, it could consume a
substantial portion of the Company's financial and personnel resources
regardless of the outcome of such litigation.
Competition
Competition in the area of pharmaceutical products is intense. There
are many companies, both public and private, including well-known
pharmaceutical companies, that are engaged in the development of products for
certain of the applications being pursued by the Company. The Company's
probable larger competitors include Amgen, Inc., Chiron Corp., Bristol-Myers
Squibb Company, Glaxo Wellcome PLC, Regeneron Pharmaceuticals, Inc., Cephalon,
Inc., Hoechst Marion Roussel Ltd. and Pfizer, Inc., among others. In addition,
Warner-Lambert Co. is currently marketing a drug, tacrine, which has been
approved by the FDA for treatment of Alzheimer's disease, under the name
Cognex(R). Another drug, which has recently been approved by the FDA for
treatment of Alzheimer's disease, is being marketed by Pfizer, Inc. under the
name of Aricept(R). Most of these companies have substantially greater
financial, research and development, manufacturing and marketing experience and
resources than the Company and represent substantial long-term competition for
the Company. In addition, there are numerous other companies that are also in
the process of developing products for the treatment of diseases and disorders
for which the Company is developing products. Such companies may succeed in
developing pharmaceutical products that are more effective or less costly than
any products that may be developed by the Company.
Factors affecting competition in the pharmaceutical industry vary
depending on the extent to which the competitor is able to achieve a
competitive advantage based on proprietary technology. If the Company is able
to establish and maintain a significant proprietary position with respect to
its products, competition will likely depend primarily
20
<PAGE> 21
on the effectiveness of the product and the number, gravity and severity of its
unwanted side effects as compared to alternative products.
The industry in which the Company competes is characterized by
extensive research and development efforts and rapid technological progress.
Although the Company believes that its proprietary position may give it a
competitive advantage with respect to its proposed drugs, new developments are
expected to continue and there can be no assurance that discoveries by others
will not render the Company's potential products noncompetitive. The Company's
competitive position also depends on its ability to attract and retain
qualified scientific and other personnel, develop effective proprietary
products, implement development and marketing plans, obtain patent protection
and secure adequate capital resources. There can be no assurance that the
Company will be able to successfully attract or retain such personnel.
Risk of Product Liability
Although the Company currently carries product liability insurance,
there can be no assurance that the amounts of such coverage will be sufficient
to protect the Company, nor that there can by any assurance that the Company
will be able to obtain or maintain additional insurance on acceptable terms for
its clinical and commercial activities or that such additional insurance would
be sufficient to cover any potential product liability claim or recall.
Failure to maintain sufficient coverage could have a material adverse effect on
the Company's business and results of operations.
Use of Hazardous Materials
The Company's research and development efforts involve the use of
hazardous materials. The Company is subject to federal, state and local laws
and regulations governing the storage, use and disposal of such materials and
certain waste products. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of an accident, the Company could be held liable for
any damages that result and any such liability could exceed the resources of
the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops its own commercial
manufacturing facility.
Possible Volatility of Stock Price
The stock market from time to time experiences significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock and/or Warrants. In addition, the
market price of the Common Stock and/or Warrants is likely to be highly
volatile. Factors such as fluctuations in the Company's results of operations,
timing and announcements of technological innovations or new products by the
Company or its competitors, FDA and foreign regulatory actions, developments
with respect to patents and proprietary rights, public concern as to the safety
of products developed by the Company or others, changes in health care policy
in the United States and in foreign countries, changes in stock market analyst
recommendations regarding the Company, the pharmaceutical industry generally
and general market conditions each may have a significant adverse effect on the
market price of the Common Stock and/or Warrants. In addition, it is likely
that during at least some future quarterly periods, the Company's results of
operations will fail to meet the expectations of stock market analysts and
investors and, in such event, the market price of the Company's Common Stock
and/or Warrants could be materially and adversely affected.
21
<PAGE> 22
Control by Directors and Executive Officers
The Company's directors and executive officers beneficially own in the
aggregate approximately 26.4% of the Company's outstanding Common Stock. These
shareholders, if acting together, would be able to control substantially all
matters requiring approval by the shareholders of the Company, including the
election of directors and the approval of mergers or other business combination
transactions. Such concentration of ownership could discourage or prevent a
change of control of the Company.
Effect of Certain Charter and Bylaws Provisions
Certain provisions of the Company's Articles of Incorporation and
Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. These
provisions may make it more difficult for shareholders to take certain
corporate actions and could have the effect of delaying or preventing a change
in control of the Company
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently maintains its principal administrative offices
in Irvine, California which are leased on a month-to-month basis. The monthly
rent for this facility is $8,424. The Company's research is conducted at
laboratories located at the Olive View/UCLA Medical Center in Sylmar,
California and at the University of California at Irvine, California. The
Company has entered into a 7-year lease with two 5-year renewal options for a
new 34,000 square foot facility which will serve to consolidate the Company's
research and development, operations and administrative functions under one
roof. This building is expected to be completed in June 1997 and will be
leased by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation or legal
proceedings and is not aware of any litigation or proceeding threatened against
it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
COMMON STOCK
As December 31, 1996, there were 5,361,807 shares of Common Stock
outstanding held of record by 259 shareholders.
22
<PAGE> 23
MARKET FOR SECURITIES
The Company's Common Stock (NEOT) and Warrant (NEOTW) are currently
listed on the Nasdaq National Market. For each quarter since trading
commenced, on September 26, 1996, the high and low bid quotations of the
Company's Common Stock and Warrant, as reported by Nasdaq, were as follows:
<TABLE>
<CAPTION>
Common Stock Warrant
------------ -------
Bid Price Bid Price
--------- ---------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
September 30, 1996 $6-1/4 $5-1/4 $2-1/4 $1-3/4
December 31, 1996 $6 $3-3/4 $2-3/8 $1
</TABLE>
The foregoing bid quotations reflect inter-dealer prices, without
retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does
not intend to pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the
year ended December 31, 1996 involving sales of the Company's securities that
were not registered under the Securities Act of 1933 (the "Securities Act").
1. In January 1996, the Company sold 4,000 shares of Common Stock
to one investor for consideration of $10,000. The Company paid commissions of
$500 in conjunction with such sale.
2. In March 1996, the Company sold 2,000 shares of Common Stock
to one investor for consideration of $5,000. The Company paid commissions of
$100 in conjunction with such sale.
3. In April 1996, the Company sold 2,000 shares of Common Stock
to one investor for consideration of $5,000. The Company paid commissions of
$250 in conjunction with such sale.
4. In May 1996, the Company sold 178,800 shares of Common Stock
to twenty-seven investors for aggregate consideration of $447,000. The Company
paid commissions of $22,350 in conjunction with such sale.
5. In May 1996, the Company granted an option to purchase 30,000
shares of Common Stock, at an exercise price of $0.025 per share, to a
financial consultant in exchange for certain investment banking services.
6. In June 1996, the Company sold 80,000 shares of Common Stock
to two investors for consideration of $200,000. The Company paid commissions
of $10,000 in conjunction with such sale.
7. In July 1996, the Company granted options to purchase 95,000
shares of Common Stock, at exercise prices ranging from $3.75 to $4.13 per
share, to five employees and one consultant pursuant to its 1991 Stock
Incentive Plan.
23
<PAGE> 24
8. In July 1996, the Company granted options to purchase a total
of 12,000 shares of Common Stock, at an exercise price of $0.025 per share, to
two technical consultants in exchange for consulting services.
9. In July 1996, the Company issued 300,000 shares of Common
Stock to seven security holders upon the conversion of 75 Revenue Participation
Units ("RPUs").
10. In September 1996, the Company granted options to purchase
70,000 shares of Common Stock, at an exercise price of $4.50 per share, to four
non-employee directors, one employee and two consultants pursuant to its 1991
Stock Incentive Plan.
In the transactions described in paragraphs 1 through 6, exemption
from the registration requirements of the Securities Act was claimed under Rule
504 and/or Rule 506 and/or Section 4(2) of the Securities Act. In the
transactions described in paragraphs 7, 8 and 10, exemption from the
registration requirements of the Securities Act was claimed under Rule 701
and/or Section 4(2) of the Securities Act. The foregoing transactions did not
involve any public offering and the recipients either received adequate
information about the Company or had access, through employment or other
relationships, to such information. In each of the foregoing transactions,
the Company reasonably believed that each of the recipients was "sophisticated"
within the meaning of Section 4(2) of the Securities Act.
In the transaction described in paragraph 9, exemption from the
registration requirements of the Securities Act was claimed under Section
3(a)(9) of the Securities Act on the basis that the Company exchanged
securities with existing security holders where no commissions were paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may
differ materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in Item 1. "Description of Business", including the section
therein entitled "Risk Factors", and this Item 6.
RESULTS OF OPERATIONS
Overview
From the inception of the Company in June 1987 through December 31,
1996, the Company devoted its resources primarily to fund its research and
development efforts, and incurred a cumulative net loss of approximately $6.1
million. During this period, the Company had only limited revenues from
grants, and had no revenues from the sale of products or other sources. The
Company expects its operating expenses to increase over the next several years
as it expands its research and development and commercialization activities and
operations. The Company expects to incur significant additional operating
losses for at least the next several years unless such operating losses are
offset, if at all, by licensing revenues under strategic alliances with larger
pharmaceutical companies which the Company is currently seeking.
Year ended December 31, 1996 compared to Year ended December 31, 1995
There were no revenues for the twelve month period ended December 31,
1996, whereas during the same period in 1995 the Company received the final
portion of its Small Business Innovative Research grant revenues of $125,431
from the National Institute on Aging ("NIA"), an agency of the U.S. Government.
24
<PAGE> 25
Research and development expenses for the twelve months ended December
31, 1996 increased by approximately $310,000 or 101% over the previous year.
This increase was due primarily to personnel additions, salary increases,
consulting fees, license fees and insurance costs as the Company commenced
utilization of the proceeds from the recent public sale of Common Stock.
Research and development expenses are expected to continue to increase as the
Company continues to expand its product development and clinical trial
activities.
General and administrative expenses decreased approximately $7,300 or
1% for the year ended December 31, 1996 over the year ended December 31, 1995.
General and administrative expenses for 1996 reflect increased expenses related
to additional personnel, salary increases, insurance, professional and
consulting fees, commissions, facilities rent, travel, regulatory agency and
other fees associated with being a public company which were all either
significantly higher in 1996 than in 1995, or were initially incurred in 1996.
Although such expenses were lower or did not exist in 1995, general and
administrative expenses for 1995 include compensation expense for shares of
Common Stock which were forfeited pursuant to an agreement with certain
stockholders. These shares were reissued, triggering compensation expense for
the difference between the original price per share when such shares were
issued and the fair market value of the stock on the date of reissuance. Also,
in the 1995 period, the Company operated from the Chief Executive Officer's
residence on a rent-free basis with very limited administrative and technical
staff. The Company expects general and administrative expenses to continue
to increase in future periods in support of the expected increases in both
research and development activities as well as sales and marketing activities
should the Company successfully bring one or more of its products to market.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 1996, the Company financed its
operations primarily through grants, sales of securities, borrowings and
deferred payment of salaries and other expenses from related parties.
At December 31, 1996, included in the Company's working capital of
approximately $14.7 million, were cash and cash equivalents of approximately
$10 million and short-term investments of approximately $5.7 million. In
comparison, at December 31, 1995, the Company had a working capital deficiency
of approximately $704,000 and a nominal cash balance. The increases resulted
from the private placement sale of Common Stock during the first six months of
1996 aggregating approximately $633,700, and the September 26, 1996 public sale
of 2,500,000 "Units", with each Unit consisting of one share of the Company's
Common Stock and one Common Stock purchase Warrant. The closing took place on
October 1, 1996 and, on that date, the Company realized net cash proceeds of
approximately $17,363,000 from the sale. On October 11, 1996, the underwriter
of the public offering of the Units exercised an option to purchase an
additional 200,000 Units resulting in net cash proceeds of $1,389,000 to the
Company. Expenses directly related to the public offering of Units were
approximately $576,000 at December 31, 1996.
In January 1997, the Company entered into a long-term operating lease
with a major developer, whereby the developer has commenced the construction of
the Company's future administrative and research and development facility. The
Company expects to occupy the facility in late June 1997 and, in addition to
the rental, has committed to pay the developer in March 1997 approximately $1.4
million for construction of tenant improvements, primarily relating to
specialized research and development laboratory facilities. The lease runs for
seven years and contains two renewal options for five years each at the then
fair market value rate. Minimum rental commitments for the seven year period
from July 1997 (assuming occupancy occurs as
25
<PAGE> 26
scheduled) through June 2002 are approximately $283,300 (1997), $465,600
(1998), $483,100 (1999), $500,500 (2000 and 2001) $538,100 (2002) $554,200
(2003) and $285,400 (2004).
The Company has committed an aggregate of $276,000 to several
Universities to conduct general sceintific research programs and to provide for
a two year Fellowship Grant.
Since its inception, the Company has been in the development stage and
therefore devotes substantially all of its efforts to research and development.
The Company has incurred cumulative losses of approximately $6.1 million
through December 31, 1996, and expects to incur substantial losses over the
next several years. The Company's future capital requirements and availability
of capital will depend upon many factors, including continued scientific
progress in research and development programs, the scope and results of
preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in filing, prosecuting and
enforcing patent claims, competing technological developments, the cost of
manufacturing scale-up, the cost of commercialization activities and other
factors which may not be within the Company's control. While the Company
believes that its existing capital resources will be adequate to fund its
capital needs for at least 12 months of operations, the Company also believes
that ultimately it will require substantial additional funds in order to
complete the research and development activities currently contemplated and to
commercialize its proposed products.
Without additional funding, the Company may be required to delay,
reduce the scope or eliminate one or more of its research and development
projects, or obtain funds through arrangements with collaborative partners or
others which may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own. Other factors impacting the
future success of the Company are the ability to develop products which will be
safe and effective in treating neurological and immunological diseases, ability
to obtain government approval as well as dependency on key personnel.
26
<PAGE> 27
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . . . 31
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
27
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of NeoTherapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of
NeoTherapeutics, Inc. (a Colorado corporation in the development stage) and
subsidiary as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1996 and the related
consolidated statements of operations from inception (June 15, 1987) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NeoTherapeutics,
Inc. and subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996 and the related consolidated statements of operations from inception (June
15, 1987) to December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 14, 1997
28
<PAGE> 29
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1996
----------------- -------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . $ 859 $ 9,995,062
Marketable securities and short-term investments - 5,702,114
Other receivables, principally investment interest - 163,988
Prepaid expenses and refundable deposits . . . . 984 239,171
---------------- -------------------
Total current assets . . . . . . . . . . . . 1,843 16,100,335
---------------- -------------------
PROPERTY AND EQUIPMENT, at cost:
Equipment . . . . . . . . . . . . . . . . . . . 59,872 158,396
Property . . . . . . . . . . . . . . . . . . . . - 33,076
Accumulated depreciation . . . . . . . . . . . . (51,065) (58,963)
--------------- ------------------
Property and equipment, net . . . . . . . . 8,807 132,509
---------------- -------------------
OTHER ASSETS:
Marketable securities . . . . . . . . . . . . . - 1,746,432
---------------- -------------------
$ 10,650 $ 17,979,276
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses . . . . . $ 249,864 $ 262,604
Accrued payroll and related taxes . . . . . . . 227,787 331,175
Employee expense reimbursement . . . . . . . . . 84,179 82,717
Accrued interest to related parties . . . . . . 121,417 122,396
Notes payable to related parties . . . . . . . . 22,500 558,304
---------------- -------------------
Total current liabilities . . . . . . . . . 705,747 1,357,196
LONG TERM LIABILITIES:
Notes payable to related party . . . . . . . . . 558,304 -
STOCKHOLDERS' EQUITY (DEFICIT):
Revenue participation units, 75 and no units
outstanding, respectively . . . . . . . . . . 676,000 -
Common Stock, no par value, 25,000,000 shares
authorized:
Issued and outstanding, 2,095,019 and
5,361,807 shares, respectively . . . . . . 3,086,407 23,125,763
Deficit accumulated during the
development stage . . . . . . . . . . . . . . . (5,015,808) (6,503,683)
---------------- -------------------
Total stockholder's equity (deficit) . . . . (1,253,401) 16,622,080
---------------- -------------------
$ 10,650 $ 17,979,276
================ ===================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
29
<PAGE> 30
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES, from grants . . . . . . . . . . $ 235,790 $ 125,431 $ - $ 497,128
--------- --------- ----------- -----------
OPERATING EXPENSES:
Research and development . . . . . 286,831 305,932 615,485 2,966,812
General and administrative . . . . 221,478 667,218 659,895 3,429,106
--------- --------- ----------- -----------
508,309 973,150 1,275,380 6,395,918
--------- --------- ----------- -----------
LOSS FROM OPERATIONS . . . . . . . . . . (272,519) (847,719) (1,275,380) (5,898,790)
--------- --------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . 78 131 268,231 275,944
Interest expense . . . . . . . . . (39,901) (46,816) (51,769) (480,136)
Other income (expense) . . . . . . - (974) 20,043 48,299
--------- --------- ----------- -----------
Total other income (expense) . . . (39,823) (47,659) 236,505 (155,893)
--------- --------- ----------- -----------
NET LOSS . . . . . . . . . . . . . $(312,342) $(895,378) $(1,038,875) $(6,054,683)
========= ========= =========== ===========
NET LOSS PER SHARE . . . . . . . . . . . $(0.13) $(0.36) $(0.31)
========= ========= ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING . . . . . . . . 2,447,727 2,466,234 3,374,549
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
REVENUE COMMON STOCK DURING THE
PARTICIPATION ------------------------- DEVELOPMENT DEFERRED
UNITS SHARES AMOUNT STAGE COMPENSATION TOTAL
------------- ----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, Inception (June 15, 1987) . . $ - - $ - $ - $ - $ -
Common stock issued . . . . . . . - 465,902 2,100 - - 2,100
Net loss . . . . . . . . . . . . . - - - (31,875) - (31,875)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31,1987 . . . . . . . - 465,902 2,100 (31,875) - (29,775)
Common stock issued . . . . . . . - 499,173 2,250 - - 2,250
Revenue Participation Units issuance 594,000 - - - - 594,000
Net loss . . . . . . . . . . . . . - - - (556,484) - (556,484)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1988 . . . . . . 594,000 965,075 4,350 (588,359) - 9,991
Revenue Participation Units issuance 82,000 - - - - 82,000
Net effect of acquisition . . . . - 145,000 354,316 - - 354,316
Net loss . . . . . . . . . . . . . - - - (934,563) - (934,563)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1989 . . . . . . 676,000 1,110,075 358,666 (1,522,922) - (488,256)
Exercise of warrants . . . . . . . - 31,108 136,402 - - 136,402
Common stock issued in exchange for
accrued salaries on June 30
at $1.25 - 402,518 503,144 - - 503,144
Net loss . . . . . . . . . . . . . - - - (859,172) - (859,172)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1990 . . . . . . 676,000 1,543,701 998,212 (2,382,094) - (707,882)
Net Loss . . . . . . . . . . . . . - - - (764,488) - (764,488)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1991 . . . . . . 676,000 1,543,701 998,212 (3,146,582) - (1,472,370)
Net loss . . . . . . . . . . . . . - - - (423,691) - (423,691)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1992 . . . . . . 676,000 1,543,701 998,212 (3,570,273) - (1,896,061)
Common stock issued in exchange
for investment banking services
on March 18 at $1.35 . . . . . . - 40,000 54,000 - - 54,000
Common stock issued in exchange
for accrued salaries on
December 30 at $2.50 . . . . . . - 255,476 638,694 - - 638,694
Common stock issued in exchange
for note payable to President
on December 30 at $2.50 . . . . - 200,000 500,000 - - 500,000
Common stock issued in exchange
for accrued expenses on
December 30 at $2.50 . . . . . . - 20,842 52,104 - - 52,104
Stock options issued in exchange
for accrued professional fees
on December 31 at $1.35 . . . . - - 108,000 - - 108,000
Stock options issued in exchange
for future services on
December 31 at $1.35 . . . . . . - - 39,750 - - 39,750
Stock options issued for services - - - - (93,749) (93,749)
Net loss . . . . . . . . . . . . . - - - (237,815) - (237,815)
---------- ----------- ----------- ----------- ---------- -----------
BALANCE, December 31, 1993 . . . . . . 676,000 2,060,019 2,390,760 (3,808,088) (93,749) (835,077)
</TABLE>
31
<PAGE> 32
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
REVENUE COMMON STOCK DURING THE
PARTICIPATION ------------------------- DEVELOPMENT DEFERRED
UNITS SHARES AMOUNT STAGE COMPENSATION TOTAL
---------- ----------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for cash at $2.50 . $ - 13,000 $ 32,500 $ - $ - $ 32,500
Amortization deferred
compensation . . . . . . . . . . - - - - 93,749 93,749
Net loss . . . . . . . . . . . . . - - - (312,342) - (312,342)
---------- ----------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1994 . . . . . . 676,000 2,073,019 2,423,260 (4,120,430) - (1,021,170)
Common stock issued for cash at
$2.50 . . . . . . . . . . . . . - 22,000 55,000 - - 55,000
Common stock forfeiture . . . . . - (678,836) (1,193,943) - - (1,193,943)
Common stock reissued at $2.50 . . - 678,836 1,697,090 - - 1,697,090
Stock options issued for services
at $2.50 . . . . . . . . . . . . - - 105,000 - - 105,000
Net loss . . . . . . . . . . . . . - - - (895,378) (895,378)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 . . . . . . 676,000 2,095,019 3,086,407 (5,015,808) - (1,253,401)
Common stock issued for cash
at $2.50 (net of commission) . . - 266,800 633,650 - - 633,650
Stock options issued for services
at $2.50 . . . . . . . . . . . . - - 103,950 - - 103,950
Cash paid out for fractional
shares . . . . . . . . . . . . . - (12) (25) - - (25)
Conversion of Revenue Participation
units into common stock . . . . (676,000) 300,000 1,125,000 (449,000) - -
Common stock and warrants issued
for cash at $7.60, less
commissions and costs of
public offering . . . . . . . . - 2,700,000 18,176,781 - - 18,176,781
Net loss . . . . . . . . . . . . . - - - (1,038,875) - (1,038,875)
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 . . . . . . $ - 5,361,807 $23,125,763 $(6,503,683) $ - $16,622,080
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss . . . . . . . . . . . . . . . $(312,342) $(895,378) $(1,038,875) $(6,054,683)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . 3,387 4,336 7,898 184,452
Issuance of common stock options
for services . . . . . . . . . . . - 105,000 103,950 208,950
Amortization of deferred compensation 93,749 - - 93,749
Compensation expense for extension of
Debt Conversion Agreements, net . 503,147 - 503,147
Gain on sale of assets . . . . . . . - - - (5,299)
Increase in other receivables . . . - - (163,988) (163,742)
(Increase) decrease in prepaid
expenses and refundable deposits . (200) 92 (238,187) (189,168)
Increase (decrease) in accounts
payable and accrued expenses . . . 26,070 46,679 12,740 422,704
Increase in accrued payroll
and related taxes . . . . . . . . 106,120 121,667 103,388 969,869
Increase (decrease) in employee
expense reimbursement . . . . . . 5,400 (301) (1,462) 82,717
Increase in accrued interest to
related parties . . . . . . . . . 39,901 46,816 979 422,800
--------- --------- ----------- -----------
Net cash used in operating
activities . . . . . . (37,915) (67,942) (1,213,557) (3,524,504)
--------- --------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment . . . . . . . . (4,380) (2,461) (131,600) (271,775)
Purchases of marketable securities and
short-term investments . . . . . . . (7,448,546) (7,448,546)
Payment of organization costs . . . . - - - (66,093)
Proceeds from sale of equipment . . . - - - 29,665
Issuance of note receivable . . . . . - - - 100,000
--------- --------- ----------- -----------
Net cash used in investing
activities . . . . . . . . (4,380) (2,461) (7,580,146) (7,656,749)
--------- ---------- ----------- -----------
</TABLE>
33
<PAGE> 34
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable
to related parties, net . . . . . . $ 9,000 $ 10,000 $ (22,500) $ 757,900
Proceeds from issuance of common stock
and warrants net of related offering
costs and expenses . . . . . . . . 32,500 55,000 18,810,431 19,541,828
Proceeds from Revenue Participation
Units . . . . . . . . . . . . . . . - - - 676,000
Cash paid out for fractional shares . - - (25) (25)
Cash at acquisition . . . . . . . . . - - - 200,612
------- -------- ----------- -----------
Net cash provided by financing
activities . . . . . . . . . . 41,500 65,000 18,787,906 21,176,315
------- -------- ----------- -----------
Net increase (decrease) in cash . . . . . (795) (5,403) 9,994,203 9,995,062
Cash, beginning of period . . . . . . . . 7,057 6,262 859 -
------- -------- ----------- -----------
Cash, end of period . . . . . . . . . . . $ 6,262 $ 859 $ 9,995,062 $ 9,995,062
======= ======== =========== ===========
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of accrued payroll into
shares of no par value common
stock . . . . . . . . . . . . . . . $ - $ - $ - $ 1,141,838
======= ======== ========== ===========
Conversion of notes payable to related
parties into shares of no par
value common stock . . . . . . . . . $ - $ - $ - $ 500,000
======== ========== ===========
Conversion of accrued interest into
notes payable to related parties . . $ - $ - $ - $ 300,404
======= ======== ========== ===========
Conversion of Revenue Participation
Units into shares of no par value
common stock . . . . . . . . . . . $ - $ - $ 676,000 $ 676,000
======= ======== ========== ===========
Issuance of stock options for
services . . . . . . . . . . . . . . $ - $105,000 $ 103,950 $ 208,950
======= ======== ========== ===========
Conversion of other accrued liabilities
to shares of no par value common
stock . . . . . . . . . . . . . . . $ - $ - $ - $ 52,104
======= ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to to NeoTherapeutics, Inc. The Company's wholly-owned
subsidiary, Advanced ImmunoTherapeutics, Inc. ("AIT") was incorporated in
California in June 1987. In July 1989, AIT completed an agreement with the
Company which provided for AIT to become a wholly- owned subsidiary of AFC in a
transaction accounted for as a reverse acquisition. All references to the
"Company" hereinafter refer to NeoTherapeutics, Inc. and AIT as a consolidated
entity.
The Company is a development stage biopharmaceutical enterprise
engaged in the discovery and development of novel therapeutic drugs intended to
treat neurodegenerative diseases and conditions, such as memory deficits
associated with Alzheimer's disease and aging, stroke, spinal cord injuries and
Parkinson's disease. The accompanying consolidated financial statements
include the results of operations of the subsidiary, AIT, from June 15, 1987
(inception), through July 18, 1989 (date of acquisition of AFC), and the
consolidated results of operations of the Company thereafter.
Development Stage Enterprise
The Company is in the development stage and, therefore, devotes
substantially all of its efforts to research and development activities. Since
its inception, the Company has incurred cumulative losses of approximately $6.1
million through December 31, 1996, and expects to incur substantial losses over
the next several years. While the Company believes that its existing capital
resources, including the net proceeds of its recently completed public
offering of Common Stock and Warrants will be adequate to fund its capital
needs for at least 12 months of operations, the Company also believes that,
ultimately, it will require substantial additional funds in order to complete
the research and development activities currently contemplated and to
commercialize its proposed products. The Company's future capital requirements
and availability of capital will depend upon many factors including, but not
limited to, continued scientific progress in research and development programs,
the scope and results of preclinical studies and clinical trials, the time and
costs involved in obtaining regulatory approvals, the cost involved in filing,
prosecuting and enforcing patent claims, competing technological developments,
the cost of manufacturing scale-up, the cost of commercialization activities
and other factors which may not be within the Company's control.
Principles of Consolidation
The consolidated financial statements include accounts of the Company
and its subsidiary. All significant intercompany accounts and transactions
have been eliminated.
35
<PAGE> 36
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consists of cash and highly liquid
investments of commercial paper and demand notes with original maturities of
less than 90 days.
Marketable Securities
The Company accounts for investments in marketable securities under
Statements of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The statement requires
investments in debt and equity securities to be classified among three
categories as follows: Held-to-maturity, trading and available-for-sale. As
of December 31, 1996, all securities held by the Company were considered
held-to-maturity. Securities held-to-maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income on investment securities. A valuation allowance
is not established to recognize temporary market value fluctuations as the
Company has the intent and ability to hold these investments until maturity.
Short-term investments consist of commercial paper and equivalent corporate
obligations and are stated at amortized cost.
Property and Equipment
Property and equipment are carried at cost, less accumulated
depreciation. Depreciation is computed using principally the straight- line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Equipment 5 to 7 Years
Leasehold Improvements Term of Lease
</TABLE>
Research and development
All costs related to research and development activities are treated
as expenses in the period incurred.
Grant Revenue
Revenue consists of amounts earned from grants which are recognized in
accordance with the terms of the related agreements.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement, among other things, requires that income taxes be accounted for
using the liability method.
36
<PAGE> 37
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share
Net loss per share is calculated using the weighted average number of
shares outstanding. Common equivalent shares are excluded from the computation
as their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletins, common and common
equivalent shares (stock options, warrants and RPU's converted to common stock
in July 1996) issued during the period commencing 12 months prior to the public
offering at prices below the public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method for stock options warrants at the estimated initial
public offering price).
Reclassifications
Certain amounts in the accompanying 1994 and 1995 financial statements
have been reclassified to conform with the 1996 presentation.
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
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.
New Pronouncements
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The statement requires that impairment losses for
long-lived assets and identifiable intangibles to be held and used be based on
the fair market value of the asset. The statement also requires that these
assets be reported at the lower of carrying amount or fair market value less
cost to sell. The adoption of this statement did not have a material effect on
the Company's financial position.
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." The statement requires, at a
minimum, new disclosures regarding employee and non-employee stock-based
compensation plans. The Company has continued using the measurement prescribed
by the former standard, and accordingly, this pronouncement did not have a
material effect on the Company's financial position or results of operations.
2. RELATED PARTY TRANSACTIONS
During 1987 and 1988, the Company's President, who is also a major
stockholder of the Company, loaned a total of $270,650 to the Company for
working capital purposes, of which $250,000 plus $2,000 of accrued interest was
canceled in December 1988 in exchange for the issuance of 28 RPU's which, in
turn, were converted into 112,000 shares of common stock (see Note 8). The
Company borrowed an additional
37
<PAGE> 38
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$737,250 from the President during 1989 through 1993. On December 31, 1993,
balances on the outstanding notes and accrued interest due to the President
were $757,900 and $300,404, respectively. On December 31, 1993, the Company
issued 200,000 shares of common stock to the President in exchange for
cancellation of $500,000 of loans made to the Company. The remaining $257,900
in principal and accrued interest of $300,404 were converted to a $558,304
secured promissory note currently bearing interest at 9% per annum (increased
by amendment from 7% on January 1, 1996). The note is due on December 31,
1997, or, pursuant to a second amendment effective January 1, 1997, at the
time the Company enters into a distribution license agreement with another
company, whichever occurs first. Under the second amendment, the President has
released all collateral held as security (all assets of the Company) on the
note and has agreed to subordinate the note to institutional debt, if required.
In September 1990, the Company issued a warrant to the President to
purchase up to 88,173 shares of Common Stock of the Company at any time between
September 1, 1990 and August 31, 1995 for $3.75 per share. Effective August
31, 1995, the expiration date of the warrant was extended to August 31, 2000.
In June 1990, certain founders and key employees of the
Company converted $503,148 of accrued salaries due them to 402,518 shares of
common stock at the price of $1.25 per share, the estimated fair market value
as determined by the Board of Directors. On December 31, 1993, certain key
employees agreed to accept 276,318 shares of common stock, in exchange for
cancellation of $690,798 of indebtedness for unpaid compensation and
unreimbursed expenses. The exchange, which was at the price of $2.50 per
share, was in excess of estimated fair market value on the issuance date as
determined by the Board of Directors. All of the aforementioned shares had a
risk of forfeiture whereby, if the Company did not generate a minimum of
$500,000 in total operating revenues from inception through December 31, 1995,
all shares were to be returned to the Company and the holders would forfeit all
rights to the shares and any claim to the previously accrued but unpaid
compensation and expenses. Effective December 31, 1995, five of the parties,
who were present or past employees, entered into agreements with the Company
whereby the forfeiture date for the Debt Conversion Agreements of 1990 and 1993
was extended from December 31, 1995 to December 31, 1997, in exchange for
increasing the minimum total operating revenues from $500,000 to $1,000,000 to
be achieved by December 31, 1997. The compensation expense previously recorded
which related to the shares forfeited on December 31, 1995, was reversed in the
1995 statement of operations. Accordingly, a new measurement date exists for
new shares issued subject to forfeiture on December 31, 1997. The value used
to record compensation expense is the estimated fair market value as determined
by the board of directors on December 31, 1995. One party to the Debt
Conversion Agreements of 1990 and 1993 has claimed that his 88,848 shares are
vested and that there was no need for him to enter into a new agreement, and
therefore he has not entered into an agreement under the new terms. Although
the Company believes that such shares were forfeited under the terms of the
Debt Conversion Agreements of 1990 and 1993, the Company has accounted for the
stock as issued and outstanding until such time as the Company can obtain the
surrender of these shares.
38
<PAGE> 39
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Assignment of Patents by President
The President of the Company has assigned two patents to the Company:
a) On June 6, 1991, the President assigned to the Company all rights to
the inventions covered by U.S. Patent No. 5,091,432 (a composition of
matter patent covering the "AIT" series of chemical compounds) and any
corresponding foreign applications and patents, including all
continuations, divisions, reissues and renewals of said applications
and any patents issued out of or based upon said applications;
b) On June 30, 1996, the President assigned to the Company all rights to
the inventions covered by U.S. Patent No. 5,447,939, covering certain
inventions in carbon monoxide dependent guanylyl cyclase and methods
of use.
Under both patent assignment agreements, which expire concurently with
the expiration of the underlying patent and any patents derived therefrom, the
Company was obligated to pay the President a royalty of four percent (4%) of
all revenues derived by the Company from the use and sale by the Company of any
products or methods included in the patents. Further, in the event that the
President's employment is terminated, the royalty rate was to be increased to
six percent (6%). Finally, in the event of the President's death, the family
or estate is entitled to continue to receive royalties at a rate of two percent
(2%) for the duration of the respective agreement. The President has the right
to terminate the patent assignment upon the filing of a petition of bankruptcy
or insolvency with respect to the Company.
On July 26, 1996, the Company and its President amended both the June
6, 1991 and June 30, 1996 patent assignment agreements. Under these
amendments, (i) the royalty rate contained in both agreements has been reduced
to two percent (2%), or five percent (5%) in the event the President's
employment is terminated by the Company without cause, and (ii) the President
no longer has the right to terminate either patent assignment should a petition
of bankruptcy or insolvency be filed with respect to the Company.
McMaster University Agreement
On July 10, 1996 the Company entered into an "Exclusive License
Agreement" with McMaster University (University) which allows the Company use
of certain chemical compounds developed by the University covered in a patent
filed jointly by the Company and the University. Under the Agreement the
Company paid a one time licensing fee of $15,000 and is obligated to pay an
annual five percent (5%) royalty on net sales of products containing compounds
developed by the University. The agreement calls for minimum annual royalty
payments of $25,000 payable beginning July 1997.
39
<PAGE> 40
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Employment Agreement
Effective July 1, 1996, the Company entered into an employment
agreement with the President. The agreement, among other things, provides for
the grant of incentive stock options, an annual base salary with annual
increases and an annual bonus based on the Company's attainment of certain
performance objectives. The agreement terminates on June 30, 1999. The
agreement also provides for guaranteed severance payments upon the President's
termination of employment without cause, or upon a change of control of the
Company. In connection with entering into this Agreement, the President was
granted an incentive option to purchase 75,000 shares of Common Stock at 110
percent of fair market value at the date of grant ($4.13 per share). This
option vests in three equal increments over the life of the agreement.
3. COMPENSATION AND EXPENSES DUE TO FOUNDERS AND KEY EMPLOYEES
At December 31, 1995 and 1996, accrued payroll and related taxes
includes $218,000 and $315,000, respectively, of unpaid compensation due to
founders and key employees of the Company. At December 31, 1995 and 1996,
$84,179 and $82,717, respectively, was due to founders and key employees as
expense reimbursements and $121,417 and $122,396, respectively, of accrued
interest relating to notes payable was also owed to such related parties. All
of the aforementioned amounts owing at December 31, 1996 were paid in January
1997.
4. MARKETABLE SECURITIES
The Company accounts for marketable securities under Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At December 31, 1996, the Company
classified all of its marketable securities as held-to-maturity.
A summary of securities held to maturity at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Type of Investment Cost Gains (Losses) Value
---------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial Paper $1,553,759 $ - $(10,769) $1,542,990
Corporate Bonds 4,148,355 1,391 (468) 4,149,278
---------- ------ -------- ----------
5,702,114 1,391 (11,237) 5,692,268
U.S. Government Agencies 1,746,432 1,468 - 1,747,900
---------- ------ -------- ----------
Total Securities Held to
Maturity $7,448,546 $2,859 $(11,237) $7,440,168
========== ====== ======== ==========
</TABLE>
The above securities which have maturities ranging from ninety days to
twenty four months are shown in the consolidated balance sheet at December 31,
1996, as follows:
40
<PAGE> 41
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Cost Market Value
---------- ------------
<S> <C> <C>
Due in one year or less $5,702,114 $5,692,268
Due after one year through two years $1,746,432 $1,747,900
</TABLE>
There were no sales of securities for the year ended December 31, 1996.
5. REVENUE FROM GRANTS
In July 1995, the Small Business Innovative Research Grant (the SBIR
Grant) from the National Institute of Health was completed and no additional
funds were due or collected. The Company has received an aggregate of $497,128
from the SBIR Grant. During 1995, the National Institute on Aging (NIA) and
the National Institute for Mental Health (NIMH) issued contracts to an
independent subcontractor of theirs to manufacture AIT-082 for animal and human
testing programs. The NIA also issued an additional contract to one of its
subcontractors to conduct the subchronic animal toxicity studies required by
the U.S. Food and Drug Administration as a part of any Investigational New Drug
(IND) application for AIT-082. The entire cost of these two contracts will be
paid by the NIA and NIMH directly to the subcontractors.
6. PROVISION FOR INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company incurred net operating losses through December, 31, 1996. At December
31, 1996, the Company had approximately $2,100,000 of federal net operating
loss carryforwards available to offset future taxable income, if any; and
approximately $6,055,000 of net operating loss carryforwards available for
financial reporting purposes. Such carryforwards expire from 2009 through
2011. The primary differences between tax and financial reporting is the
capitalization of certain start-up expenses for income tax reporting purposes
which are expensed for financial reporting purposes. Under the Tax Reform Act
of 1986, the amounts of and benefits from net operating losses carried forward
may be impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include but are not limited to, a cumulative ownership change
of more than 50 percent over a three year period. At December 31, 1996, the
effect of such limitation, if imposed, has not been determined.
7. COMMITMENTS AND CONTINGENCIES
Facility leases
The Company leases its present facilities from a property developer
under a non-cancelable operating lease which expires the earlier of August 1997
or upon occupancy of the Company's new primary research and development and
administrative facility which is presently under construction by such developer
and expected to be completed during late June 1997. The existing lease
requires monthly payments of $8,424. The new facility lease (also a
non-cancelable operating lease) runs from July 1997 (expected
41
<PAGE> 42
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
date of occupancy) through June 2004 and contains two five year options to
renew at fair value rates in effect at that time. Mininum lease requirements
(assuming a July 1, 1997 occupancy date) for each of the next five years and
thereafter under the aforementioned leases follows:
<TABLE>
<S> <C>
Years ending December 31:
1997 $ 283,300
1998 465,600
1999 483,100
2000 500,500
2001 500,500
2002-2004 1,377,700
---------
Total $3,610,700
==========
</TABLE>
The Company is obligated to reimburse the lessor-developer for
approximately $1.4 million for tenant improvements, primarily to construct the
specialized research and development laboratories for the new facility.
University Research Grants
The Company has committed an aggregate of $276,000 to several
Universities to conduct general scientific research programs and to provide for
a two year Fellowship Grant.
8. STOCKHOLDERS' EQUITY (DEFICIT)
Revenue Participation Units
In 1988 and 1989, AIT raised private placement funds via a financial
instrument specified as a Revenue Participation Unit ("RPU"). The Company
raised an aggregate of $676,000 from the issuance of seventy-five RPU's at
prices ranging from $9,000 to $10,000 per RPU. The RPU's entitled holders to
cash payments based on stipulated percentages of revenues. Holders of RPUs were
entitled to convert to Common Stock at any time and AIT had the option to
redeem the RPU's subject to certain conditions by paying cash or in exchange
for Common Stock.
In July 1996, the Company offered, and all RPU holders accepted, an
option to convert each RPU unit into 4,000 shares of Common Stock (300,000
shares in the aggregate) in exchange for waiving all rights as an RPU holder.
Common Stock
During 1993, the Company issued 40,000 shares of Common Stock at $1.35
per share, the market value on issuance date, for an aggregate amount of,
$54,000, to a financial consultant in exchange for investment banking services.
42
<PAGE> 43
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 1994, three investors bought 13,000 shares of restricted
(restrictions as to transferability) Common Stock at $2.50 per share, for an
aggregate amount of, $32,500, through a private placement. During 1995, six
investors bought 22,000 shares of restricted Common Stock at $2.50 per share,
for an aggregate amount of, $55,000, through a private placement.
From January 1, 1996 to June 20, 1996, 266,800 shares of restricted
(restrictions as to transferability) Common Stock were issued at $2.50 per
share, for an aggregate amount of $633,650 (net of commission), through a
private placement.
In June 1996, the Company filed a registration statement with the
Securities and Exchange Commission offering to the public 2,500,000 units (the
"Units"), each unit consisting of one share of the Company's Common Stock, no
par value (the "Common Stock"), and one Warrant to purchase one share of Common
Stock (the "Warrants"). The registration statement became effective on
September 26, 1996, and on October 1, 1996, the Company realized $17,363,003 in
net proceeds from the sale of the 2,500,000 units.
On October 11, 1996, the principal underwriter of the offering exercised a
portion of its overallotment option and purchased 200,000 Units for net cash of
$1,389,280. Legal, accounting, printing and other expenses of the offering
amounted to $575,502. The Units separated immediately following issuance and
the Common Stock and Warrants that made up the Units trade only as separate
securities.
Reverse Stock Split
In June 1996, the Board of Directors authorized, with shareholder approval,
a reverse split of the Company's outstanding Common Stock on the basis of 1
share for each 2.5 shares of the then outstanding Common Stock. The outstanding
and authorized Common Stock continues to have no par value. The Board of
Directors also authorized, with shareholder approval, an increase in the
authorized Common Stock from 10 million to 25 million shares and the creation of
a new class of Preferred Stock with the authorization to issue up to 5 million
shares of such Preferred Stock. All references to Common Stock amounts and loss
per share in the accompanying financial statements give effect to the reverse
stock split.
9. STOCK OPTIONS
The Company has two stock option plans: the 1987 Stock Incentive Plan (the
"1987 Plan") and the 1991 Stock Incentive Plan (the "1991 Plan") (collectively,
the "Plans"). The Plans were adopted by the Company's shareholders and Board of
Directors in December 1987 and May 1991, respectively, and provide for the
granting of incentive and nonqualified stock options as well as other
stock-based compensation. The 1987 and 1991 Plans authorized for issuance up to
20,000 and 140,000 shares, respectively, of the Company's Common Stock. On
August 7, 1996, the Company's shareholders approved an amendment to the 1991
Plan increasing the number of authorized shares by 60,000, to a total of 293,154
shares as of that date. As of January 1, 1997, the number of shares authorized
under the 1991 plan automatically increased by 53,618 (one percent of the total
shares outstanding on that date) to a total of 346,772. Options which have been
granted under the 1991 Plan contain vesting provisions determined by the Board
of Directors which range from one to three years.
43
<PAGE> 44
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the Plans, shares of the Company's Common Stock may be granted to
directors, officers and employees of the Company, except that incentive stock
options may not be granted to non-employee directors.
The Plans provide for issuance of incentive stock options having exercise
prices equal to the fair market values of the stock at the times of grant of the
options or, in certain circumstances, at option prices at least equal to 110
percent of the fair market value of the stock at the time the options are
granted. An option granted under the Plans is exercisable in such a manner and
within such period, not to exceed ten years from the date of the grant, as shall
be set forth in a stock option agreement between the employee and the Company.
Stock options have also been issued outside of the aforementioned plans to
various consultants. During the period of December 1993 through December
1996, the Company issued a total of 194,000 options to purchase Common Stock to
two technical consultants and a financial consultant in exchange for past and
future services. The options are exercisable through December 31, 2001 at an
exercise price of $0.025 per share. As the exercise price was lower than the
fair market value of the stock on the date the options were granted,
compensation expense was recorded for the difference between the option
exercise price and the estimated fair market value of the stock as determined
by the Board of Directors on the grant date. All options and warrants issued
outside of the plan were vested and exercisable upon issuance. In September
1990, the Company issued a warrant to the President of the Company to purchase
88,173 shares of Common Stock at $3.75 per share. The warrant expires August
31, 2000.
A summary of stock option activities for the years ended December 31,
1994, 1995 and 1996 follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 198,173 $0.28 198,173 $0.28 240,173 $0.24
Granted - - 42,000 0.025 207,000 3.39
Exercised - - - - - -
Forfeited - - - - - -
Expired - - - - - -
Outstanding, at end of year 198,173 $0.28 240,173 $0.24 447,173 $3.15
------- ----- ------- ----- ------- -----
Exercisable, at end of year 198,173 $0.28 240,173 $0.24 270,173 $0.21
======= ===== ======= ===== ======= =====
</TABLE>
Of the options outstanding at December 31, 1996, 302,173 of the 447,173
options have exercise prices between $0.025 and $3.75, with a weighted average
exercise price of $0.44 and a weighted average remaining contractual life of
3.7 years. At December 31, 1996, 270,173 of these options were exercisable.
The remaining 145,000 options have exercise prices between $4.13 and $4.50,
with a weighted average exercise price of $4.31 and a weighted average
remaining contractual life of 6.7 years. None of these options were
exercisable at December 31, 1996. As of December 31, 1996, there were 165,000
options outstanding under the 1991 Plan and no options outstanding under the
1987 Plan.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options, and does not recognize compensation expense when
the exercise price
44
<PAGE> 45
NEOTHERAPEUTICS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of the options equals the fair market value of the underlying shares at the
date of grant. Directors' stock options are treated in the same manner as
employee stock options for accounting purposes. Under SFAS No. 123, the Company
is required to present certain pro forma earnings information determined as if
employee stock options were accounted for under the fair value method of that
statement.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996, respectively:
risk-free interest rates of 5.86 and 6.52 percent; zero expected dividend
yields; expected lives of 5 years; expected volatility of 50 percent.
For purposes of the following required pro forma information, the weighted
average fair value of stock options granted in 1995 and 1996 was $2.48 and
$2.14, respectively. The total estimated fair value is amortized to expense
over the vesting period.
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Pro forma net loss $999,593 $1,218,389
Pro forma net loss per share $0.41 $0.36
</TABLE>
10. SALARY DEFERRAL PLAN
The Company established a 401(k) Salary Deferral Plan on January 1,
1990. The Plan allows eligible employees to defer part of their income on a
tax-free basis. Contributions by the Company to the Plan are discretionary upon
approval by the Board of Directors. To date, the Company has not made any
contributions into the Plan.
45
<PAGE> 46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth certain information with respect to
each person who is an executive officer or a director of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers and Directors
Alvin J. Glasky, Ph.D. . . . . . . . . . . 63 Chairman of the Board,
Chief Executive Officer, President and Director
Mark J. Glasky . . . . . . . . . . . . . . . 34 Director
Frank M. Meeks . . . . . . . . . . . . . . . 51 Director
Carol O'Cleireacain, Ph.D. . . . . . . . . 50 Director
Paul H. Silverman, Ph.D., D.Sc. . . . . . . 71 Director
Samuel Gulko . . . . . . . . . . . . . . . . 65 Chief Financial Officer
Rosalie H. Glasky . . . . . . . . . . . . . . 60 Secretary and Treasurer
Key Employees and Consultant
Michelle S. Glasky, Ph.D. . . . . . . . . . 37 Director of Scientific Affairs
Ronald F. Ritzmann, Ph.D. . . . . . . . . . 53 Director, Psychopharmacological
Research
Shelton K. Stern . . . . . . . . . . . . . . 62 Director, Administrative Services
Michel P. Rathbone, M.D., Ph.D. . . . . . . 53 Consultant, Medical Director
</TABLE>
Executive Officers and Directors
Alvin J. Glasky, Ph.D., has been Chief Executive Officer, President
and a director of AIT since its inception in June 1987, and has served as the
Chairman of the Board, Chief Executive Officer, President and a director of the
Company since July 1989, when AIT became a wholly-owned subsidiary of the
Company. From March 1986 to January 1987, Dr. Glasky was Executive Director of
the American Social Health Association, a non-profit organization. From 1968
until March 1986, Dr. Glasky was the President and Chairman of the Board of
Newport Pharmaceuticals International, Inc., a publicly-held pharmaceutical
company that developed, manufactured and marketed prescription medicines. From
1966 to 1968, Dr. Glasky served as Director of Research for ICN Pharmaceutical,
Inc. and as Director of the ICN-Nucleic Acid Research Institute in
46
<PAGE> 47
Irvine, California. During that period he was also an assistant professor
in the Pharmacology Department of the Chicago Medical School. Dr. Glasky
currently holds a research professor position at Olive View/UCLA Medical
Center. Dr. Glasky received a B.S. degree in Pharmacy from the University of
Illinois College of Pharmacy in 1954 and a Ph.D. degree in Biochemistry from
the University of Illinois Graduate School in 1958. Dr. Glasky was also a
Post-Doctoral Fellow, National Science Foundation, in Sweden.
Mark J. Glasky has been a director of the Company since August 1994.
Since 1982, Mr. Glasky has been employed by Bank of America NT&SA in various
corporate lending positions and currently serves as Vice President-Relationship
Manager. Mr. Glasky obtained a B.S. degree in International Finance from the
University of Southern California in 1983 and an M.B.A. degree in Corporate
Finance from the University of Texas at Austin in 1987.
Frank M. Meeks has been a director of the Company since July 1989.
Since September 1992, Mr. Meeks has been pursuing personal investments in real
estate, property management and oil and gas. Mr. Meeks was employed by
Environmental Developers, Inc., a real estate development and construction
company, from June 1979 until March 1993, first as Vice President and finally
as Financial Vice President. Mr. Meeks obtained a B.S. degree in Business
Administration from Wittenberg University in 1966, and an M.B.A. degree from
Emory University in 1967. Mr. Meeks is a non-practicing certified public
accountant and a licensed real estate broker.
Carol O'Cleireacain, Ph.D., has been a director of the Company since
September 1996. Dr. O'Cleireacain has served as an independent economic
consultant since 1994, and has been a Visiting Fellow at The Brookings
Institution since May 1996. Dr. O'Cleireacain previously served as the
Director of the New York City Office of Management and Budget from August 1993
until December 1993. From February 1990 until August 1993 Dr. O'Cleireacain
was the Commissioner of the New York City Department of Finance. Dr.
O'Cleireacain also serves on the Council of Foreign Relations among her
appointments and other professional associations. Dr. O'Cleireacain received a
B.A. degree in Economics from the University of Michigan in 1968, an M.A.
degree in Economics from the University of Michigan in 1970 and her Ph.D. In
Economics from the University of London, London School of Economics in 1977.
Paul H. Silverman, Ph.D., D.Sc. has been a director of the Company
since September 1996. Dr. Silverman has been an Associate Chancellor for the
Center for Health Sciences at the University of California, Irvine since
January 1994. Since March 1993, Dr. Silverman has also been an Adjunct
Professor in the Department of Medicine at the University of California, Irvine
and the Director of Corporate and Government Affairs at the Beckman Laser
Institute and Medical Clinic in Irvine, California. From August 1992 until
January 1994, Dr. Silverman was Director of Scientific Affairs at Beckman
Instruments, Inc. From November 1990 until December 1993, Dr. Silverman was
the Director of the Systemwide Biotechnology Research and Education Program for
the University of California. Prior to 1990, Dr. Silverman served as the
Director of the Donner Laboratory at the University of California, Berkeley, as
the President of the University of Maine at Orono, as the President of research
foundation of the State University of New York, and as the head of the
Department of Immunoparasitology at Glaxo, Ltd. Dr. Silverman received his
Ph.D. in Parasitology and Epidemiology and his Doctor of Science degree from
the University of Liverpool, England.
Samuel Gulko has served as the Chief Financial Officer of the
Company, on a part-time basis, since September 1996. From 1968 until March
1987, Mr. Gulko served
47
<PAGE> 48
as a partner in the audit practice of Ernst & Young, LLP, Certified Public
Accountants. From April 1987 to the present, Mr. Gulko has been self-employed
as a Certified Public Accountant and business consultant, as well as the
part-time Chief Financial Officer of several companies, including a computer
peripheral manufacturer (from April 1987 to March 1991) and a chain of medical
clinics (from April 1987 to September 1990), and Mr. Gulko has served as the
Chief Executive Officer as well as Chief Financial Officer of a small medical
management company from October 1990 to the present. Mr. Gulko obtained his
B.S. degree in Accounting from the University of Southern California in 1958.
Rosalie H. Glasky has served as Treasurer and Secretary of the Company
since November 1991.
Key Employees and Consultant
Michelle S. Glasky, Ph.D. joined the Company in July 1996. Prior to
joining the Company, Dr. M. Glasky worked at the Department of Pathology,
University of Southern California School of Medicine as a Research Associate
and Laboratory Administrator from February 1991 until July 1996. Dr. M. Glasky
served as a consultant to the Company from August 1990 until July 1996. Dr. M.
Glasky received a B.A. degree in Microbiology from the University of
California, San Diego in 1981 and a Ph.D. degree in Biomedical Sciences from
the University of Texas Health Science Center in 1988. Dr. M. Glasky was also
a Post-Doctoral Fellow at the Stanford University School of Medicine.
Ronald F. Ritzmann, Ph.D. has served as the Company's Director of
Psychopharmacological Research since 1989. In addition, Dr. Ritzmann currently
holds an Assistant Professorship in Psychiatry at UCLA. Dr. Ritzmann received
a B.A. degree in Psychology from Northern Illinois University in 1965, an M.A.
degree in Experimental Psychology from Northern Illinois University in 1968 and
a Ph.D. degree in Neuroscience from Northern Illinois University in 1973.
Shelton K. Stern joined the Company in July 1996 as the Director of
Administrative Services. Prior to joining the Company, Mr. Stern was Manager,
Personnel Planning and Development for the Shiley Division of Pfizer, Inc. from
June 1980 to September 1995 (in 1992, the company name was changed to Sorin
Biomedical and in 1994 it became Mallinckrodt Medical). Mr. Stern obtained his
B.A. degree in Education from the State University of New York in 1955 and an
M.S. degree in Administration from Hofstra University in 1959.
Michel P. Rathbone, M.D., Ph.D. has served as Consultant, Medical
Director to the Company since July 1996. Dr. Rathbone has been a professor in
the Departments of Medicine (Neurology) and Biomedical Sciences (Neurosciences)
at McMaster University in Ontario, Canada since 1976. Dr. Rathbone is also
coordinator of the Hamilton, Ontario Regional Neuro-Oncology Program. Dr.
Rathbone has been the principal investigator on 22 research grants from 1985 to
the present and has numerous scientific publications. Dr. Rathbone's clinical
research interests are therapy of brain tumors, spinal cord injury, motor
neuropathy and Alzheimer's disease. His basic research interests are in the
neurotrophins, purines and nerve regeneration. Dr. Rathbone received degrees
of Bachelor of Medicine and Bachelor of Surgery from the University of
Liverpool Medical School in 1966. Dr. Rathbone received his Ph.D. in
Biochemistry from McMaster University in 1972.
48
<PAGE> 49
Mark J. Glasky and Michelle S. Glasky are the adult son and daughter,
respectively, of Dr. Alvin Glasky and Rosalie Glasky. Dr. Alvin Glasky and
Rosalie Glasky are husband and wife.
The Board of Directors of the Company currently consists of five
directors and there are no vacancies. All directors hold office until the next
annual meeting of shareholders or until their successors have been duly elected
and qualified. Officers are elected by, and serve at the discretion of, the
Board of Directors. The Board of Directors currently has two committees. The
Compensation Committee, which consists of Mr. Meeks, Dr. O'Cleireacain and Dr.
Silverman, has been established to recommend salaries and incentive
compensation for executive officers of the Company. The Audit Committee, which
consists of Dr. O'Cleireacain, Mr. Glasky and Mr. Meeks, has been established
to review the results and scope of the audit and other services provided by the
Company's independent public accountants.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
distinguished scientists whom the Company believes will make a contribution to
the development of the Company's business. The Scientific Advisory Board
members review the Company's research and development progress, advise the
Company of advances in their fields and assist in identifying special product
opportunities. Members are compensated on a consulting fee basis for their
services and are reimbursed for reasonable travel expenses. Each of Dr. Nelson
and Dr. Krassner, in their capacity as members of the Scientific Advisory
Board, received options to purchase 6,000 shares of Common Stock for $0.025 per
share as compensation for their services during 1996. All of the advisors are
employed by employers other than the Company and may have commitments to, or
consulting or advisory agreements with, other entities, including potential
competitors of the Company, that may limit their availability to the Company.
Although these advisors may contribute significantly to the affairs of the
Company, none are required to devote more than a small portion of his time to
the Company in their capacity as members of the Scientific Advisory Board. The
members of the Scientific Advisory Board currently are as follows:
Stuart M. Krassner, Ph.D. has been affiliated with the University of
California, Irvine since 1965, currently as Professor of Biological Sciences
and formerly in several administrative positions, most recently as Associate
Dean of Research and Graduate Studies. Dr. Krassner has conducted research at
both the Rockefeller University (New York) and the Swiss Tropical Institute
(Basel). Dr. Krassner's research interests included parasitology and
immunology and has numerous publications in those fields. Dr. Krassner
received his doctorate degree in Parasitology from Johns Hopkins University in
1961.
Eric L. Nelson, Ph.D. has been a pharmaceutical research consultant
since 1986. He was a founder, and served as Chairman until 1986, of Nelson
Research and Development Corporation, a publicly held corporation engaged in
research and development of drug receptor technology applied to the development
of pharmaceutical products and novel drug delivery systems. Prior to 1972, Dr.
Nelson spent eleven years at Allergan Pharmaceuticals, Inc., where as Vice
President of Research he was responsible for establishing Allergan's entire
research organization. Dr. Nelson received his doctorate degree in
Microbiology from UCLA in 1951 and has authored numerous publications. He is
the inventor on various patents in the areas of microbiology, immunology,
molecular biology and pharmacology.
49
<PAGE> 50
Michel Rathbone, M.D., Ph.D. See " - Key Employees and Consultant."
Paul H. Silverman, Ph.D., D.Sc. See " - Executive Officers and
Directors."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon its review of the copies of reporting forms
furnished to the Company, and written representations that no other reports
were required, the Company believes that all filing requirements under Section
16(a) of the Securities Exchange Act of 1934 applicable to its directors,
officers and any persons holding 10% or more of the Company's Common Stock with
respect to the Company's fiscal year ended December 31, 1996, were satisfied,
except that the Form 3 Initial Statement of Beneficial Ownership of Securities
filed by Mr. Meeks in September 1996 inadvertently omitted 460 shares of Common
Stock owned of record by Mr Meeks' wife and which, under Section 16(a) of the
Securities Exchange Act of 1934, are deemed to be beneficially owned by Mr.
Meeks. Mr. Meeks has disclaimed beneficial ownership of these shares of Common
Stock, and a filing with the correct information has been made with the
Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION
The following table sets forth summary information concerning the
compensation of the Company's Chief Executive Officer (the "Named Executive
Officer") for services rendered to the Company in all capacities during the
fiscal years ended December 31, 1995 and 1996. No other executive officer of
the Company received compensation in 1996 in excess of $100,000.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)
- --------------------------- ---- ------------ ------------- -----------
<S> <C> <C> <C>
Alvin J. Glasky, Ph.D.
Chairman, Chief Executive Officer
and President 1996 . . $165,398(1) -- 75,000
1995 . . 125,400(1) -- --
- --------------------------
</TABLE>
(1) Includes an auto allowance of $450 per month. Of the total amounts,
$72,998 has been paid and $92,400 has been accrued for 1996, and
$20,000 has been paid and $105,400 has been accrued for 1995.
See "Employment Agreement".
OPTION GRANTS
The following table sets forth the options granted during the period
commencing January 1, 1996 and ending December 31, 1996 to the executive
officers named in the Summary Compensation table:
50
<PAGE> 51
STOCK OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OPTIONS
GRANTED TO EXERCISE
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (NO. OF SHARES) FISCAL YEAR ($/SHARE) DATE
---- -------------- ----------- --------- ----
<S> <C> <C> <C> <C>
Alvin J. Glasky 75,000(1) 85% $4.13 07/01/2001
- -----------------
</TABLE>
(1) Option becomes exercisable in three equal annual installments from the date
of grant.
OPTIONS EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the options exercised during the period
commencing January 1, 1996 and ending December 31, 1996 by the executive
officers named in the Summary Compensation table:
AGGREGATE STOCK OPTIONS EXERCISED IN FISCAL YEAR ENDED
DECEMBER 31, 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED VALUE ---------------------- ---------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISED EXERCISED UNEXERCISED
- ---- ----------- -------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alvin J. Glasky - - - 75,000 - -
- ---------
</TABLE>
(1) Based upon the closing price of the Common Stock on December 31, 1996, as
reported by the NASDAQ National Market ($4.125 per share).
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Dr. Alvin J. Glasky,
effective as of July 1, 1996. The agreement requires Dr. Glasky to devote all
of his productive time, attention, knowledge and skill to the affairs of the
Company during the term of the agreement. The agreement provides for an annual
base salary of $200,000 with annual increases and an annual bonus based on the
Company's attainment of certain performance objectives. The agreement ends on
June 30, 1999 and may be terminated by the Company with or without cause as
defined in the agreement. The agreement also provides for guaranteed servance
payments equal to Dr. Glasky's annual base salary over the remaining life of
the agreement upon the termination of employment without cause or upon a change
in control of the Company. In connection with entering into this agreement,
Dr. Glasky was granted an incentive stock option to purchase 75,000 shares of
Common Stock at an exercise price of $4.13 per share, which vests in three
equal increments over the life of Dr. Glasky's employment agreement.
COMPENSATION OF DIRECTORS
Each of the Company's non-employee directors receives $1,000 for each
Board of Directors meeting and $500 for each committee meeting attended (with
the Chairperson
51
<PAGE> 52
of the Committee receiving $1,000). The directors are also reimbursed for
certain expenses in connection with attendance at Board meetings. The Company
has granted to each non-employee director an option to purchase 10,000 shares
of Common Stock at $4.50 per share.
STOCK OPTION PLANS
The Company has two stock option plans: the 1987 Incentive Stock
Option Plan (the "1987 Plan") and the 1991 Stock Incentive Plan (the "1991
Plan, and together with the 1987 Plan, the "Plans"). The Plans were adopted by
the Company's shareholders and Board of Directors in December 1987 and May
1991, respectively, and provide for the granting of "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The 1991 Plan also provides for the grant of
nonqualified stock options, stock appreciation rights ("SARs") and bonus stock.
The 1987 and 1991 Plans authorized for issuance up to 20,000 and 140,000
shares, respectively, of the Company's Common Stock. The number of shares
issuable under the 1991 Plan is increased each January 1 by a number equal to
one percent of the Company's then total outstanding shares. On August 7, 1996,
the Company's shareholders approved an amendment to the 1991 Plan increasing
the number of authorized shares by 60,000, to a total of 293,154 shares as of
that date. As of January 1, 1997, the number of shares authorized under the
1991 plan automatically increased by 53,618 (one percent of the total shares
outstanding on that date) to a total of 346,772. Under The Plans, incentive
stock options may be granted to employees, and nonqualified stock options, SARs
and bonus stock provided for in the 1991 Plan may be granted to employees of
the Company and other persons whose participation in the 1991 Plan is
determined to be in the Company's best interests. The Plans are administered
by the Board of Directors or a committee appointed by the Board (the
"Committee"), which has sole discretion and authority, consistent with the
provisions of the Plans, to determine which eligible participants will receive
options, the time when options will be granted, the terms of options granted
and the number of shares which will be subject to options granted under the
Plans. As of January 1, 1997, there were options to purchase 165,000 shares of
Common Stock outstanding under the 1991 Plan and no options outstanding under
the 1987 Plan.
In the event of a merger of the Company with or into another
corporation or the sale of substantially all of the assets of the Company, all
outstanding options and SARs granted under the 1991 Plan shall be assumed or
equivalent options and SARs substituted by the successor corporation. In the
event a successor corporation refuses to assume or substitute the options and
SARs, the exercisability of the options and SARs under the 1991 Plan shall be
accelerated.
The exercise price of incentive stock options must be not less than
the fair market value of a share of Common Stock on the date of the option is
granted (110% with respect to optionees who own at least 10% of the outstanding
Common Stock). Nonqualified options shall have such exercise price as
determined by the Committee. The Committee has the authority to determine the
time or times at which options granted under the Plans become exercisable,
provided that options expire no later than ten years from the date of grant
(five years with respect to optionees who own at least 10% of the outstanding
Common Stock). Options are nontransferable, other than upon death, by will and
the laws of descent and distribution, and incentive stock options may be
exercised only by an employee while employed by the Company or within three
months after termination of employment (one year for termination resulting from
death or disability).
52
<PAGE> 53
SECTION 401(K) PLAN
In January 1990, the Company adopted the AIT Cash or Deferred Profit
Sharing Plan (the "401(k) Plan") covering the Company's full-time employees
located in the United States. The 401(k) Plan is intended to qualify under
Section 401(k) of the Code, so that contributions to the 401(k) Plan by
employees or by the Company, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($9,500 in 1996)
and to have the amount of such reduction contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching contributions to
the 401(k) Plan by the Company on behalf of all participants in the 401(k)
Plan. The Company has not made any contributions to the 401(k) Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 14, 1997 by (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the Common Stock, (ii) each of the Company's
directors, (iii) the Named Executive Officer, and (iv) all executive officers
and directors of the Company as a group. The information as to each person or
entity has been furnished by such person or entity, and unless otherwise
indicated, the persons named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP(1) OWNED(1) OUTSTANDING
- ------------------------------------------- --------- -----------
<S> <C> <C>
Alvin J. Glasky, Ph.D.(2) . . . . . . . . . . . . . . . 1,318,911 24.2%
One Technology Drive, Suite I-821
Irvine, CA 92618
Mark J. Glasky(3)(4) . . . . . . . . . . . . . . . . . 32,134 *
Frank M. Meeks(5) . . . . . . . . . . . . . . . . . . . 27,500 *
Carol O'Cleireacain, Ph.D.(6) . . . . . . . . . . . . . 5,000 *
Paul H. Silverman, Ph.D., Sc.(6) . . . . . . . . . . . 5,000 *
All Executive Officers and Directors
as a group (seven persons)(9) . . . . . . . . . . . . 1,449,107 26.4
- --------------------------
</TABLE>
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options and warrants currently exercisable or convertible,
or exercisable or convertible within 60 days of March 14, 1997, are
deemed beneficially owned and outstanding
53
<PAGE> 54
for computing the percentage of the person holding such securities, but
are not considered outstanding for computing the percentage of any
other person.
(2) Includes 88,173 shares issuable within 60 days of March 14, 1997 upon
exercise of the Glasky Warrant and 4,000 shares owned BY the AIT Cash
or Deferred Profit Sharing Plan (401(k)), of which Dr. Glasky is the
trustee. Does not include 50,462 shares beneficially owned by Dr.
Glasky's wife, Rosalie H. Glasky, and 32,134 shares beneficially owned
by Mark J. Glasky, Dr. Glasky's adult son, for which Dr. Glasky
disclaims beneficial ownership.
(3) Mark J. Glasky is the adult son of Dr. Alvin J. Glasky.
(4) Includes 7,500 shares subject to options held by Mr. Glasky which are
currently exercisable or exercisable within 60 days of March 14, 1997,
and 1,000 shares subject to currently exercisable Warrants.
(5) Includes 7,500 shares subject to options held by Mr. Meeks which are
currently exercisable or exercisable within 60 days of March 14, 1997.
Does not include 460 shares beneficially owned by Mr. Meeks' wife, for
which Mr. Meeks disclaims beneficial ownership.
(6) Includes 5,000 shares subject to options held by each of Drs.
O'Cleireacain and Silverman which are currently exercisable or
exercisable within 60 days of March 14, 1997.
(7) Includes 88,173 shares issuable upon the exercise of the Glasky
Warrant, 34,000 shares subject to options which are currently
exercisable or exercisable within 60 days of March 14, 1997, 2,050
shares subject to curently exercisable Warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1990, the Company issued a warrant to Dr. Alvin J. Glasky
(the "Glasky Warrant") to purchase up to 88,173 shares of Common Stock of the
Company at any time between September 1, 1990 and August 31, 1995 for $3.75 per
share. Effective August 31, 1995, the expiration date of the Glasky Warrant
was extended to August 31, 2000.
On June 30, 1990, in exchange for cancellation of $503,148 of
indebtedness for unpaid compensation, the Company issued a total of 402,518
shares of Common Stock in the following amounts: Dr. Alvin Glasky 184,000
shares; Sanford Glasky (the brother of Dr. Alvin Glasky), 60,012 shares; JoAnne
Law, 24,344 shares; Luana Kruse 19,200 shares; Rosalie Glasky (the wife of Dr.
Glasky), 28,066 shares; and John W. Baldridge, 86,906 shares (the "1990
Restricted Stock Exchange"). On December 30, 1993, in exchange for
cancellation of $690,795 of indebtedness for unpaid compensation and accrued
expenses, the Company issued a total of 276,318 shares of Common Stock in the
following amounts: Dr. Alvin Glasky, 169,001 shares; Sanford Glasky, 49,837
shares; JoAnne Law, 16,560 shares; Luana Kruse 19,800 shares; Rosalie Glasky,
19,178 shares; and John W. Baldridge, 1,942 shares (the "1993 Restricted Stock
Exchange"). Both the 1990 Restricted Stock Exchange and the 1993 Restricted
Stock Exchange involved a risk of forfeiture whereby if the Company did not
generate a minimum of $500,000 in total operating revenues from inception
through December 31, 1995, all shares would be returned to the Company with the
holders forfeiting all rights to the shares and forfeiting any claim to the
previously accrued but unpaid compensation. Effective December 31, 1995, five
of the parties, all of whom were present or past employees of the Company,
54
<PAGE> 55
entered into agreements with the Company whereby the forfeiture date was
extended from December 31, 1995 to December 31, 1997 in exchange of increasing
the minimum total operating revenues which the Company would need to achieve in
order to avoid forfeiture of the shares from $500,000 to $1,000,000, with such
revenues to be achieved by December 31, 1997. If the Company achieves
$1,000,000 in total operating revenues by December 31,1997, the holders of the
shares subject to forfeiture are entitled to certain registration rights
covering those shares. One party to the 1990 and 1993 Restricted Stock
Exchanges has claimed that his shares are vested, that there was no need for
him to enter into the new agreement extending the forfeiture date and therefore
he has not entered into an agreement under the new terms with respect to the
88,848 shares held by him (the "Forfeited Shares"). Although the Company
believes that the Forfeited Shares were forfeited under the terms of the
Restricted Stock Exchanges 1990 and 1993, the Company has accounted for the
Forfeited Shares as outstanding until such time as the Company can obtain the
surrender of the Forfeited Shares.
On June 6, 1991, the Company entered into an agreement (the "1991
Patent Agreement") with Dr. Alvin Glasky whereby Dr. Glasky assigned to the
Company all rights to the inventions covered by United States Patent No.
5,091,432 and any corresponding foreign applications and patents, including all
continuations, divisions, reissues and renewals of said applications and any
patents issued out of or based upon said applications (the "Assigned Rights").
The 1991 Patent Agreement was amended on July 26, 1996. The 1991 Patent
Agreement, as amended, calls for the Company to pay Dr. Glasky a two percent
royalty on all revenues derived by the Company from the use and sale by the
Company of any products covered by these patents and applications or any
patents derived from them. In the event that Dr. Glasky's employment is
terminated by the Company without cause, the royalty rate shall be increased to
five percent and in the event that Dr. Glasky dies during the term of the 1991
Patent Agreement, Dr. Glasky's family or estate shall be entitled to continue
to receive royalties at the rate of two percent. The 1991 Patent Agreement
terminates on the later of its ten year anniversary or the expiration of the
final patent included within the Assigned Rights. On June 30, 1996, the
Company and Dr. Glasky entered into an agreement whereby Dr. Glasky assigned to
AIT all rights to the inventions covered by United States Patent No. 5,447,938
(the "1996 Patent Agreement"). The scope of the 1996 Patent Agreement as well
as its terms and conditions are identical in all material respects to the 1991
Patent Agreement; provided, however, that the aggregate royalty amount with
respect to any product shall be two percent (five percent in the event of
termination without cause), even if a product is based on both patents. The
1996 Patent Agreement was also amended on July 26, 1996. Dr. Glasky will not
receive any royalties with respect to sales of products which utilize patent
rights licenses to the Company by McMaster University. See "ITEM 1 -
Description of Business - Patents and Proprietary Rights."
On December 31, 1993, the Company issued 200,000 shares of Common
Stock to Dr. Glasky in Exchange for cancellation of $500,000 of indebtedness
for loans made by Dr. Glasky to the Company. Dr. Glasky received certain
registration rights with respect to these shares. The remaining $257,900 in
principal on the loans payable and accrued interest of $300,404 due to Dr.
Glasky were converted into a $558,304 Secured Promissory Note due January 1,
1996 bearing interest at 7% per annum (the "1993 Note"). The 1993 Note is
secured by all assets of the Company. On January 1, 1996, the due date of the
1993 Note was extended to December 31, 1996 and the interest rate was increased
to 9% per annum. In June 1996, the due date of the 1993 Note was extended to
December 31, 1997.
In July 1996, all of the holders of the 75 outstanding Revenue
Participation Units ("RPUs") converted their RPUs into an aggregate of 300,000
shares of Common Stock.
55
<PAGE> 56
As a part of this transaction, Dr. Glasky converted his 28 outstanding RPUs
into a total of 112,000 shares of Common Stock. See Note 8 of Notes to
Consolidated Financial Statements.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Registrant, as filed on August 7, 1996.
(Filed as Exhibit 3.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-
LA), and incorporated herein by reference.)
3.2 Bylaws of the Registrant. (Filed as Exhibit 3.3 to the Registration Statement on Form SB-2
as amended (No. 333-05342-LA), and incorporated herein by reference.)
4.1 Form of Registration Rights Agreement dated as of July 23, 1996, entered into between the
Registrant and certain investors named therein. (Filed as Exhibit 4.1 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
4.2 Form of Registration Rights Agreement dated December 30, 1993, entered into between the
Registrant and each of Alvin J. Glasky, Sanford J. Glasky, Joanne Law, Luana M. Kruse,
Rosalie H. Glasky and John W. Baldridge. (Filed as Exhibit 4.2 to the Registration Statement
on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
4.3 Form of Representatives' Warrant Agreement dated as of September 25, 1996, entered into in
connection with the public offering of the Company's securities on September 26, 1996.
(Filed as Exhibit 4.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-
LA), and incorporated herein by reference.)
4.4 Form of Stock Purchase Agreement dated December 30, 1993, including amendment effective
December 30, 1995, between the Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as Exhibit 4.4 to the
Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.5 Form of Stock Purchase Agreement dated June 30, 1990, as amended on May 27, 1992, June 30,
1993 and December 30, 1993, and amendment thereto effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne Law, Luana Kruse, Rosalie
Glasky and John Baldridge. (Filed as Exhibit 4.5 to the Registration Statement on Form SB-2
as amended (No. 333-05342-LA), and incorporated herein by reference.)
4.6 Warrant Agreement entered into between Neotherapeutics, Inc. and U.S. Stock Transfer
Corporation dated as of September 25, 1996. (Filed as Exhibit 4.6 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
10.1 Incentive Stock Option Plan dated December 18, 1987. (Filed as Exhibit 10.1 to the
Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.2 * 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the Registration Statement on Form SB-2
as amended (No. 333-05342-LA), and incorporated herein by reference.)
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.3 * Employment Agreement between the Registrant and Alvin J. Glasky, Ph.D. (Filed as Exhibit
10.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.4 Note dated June 21, 1996 between the Registrant and Alvin J. Glasky and related Security
Agreement dated August 31, 1990. (Filed as Exhibit 10.4 to the Registration Statement on
Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
10.5 Warrant to purchase Common Stock of the Registrant dated August 31, 190 held by Alvin J.
Glasky. (Filed as Exhibit 10.6 to the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.6 Agreement dated as of June 6, 1991, as amended on July 26, 1996, by and between the
Registrant and Alvin J. Glasky. (Filed as Exhibit 10.7 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
10.7 Agreement dated as of June 30, 1991, as amended on July 26, 1996, by and between the
Registrant and Alvin J. Glasky. (Filed as Exhibit 10.8 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
10.8 * Form of Indemnification Agreement between the Registrant and each of its officers and
directors. (Filed as Exhibit 10.10 to the Registration Statement on Form SB-2 as amended
(No. 333-05342-LA), and incorporated herein by reference.)
10.9 Underwriting Agreement dated as of September 25, 1996, among the Company, Paulson Investment
Company, Inc. and First Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the
Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.10 Letter Agreement dated March 18, 1993, including addendums dated April 1, 1993, December 31,
1993, April 6, 1995 and May 3, 1996, and amendment dated July 26, 1996, between the
Registrant and North American Capital Partners. (Filed as Exhibit 1.2 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
10.11 Industrial Lease Agreement, dated January 16, 1997, between the Company and the Irvine
Company.
10.12 Addendum to Note dated June 21, 1996 between the Registrant and Alvin J. Glasky.
21.1 Subsidiaries of Registrant. (Filed as Exhibit 21.1 to the Registration Statement on Form SB-
2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
23.1 Consent of Arthur Andersen, L.L.P.
- ---------------------
</TABLE>
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the quarter ended December 31, 1996.
57
<PAGE> 58
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
NEOTHERAPEUTICS, INC.
Date: March 24, 1997 By: /s/ ALVIN J. GLASKY
------------------------------------
Alvin J. Glasky, Ph.D.
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act, 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>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALVIN J. GLASKY Chairman of the Board, March 24, 1997
- ---------------------------------- Chief Executive Officer,
Alvin J. Glasky, Ph.D. President and Director
(Principal Executive Officer)
/s/ SAMUEL GULKO Chief Financial Officer March 24, 1997
- ---------------------------------- (Principal Accounting and
Samuel Gulko Financial Officer)
/s/ MARK J. GLASKY Director March 24, 1997
- ----------------------------------
Mark J. Glasky
/s/ FRANK M. MEEKS Director March 24, 1997
- ----------------------------------
Frank M. Meeks
/s/ CAROL O'CLEIREACAIN Director March 24, 1997
- ----------------------------------
Carol O'Cleireacain, Ph.D.
/s/ PAUL H. SILVERMAN Director March 24, 1997
- ----------------------------------
Paul H. Silverman Ph.D., D.Sc.
</TABLE>
58
<PAGE> 1
EXHIBIT 10.11
INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net)
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premises
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
ARTICLE III. TERM
Section 3.1 General
Section 3.2 Delay in Possession
ARTICLE IV. RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. COMMON AREAS; SERVICES
Section 6.1 Utilities and Services
Section 6.2 Operation and Maintenance of Common Areas
Section 6.3 Use of Common Areas
Section 6.4 Parking
Section 6.5 Changes and Additions by Landlord
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Tenant's Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIAL
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
</TABLE>
(i)
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
Section 14.9 Limitation of Actions Against Landlord
ARTICLE XV. END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII. BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
EXHIBITS
Exhibit A Description of the Premises
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
Exhibit Y Project Site Plan
</TABLE>
(ii)
<PAGE> 3
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
BETWEEN
THE IRVINE COMPANY
AND
NEOTHERAPEUTICS, INC.
<PAGE> 4
INDUSTRIAL LEASE
(SINGLE TENANT; NET)
THIS LEASE is made as of the 16th day of January, 1997, by and
between THE IRVINE COMPANY, a Michigan corporation, hereafter called
"Landlord," and NEOTHERAPEUTICS, INC., a Colorado corporation, hereinafter
called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall
mean and refer to the following collective terms, the application of which
shall be governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section
2.1.
Address of Building: 157 Technology Drive, Irvine, CA 92618
2. Project Description (if applicable): Corporate Business Center
3. Use of Premises: General administrative office and laboratories for
the development of new drugs.
4. Estimated Commencement Date: June 1, 1997
5. Lease Term: Eighty-Four (84) months, plus such additional days as
may be required to cause this Lease to terminate on the final day of
the calendar month.
6. Basic Rent: Thirty-Eight Thousand Eight Hundred Dollars ($38,800.00)
per month.
Basic Rent is subject to adjustment as follows:
The Basic Rent shall be increased, as of the commencement of the
thirty-first (31st) month of the Lease Term and again at the
commencement of the sixty-first (61st) month of the Lease Term (the
"Rental Adjustment Date(s)"), by the percentage increase, if any, in
the United States Department of Labor, Bureau of Labor Statistics,
Consumer Price Index for all Urban Consumers, Los Angeles-
Anaheim-Riverside Area Average, all items (1982-84=100) (the "Index").
The adjustment shall be calculated by comparing the Index published
for the third month preceding the applicable Rental Adjustment Date
with the Index published for the third month preceding the last prior
Rental Adjustment Date (or the third month preceding the Commencement
Date in the case of the first rental adjustment), and the Basic Rent
then in effect shall be increased by the amount of the percentage
increase, if any, between those published Index amounts. In no event
shall the Basic Rent be reduced by reason of such computation. If at
any Rental Adjustment Date the Index shall not exist, Landlord may
substitute another index published by any governmental agency
reasonably acceptable to Tenant. Landlord shall use diligent efforts
to calculate and give Tenant notice of any such increase in the Basic
Rent on or near each Rental Adjustment Date, and Tenant shall commence
to pay the increased Basic Rent effective on the applicable Rental
Adjustment Date. In the event Landlord is unable to deliver to Tenant
the notice of the increased Basic Rent at least five (5) days prior to
any Rental Adjustment Date, Tenant shall commence to pay the increased
Basic Rent on the first day of the month following the delivery of
such notice (the "Payment Date"), provided Landlord's notice has been
given at least five (5) days in advance. Tenant shall also pay,
together with the first payment of the increased Basic Rent, an amount
determined by multiplying the amount of the increase in Basic Rent
times the number of months that have elapsed between the Rental
Adjustment Date and the Payment Date.
Notwithstanding the foregoing, the parties agree that as of any Rental
Adjustment Date, the revised Basic Rent due to all cumulative
increases pursuant to this paragraph shall neither (i) exceed the
amount obtained by increasing the initial Basic Rent from the
Commencement Date to said Rental Adjustment at the rate of six percent
(6%) per annum, compounded annually, nor (ii) be less than the amount
obtained by increasing the initial Basic Rent from the Commencement
Date to said Rental Adjustment Date at the rate of three percent (3%)
per annum, compounded annually.
7. Guarantor(s): N/A
8. Floor Area of Premises: approximately 34,320 rentable square feet
<PAGE> 5
9. Security Deposit: $50,210.00
10. Broker(s): Grubb & Ellis
11. Additional Insureds: Insignia Commercial Group, Inc.
12. Address for Payments and Notices:
<TABLE>
<CAPTION>
LANDLORD TENANT
<S> <C>
Insignia Commercial Group, Inc. NeoTherapeutics, Inc.
One Technology Drive, Suite F-207 157 Technology
Irvine, CA 92618 Irvine, CA 92618
with a copy of notices to:
Irvine Industrial Company
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
</TABLE>
13. Tenant's Liability Insurance Requirement: $2,000,000.00
14. Vehicle Parking Spaces: One Hundred Two (102)
15. Estimated Space Plan Approval Date: N/A
<TABLE>
<S> <C> <C> <C>
Exhibits:
A Description of Premises E Rules and Regulations
B Environmental Questionnaire X Work Letter
C Landlord's Disclosures Y Project Site Plan
D Insurance Requirements
</TABLE>
<PAGE> 6
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and
Tenant leases from Landlord the premises shown in Exhibit A (the "Premises"),
including the building identified in Item 1 of the Basic Lease Provisions
(which together with the underlying real property, is called the "Building"),
and containing approximately the floor area set forth in Item 8 of the Basic
Lease Provisions. The Premises is a portion of the project shown in Exhibit Y
(the "Project").
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that
neither Landlord nor any representative of Landlord has made any representation
or warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters, and
that neither Landlord nor any representative of Landlord has made any
representations or warranties regarding (i) what other tenants or uses may be
permitted or intended in the Building and the Project, or (ii) any exclusivity
of use by Tenant with respect to its permitted use of the Premises as set forth
in Item 3 of the Basic Lease Provisions. Tenant further acknowledges that
neither Landlord nor any representative of Landlord has agreed to undertake any
alterations or additions or construct any improvements to the Premises except
as expressly provided in this Lease. The taking of possession or use of the
Premises by Tenant for any purpose other than construction shall conclusively
establish that the Premises and the Building were in satisfactory condition and
in conformity with the provisions of this Lease in all respects, except for
those matters which Tenant shall have brought to Landlord's attention on a
written punch list. The list shall be limited to any items required to be
accomplished by Landlord under the Work Letter attached as Exhibit X, and shall
be delivered to Landlord within thirty (30) days after the term ("Term") of
this Lease commences as provided in Article III below. If no items are
required of Landlord under the Work Letter, by taking possession of the
Premises Tenant accepts the improvements in their existing condition, and
waives any right or claim against Landlord arising out of the condition of the
Premises. Nothing contained in this Section shall affect the commencement of
the Term or the obligation of Tenant to pay rent. Landlord shall diligently
complete all punch list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize
any name selected by Landlord from time to time for the Building and/or the
Project as any part of Tenant's corporate or trade name. Landlord shall have
the right to change the name, address, number or designation of the Building or
Project without liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL.
(a) The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. Subject to the provisions of Section 3.2 below,
the Term shall commence ("Commencement Date") on the earlier of (a) the date
upon which all relevant governmental authorities have approved the Tenant
Improvements in accordance with applicable building codes, as evidenced by
written approval thereof in accordance with the building permits issued for the
Tenant Improvements or issuance of a temporary or final certificate of
occupancy for the Premises, or (b) the date Tenant acquires possession or
commences use of the Premises for any purpose other than construction of Tenant
Improvements by Tenant under the Work Letter. Within ten (10) days after
possession of the Premises is tendered to Tenant, the parties shall memorialize
on a form provided by Landlord the actual Commencement Date and the expiration
date ("Expiration Date") of this Lease. Tenant's failure to execute that form
shall not affect the validity of Landlord's determination of those dates.
(b) Provided that Tenant is not in default under any
provision of this Lease, either at the time of exercise of the extension right
granted herein or at the time of the commencement of such extension, and
provided further that Tenant is occupying more than fifty percent (50%) of the
floor area of the Premise and/or has not assigned its interest in this Lease,
Tenant shall have two (2) successive options to extend the Term of this Lease
for periods of sixty (60) months each. Tenant shall exercise its right to
extend the Term by and only by delivering to Landlord, not less than nine (9)
months or more than twelve (12) months prior to the then-current expiration
date of the Term, Tenant's irrevocable written notice of its commitment to
extend (the "Commitment Notice"). The Basic Rent payable under the Lease
during any extension of the Term shall be at the fair market rental, including
subsequent adjustments, for comparable office/research and development space
being leased by Landlord in the Irvine Spectrum area; provided that such rate
shall in no event be less than the rate payable by Tenant during the final
month of the initial Term. In the event that the parties are not able to agree
on the fair market rental within one hundred twenty (120) days prior to the
expiration date of the Term, then either party may elect, by written notice to
the other party, to cause said rental, including subsequent adjustments, to be
determined by appraisal as follows.
<PAGE> 7
Within ten (10) days following receipt of such
appraisal election, the parties shall attempt to agree on an appraiser to
determine the fair market rental. If the parties are unable to agree in that
time, then each party shall designate an appraiser within ten (10) days
thereafter. Should either party fail to so designate an appraiser within that
time, then the appraiser designated by the other party shall determine the fair
rental value. Should each of the parties timely designate an appraiser, then
the two appraisers so designated shall appoint a third appraiser who shall,
acting alone, determine the fair rental value of the Premises. Any appraiser
designated hereunder shall have an M.A.I. certification with not less than five
(5) years experience in the valuation of commercial industrial buildings in
Orange County, California.
Within thirty (30) days following the selection of
the appraiser, such appraiser shall determine the fair market rental value,
including subsequent adjustments of the Premises. In determining such value,
the appraiser shall first consider rental comparables for the Project, provided
that if adequate comparables do not exist then the appraiser may consider
transactions involving similarly improved space in the Irvine Spectrum area
with appropriate adjustments for differences in location and quality of
project. In no event shall the appraiser attribute factors for brokerage
commissions to reduce said fair market rental. The fees of the appraiser(s)
shall be shared equally by both parties.
Within twenty (20) days after the determination of
the fair market rental, Landlord shall prepare a reasonably appropriate
amendment to this Lease for the extension period and Tenant shall execute and
return same to Landlord within ten (10) days. Should the fair market rental
not be established by the commencement of the extension period, then Tenant
shall continue paying rent at the rate in effect during the last month of the
initial Term, and a lump sum adjustment shall be made promptly upon the
determination of such new rental.
If Tenant fails to timely comply with any of the
provisions of this paragraph, Tenant's right to extend the Term shall be
extinguished and the Lease shall automatically terminate as of the expiration
date of the Term, without any extension and without any liability to Landlord.
Any attempt to assign or transfer any right or interest created by this
paragraph shall be void from its inception. Tenant shall have no other right
to extend the Term beyond the single sixty (60) month extension created by this
paragraph.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason
whatsoever, cannot deliver possession of the Premises to Tenant on or before
the Estimated Commencement Date, this Lease shall not be void or voidable nor
shall Landlord be liable to Tenant for any resulting loss or damage. However,
Tenant shall not be liable for any rent and the Commencement Date shall not
occur until Landlord delivers possession of the Premises and the Premises are
in fact available for Tenant's occupancy with any Tenant Improvements that have
been approved as per Section 3.1(a) above, except that if Landlord's failure
to so deliver possession on the Estimated Commencement Date is attributable to
any action or inaction by Tenant (including without limitation any Tenant Delay
described in the Work Letter, if any, attached to this Lease), then the
Commencement Date shall not be advanced to the date on which possession of the
Premises is tendered to Tenant, and Landlord shall be entitled to full
performance by Tenant (including the payment of rent) from the date Landlord
would have been able to deliver the Premises to Tenant but for Tenant's
delay(s). Notwithstanding anything to the contrary contained in this Section
3.2, however, if for any reason other than "Tenant Delays" (as defined in the
Work Letter) or other matters beyond Landlord's reasonable control, the
Commencement Date has not occurred by the date that is one hundred eighty
(180) days following the Estimated Commencement Date, then Tenant may, by
written notice to Landlord given at any time thereafter but prior to the actual
occurrence of the Commencement Date, elect to terminate this Lease.
Notwithstanding the foregoing, if at any time during the construction period,
Landlord reasonably believes that the Commencement Date will not occur on or
before one hundred eighty (180) days following the Estimated Commencement
Date, Landlord may notify Tenant in writing of such fact and of a new outside
date on or before which the Commencement Date will occur, and Tenant must elect
within ten (10) days of receipt of such notice to either terminate this Lease
or waive its right to terminate this Lease provided the Commencement Date
occurs on or prior to the new outside date established by Landlord in such
notice to Tenant. Tenant's failure to elect to terminate this Lease within
such ten (10) day period shall be deemed Tenant's waiver of its right to
terminate this Lease as provided in this paragraph as to the previous outside
date, but not as to the new outside date established by said notice.
Notwithstanding anything to the contrary contained in this Section 3.2,
however, if for any reason other than "Tenant Delays" (as defined in the Work
Letter), the Commencement Date has not occurred by that date that is one (1)
year following the Estimated Commencement Date, then Tenant may, by written
notice to Landlord given within twenty (20) business days thereafter but prior
to the actual Commencement Date, elect to terminate this Lease.
ARTICLE IV. RENT AND OPERATING EXPENSES
<PAGE> 8
SECTION 4.1. BASIC RENT. From and after the Commencement Date,
Tenant shall pay to Landlord without deduction or offset, Basic Rent for the
Premises in the total amount shown (including subsequent adjustments, if any)
in Item 6 of the Basic Lease Provisions. Any rental adjustment shown in Item 6
shall be deemed to occur on the specified monthly anniversary of the
Commencement Date, whether or not that date occurs at the end of a calendar
month. The rent shall be due and payable in advance commencing on the
Commencement Date (as prorated for any partial month) and continuing thereafter
on the first day of each successive calendar month of the Term. No demand,
notice or invoice shall be required for the payment of Basic Rent. An
installment of rent in the amount of one (1) full month's Basic Rent at the
initial rate specified in Item 6 of the Basic Lease Provisions shall be
delivered to Landlord concurrently with Tenant's execution of this Lease and
shall be applied against the Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent,
"Building Costs" and "Property Taxes," as those terms are defined below,
incurred by Landlord in the operation of the Building and Project. For
convenience of reference, Property Taxes and Building Costs shall be referred
to collectively as "Operating Expenses".
(b) Commencing prior to the start of the first full
"Expense Recovery Period" (as defined below) of the Lease, and prior to the
start of each full or partial Expense Recovery Period thereafter, Landlord
shall give Tenant a written estimate of the amount of Operating Expenses for
the Expense Recovery Period. Tenant shall pay the estimated amounts to
Landlord in equal monthly installments, in advance, with Basic Rent. If
Landlord has not furnished its written estimate for any Expense Recovery Period
by the time set forth above, Tenant shall continue to pay cost reimbursements
at the rates established for the prior Expense Recovery Period, if any;
provided that when the new estimate is delivered to Tenant, Tenant shall, at
the next monthly payment date, pay any accrued cost reimbursements based upon
the new estimate. For purposes hereof, "Expense Recovery Period" shall mean
every twelve month period during the Term (or portion thereof for the first and
last lease years) commencing July 1 and ending June 30.
(c) Within one hundred twenty (120) days after the end of
each Expense Recovery Period, Landlord shall furnish to Tenant a statement
showing in reasonable detail the actual or prorated Operating Expenses incurred
by Landlord during the period, and the parties shall within thirty (30) days
thereafter make any payment or allowance necessary to adjust Tenant's estimated
payments, if any, to Tenant's actual owed amounts as shown by the annual
statement. Any delay or failure by Landlord in delivering any statement
hereunder shall not constitute a waiver of Landlord's right to require Tenant
to pay Operating Expenses pursuant hereto. Any amount due Tenant shall be
credited against installments next coming due under this Section 4.2, and any
deficiency shall be paid by Tenant together with the next installment. If
Tenant has not made estimated payments during the Expense Recovery Period, any
amount owing by Tenant pursuant to subsection (a) above shall be paid to
Landlord in accordance with Article XVI. Should Tenant fail to object in
writing to Landlord's determination of actual Operating Expenses within sixty
(60) days following delivery of Landlord's expense statement, Landlord's
determination of actual Operating Expenses for the applicable Expense Recovery
Period shall be conclusive and binding on the parties and any future claims to
the contrary shall be barred. For each Expense Recovery Period from and after
July 1, 1998 during the initial Term of this Lease, Landlord hereby agrees that
Tenant's proportionate share of "controllable" Building Costs shall not
increase by more than five percent (5%) per annum, on a compound basis, over
Tenant's share of Building costs for the Expense Recovery Period ending June
30, 1998. As used herein, controllable" Building Costs shall mean the
following costs only: (i) landscape maintenance; (ii) parking lot maintenance;
(iii) refuse collection; (iv) window washing; (v) janitorial and day porter
services; (vi) general building maintenance; (vii) security; (viii) gas and
electric utilities; (ix) HVAC maintenance; (x) the management fee, wages,
taxes, salaries, fringe benefits for administrative and other personnel
directly applicable to the Building and/or the Project; and (xi) cost of
Landlord's environmental, tax or other consultants.
Landlord agrees that it will maintain complete and
accurate records of all costs, expenses and disbursements paid or incurred by
Landlord, its employees, agents and/or contractors, with respect to the
Operating Expenses. Provided Tenant is not then in default under this Lease,
Tenant shall have the right to have Tenant's financial officer, a trained
accountant (which may be an employee of Tenant) or a certified public
accountant to audit Landlord's Operating Expenses, subject to the terms and
conditions hereof. In no event, however, shall such auditor be compensated by
Tenant on a "contingency" basis, or on any other basis tied to the results of
said audit. Tenant shall give notice to Landlord of Tenant's intent to audit
within sixty (60) days following delivery of Landlord's expense statement for
each of the Expense Recovery Periods. Following reasonable notice to Landlord,
such audit shall be conducted at a mutually agreeable time during normal
business hours at the office of Landlord or its management agent where the
records are maintained. If Tenant's audit determines that
<PAGE> 9
actual Operating Expenses have been overstated by more than five percent (5%),
then subject to Landlord's right to review and/or contest the audit results,
Landlord shall reimburse Tenant for the reasonable out-of-pocket costs of such
audit. Tenant's rent shall be appropriately adjusted to reflect any
overstatement in Operating Expenses. In the event of a dispute between
Landlord and Tenant regarding the results of such audit, either party may elect
to submit the matter for binding arbitration with JAMS/ENDISPUTE, as provided
in Section 22.7 of this Lease.
All of the information obtained by Tenant and/or its
auditor in connection with such audit, as well as any compromise, settlement,
or adjustment reached between Landlord and Tenant as a result thereof, shall be
held in strict confidence and, except as may be required pursuant to litigation
and except for inadvertent disclosures despite Tenant's reasonable efforts to
keep the disclosed information confidential, shall not be disclosed to any
third party, directly or indirectly, by Tenant or its auditor or any of their
officers, agents or employees. Landlord may require Tenant's auditor to
execute a separate confidentiality agreement affirming the foregoing as a
condition precedent to any audit.
(d) Even though the Lease has terminated and the Tenant
has vacated the Premises, when the final determination is made of Operating
Expenses for the Expense Recovery Period in which the Lease terminates, Tenant
shall upon notice pay the entire increase due over the estimated expenses paid.
Conversely, any overpayment made in the event expenses decrease shall be
rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period,
any one or more of the Operating Expenses are increased to a rate(s) or
amount(s) in excess of the rate(s) or amount(s) used in calculating the
estimated expenses for the year, then the estimate of Operating Expenses shall
be increased for the month in which such rate(s) or amount(s) becomes effective
and for all succeeding months by an amount equal to the increase. Landlord
shall give Tenant written notice of the amount or estimated amount of the
increase, the month in which the increase will become effective, and the month
for which the payments are due. Tenant shall pay the increase to Landlord as a
part of Tenant's monthly payments of estimated expenses as provided in
paragraph (b) above, commencing from and after Landlord's notice to Tenant
with the month in which such increase shall be in effect.
(f) The term "Building Costs" shall include all expenses
of operation and maintenance of the Building and of the Building's
proportionate share of the Project, if applicable (determined as the rentable
square footage of the Building divided by the rentable square footage of all
space in the Project), to the extent such expenses are not billed to and paid
directly by Tenant, and shall include the following charges by way of
illustration but not limitation: water and sewer charges; insurance premiums
or reasonable premium equivalents should Landlord elect to self-insure any risk
that Landlord is authorized to insure hereunder; license, permit, and
inspection fees; heat; light; power; air conditioning; supplies; materials;
equipment; tools; the cost of any environmental, insurance, tax or other
consultant utilized by Landlord in connection with the Building and/or Project;
establishment of reasonable reserves for replacements and/or repair of Common
Area improvements (if applicable), equipment and supplies; costs incurred in
connection with compliance of any laws or changes in laws applicable to the
Building or the Project; the cost of any capital investments (other than tenant
improvements for specific tenants) to the extent of the amortized amount
thereof over the useful life of such capital investments calculated at a market
cost of funds, all as reasonably determined by Landlord, for each such year of
useful life during the Term; costs associated with the procurement and
maintenance of an intrabuilding network cable service agreement for any
intrabuilding network cable telecommunications lines within the Project, and
any other installation, maintenance, repair and replacement costs associated
with such lines; labor; reasonably allocated wages and salaries, fringe
benefits, and payroll taxes for administrative and other personnel directly
applicable to the Building and/or Project, including both Landlord's personnel
and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4,
7.2, and 10.2; and a reasonable overhead/management fee for the professional
operation of the Building and Project. Notwithstanding anything to the
contrary contained herein, the amount of such overhead/management fee to be
charged to Tenant shall be determined by multiplying the actual fee charged
(which from time to time may be with respect to the entire Project, a portion
of the Project only, the Building only, or the Project together with other
properties owned by Landlord and/or its affiliates) by a fraction, the
numerator of which is the floor area of the Premises (as set forth in Item No.
8 of the Basic Lease Provisions) and the denominator of which is the total
square footage of space charged with such fee actually leased to tenants
(including Tenant). It is understood that Building Costs shall include
competitive charges for direct services provided by any subsidiary or division
of Landlord.
(g) The term "Property Taxes" as used herein shall
include the following: (i) all real estate taxes or personal property taxes,
as such property taxes may be reassessed from time to time; and (ii) other
taxes, charges and assessments which are levied with respect to this Lease or
to the Building and/or the Project, and any improvements, fixtures and
equipment and other property of Landlord located in the Building and/or the
Project, except that general net income and franchise taxes imposed against
Landlord shall be excluded; and (iii) all
<PAGE> 10
assessments and fees for public improvements, services, and facilities and
impacts thereon, including without limitation arising out of any Community
Facilities Districts, "Mello Roos" districts, similar assessment districts, and
any traffic impact mitigation assessments or fees; (iv) any tax, surcharge or
assessment which shall be levied in addition to or in lieu of real estate or
personal property taxes, other than taxes covered by Article VIII; and (v)
costs and expenses incurred in contesting the amount or validity of any
Property Tax by appropriate proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's
delivery of this Lease, Tenant shall deposit with Landlord the sum, if any,
stated in Item 9 of the Basic Lease Provisions, to be held by Landlord as
security for the full and faithful performance of Tenant's obligations under
this Lease (the "Security Deposit"). Subject to the last sentence of this
Section, the Security Deposit shall be understood and agreed to be the property
of Landlord upon Landlord's receipt thereof, and may be utilized by Landlord in
its discretion towards the payment of all prepaid expenses by Landlord for
which Tenant would be required to reimburse Landlord under this Lease,
including without limitation brokerage commissions and Tenant Improvement
costs. Upon any default by Tenant, including specifically Tenant's failure to
pay rent or to abide by its obligations under Sections 7.1 and 15.3 below,
whether or not Landlord is informed of or has knowledge of the default, the
Security Deposit shall be deemed to be automatically and immediately applied,
without waiver of any rights Landlord may have under this Lease or at law or in
equity as a result of the default, as a setoff for full or partial compensation
for Landlord's damages arising from that default. If any portion of the
Security Deposit is applied after a default by Tenant, Tenant shall within five
(5) days after written demand by Landlord deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on the Security
Deposit. If Tenant fully performs its obligations under this Lease, the
Security Deposit or any balance thereof shall be returned to Tenant (or, at
Landlord's option, and unless otherwise expressly agreed to in the applicable
consent to assignment agreement, to the last assignee of Tenant's interest in
this Lease) after the expiration of the Term, provided that Landlord may retain
the Security Deposit to the extent and until such time as all amounts due from
Tenant in accordance with this Lease have been determined and paid in full.
<PAGE> 11
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the
purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities.
The parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not do or permit to be done anything which will invalidate or increase
the cost of any insurance policy(ies) covering the Building, the Project and/or
their contents, and shall comply with all applicable insurance underwriters
rules and the requirements of the Pacific Fire Rating Bureau or any other
organization performing a similar function. Tenant shall comply at its expense
with all present and future laws, ordinances, restrictions, regulations,
orders, rules and requirements of all governmental authorities that pertain to
Tenant or its use of the Premises, including without limitation all federal and
state occupational health and safety requirements, whether or not Tenant's
compliance will necessitate expenditures or interfere with its use and
enjoyment of the Premises. Tenant shall comply at its expense with all present
and future covenants, conditions, easements or restrictions now or hereafter
affecting or encumbering the Building and/or Project, and any amendments or
modifications thereto, including without limitation the payment by Tenant of
any periodic or special dues or assessments charged against the Premises or
Tenant which may be allocated to the Premises or Tenant in accordance with the
provisions thereof. Tenant shall promptly upon demand reimburse Landlord for
any additional insurance premium charged by reason of Tenant's failure to
comply with the provisions of this Section, and shall indemnify Landlord from
any liability and/or expense resulting from Tenant's noncompliance. As used in
this Section 5.1, the term "permit" shall be deemed to mean "knowingly permit"
in connection with anything that Tenant permits to be done on or about the
Common Areas of the Project, as opposed to the Premises itself.
Notwithstanding anything to the contrary contained in this Section 5.1, in the
event Tenant's obligation for compliance with all future and present laws,
ordinances, restrictions, regulations, orders, rules and requirements of all
governmental authorities, and with all present and future covenants,
conditions, easements or restrictions now or hereafter affecting or encumbering
the Building and/or the Project, results in a capital improvement on Tenant's
part (or Tenant's being obligated to reimburse Landlord for a capital
improvement), Tenant shall only be responsible for the amortized cost of such
capital improvement (amortized at a market cost of funds as reasonably
determined by Landlord) over the useful life of said improvement during the
Term.
SECTION 5.2 SIGNS. Except as approved in writing by Landlord, in
its sole discretion, Tenant shall have no right to maintain identification
signs in any location in, on or about the Premises, the Building or the Project
and shall not place or erect any signs, displays or other advertising materials
that are visible from the exterior of the Building. The size, design,
graphics, material, style, color and other physical aspects of any permitted
sign shall be subject to Landlord's written approval prior to installation
(which approval may be withheld in Landlord's discretion), any covenants,
conditions or restrictions encumbering the Premises, Landlord's signage program
for the Project, as in effect from time to time and approved by the City of
Irvine ("Signage Criteria"), and any applicable municipal or other governmental
permits and approvals. Tenant acknowledges having received and reviewed a copy
of the current Signage Criteria for the Project. Tenant shall be responsible
for the cost of any permitted sign, including the fabrication, installation,
maintenance and removal thereof. If Tenant fails to maintain its sign, or if
Tenant fails to remove same upon termination of this Lease and repair any
damage caused by such removal, Landlord may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous
Materials" includes (i) any "hazardous materials" as defined in Section
25501(k) of the California Health and Safety Code, (ii) any other substance
or matter which results in liability to any person or entity from exposure to
such substance or matter under any statutory or common law theory, and (iii)
any substance or matter which is in excess of permitted levels set forth in
any federal, California or local law or regulation pertaining to any hazardous
or toxic substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous
Materials to be brought upon, stored, used, generated, released or disposed of
on, under, from or about the Premises (including without limitation the soil
and groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord, to utilize within the Premises standard
household
<PAGE> 12
cleaning products and office products that may contain Hazardous Materials
(such as photocopy toner, "White Out", and the like), provided however, that
(i) Tenant shall maintain such products in their original retail packaging,
shall follow all instructions on such packaging with respect to the storage,
use and disposal of such products, and shall otherwise comply with all
applicable laws with respect to such products, and (ii) all of the other terms
and provisions of this Section 5.3 shall apply with respect to Tenant's
storage, use and disposal of all such products. Landlord may, in its sole
discretion, place such conditions as Landlord deems appropriate with respect to
any such Hazardous Materials, and may further require that Tenant demonstrate
that any such Hazardous Materials are necessary or useful to Tenant's business
and will be generated, stored, used and disposed of in a manner that complies
with all applicable laws and regulations pertaining thereto and with good
business practices. Tenant understands that Landlord may utilize an
environmental consultant to assist in determining conditions of approval in
connection with the storage, generation, release, disposal or use of Hazardous
Materials by Tenant on or about the Premises, and/or to conduct periodic
inspections of the storage, generation, use, release and/or disposal of such
Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that
any costs incurred by Landlord in connection therewith, to the extent of a
violation by Tenant of the provisions of this Section 5.3 of the Lease, shall
be reimbursed by Tenant to Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall
complete, execute and deliver to Landlord an Environmental Questionnaire and
Disclosure Statement (the "Environmental Questionnaire") in the form of Exhibit
B attached hereto. Landlord hereby consents to the use by Tenant of the kinds
and quantities of Hazardous Materials shown in the foregoing-delivered
Environmental Questionnaire, provided Tenant shall comply with all applicable
laws and regulations pertaining to the generation, storage, use and disposal of
such Hazardous Materials. The completed Environmental Questionnaire shall be
deemed incorporated into this Lease for all purposes, and Landlord shall be
entitled to rely fully on the information contained therein. On each
anniversary of the Commencement Date until the expiration or sooner termination
of this Lease, Tenant shall disclose to Landlord in writing the names and
amounts of all Hazardous Materials which were stored, generated, used, released
and/or disposed of on, under or about the Premises for the twelve-month period
prior thereto, and which Tenant desires to store, generate, use, release and/or
dispose of on, under or about the Premises for the succeeding twelve-month
period. In addition, to the extent Tenant is permitted to utilize Hazardous
Materials upon the Premises, Tenant shall promptly provide Landlord with
complete and legible copies of all the following environmental documents
relating thereto: reports filed pursuant to any self-reporting requirements;
permit applications, permits, monitoring reports, workplace exposure and
community exposure warnings or notices and all other reports, disclosures,
plans or documents (even those which may be characterized as confidential)
relating to water discharges, air pollution, waste generation or disposal, and
underground storage tanks for Hazardous Materials; orders, reports, notices,
listings and correspondence (even those which may be considered confidential)
of or concerning the release, investigation of, compliance, cleanup, remedial
and corrective actions, and abatement of Hazardous Materials; and all
complaints, pleadings and other legal documents filed by or against Tenant
related to Tenant's use, handling, storage, release and/or disposal of
Hazardous Materials.
(d) Landlord and its agents shall have the right, but not
the obligation, to inspect, sample and/or monitor the Premises and/or the soil
or groundwater thereunder at any time to determine whether Tenant is complying
with the terms of this Section 5.3, and in connection therewith Tenant shall
provide Landlord with full access to all relevant facilities, records and
personnel. If Tenant is not in compliance with any of the provisions of this
Section 5.3, or in the event of a release of any Hazardous Material on, under
or about the Premises caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, Landlord and its agents shall have the
right, but not the obligation, without limitation upon any of Landlord's other
rights and remedies under this Lease, to immediately enter upon the Premises
without notice and to discharge Tenant's obligations under this Section 5.3 at
Tenant's expense, including without limitation the taking of emergency or
long-term remedial action. Landlord and its agents shall endeavor to minimize
interference with Tenant's business in connection therewith, but shall not be
liable for any such interference. In addition, Landlord, at Tenant's expense,
shall have the right, but not the obligation, to join and participate in any
legal proceedings or actions initiated in connection with any claims arising
out of the storage, generation, use, release and/or disposal by Tenant or its
agents, employees, contractors, licensees or invitees of Hazardous Materials
on, under, from or about the Premises.
(e) If the presence of any Hazardous Materials on, under,
from or about the Premises or the Project caused or permitted by Tenant or its
agents, employees, contractors, licensees or invitees results in (i) injury to
any person, (ii) injury to or any contamination of the Premises or the
Project, or (iii) injury to or contamination of any real or personal property
wherever situated, Tenant, at its expense, shall promptly take all actions
necessary to return the Premises and the Project and any other affected real or
personal property owned by Landlord to the condition existing prior to the
introduction of such Hazardous Materials and to remedy
<PAGE> 13
or repair any such injury or contamination, including without limitation, any
cleanup, remediation, removal, disposal, neutralization or other treatment of
any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not,
without Landlord's prior written consent, take any remedial action in response
to the presence of any Hazardous Materials on, under or about the Premises or
the Project or any other affected real or personal property owned by Landlord
or enter into any similar agreement, consent, decree or other compromise with
any governmental agency with respect to any Hazardous Materials claims;
provided however, Landlord's prior written consent shall not be necessary in
the event that the presence of Hazardous Materials on, under or about the
Premises or the Project or any other affected real or personal property owned
by Landlord (i) imposes an immediate threat to the health, safety or welfare
of any individual or (ii) is of such a nature that an immediate remedial
response is necessary and it is not possible to obtain Landlord's consent
before taking such action. To the fullest extent permitted by law, Tenant
shall indemnify, hold harmless, protect and defend (with attorneys acceptable
to Landlord) Landlord and any successors to all or any portion of Landlord's
interest in the Premises and the Project and any other real or personal
property owned by Landlord from and against any and all liabilities, losses,
damages, diminution in value, judgments, fines, demands, claims, recoveries,
deficiencies, costs and expenses (including without limitation attorneys' fees,
court costs and other professional expenses), whether foreseeable or
unforeseeable, arising directly or indirectly out of the use, generation,
storage, treatment, release, on- or off-site disposal or transportation of
Hazardous Materials on, into, from, under or about the Premises, the Building
and the Project and any other real or personal property owned by Landlord
caused or permitted by Tenant, its agents, employees, contractors, licensees or
invitees, specifically including without limitation the cost of any required or
necessary repair, restoration, cleanup or detoxification of the Premises, the
Building and the Project and any other real or personal property owned by
Landlord, and the preparation of any closure or other required plans, whether
or not such action is required or necessary during the Term or after the
expiration of this Lease. If Landlord at any time discovers that Tenant or its
agents, employees, contractors, licensees or invitees may have caused or
permitted the release of a Hazardous Material on, under, from or about the
Premises or the Project or any other real or personal property owned by
Landlord, Tenant shall, at Landlord's request, immediately prepare and submit
to Landlord a comprehensive plan, subject to Landlord's approval, specifying
the actions to be taken by Tenant to return the Premises or the Project or any
other real or personal property owned by Landlord to the condition existing
prior to the introduction of such Hazardous Materials. Upon Landlord's
approval of such cleanup plan, Tenant shall, at its expense, and without
limitation of any rights and remedies of Landlord under this Lease or at law or
in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall
expressly survive the expiration or sooner termination of this Lease. As used
in this Section 5.3(e), the terms "permit" and "permitted" shall be deemed to
mean "knowingly permit" and "knowingly permitted" in connection with anything
that Tenant permits, or has permitted, to be done on or about the Common Areas
of the Project, as opposed to the Premises itself.
(f) Landlord hereby discloses to Tenant, and Tenant
hereby acknowledges, certain facts relating to Hazardous Materials at the
Project known by Landlord to exist as of the date of this Lease, as more
particularly described in Exhibit C attached hereto. Tenant shall have no
liability or responsibility with respect to the Hazardous Materials conditions
described in Exhibit C, nor with respect to any Hazardous Materials which
Tenant proves: (i) were not caused or permitted by Tenant, its agents,
employees, contractors, licensees or invitees; (ii) were the result of
violations of any "Hazardous Materials Laws" (as hereinafter defined) relating
to the Premises, the Building, or the Project (the Premises, the Building, and
the Project shall be collectively referred to herein as the "Property") which
violations existed as of the Commencement Date, or (iii) were present in, on,
under or about any part of the Property as of the Commencement Date, or that
were brought into, onto, about, or under any part of the Property by anyone
other than Tenant or its agents, employees, contractors, licensees or invitees.
"Hazardous Materials Laws" shall mean and include all federal, state, and local
laws relating to the environment or to Hazardous Materials, including, but not
limited to, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (42 U.S.C. Section 9601 et seq.), each as amended from
time to time. Notwithstanding the foregoing, Tenant agrees to notify its
agents, employees, contractors, licensees, and invitees of any exposure or
potential exposure to Hazardous Materials at the Premises that Landlord brings
to Tenant's attention.
(g) To "Landlord's knowledge" (as hereinafter defined),
Landlord has complied, and the Property is in compliance as of the date of this
Lease, with all Hazardous Materials Laws, and no notice of violation of any
Hazardous Materials Law with respect thereto, or any permit, license or other
authorization relating thereto has been received, nor is any such notice
pending or, to Landlord's knowledge, threatened. To Landlord's knowledge, no
underground or above-ground storage tanks or surface impoundments are located
on or under any part of the Property. Except in compliance with Hazardous
Materials Laws, neither Landlord, nor to Landlord's knowledge, any prior owner,
operator, tenant or occupant of any part of the Property, has generated, used,
treated, spilled, stored, transferred, disposed, released
<PAGE> 14
or caused a threatened release in, at, under, into, from, to or on any part of
the Property of any Hazardous Materials. Except as disclosed to Tenant,
Landlord has not received any notice or claim to the effect that either
Landlord or any part of the Property is or may be liable to any governmental
authority or private party as a result of the release or threatened release of
any Hazardous Materials. As used herein, "Landlord's knowledge" shall mean the
actual knowledge, as of the Commencement Date of this Lease, of the current
employees of Landlord charged with responsibility for the environmental
compliance of the Property with Hazardous Materials Laws, but without
obligation whatsoever for on- or off-site inquiry, investigation or inspection.
(h) Landlord shall take responsibility, at its sole cost
and expense, for any governmentally-ordered clean-up, remediation, removal,
disposal, neutralization, monitoring or other treatment of the Hazardous
Materials conditions disclosed on EXHIBIT C attached hereto, and in connection
with other Hazardous Materials which were present in, on under or about any
part of the Property as of the Commencement Date. The foregoing obligation on
the part of Landlord shall include the reasonable costs (including, without
limitation, reasonable attorney's fees) of defending Tenant (with attorneys
reasonably acceptable to Tenant) from and against any legal action or
proceeding instituted by any governmental agency in connection with such
clean-up, remediation, removal, disposal, neutralization or other treatment of
such conditions, provided that Tenant promptly tenders such defense to
Landlord. The obligation on the part of Landlord contained in this Section
5.3(h) is personal to Landlord and shall not be binding on, nor inure against
any successor in interest to Landlord as of the owner of the Premises,
including without limitation, any lender acquiring the Premises by foreclosure
of its mortgage or deed of trust or deed in lieu of foreclosure.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible
for and shall pay promptly, directly to the appropriate supplier, all charges
for water, gas, electricity, sewer, heat, light, power, telephone, refuse
pickup, janitorial service, interior landscape maintenance and all other
utilities, materials and services furnished directly to Tenant or the Premises
or used by Tenant in, on or about the Premises during the Term, together with
any taxes thereon. Landlord shall not be liable for damages or otherwise for
any failure or interruption of any utility or other service furnished to the
Premises, and no such failure or interruption shall be deemed an eviction or
entitle Tenant to terminate this Lease or withhold or abate any rent due
hereunder. Notwithstanding the foregoing, if as a result of the actions of
Landlord, its agents, contractors or employees, for more than three (3)
consecutive business days following written notice to Landlord, there is no
HVAC or electricity services to the Premises, or such an interruption of other
essential utilities and building services, such as fire protection or water, so
that the Premises cannot be used by Tenant, in Tenant's judgment reasonably
exercised, then Tenant's Basic Rent shall thereafter be abated until the
Premises are again usable by Tenant; provided, however, that if Landlord is
diligently pursuing the repair of such utilities or services and Landlord
provides substitute services reasonably suitable for Tenant's purposes, as for
example, bringing in portable air-conditioning equipment, then there shall not
be an abatement of Basic Rent. Any disputes concerning the foregoing shall be
resolved by JAMS arbitration pursuant to Section 22.7 of this Lease. The
foregoing provisions shall not apply in case of damage to, or destruction of,
the Premises, which shall be governed by the provisions of Article XI of the
Lease. Landlord shall, upon at least 24 hours prior notice to Tenant and during
normal business hours (except in cases of emergency), have free access to all
electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During
the Term, Landlord shall operate and maintain in a first-class condition all
Common Areas within the Project. The term "Common Areas" shall mean all areas
which are not held for exclusive use by persons entitled to occupy space, and
all other appurtenant areas and improvements provided by Landlord for the
common use of Landlord and tenants and their respective employees and invitees,
including without limitation parking areas and structures, driveways,
sidewalks, landscaped and planted areas, hallways and interior stairwells not
located within the premises of any tenant, common electrical rooms and roof
access entries, common entrances and lobbies, elevators, and restrooms not
located within the premises of any tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the
Premises shall include the use of the Common Areas in common with Landlord and
with all others for whose convenience and use the Common Areas may be provided
by Landlord, subject, however, to compliance with all rules and regulations as
are prescribed from time to time by Landlord. Landlord shall operate and
maintain the Common Areas in the manner Landlord may determine to be
appropriate. All costs incurred by Landlord for the maintenance and operation
of the Common Areas shall be included in Building Costs unless any particular
cost incurred can be charged to a specific tenant of the Project. Landlord
shall at all times during the Term have exclusive control of the Common Areas,
and may restrain any use or occupancy, except as authorized by Landlord's rules
and regulations. Tenant shall keep the Common Areas clear of
<PAGE> 15
any obstruction or unauthorized use related to Tenant's operations. Except as
expressly provided in Section 10.3(b) of this Lease, nothing in this Lease
shall be deemed to impose liability upon Landlord for any damage to or loss of
the property of, or for any injury to, Tenant, its invitees or employees.
Landlord may temporarily close any portion of the Common Areas for repairs,
remodeling and/or alterations, to prevent a public dedication or the accrual of
prescriptive rights, or for any other reason deemed sufficient by Landlord,
without liability to Landlord.
SECTION 6.4. PARKING. Tenant shall be entitled to the number of
vehicle parking spaces set forth in Item 14 of the Basic Lease Provisions,
which spaces shall be unreserved and unassigned, on those portions of the
Common Areas designated by Landlord for parking. Tenant shall not use more
parking spaces than such number. All parking spaces shall be used only for
parking by vehicles no larger than full size passenger automobiles or pickup
trucks. Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers, customers or
invitees to be loaded, unloaded or parked in areas other than those designated
by Landlord for such activities. If Tenant permits or allows any of the
prohibited activities described above, then Landlord shall have the right,
without notice, in addition to such other rights and remedies that Landlord may
have, to remove or tow away the vehicle involved and charge the costs to
Tenant. Parking within the Common Areas shall be limited to striped parking
stalls, and no parking shall be permitted in any driveways, access ways or in
any area which would prohibit or impede the free flow of traffic within the
Common Areas. There shall be no overnight parking of any vehicles of any kind
unless otherwise authorized by Landlord, and vehicles which have been abandoned
or parked in violation of the terms hereof may be towed away at the owner's
expense. Except as expressly provided in Section _10.3(b) of this Lease,
nothing contained in this Lease shall be deemed to create liability upon
Landlord for any damage to motor vehicles of visitors or employees, for any
loss of property from within those motor vehicles, or for any injury to Tenant,
its visitors or employees. Landlord shall have the right to establish, and
from time to time amend, and to enforce against all users all reasonable rules
and regulations (including the designation of areas for employee parking) that
Landlord may deem necessary and advisable for the proper and efficient
operation and maintenance of parking within the Common Areas. Landlord shall
have the right to construct, maintain and operate lighting facilities within
the parking areas; to change the area, level, location and arrangement of the
parking areas and improvements therein; to restrict parking by tenants, their
officers, agents and employees to employee parking areas; to enforce parking
charges (by operation of meters or otherwise); and to do and perform such other
acts in and to the parking areas and improvements therein as, in the use of
good business judgment, Landlord shall determine to be advisable.
Notwithstanding the foregoing, in no event shall Landlord enforce additional
parking charges against Tenant during the initial Term of this Lease. Any
person using the parking area shall observe all directional signs and arrows
and any posted speed limits. In no event shall Tenant interfere with the use
and enjoyment of the parking area by other tenants of the Project or their
employees or invitees. Parking areas shall be used only for parking vehicles.
Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles
for 24-hour periods, is prohibited unless otherwise authorized by Landlord.
Tenant shall be liable for any damage to the parking areas caused by Tenant or
Tenant's employees, suppliers, shippers, customers or invitees, including
without limitation damage from excess oil leakage. Tenant shall have no right
to install any fixtures, equipment or personal property in the parking areas.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves
the right to make alterations or additions to the Project, or to the attendant
fixtures, equipment and Common Areas. Landlord may at any time relocate or
remove any of the various buildings (other than the Building), parking areas,
and other Common Areas, and may add buildings and areas to the Project from
time to time. No change shall entitle Tenant to any abatement of rent or other
claim against Landlord, provided that the change does not deprive Tenant of
reasonable access to or use of the Premises.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole
expense shall comply with all applicable laws and governmental regulations
governing the Premises and make all repairs necessary to keep the Premises in
the condition as existed on the Commencement Date (or on any later date that
the improvements may have been installed), excepting ordinary wear and tear,
including without limitation the electrical and mechanical systems, any air
conditioning, ventilating or heating equipment which serves the Premises, all
walls, glass, windows, doors, door closures, hardware, fixtures, electrical,
plumbing, fire extinguisher equipment and other equipment. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Tenant. As
part of its maintenance obligations hereunder, Tenant shall, at Landlord's
request, provide Landlord with copies of all maintenance schedules, reports and
<PAGE> 16
notices prepared by, for or on behalf of Tenant. Tenant shall obtain
preventive maintenance contracts from a licensed heating and air conditioning
contractor to provide for regular inspection and maintenance of the heating,
ventilating and air conditioning systems servicing the Premises, all subject to
Landlord's approval. All repairs shall be at least equal in quality to the
original work, shall be made only by a licensed contractor approved in writing
in advance by Landlord (which approval shall not be unreasonably withheld), and
shall be made only at the time or times approved by Landlord. Any contractor
utilized by Tenant shall be subject to Landlord's standard requirements for
contractors, as modified from time to time. Landlord shall have the right at
all times (upon at least 24 hours' prior notice) to inspect Tenant's
maintenance of all equipment (including without limitation air conditioning,
ventilating and heating equipment), and may impose reasonable restrictions and
requirements with respect to repairs, as provided in Section 7.3, and the
provisions of Section 7.4 shall apply to all repairs. Alternatively, Landlord
may elect to make any repair or maintenance required hereunder on behalf of
Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord
for all costs incurred upon submission of an invoice. Notwithstanding anything
to the contrary contained in this Section 7.1, in the event Tenant's
obligation for compliance with all applicable laws and governmental
regulations, or making repairs, results in a capital improvement on Tenant's
part (or Tenant's being obligated to reimburse Landlord for a capital
improvement), Tenant shall only be responsible for the amortized cost of such
capital improvement (amortized at a market cost of funds as reasonably
determined by Landlord) over the useful life of such improvements during the
Term.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to
Section 7.1 and Article XI, Landlord shall provide service, maintenance and
repair with respect to the roof, foundations, and footings of the Building, all
landscaping, walkways, parking areas, Common Areas, exterior lighting, and the
exterior surfaces of the exterior walls of the Building, except that Tenant at
its expense shall make all repairs which Landlord deems reasonably necessary as
a result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or
designate any reputable person or firm, including any employee or agent of
Landlord or any of Landlord's affiliates or divisions, to perform any service,
repair or maintenance function. Landlord need not make any other improvements
or repairs except as specifically required under this Lease, and nothing
contained in this Section shall limit Landlord's right to reimbursement from
Tenant for maintenance, repair costs and replacement costs as provided
elsewhere in this Lease. Except as expressly provided in Section 7.6 of this
Lease, Tenant understands that it shall not make repairs at Landlord's expense
nor, in any event, by rental offset. Tenant further understands that Landlord
shall not be required to make any repairs to the roof, foundations or footings
unless and until Tenant has notified Landlord in writing of the need for such
repair and Landlord shall have a reasonable period of time thereafter to
commence and complete said repair, if warranted. All costs of any maintenance
and repairs on the part of Landlord provided hereunder shall be considered part
of Building Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations,
additions or improvements to the Premises without the prior written consent of
Landlord, which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which
cost less than One Dollar ($1.00) per square foot of the improved portions of
the Premises (excluding warehouse square footage) and do not (i) affect the
exterior of the Building or outside areas (or be visible from adjoining sites),
or (ii) affect or penetrate any of the structural portions of the Building,
including but not limited to the roof, or (iii) require any change to the
basic floor plan of the Premises, any change to any structural or mechanical
systems of the Premises, or any governmental permit as a prerequisite to the
construction thereof, or (iv) interfere in any manner with the proper
functioning of or Landlord's access to any mechanical, electrical, plumbing or
HVAC systems, facilities or equipment located in or serving the Building, or
(v) diminish the value of the Premises. Landlord may impose, as a condition
to its consent, any requirements that Landlord in its discretion may deem
reasonable or desirable, including but not limited to a requirement that all
work be covered by a lien and completion bond satisfactory to Landlord and
requirements as to the manner, time, and contractor for performance of the
work. Tenant shall obtain all required permits for the work and shall perform
the work in compliance with all applicable laws, regulations and ordinances,
all covenants, conditions and restrictions affecting the Project, and the Rules
and Regulations (hereafter defined). If any governmental entity requires, as a
condition to any proposed alterations, additions or improvements to the
Premises by Tenant, that improvements be made to the Common Areas, and if
Landlord consents to such improvements to the Common Areas, then Tenant shall,
at Tenant's sole expense, make such required improvements to the Common Areas
in such manner, utilizing such materials, and with such contractors (including,
if required by Landlord, Landlord's contractors) as Landlord may require in its
sole discretion. Under no circumstances shall Tenant make any improvement
which incorporates any Hazardous Materials, including without limitation
asbestos-containing construction materials into the Premises. Any request for
Landlord's consent shall be made in writing and shall contain architectural
plans describing the work in detail reasonably satisfactory to Landlord.
Unless Landlord otherwise requires in writing at the time of its consent
thereto, all alterations, additions or improvements affixed to the Premises
(excluding moveable trade fixtures and
<PAGE> 17
furniture) shall become the property of Landlord and shall be surrendered with
the Premises at the end of the Term, except that Landlord may, by notice to
Tenant given at the time of Landlord's consent thereto, require Tenant to
remove by the Expiration Date, or sooner termination date of this Lease, all or
any alterations, decorations, fixtures, additions, improvements and the like
installed either by Tenant or by Landlord at Tenant's request and to repair any
damage to the Premises arising from that removal (excluding, however, the
Tenant Improvements constructed pursuant to the Work Letter, which shall remain
as Landlord's property at the expiration of the Term). Except as otherwise
provided in this Lease or in any Exhibit to this Lease, should Landlord make
any alteration or improvement to the Premises for Tenant, Landlord shall be
entitled to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises
free from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall
promptly cause any such lien to be released by posting a bond in accordance
with California Civil Code Section 3143 or any successor statute. In the event
that Tenant shall not, within thirty (30) days following the imposition of any
lien, cause the lien to be released of record by payment or posting of a proper
bond, Landlord shall have, in addition to all other available remedies, the
right to cause the lien to be released by any means it deems proper, including
payment of or defense against the claim giving rise to the lien. All expenses
so incurred by Landlord, including Landlord's attorneys' fees, shall be
reimbursed by Tenant promptly following Landlord's demand, together with
interest from the date of payment by Landlord at the maximum rate permitted by
law until paid. Tenant shall give Landlord no less than twenty (20) days'
prior notice in writing before commencing construction of any kind on the
Premises so that Landlord may post and maintain notices of nonresponsibility on
the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall during normal
business hours, upon at least 24 hours' written or oral notice and with a
Tenant escort if Tenant so chooses (except in emergencies, when no notice or
escort shall be required) have the right to enter the Premises to inspect them,
to supply services in accordance with this Lease, to protect the interests of
Landlord in the Premises, and to submit the Premises to prospective or actual
purchasers or encumbrance holders (or, during the last one hundred and eighty
(180) days of the Term or when an uncured Tenant default exists, to prospective
tenants), all without being deemed to have caused an eviction of Tenant and
without abatement of rent except as provided elsewhere in this Lease. Landlord
shall have the right, if desired, but subject to Tenant's reasonable security
requirements, to retain a key which unlocks all of the doors in the Premises,
excluding Tenant's vaults and safes, and Landlord shall have the right to use
any and all means which Landlord may deem proper to open the doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
7.6 TENANT'S SELF-HELP. If Landlord shall fail to perform any repair
obligations required under this Lease within thirty (30) days following
Tenant's written request for such repairs, or if Landlord shall fail to perform
any repairs required under this Lease of an emergency condition within 24
hours' written notice from Tenant, then Tenant may elect to make such repairs
at Landlord's expense by complying with the following provisions of this
Section 7.6. Before making any such repair, Tenant shall deliver to Landlord a
notice for the need for such repair ("Self-Help Notice"), which notice shall
specifically advise Landlord that Tenant intends to exercise its self-help
right hereunder. Should Landlord fail, within ten (10) days following receipt
of the Self-Help Notice (or within 24 hours following notice in the event of
necessary emergency repairs), to commence the necessary repair or to make other
arrangements reasonably satisfactory to Tenant, then Tenant shall have the
right to make such repair on behalf of Landlord. Landlord shall promptly
reimburse Tenant for the reasonable costs of such repairs, but in no event
shall Tenant have the right to offset rent against such costs. In the event
that the work could affect the Building's structural, mechanical, electrical,
heating, ventilating, air conditioning, life safety or plumbing components or
systems, then Tenant shall use only those contractors used by Landlord in the
Project for such work. If those contractors are unwilling or unable to perform
the work, Tenant may retain the services of qualified, reputable and licensed,
bonded contractors with like experience in similar building systems. Tenant
shall be responsible for obtaining any necessary governmental permits before
commencing the repair work, and Tenant shall assume the risk of any damage,
loss or injury resulting from such work.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, before delinquency, all
taxes and assessments levied against all personal property of Tenant located
in the Premises, against all improvements to the Premises made by Landlord or
Tenant which are above Landlord's Project standard in quality and/or quantity
for comparable space within the Project ("Above Standard Improvements"), and
against any alterations, additions or like improvements made to the
<PAGE> 18
Premises by or on behalf of Tenant. When possible Tenant shall cause its
personal property, Above Standard Improvements and alterations to be assessed
and billed separately from the real property of which the Premises form a part.
If any taxes on Tenant's personal property, Above Standard Improvements and/or
alterations are levied against Landlord or Landlord's property and if Landlord
pays the same, or if the assessed value of Landlord's property is increased by
the inclusion of a value placed upon the personal property, Above Standard
Improvements and/or alterations of Tenant and if Landlord pays the taxes based
upon the increased assessment, Tenant shall pay to Landlord the taxes so levied
against Landlord or the proportion of the taxes resulting from the increase in
the assessment. In calculating what portion of any tax bill which is assessed
against Landlord separately, or Landlord and Tenant jointly, is attributable to
Tenant's Above Standard Improvements, alterations and personal property,
Landlord's reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the
contrary, Tenant will not, either voluntarily or by operation of law, assign,
sublet, encumber, or otherwise transfer all or any part of Tenant's interest in
this lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1.(b). No
assignment (whether voluntary, involuntary or by operation of law) and no
subletting shall be valid or effective without Landlord's prior written consent
and, at Landlord's election, any such assignment or subletting or attempted
assignment or subletting shall constitute a material default of this Lease.
Landlord shall not be deemed to have given its consent to any assignment or
subletting by any other course of action, including its acceptance of any name
for listing in the Building directory. To the extent not prohibited by
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and
its creditors, administrators and assigns waives the applicability of Section
365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for
the estate of the bankrupt meets Landlord's standard for consent as set forth
in Section 9.1(b) of this Lease. If this Lease is assigned to any person or
entity pursuant to the provisions of the Bankruptcy Code, any and all monies or
other considerations to be delivered in connection with the assignment shall be
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to which this Lease
is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed
to have assumed all of the obligations arising under this Lease on and after
the date of the assignment, and shall upon demand execute and deliver to
Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this
Lease, it shall first notify Landlord of its desire and shall submit in writing
to Landlord: (i) the name and address of the proposed transferee; (ii) the
nature of any proposed subtenant's or assignee's business to be carried on in
the Premises; (iii) the terms and provisions of any proposed sublease or
assignment, including a copy of the proposed assignment or sublease form; (iv)
_evidence of insurance of the proposed assignee or subtenant complying with the
requirements of Exhibit D hereto; (v) a completed Environmental Questionnaire
from the proposed assignee or subtenant; and (vi) any other information
requested by Landlord and reasonably related to the transfer. Except as
provided in Subsection (e) of this Section, Landlord shall not unreasonably
withhold its consent, provided: (1) the use of the Premises will be consistent
with the provisions of this Lease and with Landlord's commitment to other
tenants of the Project; (2) the proposed assignee or subtenant is not
currently subject to any enforcement order issued by any governmental authority
in connection with the use, disposal or storage of a Hazardous Material; (3) at
Landlord's election, insurance requirements shall be brought into conformity
with Landlord's then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by submission to
Landlord of all reasonable information as Landlord may request concerning the
proposed subtenant or assignee, including, but not limited to, a balance sheet
of the proposed subtenant or assignee as of a date within ninety (90) days of
the request for Landlord's consent and statements of income or profit and loss
of the proposed subtenant or assignee for the two-year period preceding the
request for Landlord's consent, and/or a certification signed by the proposed
subtenant or assignee that it has not been evicted or been in arrears in rent
at any other leased premises for the 3-year period preceding the request for
Landlord's consent; (5) the proposed assignee or subtenant is not an existing
tenant of the Project or a prospect with whom Landlord is negotiating to become
a tenant at the Project; and (6) the proposed transfer will not impose
additional burdens or adverse tax effects on Landlord. If Tenant has any
exterior sign rights under this Lease, such rights are personal to Tenant and
may not be assigned or transferred to any assignee of this Lease or subtenant
of the Premises without Landlord's prior written consent, which may be withheld
in Landlord's reasonable discretion, provided that such signage complies with
the provision of Section 5.2 of this Lease and that Landlord's sole and
absolute consent shall apply
<PAGE> 19
to the assignee's or sublessee's name on said signage.
If Landlord consents to the proposed transfer, Tenant
may within ninety (90) days after the date of the consent effect the transfer
upon the terms described in the information furnished to Landlord; provided
that any material change in the terms shall be subject to Landlord's consent as
set forth in this Section. Landlord shall approve or disapprove any requested
transfer within thirty (30) days following receipt of Tenant's written request,
the information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b)
above, in lieu of consenting to a proposed assignment or any subletting (or
sublettings) in excess of fifty percent (50%) of the floor area of the
Premises in the aggregate, Landlord may elect to (i) sublease the Premises (or
the portion proposed to be subleased), or take an assignment of Tenant's
interest in this Lease, upon the same terms as offered to the proposed
subtenant or assignee (excluding terms relating to the purchase of personal
property, the use of Tenant's name or the continuation of Tenant's business),
or (ii) terminate this Lease as to the portion of the Premises proposed to be
subleased or assigned with a proportionate abatement in the rent payable under
this Lease, effective on the date that the proposed sublease or assignment
would have become effective. Landlord may thereafter, at its option, assign or
re-let any space so recaptured to any third party, including without limitation
the proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts
paid by the assignee or subtenant, however described, in excess of (i) the
Basic Rent payable by Tenant hereunder, or in the case of a sublease of a
portion of the Premises, in excess of the Basic Rent reasonably allocable to
such portion, plus (ii) Tenant's direct out-of-pocket costs which Tenant
certifies to Landlord have been paid to provide occupancy related services to
such assignee or subtenant of a nature commonly provided by landlords of
similar space, shall be the property of Landlord and such amounts shall be
payable directly to Landlord by the assignee or subtenant or, at Landlord's
option, by Tenant. At Landlord's request, a written agreement shall be entered
into by and among Tenant, Landlord and the proposed assignee or subtenant
confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred
Dollars ($500.00) if and when any transfer hereunder is requested by Tenant.
Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord
for its costs of review and evaluation of a proposed assignee/sublessee, and
Landlord shall not be obligated to commence such review and evaluation unless
and until such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment,
even with the consent of Landlord, shall relieve Tenant of its obligation to
pay rent and to perform all its other obligations under this Lease, including,
without limitation, the obligations contained in Section 10.3 of this Lease.
Each assignee, other than Landlord, shall be deemed to assume all obligations
of Tenant under this Lease and shall be liable jointly and severally with
Tenant for the payment of all rent, and for the due performance of all of
Tenant's obligations, under this Lease. No transfer shall be binding on
Landlord unless any document memorializing the transfer is delivered to
Landlord and both the assignee/subtenant and Tenant deliver to Landlord an
executed consent to transfer instrument prepared by Landlord and consistent
with the requirements of this Article. The acceptance by Landlord of any
payment due under this Lease from any other person shall not be deemed to be a
waiver by Landlord of any provision of this Lease or to be a consent to any
transfer. Consent by Landlord to one or more transfers shall not operate as a
waiver or estoppel to the future enforcement by Landlord of its rights under
this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and
conditions shall apply to any subletting by Tenant of all or any part of the
Premises and shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease
(other than with respect to the payment of rent hereunder) is incorporated by
reference into and made a part of such sublease, with "Landlord" hereunder
meaning the sublandlord therein and "Tenant" hereunder meaning the subtenant
therein.
(b) Tenant hereby irrevocably assigns to Landlord all of
Tenant's interest in all rentals and income arising from any sublease of the
Premises, and Landlord may collect such rent and income and apply same toward
Tenant's obligations under this Lease; provided, however, that unless and until
a default occurs in the performance of Tenant's obligations under this Lease,
Tenant shall have the right to receive and collect the sublease rentals.
Landlord shall not, by reason of this assignment or the collection of sublease
rentals, be deemed liable to the subtenant for the performance of any of
Tenant's obligations under the sublease. Tenant hereby irrevocably authorizes
and directs any subtenant, upon receipt of a written notice from Landlord
stating that an uncured default exists in the performance of Tenant's
obligations under this Lease, to pay to Landlord all sums then and thereafter
due under the sublease. Tenant agrees that the subtenant may rely on that
notice without any
<PAGE> 20
duty of further inquiry and notwithstanding any notice or claim by Tenant to
the contrary. Tenant shall have no right or claim against the subtenant or
Landlord for any rentals so paid to Landlord.
(c) In the event of the termination of this Lease,
Landlord may, at its sole option, take over Tenant's entire interest in any
sublease and, upon notice from Landlord, the subtenant shall attorn to
Landlord. In no event, however, shall Landlord be liable for any previous act
or omission by Tenant under the sublease or for the return of any advance
rental payments or deposits under the sublease that have not been actually
delivered to Landlord, nor shall Landlord be bound by any sublease modification
executed without Landlord's consent or for any advance rental payment by the
subtenant in excess of one month's rent. The general provisions of this Lease,
including without limitation those pertaining to insurance and indemnification,
shall be deemed incorporated by reference into the sublease despite the
termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially
all of Tenant's assets (other than bulk sales in the ordinary course of
business) or, if Tenant is a corporation, an unincorporated association, or a
partnership, the transfer, assignment or hypothecation of any stock or interest
in such corporation, association, or partnership in the aggregate of fifty
percent (50%)(except for publicly traded shares of stock) shall be deemed an
assignment within the meaning and provisions of this Article. Notwithstanding
the foregoing, Landlord's consent shall not be required for the assignment of
this Lease as a result of a merger by Tenant with or into another entity, as
the result of a transfer of all or substantially all of Tenant's assets, or as
the result of the acquisition of Tenant's shares of the stock, so long as (i)
the net worth of the successor entity after such transfer or merger is at
least equal to the greater of the net worth of Tenant as of the execution of
this Lease by Landlord or the net worth of Tenant immediately prior to the date
of such transfer or merger, evidence of which, satisfactory to Landlord, shall
be presented to Landlord prior to such transfer or merger, (ii) Tenant shall
provide to Landlord, prior to such transfer or merger, written notice of such
transfer or merger and such assignment documentation and other information as
Landlord may request in connection therewith, and (iii) all of the other terms
and requirements of this Article shall apply with respect to such assignment.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and
expense, shall provide and maintain in effect the insurance described in
Exhibit D. Evidence of that insurance must be delivered to Landlord prior to
the Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord shall provide the
following types of insurance, with or without deductible and in amounts and
coverages as may be determined by Landlord in its discretion: "all risk"
property insurance, subject to standard exclusions, covering the Building or
Project. Landlord may, at its election, obtain insurance for such other risks
as Landlord or its mortgagees may from time to time deem appropriate, including
leasehold improvements made by Landlord, and commercial general liability
coverage. Landlord shall not be required to carry insurance of any kind on
Tenant's property, including leasehold improvements, trade fixtures,
furnishings, equipment, plate glass, signs and all other items of personal
property, and shall not be obligated to repair or replace that property should
damage occur. All proceeds of insurance maintained by Landlord upon the
Building and Project shall be the property of Landlord, whether or not Landlord
is obligated to or elects to make any repairs. In no event shall the limits of
such policy be considered as limiting the liability of Landlord under this
Lease. At Landlord's option, Landlord may self-insure all or any portion of
the risks for which Landlord elects to, or is obligated to, provide insurance
hereunder.
SECTION 10.3. JOINT INDEMNITY.
(a) Tenant's Indemnity. To the fullest extent permitted
by law, Tenant shall defend, indemnify, protect, save and hold harmless
Landlord, its agents, and any and all affiliates of Landlord, including,
without limitation, any corporations or other entities controlling, controlled
by or under common control with Landlord, from and against any and all claims,
liabilities, costs or expenses arising either before or after the Commencement
Date from Tenant's use or occupancy of the Premises or the Building, or from
the conduct of its business, or from any activity, work, or thing done,
permitted or suffered by Tenant or its agents, employees, invitees or licensees
in or about the Premises or the Building, or from any default in the
performance of any obligation on Tenant's part to be performed under this
Lease, or from any act or negligence of Tenant or its agents, employees,
visitors, patrons, guests, invitees or licensees; provided Tenant does not
indemnify Landlord for any claims, liabilities, costs or expenses to the extent
the same is caused by the negligence or willful misconduct on the part of
Landlord, or its agents or employees, or for which Tenant is otherwise
indemnified hereunder. In cases of alleged negligence asserted by third
parties against Landlord which arise out of, are occasioned by, or in any way
attributable to Tenant's, its agents, employees,
<PAGE> 21
contractors, licensees or invitees use and occupancy of the Premises or the
Building, or from the conduct of its business or from any activity, work or
thing done, permitted or suffered by Tenant or its agents, employees, invitees
or licensees on Tenant's part to be performed under this Lease, or from any act
of negligence of Tenant, its agents, employees, licensees or invitees, Tenant
shall accept any tender of defense for Landlord and shall, notwithstanding any
allegation of negligence or willful misconduct on the part of the Landlord,
defend Landlord and protect and hold Landlord harmless and pay all costs,
expenses and attorneys' fees incurred in connection with such litigation,
provided that Tenant shall not be liable for any such injury or damage, and
Landlord shall reimburse Tenant for the reasonable attorney's fees and costs
for the attorney representing both parties, all to the extent and in the
proportion that such injury or damage is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Landlord) to be attributable to the negligence or willful misconduct of
Landlord. Upon Landlord's request, Tenant shall at Tenant's sole cost and
expense, retain a separate attorney selected by Landlord to represent Landlord
in any such suit if Landlord determines that the representation of both Tenant
and Landlord by the same attorney would cause a conflict of interest; provided,
however, that to the extent and in the proportion that the injury or damage
which is the subject of the suit is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Landlord) to be attributable to the negligence or willful misconduct of
Landlord, Landlord shall reimburse Tenant for the reasonable legal fees and
costs of the separate attorney retained by Tenant. The provisions of this
Subsection 10.3(a) shall expressly survive the expiration or sooner
termination of this Lease.
(b) Landlord's Indemnity. To the fullest extent
permitted by law, but subject to the express limitations on liability contained
in this Lease (including, without limitation, the provisions of Sections 10.4,
10.5 and 14.8 of this Lease), Landlord shall defend, indemnify, protect, save
and hold harmless Tenant, its agents and any and all affiliates of Tenant,
including, without limitation, any corporations, or other entities controlling,
controlled by or under common control with Tenant, from and against any and all
claims, liabilities, costs or expenses arising either before or after the
Commencement Date from the maintenance or repair of the Common Areas, the
Project and/or the Building by Landlord or its employees, authorized agents or
contractors; provided that Landlord does not indemnify Tenant for any claims,
liabilities, costs or expenses to the extent the same is caused by the
negligence or willful misconduct on the part of Tenant, or its agents,
employees, licensees or invitees, or for which Landlord is otherwise
indemnified hereunder. In cases of alleged negligence asserted by third
parties against Tenant which arise out of, are occasioned by, or in any way
attributable to the maintenance or repair of the Common Areas, the Project or
the Building by Landlord or its contractors, authorized agents or employees,
Landlord shall accept any tender defense for Tenant and shall, notwithstanding
any allegation of negligence or willful misconduct on the part of Tenant,
defend Tenant and protect and hold Tenant harmless and pay all cost, expense
and attorneys' fees incurred in connection with such litigation, provided that
Landlord shall not be liable for any such injury or damage, and Tenant shall
reimburse Landlord for the reasonable attorney's fees and costs for the
attorney representing both parties, all to the extent and in the proportion
that such injury or damage is ultimately determined by a court of competent
jurisdiction (or in connection with any negotiated settlement agreed to by
Tenant) to be attributable to the negligence or willful misconduct of Tenant.
Upon Tenant's request, Landlord shall at Landlord's sole cost and expense,
retain a separate attorney selected by Tenant to represent Tenant in any such
suit if Tenant determines that the representation of both Tenant and Landlord
by the same attorney would cause conflict of interest; provided, however, that
to the extent and the proportion that the injury or damage which is the subject
of the suit is ultimately determined by a court of competent jurisdiction (or
in connection with any negotiated settlement agreed to by Tenant) to be
attributable to the negligence or willful misconduct of Tenant, Tenant shall
reimburse Landlord for the reasonable legal fees and costs of the separate
attorney retained by Landlord. The provisions of this Subsection 10.3(b) shall
expressly survive the expiration or sooner termination of this Lease.
SECTION 10.4. LANDLORD'S NONLIABILITY. Subject to the express
indemnity obligations contained in Section 10.3(b) of this Lease, Landlord
shall not be liable to Tenant, its employees, agents and invitees, and Tenant
hereby waives all claims against Landlord, for loss of or damage to any
property, or any injury to any person, or any other loss, cost, damage, injury
or liability whatsoever resulting from fire, explosion, falling plaster, steam,
gas, electricity, water or rain which may leak or flow from or into any part
of the Building or from the breakage, leakage, obstruction or other defects of
the pipes, sprinklers, wires, appliances, plumbing, air conditioning,
electrical works or other fixtures in the Building, whether the damage or
injury results from conditions arising in the Premises or in other portions of
the Project. Notwithstanding any provision of this Lease to the contrary,
including, without limitation, the provisions of Section 10.3(b) of this
Lease, Landlord shall in no event be liable to Tenant, its employees, agents,
and invitees, and Tenant hereby waives all claims against Landlord, for loss or
interruption of Tenant's business or income (including, without limitation, any
consequential damages and lost profit or opportunity costs), or any other loss,
cost, damage, injury or liability resulting from, but not limited to, Acts of
God, acts of civil disobedience or insurrection, acts of omissions (criminal or
otherwise) of any third parties, including without limitation, any other
tenants within the Project or their agents, employees, contractors, guests
<PAGE> 22
or invitees. It is understood that any such conditions may require the
temporary evacuation or closure of all or a portion of the Building. Except as
provided in Sections 6.1, 11.1 and 12.1 below, there shall be no abatement of
rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business (including without limitation consequential damages and
lost profit or opportunity costs) arising from the making of any repairs,
alterations or improvements to any portion of the Building, including repairs
to the Premises, nor shall any related activity by Landlord constitute an
actual or constructive eviction; provided, however, that in making repairs,
alterations or improvements, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the Premises. Neither
Landlord nor its agents shall be liable for interference with light or other
similar intangible interests. Tenant shall immediately notify Landlord in case
of fire or accident in the Premises, the Building or the Project and of defects
in any improvements or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each
hereby waives all rights of recovery against the other and the other's agents
on account of loss and damage occasioned to the property of such waiving party
to the extent only that such loss or damage is required to be insured against
under any "all risk" property insurance policies required by this Article X;
provided however, that (i) the foregoing waiver shall not apply to the extent
of Tenant's obligations to pay deductibles under any such policies and this
Lease, and (ii) if any loss is due to the act, omission or negligence or
willful misconduct of Tenant or its agents, employees, contractors, guests or
invitees, Tenant's liability insurance shall be primary and shall cover all
losses and damages prior to any other insurance hereunder. By this waiver it
is the intent of the parties that neither Landlord nor Tenant shall be liable
to any insurance company (by way of subrogation or otherwise) insuring the
other party for any loss or damage insured against under any "all-risk"
property insurance policies required by this Article, even though such loss or
damage might be occasioned by the negligence of such party, its agents,
employees, contractors, guests or invitees. The provisions of this Section
shall not limit the indemnification provisions elsewhere contained in this
Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall proceed
diligently and in good faith to obtain all required permits and to repair that
damage as soon as reasonably possible, at its expense, unless: (i) Landlord
reasonably determines that the cost of repair is not covered by Landlord's fire
and extended coverage insurance plus such additional amounts Tenant elects, at
its option, to contribute, excluding however the deductible (for which Tenant
shall be responsible for Tenant's proportionate share); (ii) Landlord
reasonably determines that the Premises cannot, with reasonable diligence, be
fully repaired by Landlord (or cannot be safely repaired because of the
presence of hazardous factors, including without limitation Hazardous
Materials, earthquake faults, and other similar dangers) within two hundred
seventy (270) days after the date of the damage; (iii) an event of default by
Tenant has occurred and is continuing at the time of such damage; or (iv) the
damage occurs during the final twelve (12) months of the Term. Should Landlord
elect not to repair the damage for one of the preceding reasons, Landlord shall
so notify Tenant in writing within thirty (30) days after the damage occurs
and this Lease shall terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in
accordance with subsection (a) above, this Lease shall continue in effect for
the remainder of the Term; provided that so long as Tenant is not in default
under this Lease, if the damage is so extensive that Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be repaired by
Landlord (or cannot be safely repaired because of the presence of hazardous
factors, earthquake faults, and other similar dangers) so as to allow Tenant's
substantial use and enjoyment of the Premises within two hundred seventy (270)
days after the date of damage, then Tenant may elect to terminate this Lease by
written notice to Landlord within the thirty (30) day period stated in
subsection (a).
(c) Commencing on the date of any damage to the Building,
and ending on the sooner of the date the damage is repaired or the date this
Lease is terminated, the rental to be paid under this Lease shall be abated in
the same proportion that the floor area of the Building that is rendered
unusable by the damage from time to time bears to the total floor area of the
Building, provided that Tenant is then carrying the required business
interruption insurance described in Exhibit D.
(d) Notwithstanding the provisions of subsections (a),
(b) and (c) of this Section, and subject to the provisions of Section 10.5
above, the cost of any repairs shall be borne by Tenant, and Tenant shall not
be entitled to rental abatement or termination rights, if the damage is due to
the negligence of Tenant or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be
deemed to require Landlord to repair any improvements or fixtures that Tenant
is obligated to repair or insure
<PAGE> 23
pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in
removing Tenant's personal property and any debris from the Premises to
facilitate all inspections of the Premises and the making of any repairs.
Notwithstanding anything to the contrary contained in this Lease, if Landlord
in good faith believes there is a risk of injury to persons or damage to
property from entry into the Building or Premises following any damage or
destruction thereto, Landlord may restrict entry into the Building or the
Premises by Tenant, its employees, agents and contractors in a
non-discriminatory manner, without being deemed to have violated Tenant's
rights of quiet enjoyment to, or made an unlawful detainer of, or evicted
Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to
determine if there are safe methods of entry into the Building or the Premises
solely in order to allow Tenant to retrieve files, data in computers, and
necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may require.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of
this Lease, including without limitation Section 11.1, shall govern any damage
or destruction and shall accordingly supersede any contrary statute or rule of
law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material
portion of the Premises is taken by any lawful authority by exercise of the
right of eminent domain, or sold to prevent a taking, either Tenant or Landlord
may terminate this Lease effective as of the date possession is required to be
surrendered to the authority. In the event title to a portion of the Premises
is taken or sold in lieu of taking, and if Landlord elects to restore the
Premises in such a way as to alter the Premises materially, either party may
terminate this Lease, by written notice to the other party, effective on the
date of vesting of title. In the event neither party has elected to terminate
this Lease as provided above, then Landlord shall promptly, after receipt of a
sufficient condemnation award, proceed to restore the Premises to substantially
their condition prior to the taking, and a proportionate allowance shall be
made to Tenant for the rent corresponding to the time during which, and to the
part of the Premises of which, Tenant is deprived on account of the taking and
restoration. In the event of a taking, Landlord shall be entitled to the
entire amount of the condemnation award without deduction for any estate or
interest of Tenant; provided that nothing in this Section shall be deemed to
give Landlord any interest in, or prevent Tenant from seeking any award against
the taking authority for, the taking of personal property and fixtures
belonging to Tenant, the amortized value of the Tenant Improvements funded by
Tenant, or for relocation or business interruption expenses recoverable from
the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the
Premises shall terminate this Lease or give Tenant any right to abatement of
rent, and any award specifically attributable to a temporary taking of the
Premises shall belong entirely to Tenant. A temporary taking shall be deemed
to be a taking of the use or occupancy of the Premises for a period of not to
exceed ninety (90) days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be
a taking of the parking area such that Landlord can no longer provide
sufficient parking to comply with this Lease, Landlord may substitute
reasonably equivalent parking in a location reasonably close to the Building;
provided that if Landlord fails to make that substitution within ninety (90)
days following the taking and if the taking materially impairs Tenant's use and
enjoyment of the Premises, Tenant may, at its option, terminate this Lease by
written notice to Landlord. If this Lease is not so terminated by Tenant,
there shall be no abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease
shall be either superior or subordinate to all ground or underlying leases,
mortgages and deeds of trust, if any, which may hereafter affect the Premises,
and to all renewals, modifications, consolidations, replacements and extensions
thereof; provided, that so long as Tenant is not in default under this Lease,
this Lease shall not be terminated or Tenant's quiet enjoyment of the Premises
disturbed in the event of termination of any such ground or underlying lease,
or the foreclosure of any such mortgage or deed of trust, to which Tenant has
subordinated this Lease pursuant to this Section. In the event of a
termination or foreclosure, Tenant shall become a tenant of and attorn to the
successor-in-interest to Landlord upon the same terms and conditions as are
contained in this Lease, and shall execute any instrument reasonably required
by Landlord's successor for that purpose. Tenant shall also, upon written
request of Landlord, execute and deliver all instruments as may be required
from time to time to
<PAGE> 24
subordinate the rights of Tenant under this Lease to any ground or
underlying lease or to the lien of any mortgage or deed of trust (provided that
such instruments include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or in part, any
ground or underlying lease or the lien of any mortgage or deed of trust to this
Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10)
days prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no
uncured defaults on the part of Landlord, or specifying each default if any are
claimed, and (iii) setting forth all further information that Landlord may
reasonably require. Tenant's statement may be relied upon by any prospective
purchaser or encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of
Landlord, Tenant's failure to deliver any estoppel statement within the
provided time shall be conclusive upon Tenant that (i) this Lease is in full
force and effect, without modification except as may be accurately represented
by Landlord, (ii) there are no uncured defaults in Landlord's performance, and
(iii) not more than one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the
execution of this Lease and thereafter at any time upon Landlord's request,
Tenant's current tax returns and regularly-prepared financial statements,
certified true, accurate and complete by the chief financial officer of Tenant,
including a balance sheet and profit and loss statement for the most recent
prior year (collectively, the "Statements"), which Statements shall accurately
and completely reflect the financial condition of Tenant. Landlord agrees that
it will keep the Statements confidential, except that Landlord shall have the
right to deliver the same to any proposed purchaser or encumbrancer of the
Premises.
(b) Tenant acknowledges that Landlord is relying on the
Statements in its determination to enter into this Lease, and Tenant represents
to Landlord, which representation shall be deemed made on the date of this
Lease and again on the Commencement Date, that no material change in the
financial condition of Tenant, as reflected in the Statements, has occurred
since the date Tenant delivered the Statements to Landlord. The Statements are
represented and warranted by Tenant to be materially correct and to accurately
and fully reflect Tenant's true financial condition in all material respects as
of the date of submission by any Statements to Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due, where the
failure continues for a period of five (5) days after written notice from
Landlord to Tenant; provided, however, that any such notice shall be in lieu
of, and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. For purposes of these default
and remedies provisions, the term "additional rent" shall be deemed to include
all amounts of any type whatsoever other than Basic Rent to be paid by Tenant
pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer
of the Lease by Tenant, either voluntarily or by operation of law, whether by
judgment, execution, transfer by intestacy or testacy, or other means, without
the prior written consent of Landlord.
(c) The discovery by Landlord that any financial
statement provided by Tenant, or by any affiliate, successor or guarantor of
Tenant, was materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of
<PAGE> 25
Article XIII.
(e) The failure or inability by Tenant to observe or
perform any of the express or implied covenants or provisions of this Lease to
be observed or performed by Tenant, other than as specified in any other
subsection of this Section, where the failure continues for a period of thirty
(30) days after written notice from Landlord to Tenant or such shorter period
as is specified in any other provision of this Lease; provided, however, that
any such notice shall be in lieu of, and not in addition to, any notice
required under California Code of Civil Procedure Section 1161 and 1161(a) as
amended. However, if the nature of the failure is such that more than thirty
(30) days are reasonably required for its cure, then Tenant shall not be deemed
to be in default if Tenant commences the cure within thirty (30) days, and
thereafter diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment
for the benefit of creditors; (ii) the filing by or against Tenant of a
petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code
or to have debts discharged or a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed within thirty (30) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
if possession is not restored to Tenant within thirty (30) days; (iv) the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where the seizure is not discharged within thirty (30) days; or (v) Tenant's
convening of a meeting of its creditors for the purpose of effecting a
moratorium upon or composition of its debts. Landlord shall not be deemed to
have knowledge of any event described in this subsection unless notification in
writing is received by Landlord, nor shall there be any presumption
attributable to Landlord of Tenant's insolvency. In the event that any
provision of this subsection is contrary to applicable law, the provision shall
be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the
event of the abandonment of the Premises by Tenant, then in addition to any
other remedies available to Landlord, Landlord may exercise the following
remedies:
(i) Landlord may 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. Such termination shall not affect any accrued obligations of Tenant
under this Lease. Upon termination, Landlord shall have the right to reenter
the Premises and remove all persons and property. Landlord shall also be
entitled to recover from Tenant:
(1) The worth at the time of award of
the unpaid rent and additional rent which had been earned at the time of
termination;
(2) The worth at the time of award of
the amount by which the unpaid rent and additional rent which would have been
earned after termination until the time of award exceeds the amount of such
loss that Tenant proves could have been reasonably avoided;
(3) The worth at the time of award of
the amount by which the unpaid rent and additional rent for the balance of the
Term after the time of award exceeds the amount of such loss that Tenant proves
could be reasonably avoided;
(4) Any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result from Tenant's default, including,
but not limited to, the cost of recovering possession of the Premises,
marketing costs, commissions and other reasonable expenses of reletting,
including necessary repair, the unamortized portion of any tenant improvements
and brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other
amounts in addition to or in lieu of the foregoing as may be permitted by law.
The term "rent" as used in this Lease shall be deemed to mean the Basic Rent and
all other sums required to be paid by Tenant to Landlord pursuant to the terms
of this Lease. Any sum, other than Basic Rent, shall be computed on the basis
of the average monthly amount accruing during the twenty-four (24) month period
immediately prior to default, except that if it becomes necessary to compute
such rental before the twenty-four (24) month period has occurred, then the
computation shall be on the basis of the average monthly amount during the
shorter period. As used in subparagraphs (1) and (2) above, the "worth at the
time of award" shall be computed by allowing interest at the rate of ten percent
(10%) per annum. As used in subparagraph (3) above, the "worth at the time of
award"
<PAGE> 26
shall be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's
right to possession of the Premises, in which event Landlord may continue to
enforce all of its rights and remedies under this Lease, including the right to
collect all rent as it becomes due. Efforts by the Landlord to maintain,
preserve or relet the Premises, or the appointment of a receiver to protect the
Landlord's interests under this Lease, shall not constitute a termination of
the Tenant's right to possession of the Premises. In the event that Landlord
elects to avail itself of the remedy provided by this subsection (ii), Landlord
shall not unreasonably withhold its consent to an assignment or subletting of
the Premises subject to the reasonable standards for Landlord's consent as are
contained in this Lease.
(b) Landlord shall be under no obligation to observe or
perform any covenant of this Lease on its part to be observed or performed
which accrues after the date of any default by Tenant unless and until the
default is cured by Tenant, it being understood and agreed that the performance
by Landlord of its obligations under this Lease are expressly conditioned upon
Tenant's full and timely performance of its obligations under this Lease. The
various rights and remedies reserved to Landlord in this Lease or otherwise
shall be cumulative and, except as otherwise provided by California law,
Landlord may pursue any or all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any
right or remedy shall be construed as a waiver of the right or remedy or of any
default by Tenant. The acceptance by Landlord of rent shall not be a (i)
waiver of any preceding breach or default by Tenant of any provision of this
Lease, other than the failure of Tenant to pay the particular rent accepted,
regardless of Landlord's knowledge of the preceding breach or default at the
time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise
any remedy available to Landlord by virtue of the breach or default. The
acceptance of any payment from a debtor in possession, a trustee, a receiver or
any other person acting on behalf of Tenant or Tenant's estate shall not waive
or cure a default under Section 14.1. No payment by Tenant or receipt by
Landlord of a lesser amount than the rent required by this Lease shall be
deemed to be other than a partial payment on account of the earliest due
stipulated rent, nor shall any endorsement or statement on any check or letter
be deemed an accord and satisfaction and Landlord shall accept the check or
payment without prejudice to Landlord's right to recover the balance of the
rent or pursue any other remedy available to it. No act or thing done by
Landlord or Landlord's agents during the Term shall be deemed an acceptance of
a surrender of the Premises, and no agreement to accept a surrender shall be
valid unless in writing and signed by Landlord. No employee of Landlord or of
Landlord's agents shall have any power to accept the keys to the Premises prior
to the termination of this Lease, and the delivery of the keys to any employee
shall not operate as a termination of the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by
Landlord within ten (10) days of the date when due shall bear interest at the
"maximum rate permitted by law" from the date due until fully paid. The
payment of interest shall not cure any default by Tenant under this Lease. In
addition, Tenant acknowledges that the late payment by Tenant to Landlord of
rent will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Those costs may include, but are not limited to, administrative,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any rent due from Tenant shall not be received by
Landlord or Landlord's designee within ten (10) days after the date due, then
Tenant shall pay to Landlord, in addition to the interest provided above, a
late charge in a sum equal to the greater of five percent (5%) of the amount
overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment.
Acceptance of a late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor shall it prevent
Landlord from exercising any of its other rights and remedies. The parties
agree that, as used herein and in Section 14.4, the "maximum rate allowed by
law" shall mean the federal discount rate, as announced by the San Francisco
Federal Reserve, plus five percent (5%). The initial late charge for any
initial delinquent payment by Tenant shall be waived by Landlord.
(b) Following each second consecutive installment of rent
that is not paid within ten (10) days following notice of nonpayment from
Landlord, Landlord shall have the option (i) to require that beginning with the
first payment of rent next due, rent shall no longer be paid in monthly
installments but shall be payable quarterly three (3) months in advance and/or
(ii) to require that Tenant increase the amount, if any, of the Security
Deposit by one hundred percent (100%). Should Tenant deliver to Landlord, at
any time during the Term, two (2) or more insufficient checks, the Landlord may
require that all monies then and thereafter due from Tenant be paid to Landlord
by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and
<PAGE> 27
agreements to be performed by Tenant under this Lease shall be performed at
Tenant's sole cost and expense and without any abatement of rent or right of
set-off. If Tenant fails to pay any sum of money, other than rent, or fails to
perform any other act on its part to be performed under this Lease, and the
failure continues beyond any applicable grace period set forth in Section 14.1,
then in addition to any other available remedies, Landlord may, at its election
make the payment or perform the other act on Tenant's part. Landlord's
election to make the payment or perform the act on Tenant's part shall not give
rise to any responsibility of Landlord to continue making the same or similar
payments or performing the same or similar acts. Tenant shall, promptly upon
demand by Landlord, reimburse Landlord for all sums paid by Landlord and all
necessary incidental costs, together with interest at the maximum rate
permitted by law from the date of the payment by Landlord. Landlord shall have
the same rights and remedies if Tenant fails to pay those amounts as Landlord
would have in the event of a default by Tenant in the payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to
be in default in the performance of any obligation under this Lease unless and
until it has failed to perform the obligation within thirty (30) days after
written notice by Tenant to Landlord specifying in reasonable detail the nature
and extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably
incurred by Landlord in connection with any event of default by Tenant under
this Lease or holding over of possession by Tenant after the expiration or
earlier termination of this Lease, including without limitation all costs,
expenses and actual accountants, appraisers, attorneys and other professional
fees, and any collection agency or other collection charges, shall be due and
payable by Tenant to Landlord on demand, and shall bear interest at the rate of
ten percent (10%) per annum. Should either Landlord or Tenant bring any action
in connection with this Lease, the prevailing party shall be entitled to
recover as a part of the action its reasonable attorneys' fees, and all other
costs. The prevailing party for the purpose of this paragraph shall be
determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS
CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY
EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST
THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR
SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE
PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of
Landlord do not constitute the personal obligations of the individual partners,
trustees, directors, officers or shareholders of Landlord or its constituent
partners. Should Tenant recover a money judgment against Landlord, such
judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levied thereon against the right, title and
interest of Landlord in the Project and out of the rent or other income from
such property receivable by Landlord or out of consideration received by
Landlord from the sale or other disposition of all or any part of Landlord's
right, title or interest in the Project, and no action for any deficiency may
be sought or obtained by Tenant.
SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim,
demand or right of any kind by Tenant which is based upon or arises in
connection with this Lease shall be barred unless Tenant commences an action
thereon within six (6) months after the date that Tenant has actual knowledge
of the act, omission, event or default upon which the claim, demand or right
arises, has occurred.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without
further notice upon the expiration of the Term, and any holding over by Tenant
after the expiration shall not constitute a renewal or extension of this Lease,
or give Tenant any rights under this Lease, except when in writing signed by
both parties. If Tenant holds over for any period after the expiration (or
earlier termination) of the Term without the prior written consent of Landlord,
such possession shall constitute a tenancy at sufferance only; such holding
over with the prior written consent of Landlord shall constitute a
month-to-month tenancy commencing on the first (1st) day following the
termination of this Lease. In either of such events, possession shall be
subject to all of the terms of this Lease, except that the monthly
<PAGE> 28
Basic Rent shall be the greater of (a) one hundred seventy-five percent (175%)
of the Basic Rent for the month immediately preceding the date of termination
or (b) the then currently scheduled Basic Rent for comparable space in the
Building. If Tenant fails to surrender the Premises upon the expiration of
this Lease despite demand to do so by Landlord, Tenant shall be liable in
damages for all loss or liability, including without limitation, any claims
made by any succeeding tenant relating to such failure to surrender.
Acceptance by Landlord of rent after the termination shall not constitute a
consent to a holdover or result in a renewal of this Lease. The foregoing
provisions of this Section are in addition to and do not affect Landlord's
right of re-entry or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other
surrender of this Lease by Tenant, or a mutual termination of this Lease, shall
terminate any or all existing subleases unless Landlord, at its option, elects
in writing to treat the surrender or termination as an assignment to it of any
or all subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall
quit and surrender possession of the Premises to Landlord in as good order,
condition and repair as when received or as hereafter may be improved by
Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord, remove or cause to
be removed from the Premises all personal property and debris, except for any
items that Landlord may by written authorization allow to remain. Tenant shall
repair all damage to the Premises resulting from the removal, which repair
shall include the patching and filling of holes and repair of structural
damage, provided that Landlord may instead elect to repair any structural
damage at Tenant's expense. If Tenant shall fail to comply with the provisions
of this Section, Landlord may effect the removal and/or make any repairs, and
the cost to Landlord shall be additional rent payable by Tenant upon demand.
If Tenant fails to remove Tenant's personal property from the Premises upon the
expiration of the Term, Landlord may remove, store, dispose of and/or retain
such personal property, at Landlord's option, in accordance with then
applicable laws, all at the expense of Tenant. If requested by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an instrument in
writing releasing and quitclaiming to Landlord all right, title and interest of
Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without
deduction or offset, in lawful money of the United States to Landlord at its
address set forth in Item 12 of the Basic Lease Provisions, or at any other
place as Landlord may designate in writing. Unless this Lease expressly
provides otherwise, as for example in the payment of rent pursuant to Section
4.1, all payments shall be due and payable within five (5) days after demand.
All payments requiring proration shall be prorated on the basis of a thirty
(30) day month and a three hundred sixty (360) day year. Any notice, election,
demand, consent, approval or other communication to be given or other document
to be delivered by either party to the other may be delivered in person or by
courier or overnight delivery service to the other party, or may be deposited
in the United States mail, duly registered or certified, postage prepaid,
return receipt requested, and addressed to the other party at the address set
forth in Item 12 of the Basic Lease Provisions, or if to Tenant, at that
address or, from and after the Commencement Date, at the Premises (whether or
not Tenant has departed from, abandoned or vacated the Premises), or may be
delivered by telegram, telex or telecopy, provided that receipt thereof is
telephonically confirmed. Either party may, by written notice to the other,
served in the manner provided in this Article, designate a different address.
If any notice or other document is sent by mail, it shall be deemed served or
delivered twenty-four (24) hours after mailing. If more than one person or
entity is named as Tenant under this Lease, service of any notice upon any one
of them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules
and Regulations, attached as Exhibit E, and any reasonable and
nondiscriminatory amendments, modifications and/or additions as may be adopted
and published by written notice to tenants by Landlord for the safety, care,
security, good order, or cleanliness of the Premises, and Project and Common
Areas (if applicable). Landlord shall not be liable to Tenant for any
violation of the Rules and Regulations or the breach of any covenant or
condition in any lease by any other tenant or such tenant's agents, employees,
contractors, quests or invitees. One or more waivers by Landlord of any breach
of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a
waiver of any subsequent breach of that rule or any other. Tenant's failure to
keep and observe the Rules and Regulations shall constitute a default under
this Lease. In the case of any conflict between the Rules and Regulations and
this Lease, this Lease shall be controlling.
<PAGE> 29
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent
employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease. If Tenant fails to take possession of
the Premises or if this Lease otherwise terminates prior to the Expiration Date
as the result of failure of performance by Tenant, Landlord shall be entitled
to recover from Tenant the unamortized portion of any brokerage commission
funded by Landlord in addition to any other damages to which Landlord may be
entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises,
the transferor shall be automatically relieved of all obligations on the part
of Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or
deed of trust to which this Lease is or may be subordinate, and no landlord
under a so-called sale-leaseback, shall be responsible in connection with the
Security Deposit, unless the mortgagee or holder of the deed of trust or the
landlord actually receives the Security Deposit. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord
shall, subject to the foregoing, be binding on Landlord, its successors and
assigns, only during and in respect to their respective successive periods of
ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this
Lease requires, the words "Landlord" and "Tenant" shall include the plural as
well as the singular, and words used in neuter, masculine or feminine genders
shall include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles
and sections of this Lease are for convenience only, are not a part of this
Lease and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person
or entity is named as Tenant, the obligations imposed upon each shall be joint
and several and the act of or notice from, or notice or refund to, or the
signature of, any one or more of them shall be binding on all of them with
respect to the tenancy of this Lease, including, but not limited to, any
renewal, extension, termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all
rights and liabilities given to or imposed upon Landlord and Tenant shall
extend to and bind their respective heirs, executors, administrators,
successors and assigns. Nothing contained in this Section is intended, or
shall be construed, to grant to any person other than Landlord and Tenant and
their successors and assigns any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect
to the performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this
Lease, the deletion of which would not adversely affect the receipt of any
material benefit by either party or the deletion of which is consented to by
the party adversely affected, shall be held invalid or unenforceable to any
extent, the remainder of this Lease shall not be affected and each term and
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers
by Landlord or Tenant of any breach of any term, covenant or condition
contained in this Lease
<PAGE> 30
shall not be a waiver of any subsequent breach of the same or any other term,
covenant or condition. Consent to any act by one of the parties shall not be
deemed to render unnecessary the obtaining of that party's consent to any
subsequent act. No breach by Tenant of this Lease shall be deemed to have been
waived by Landlord unless the waiver is in a writing signed by Landlord. The
rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party
shall be delayed or hindered in or prevented from the performance of any work
or in performing any act required under this Lease by reason of any cause
beyond the reasonable control of that party, then the performance of the work
or the doing of the act shall be excused for the period of the delay and the
time for performance shall be extended for a period equivalent to the period of
the delay. The provisions of this Section shall not operate to excuse Tenant
from the prompt payment of rent or from the timely performance of any other
obligation under this Lease within Tenant's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and
other attachments cover in full each and every agreement of every kind between
the parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement
or implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance
of all the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without
hindrance or interruption by Landlord or any other person claiming by or
through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of
the respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or
more counterparts, each of which shall constitute an original and all of which
shall be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement
or certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The
submission of this Lease to Tenant shall be for examination purposes only, and
shall not constitute an offer to or option for Tenant to lease the Premises.
Execution of this Lease by Tenant and its return to Landlord shall not be
binding upon Landlord, notwithstanding any time interval, until Landlord has in
fact executed and delivered this Lease to Tenant, it being intended that this
Lease shall only become effective upon execution by Landlord and delivery of a
fully executed counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease
without the prior written consent of Landlord. Tenant, upon the request of
Landlord, shall execute and acknowledge a "short form" memorandum of this Lease
for recording purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this
Lease shall be effective unless in writing signed by authorized signatories of
Tenant and Landlord, or by their respective successors in interest. No
actions, policies, oral or informal arrangements, business dealings or other
course of conduct by or between the parties shall be deemed to modify this
Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or
similar reproduction of this Lease shall be deemed an original for all
purposes.
<PAGE> 31
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and
addenda attached to this Lease are hereby incorporated into and made a part of
this Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges
and agrees that the terms of this Lease are confidential and constitute
proprietary information of Landlord. Disclosure of the terms could adversely
affect the ability of Landlord to negotiate other leases and impair Landlord's
relationship with other tenants. Accordingly, Tenant agrees that it, and its
partners, officers, directors, employees and attorneys, shall not intentionally
and voluntarily disclose the terms and conditions of this Lease to any other
tenant or apparent prospective tenant of the Project, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
SECTION 22.2. GUARANTY. As a condition to the execution of this
Lease by Landlord, the obligations, covenants and performance of the Tenant as
herein provided shall be guaranteed in writing by the Guarantor(s) listed in
Item 7 of the Basic Lease Provisions, if any, on a form of guaranty provided
by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Project, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on
the part of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Premises
whose address has been furnished to Tenant and (b) such beneficiary is afforded
a reasonable opportunity to cure the default by Landlord (which in no event
shall be less than sixty (60) days), including, if necessary to effect the
cure, time to obtain possession of the Premises by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently pursued.
Tenant agrees that each beneficiary of a deed of trust or mortgage covering the
Premises is an express third party beneficiary hereof, Tenant shall have no
right or claim for the collection of any deposit from such beneficiary or from
any purchaser at a foreclosure sale unless such beneficiary or purchaser shall
have actually received and not refunded the deposit, and Tenant shall comply
with any written directions by any beneficiary to pay rent due hereunder
directly to such beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of
this Lease shall be construed to be conditions as well as covenants as though
the words specifically expressing or imparting covenants and conditions were
used in each separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that
Landlord shall have no obligation whatsoever to provide guard service or other
security measures for the benefit of the Premises or the Project. Tenant
assumes all responsibility for the protection of Tenant, its agents, invitees
and property from acts of third parties. Nothing herein contained shall
prevent Landlord, at its sole option, from providing security protection for
the Project or any part thereof, in which event the cost thereof shall be
included within the definition of Building Costs. Subject to the provisions in
this Lease, including without limitation, the provisions of Section 7.3
hereof, Tenant shall have the right to install such security devices in the
Premises as Tenant deems reasonably necessary.
SECTION 22.7. JAMS.
(a) All claims or disputes between Landlord and Tenant
arising out of, or relating to, the Lease which either party is expressly
authorized by a provision hereof to submit to arbitration, shall be decided by
the JAMS/Endispute, or its successor, in Orange, California ("JAMS"), unless
the parties mutually agree otherwise. Within ten (10) business days following
submission to JAMS, JAMS shall designate three arbitrators and each party may,
within five (5) business days thereafter, veto one of the three persons so
designated. If two different designated arbitrators have been vetoed, the
third arbitrator shall hear and decide the matter. Any arbitration pursuant to
this Section 22.7 shall be decided within thirty (30) days of submission of
JAMS. The decision of the arbitrator shall be final and binding on the
parties. All costs associated with arbitration shall be awarded to the
prevailing party as determined by the arbitrator.
<PAGE> 32
(b) Notice of the demand for arbitration by either party
to the Lease shall be filed in writing with the other party to the Lease and
with JAMS and shall be made within a reasonable time after the dispute has
arisen. The award rendered by the arbitrators shall be final, and judgment may
be entered upon it in accordance with applicable law in any court having
jurisdiction thereof. Except by written consent of the person or entity sought
to be joined, no arbitration arising out of or relating to the Lease shall
include, by consolidation, joinder or in any other manner, any person or entity
not a party to the Lease under which such arbitration is filed if (1) such
person or entity is substantially involved in a common question of fact or law,
(2) the presence of such person or entity is required if complete relief is to
be accorded in the arbitration, or (3) the interest or responsibility of such
person or entity in the matter is not insubstantial.
(c) The agreement herein among the parties to the Lease
and any other written agreement to arbitrate referred to herein shall be
specifically enforceable under prevailing law."
[Signatures on following page.]
<TABLE>
<S> <C>
LANDLORD: TENANT:
THE IRVINE COMPANY NEOTHERAPEUTICS, INC.
a Michigan corporation a Colorado corporation
By:
------------------------------------------- By:
Richard G. Sim, Name:
Executive Vice President Title:
By:
------------------------------------------- By:
Clarence W. Barker, Name:
President, Irvine Industrial Company Title:
a division of The Irvine Company
</TABLE>
<PAGE> 33
EXHIBIT D
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in effect at
the Premises. Landlord reserves the right to adopt reasonable
nondiscriminatory modifications and additions to those standards. Tenant
agrees to obtain and present evidence to Landlord that it has fully complied
with the insurance requirements.
1. Tenant shall, at its sole cost and expense, commencing on the
date Tenant is given access to the Premises for any purpose and during the
entire Term, procure, pay for and keep in full force and effect: (i)
commercial general liability insurance with respect to the Premises and the
operations of or on behalf of Tenant in, on or about the Premises, including
but not limited to personal injury, owned and nonowned automobile, blanket
contractual, independent contractors, broad form property damage (with an
exception to any pollution exclusion with respect to damage arising out of
heat, smoke or fumes from a hostile fire), fire and water legal liability,
products liability (if a product is sold from the Premises), liquor law
liability (if alcoholic beverages are sold, served or consumed within the
Premises), and severability of interest, which policy(ies) shall be written on
an "occurrence" basis and for not less than the amount set forth in Item 13 of
the Basic Lease Provisions, with a combined single limit (with a $50,000
minimum limit on fire legal liability) per occurrence for bodily injury, death,
and property damage liability, or the current limit of liability carried by
Tenant, whichever is greater, and subject to such increases in amounts as
Landlord may reasonably determine from time to time; (ii) workers' compensation
insurance coverage as required by law, together with employers' liability
insurance; (iii) with respect to improvements, alterations, and the like
required or permitted to be made by Tenant under this Lease, builder's all-risk
insurance, in an amount equal to the replacement cost of the work; (iv)
insurance against fire, vandalism, malicious mischief and such other additional
perils as may be included in a standard "all risk" form in general use in
Orange County, California, insuring Tenant's leasehold improvements, trade
fixtures, furnishings, equipment and items of personal property of Tenant
located in the Premises, in an amount equal to not less than ninety percent
(90%) of their actual replacement cost (with replacement cost endorsement); and
(v) business interruption insurance in amounts satisfactory to cover one (1)
year of loss. In no event shall the limits of any policy be considered as
limiting the liability of Tenant under this Lease.
2. In the event Landlord consents to Tenant's use, generation or
storage of Hazardous Materials on, under or about the Premises pursuant to
Section 5.3 of this Lease, Landlord shall have the continuing right to require
Tenant, at Tenant's sole cost and expense (provided the same is available for
purchase upon commercially reasonable terms), to purchase insurance specified
and approved by Landlord, with coverage not less than Five Million Dollars
($5,000,000.00), insuring (i) any Hazardous Materials shall be removed from the
Premises, (ii) the Premises shall be restored to a clean, healthy, safe and
sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord's
officers, directors, shareholders, agents, employees and representatives,
arising from such Hazardous Materials.
3. All policies of insurance required to be carried by Tenant
pursuant to this Exhibit D containing a deductible exceeding Ten Thousand
Dollars ($10,000.00) per occurrence must be approved in writing by Landlord
prior to the issuance of such policy. Tenant shall be solely responsible for
the payment of all deductibles.
4. All policies of insurance required to be carried by Tenant
pursuant to this Exhibit D shall be written by responsible insurance companies
authorized to do business in the State of California and with a Best's rating
of not less than "A" subject to final acceptance and approval by Landlord. Any
insurance required of Tenant may be furnished by Tenant under any blanket
policy carried by it or under a separate policy, so long as (i) the Premises
are specifically covered (by rider, endorsement or otherwise), (ii) the limits
of the policy are applicable on a "per location" basis to the Premises and
provide for restoration of the aggregate limits, and (iii) the policy otherwise
complies with the provisions of this Exhibit D. A true and exact copy of each
paid up policy evidencing the insurance (appropriately authenticated by the
insurer) or a certificate of insurance, certifying that the policy has been
issued, provides the coverage required by this Exhibit D and contains the
required provisions, shall be delivered to Landlord prior to the date Tenant is
given the right of possession of the Premises. Proper evidence of the renewal
of any insurance coverage shall also be delivered to Landlord not less than
thirty (30) days prior to the expiration of the coverage. Landlord may at any
time, and from time to time, inspect and/or copy any and all insurance policies
required by this Lease.
5. Each policy evidencing insurance required to be carried by
Tenant pursuant to this Exhibit D shall contain the following provisions and/or
clauses satisfactory to Landlord: (i) a provision that the policy and the
coverage provided shall be primary and that any coverage carried by Landlord
shall be noncontributory with respect to any policies carried by Tenant except
as to workers' compensation insurance; (ii) a provision including Landlord, the
Additional Insureds identified in Item 11 of the Basic Lease Provisions, and
any other parties in interest designated by Landlord as an additional insured,
except as to workers' compensation
<PAGE> 34
insurance; (iii) a waiver by the insurer of any right to subrogation against
Landlord, its agents, employees, contractors and representatives which arises
or might arise by reason of any payment under the policy or by reason of any
act or omission of Landlord, its agents, employees, contractors or
representatives; and (iv) a provision that the insurer will not cancel or
change the coverage provided by the policy without first giving Landlord thirty
(30) days prior written notice.
6. In the event that Tenant fails to procure, maintain and/or pay
for, at the times and for the durations specified in this Exhibit D, any
insurance required by this Exhibit D, or fails to carry insurance required by
any governmental authority, Landlord may at its election procure that insurance
and pay the premiums, in which event Tenant shall repay Landlord all sums paid
by Landlord, together with interest at the maximum rate permitted by law and
any related costs or expenses incurred by Landlord, within ten (10) days
following Landlord's written demand to Tenant.
<PAGE> 35
EXHIBIT E
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing
Tenant's use of the Premises leased to Tenant pursuant to the terms, covenants
and conditions of the Lease to which this Exhibit is attached and therein made
part thereof. In the event of any conflict or inconsistency between this
Exhibit and the Lease, the Lease shall control.
1. Tenant shall not place anything or allow anything to
be placed near the glass of any window, door, partition or wall which may
appear unsightly from outside the Premises.
2. The walls, walkways, sidewalks, entrance passages,
courts and vestibules shall not be obstructed or used for any purpose other
than ingress and egress of pedestrian travel to and from the Premises, and
shall not be used for loitering or gathering, or to display, store or place any
merchandise, equipment or devices, or for any other purpose. The walkways,
entrance passageways, courts, vestibules and roof are not for the use of the
general public and Landlord shall in all cases retain the right to control and
prevent access thereto by all persons whose presence in the judgment of the
Landlord shall be prejudicial to the safety, character, reputation and
interests of the Building and its tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom Tenant
normally deals in the ordinary course of Tenant's business unless such persons
are engaged in illegal activities. No tenant or employee or invitee of any
tenant shall be permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to
the outside walls of the Building. No security bars or gates, curtains,
blinds, shades or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises without the prior written
consent of Landlord. Neither the interior nor exterior of any windows shall be
coated or otherwise sunscreened without the express written consent of
Landlord.
4. Tenant shall not mark, nail, paint, drill into, or in
any way deface any part of the Premises or the Building. Tenant shall not lay
linoleum, tile, carpet or other similar floor covering so that the same shall
be affixed to the floor of the Premises in any manner except as approved by
Landlord in writing. The expense of repairing any damage resulting from a
violation of this rule or removal of any floor covering shall be borne by
Tenant.
5. The toilet rooms, urinals, wash bowls and other
plumbing apparatus shall not be used for any purpose other than that for which
they were constructed and no foreign substance of any kind whatsoever shall be
thrown therein. The expense of any breakage, stoppage or damage resulting from
the violation of this rule shall be borne by the tenant who, or whose employees
or invitees, caused it.
6. Landlord shall direct electricians as to the manner
and location of any future telephone wiring. No boring or cutting for wires
will be allowed without the prior consent of Landlord. The locations of the
telephones, call boxes and other office equipment affixed to the Premises shall
be subject to the prior written approval of Landlord.
7. The Premises shall not be used for manufacturing or
for the storage of merchandise except as such storage may be incidental to the
permitted use of the Premises. No exterior storage shall be allowed at any
time without the prior written approval of Landlord. The Premises shall not be
used for cooking or washing clothes without the prior written consent of
Landlord, or for lodging or sleeping or for any immoral or illegal purposes.
8. Tenant shall not make, or permit to be made, any
unseemly or disturbing noises or disturb or interfere with occupants of this or
neighboring buildings or premises or those having business with them, whether
by the use of any musical instrument, radio, phonograph, noise, or otherwise.
Tenant shall not use, keep or permit to be used, or kept, any foul or obnoxious
gas or substance in the Premises or permit or suffer the Premises to be used or
occupied in any manner offensive or objectionable to Landlord or other
occupants of this or neighboring buildings or premises by reason of any odors,
fumes or gases.
9. No animals shall be permitted at any time within the
Premises, other than animals used for testing conducted by Tenant (provided
that Tenant complies with all applicable laws and regulations pertaining
thereto).
10. Tenant shall not use the name of the Building or the
Project in connection with or in promoting or advertising the business of
Tenant, except as Tenant's address, without the written consent of Landlord.
Landlord shall have the right to prohibit any advertising by any Tenant which,
in Landlord's reasonable opinion, tends to impair the
<PAGE> 36
reputation of the Project or its desirability for its intended uses, and upon
written notice from Landlord any Tenant shall refrain from or discontinue such
advertising.
11. Canvassing, soliciting, peddling, parading,
picketing, demonstrating or otherwise engaging in any conduct that unreasonably
impairs the value or use of the Premises or the Project are prohibited and each
Tenant shall cooperate to prevent the same.
12. No equipment of any type shall be placed on the
Premises which in Landlord's opinion exceeds the load limits of the floor or
otherwise threatens the soundness of the structure or improvements of the
Building.
13. No air conditioning unit or other similar apparatus
shall be installed or used by any Tenant without the prior written consent of
Landlord.
14. No aerial antenna shall be erected on the roof or
exterior walls of the Premises, or on the grounds, without in each instance,
the prior written consent of Landlord. Any aerial or antenna so installed
without such written consent shall be subject to removal by Landlord at any
time without prior notice at the expense of the Tenant, and Tenant shall upon
Landlord's demand pay a removal fee to Landlord of not less than $200.00.
15. The entire Premises, including vestibules, entrances,
doors, fixtures, windows and plate glass, shall at all times be maintained in a
safe, neat and clean condition by Tenant. All trash, refuse and waste
materials shall be regularly removed from the Premises by Tenant and placed in
the containers at the locations designated by Landlord for refuse collection.
All cardboard boxes must be "broken down" prior to being placed in the trash
container. All styrofoam chips must be bagged or otherwise contained prior to
placement in the trash container, so as not to constitute a nuisance. Pallets
may not be disposed of in the trash container or enclosures. The burning of
trash, refuse or waste materials is prohibited.
16. Tenant shall use at Tenant's cost such pest
extermination contractor as Landlord may direct and at such intervals as
Landlord may require.
17. All keys for the Premises shall be provided to Tenant
by Landlord and Tenant shall return to Landlord any of such keys so provided
upon the termination of the Lease. Tenant shall not change locks or install
other locks on doors of the Premises, without the prior written consent of
Landlord. In the event of loss of any keys furnished by Landlord for Tenant,
Tenant shall pay to Landlord the costs thereof.
18. No person shall enter or remain within the Project
while intoxicated or under the influence of liquor or drugs. Landlord shall
have the right to exclude or expel from the Project any person who, in the
absolute discretion of Landlord, is under the influence of liquor or drugs.
Landlord reserves the right to amend or supplement the
foregoing Rules and Regulations and to adopt and promulgate additional rules
and regulations applicable to the Premises. Notice of such rules and
regulations and amendments and supplements thereto, if any, shall be given to
the Tenant.
<PAGE> 1
ADDENDUM TO NOTE NUMBER 63, DATED JUNE 21, 1996
Note Number 63, dated June 21, 1996 between Advanced
ImmunoTherapeutics, Inc. as payor and Alvin J. Glasky, payee and having a
principal balance of $558,304 and interest payments at 9% payable in quarterly
installments is hereby amended as follows:
A) Effective January 1, 1997, interest is payable on a monthly basis.
B) The principal payment date is hereby modified to occur upon the
earlier of December 31, 1997 or the execution of a Licensing
Agreement with a major pharmaceutical company.
C) Advanced ImmunoTherapeutics, Inc. and its Parent, NeoTherapeutics,
Inc. are hereby released from their pledge of all of their assets as
collateral for the note. The note is hereinafter an unsecured
obligation of the aforementioned Companies.
D) Dr. Alvin J. Glasky hereby agrees to subordinate the principal of
this note to that of any institutional indebtedness of Advanced
ImmunoTherapeutics, Inc. or its parent, NeoTherapeutics, Inc.
Dated March 10, 1997 at Irvine, California.
AGREED:
/s/ ALVIN J. GLASKY
- -------------------------
Alvin J. Glasky
Advanced ImmunoTherapeutics, Inc.
By: /s/ ROSALIE H. GLASKY
----------------------------------------
Rosalie H. Glasky, Secretary, Treasurer
