<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-19731
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GILEAD SCIENCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3047598
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
333 LAKESIDE DRIVE, FOSTER CITY, 94404
CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
Registrant's telephone number, including area code: 650-574-3000
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing price of the Common Stock on the Nasdaq Stock
Market on February 25, 2000 was $2,442,500,000*.
The number of shares outstanding of the Registrant's Common Stock on
February 25, 2000 was 44,388,828.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 2000 Annual Meeting
are incorporated by reference into Part III of this Report.
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* Based on a closing price of $72.34 per share. Excludes 10,625,287 shares of
the Registrant's Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
February 25, 2000. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the
Registrant or that such person is controlled by or under common control with
the Registrant.
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<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In addition to the historical information contained in this report, this
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act that involve risks and
uncertainties. Our actual financial and operating results could differ
materially from our expectations. Factors that could cause or contribute to
these differences include uncertainties related to future sales of our products
and uncertainties relating to clinical results and regulatory approval of our
product candidates, as well as the factors listed under "Risk Factors" beginning
on page 26 of this report.
GENERAL
Gilead Sciences, Inc. is an independent biopharmaceutical company that seeks
to provide accelerated solutions for patients and the people who care for them.
We have a broad-based focus on developing and marketing drugs to treat patients
with infectious diseases, including viral infections, fungal infections and
bacterial infections, and a specialized focus on cancer. We also have expertise
in liposomal drug delivery technology, a technology that we use to develop drugs
that are safer, easier for patients to tolerate and more effective.
Within our focus areas, we have developed four products that have been
approved by the U.S. Food and Drug Administration (FDA). We also have five
product candidates in human clinical trials, including two that are in "Phase
III" advanced clinical trials. In addition, we continually seek to develop or
acquire rights to additional products, compounds and technologies to treat
diseases for which no therapies exist or for which patients and the medical
community have demanded new and improved therapies.
Developing and selling drugs is a very difficult business. We discuss many
of the factors that make this a difficult business under the caption "Risk
Factors" beginning on page 26. Perhaps the most challenging aspect of our
business is the complex regulatory environment that we operate in. Before we can
sell a drug, we must obtain a substantial amount of data about the drug in
rigorous clinical trials. The FDA and regulatory authorities in other countries
then review the data generated from these trials. The FDA and these other
regulatory authorities will not approve a drug if they believe that it is not
safe enough, or effective enough, if they believe it cannot be properly
manufactured, or if they believe that our clinical trails are unreliable. In
addition, our approved drugs are subject to extensive ongoing regulation.
We have been researching and developing drugs at our corporate headquarters
in Foster City since we became a company in 1987 and began selling our first
commercial product, VISTIDE-Registered Trademark-, in June 1996. In July 1999,
we substantially increased the size of our organization when we combined with
NeXstar Pharmaceuticals, Inc. in a stock-for-stock merger. Today we have four
commercial products and research and development facilities in Foster City,
California, Boulder, Colorado, San Dimas, California and Cambridge, U.K. We also
have manufacturing operations at our San Dimas facility and in Ireland, and
sales and marketing operations in the United States, Europe and Australia.
OUR MARKETED PRODUCTS
The products we have developed that are commercially available include:
- AmBisome-Registered Trademark-: A drug for treating and preventing
life-threatening fungal infections;
- Tamiflu-TM-: A drug for treating influenza;
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- VISTIDE: A drug for treating CMV retinitis in AIDS patients; and
- DaunoXome-Registered Trademark-: A drug for treating AIDS-related Kaposi's
sarcoma.
How these products are sold, and the uses or "indications" that they are
approved for, varies with each product and in each country or region where they
are sold.
In 1999, we earned revenues of approximately $150.3 million from sales of
these products. Of this amount, sales of AmBisome generated aggregate product
sales and royalty revenues of approximately $137.5 million, or 81% of our total
revenues. Hoffmann-La Roche, our corporate partner who sells Tamiflu, did not
begin selling Tamiflu until November 1999. We expect that royalty revenues we
earn from sales of Tamiflu in 2000 will decrease the percentage of our total
revenues from sales of AmBisome, although we cannot predict with any certainty
what our actual revenues from either AmBisome or Tamiflu will be in 2000. We do,
however, expect that revenues from sales of AmBisome will continue to constitute
a substantial majority of our total revenues in 2000.
AMBISOME
AmBisome is a liposomal formulation of amphotericin B. Amphotericin B is a
powerful antifungal agent that is well known for its ability to attack and kill
a broad variety of life-threatening fungal infections but also has serious side
effects, including kidney toxicity. The patients most likely to suffer from
these fungal infections are patients with weakened immune systems including
transplant patients, patients infected with the HIV virus, and cancer patients
undergoing chemotherapy. By delivering amphotericin B in our proprietary
liposomal formulation, studies show that AmBisome reduces the rate and severity
of kidney toxicity and injection-related reactions, and allows these patients to
receive higher and more effective doses of amphotericin B.
We sell AmBisome in 40 countries, including the United States, all of the
European Union, most of the rest of Europe and several countries in Latin
America and Asia. AmBisome is primarily used for treating patients who are known
to have life-threatening fungal infections. AmBisome is also approved in the
United States and nine other countries to treat patients who, because of certain
symptoms, are presumed to have fungal infections. In addition, AmBisome is
approved in four countries as a precautionary treatment for preventing fungal
infections in liver transplant patients, and is approved for treating a rare
parasitic infection called visceral leishmaniasis in several countries. In 16 of
the countries where we sell AmBisome, including the United States, we are
authorized to promote AmBisome as a first choice for treating patients who are
known to have a fungal infection--a "first line therapy". In the other 24
countries, we promote AmBisome for use after traditional amphotericin B therapy
fails or when traditional amphotericin B cannot be used--a "second line
therapy."
In the United States, we co-promote AmBisome with Fujisawa Healthcare
through our domestic sales force. Our agreement with Fujisawa entitles us to a
percentage of revenues generated from these sales and provides that Fujisawa
purchases AmBisome from us at our manufacturing cost. See "Collaborative
Relationships--Fujisawa". In the major European countries and in Australia, we
sell AmBisome through our international sales force. We also sell AmBisome
through independent distributors in a number of countries in Europe, Latin
America and Asia. Our corporate partner, Sumitomo, has filed an application
requesting approval of AmBisome in Japan. We gave Sumitomo the exclusive right
to sell AmBisome in Japan and would receive a percentage of any revenues that
they receive from those sales. See "Collaborative Relationships--Sumitomo." Most
of our sales of AmBisome are in Europe and we expect this to be the case for the
foreseeable future. In most significant European countries, we sell AmBisome in
the currency of that country and our revenues could therefore be decreased if
the value of the U.S. Dollar were to decrease relative to these other
currencies.
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Traditional amphotericin B is the most significant competition for AmBisome.
In many countries, AmBisome cannot be prescribed until traditional amphotericin
B therapy has failed or cannot be used. In addition, there are other lipid-based
formulations of amphotericin B that compete with AmBisome and there are other
products being developed that are likely to compete with AmBisome in the future.
The most significant lipid-based amphotericin B product that currently competes
with AmBisome is Abelcet, a drug sold by The Liposome Company. The Liposome
Company recently announced that it will be acquired by Elan Corporation, a
company with significantly greater resources than we have. Traditional
amphotericin B is significantly less expensive than AmBisome, and Abelcet is
also less expensive than AmBisome. Fujisawa recently completed a multicenter
study in 244 patients comparing AmBisome to Abelcet. This study showed that in
neutropenic cancer patients with unresolved fever (cancer patients with low
white blood cell counts and continuing fevers), AmBisome was significantly safer
than Abelcet yet was equally effective. The FDA has reviewed this study and has
allowed Fujisawa to include this comparative data in their labels for AmBisome
sold in the United States. We cannot be certain, however, that the medical
community will accept the results of this study or that the study will improve
the competitive position of AmBisome. See "Competition."
OTHER POTENTIAL USES FOR AMBISOME
AmBisome is also being studied for the following potential uses:
- Fujisawa has completed Phase III clinical trials for treating acute
cryptococcal meningitis in AIDS patients and has requested approval from
the FDA for this use. We have filed for approval of AmBisome for this use
in France.
- Fujisawa is studying AmBisome in Phase II clinical trials for treating
"Histoplasmosis" a rare fungal infection that affects persons with
compromised immune systems and is most common in the midwestern United
States. The results of this study, which showed that AmBisome was safer
and more effective than traditional amphotericin B in achieving certain
clinical end points, will be presented to the FDA and published.
We cannot be certain that any of these studies will be successful or that
the FDA or any other regulatory agencies will approve AmBisome for these other
potential uses.
TAMIFLU
Tamiflu is an orally administered pill for the treatment of influenza A and
B that was approved by the FDA on October 27, 1999. Tamiflu is in a new class of
drugs called neuraminidase inhibitors that act by disabling all common strains
of the flu virus and preventing the virus from spreading in a patient. As
approved by the FDA, when taken twice daily for five days starting within 48
hours of initial symptoms, studies show that Tamiflu reduces the duration of the
flu by an average of 1.3 days. Tamiflu also reduces the severity of flu symptoms
and the incidence of secondary infections. Tamiflu is approved for this use in
adult patients with uncomplicated influenza. The most common side effect
associated with Tamiflu is mild nausea and vomiting.
Hoffmann-La Roche, our corporate partner who developed Tamiflu with us and
who has the exclusive right to sell Tamiflu, began selling Tamiflu in the United
States in November 1999. In May 1999, Hoffmann-La Roche submitted a Marketing
Authorisation Application to the European Commission seeking to have Tamiflu
approved under the centralized procedure in the European Union. We cannot be
certain if or when this application will be approved. We receive a percentage of
the net revenues that Hoffmann-La Roche generates from sales of Tamiflu. See
"Collaborative Relationships--Hoffmann-La Roche."
There are several products that have been available to treat the flu for
some time, but they have not been shown to be as effective or safe as
neuraminidase inhibitors. Relenza, an anti-flu drug sold by
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Glaxo Wellcome, is the only other neuraminidase inhibitor that has been approved
by the FDA. This drug, which is delivered as an inhaled powder, is direct and
significant competition for Tamiflu. Tamiflu currently is the only FDA-approved
neuraminidase inhibitor that is available in a pill and we believe that this
method of delivery gives Tamiflu a competitive advantage over Relenza. We are
aware, however, that Johnson & Johnson is developing a neuraminidase inhibitor
that has the potential to be delivered as a once-daily pill. When and if
Johnson & Johnson receives approval for this product, it will also be direct and
significant competition for Tamiflu. See "Competition."
OTHER POTENTIAL USES FOR TAMIFLU
Tamiflu is also being studied for the following potential uses:
- Hoffmann-La Roche is evaluating Tamiflu in elderly patients aged 65 and
older as well as in children between the ages 1-12. The results of the
study of Tamiflu in elderly patients and children have been similar to the
results of the studies involving adults ages 18-65.
- Hoffmann-La Roche is studying Tamiflu as a preventative medicine--a pill
that a healthy person could take to prevent the flu. This study has shown
that people in the study groups who have taken Tamiflu are less likely to
become infected with the flu than people in the study groups who have not
taken Tamiflu.
Drugs tend to have different affects on people in different age groups and
it is possible that the FDA will have different criteria to approve Tamiflu for
these uses. We cannot be certain that Tamiflu will be approved for any of these
additional uses.
Tamiflu is not being marketed as an alternative to influenza vaccinations.
Even if Tamiflu is approved as a method to prevent infection with the flu virus,
influenza vaccinations will remain the most effective method of preventing the
flu.
VISTIDE
VISTIDE is an antiviral medication for the treatment of CMV retinitis in
patients with AIDS. CMV retinitis is a condition caused by a viral infection
(cytomegalovirus or CMV) that is characterized by lesions that form on a
patient's retina. This condition affects persons with weakened immune systems
and is most common in patients with AIDS. If left untreated, CMV retinitis can
lead to blindness. VISTIDE was approved by the FDA in June 1996 and by the
European regulatory authorities in May 1997 based on clinical trials
demonstrating that the drug delays the progression of CMV retinitis lesions in
newly diagnosed patients, and in previously treated patients who had failed
other therapies.
We sell VISTIDE in the United States primarily through our sales force of
therapeutic specialists. These specialists promote VISTIDE through direct
contact with physicians, hospitals, clinics, and other healthcare providers who
are involved in the treatment of patients with CMV retinitis. We also sell
VISTIDE to wholesalers and specialty distributors who sell the product in the
United States to healthcare providers. See "Marketing and Sales." Outside the
United States, Pharmacia & Upjohn has the exclusive right to sell VISTIDE.
Pharmacia & Upjohn currently sells VISTIDE in all 15 countries of the European
Union as well as 7 other countries throughout the world and is seeking clearance
to sell VISTIDE in Colombia, Mexico and New Zealand. Pharmacia & Upjohn pay to
us a percentage of any revenues it generates from sales of VISTIDE. See
"Collaborative Relationships--Pharmacia & Upjohn."
There are several other products that compete with VISTIDE. Ganciclovir,
which is sold by Roche Laboratories, is the most widely prescribed drug
treatment for CMV retinitis. Ganciclovir is available in injectable and oral
formulations, and the oral formulation is approved for both preventing and
treating CMV retinitis. There is a device that is marketed by Bausch & Lomb
Incorporated that is implanted in a patient's infected eye and releases
ganciclovir directly to the infected area. In addition, AstraZeneca sells an
injectable drug for the treatment of CMV retinitis called foscarnet, and
CibaVision sells a
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CMV retinitis drug called formivirsen, that is injected directly into the eye.
There also are drugs in clinical development for the treatment of CMV retinitis
that would compete with VISTIDE if they are approved. We believe that VISTIDE
has competitive advantages over existing products, including dosing convenience
and effectiveness, but we can't be certain that we will be successful in
maintaining or increasing VISTIDE's share of the declining CMV retinitis
treatment market. See "Competition." The CMV retinitis market has been declining
in recent years due to the success of combination antiretroviral drug therapies
in treating HIV-infected patients.
The most significant side effect associated with the use of VISTIDE is
kidney toxicity. Due to this side effect, certain precautions must be taken when
VISTIDE is used, and in certain circumstances VISTIDE may not be used. Each time
VISTIDE is given to a patient, the patient must first be tested for warning
signs of kidney toxicity. If the patient does not have warning signs of kidney
toxicity, VISTIDE may be given to that patient but only in combination with
certain solutions that reduce the possibility of kidney toxicity. In addition,
VISTIDE may not be given to patients who are receiving other drugs that can
cause kidney toxicity. Patients who are receiving other drugs that are known to
cause kidney toxicity must discontinue taking those drugs and then wait
seven days before using VISTIDE. In certain animal studies, cidofovir, the
active ingredient in VISTIDE, has caused cancer. These side effects and dosing
limitations are a competitive disadvantage of VISTIDE.
In August 1994, we entered into a license and supply agreement with
Bausch & Lomb. This agreement provided that Bausch & Lomb would develop and have
the right to market an eye drop formulation of cidofovir for the potential
treatment of certain infections of the eye. This agreement and the related
funding was terminated by Bausch & Lomb in December 1999 because Bausch & Lomb
did not believe they were achieving their performance objectives. We are
evaluating this use of cidofovir but have not yet determined if we will continue
this development ourselves, seek a partner for this development or terminate
this program.
We have an exclusive, worldwide license to patent rights and related
technology for cidofovir from IOCB/REGA, and are obligated to pay a percentage
of any revenues from sales of VISTIDE or any other products containing cidofovir
to IOCB/REGA. See "Collaborative Relationships--
IOCB/REGA."
DAUNOXOME
DaunoXome is a liposomal formulation of the anticancer agent daunorubicin.
We have received approval to sell DaunoXome in the United States, Canada and 22
other countries as a primary "first line" therapy for treating patients who
suffer from HIV-associated Kaposi's sarcoma. Kaposi's sarcoma is a disease
characterized by widely disseminated lesions in the skin, mucous membranes,
lymph nodes and viscera that can be life threatening for patients suffering from
AIDS.
DaunoXome uses our proprietary liposomal technology to deliver safer and
more effective doses of daunorubicin to the disease site. Studies have shown
that DaunoXome may actually locate and accumulate in the patient's tumor and
allow a patient to receive higher concentrations of daunorubicin at the disease
site than could be obtained with an equivalent dose of non-liposomal
daunorubicin.
DaunoXome is marketed in the United States and abroad by our therapeutic
specialists and, in certain foreign countries, by distributors. The number of
HIV-infected patients who develop Kaposi's sarcoma has declined in recent years
due to the success of combination therapies in treating HIV patients. This has
reduced the overall size of the potential market for drugs that, like DuanoXome,
treat these patients.
DaunoXome is also being studied for other potential uses in other forms of
cancer including a Phase II clinical trial for certain forms of leukemia. We
cannot be certain that any of these studies will be successful or that DaunoXome
will ever be approved for any additional uses.
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PRODUCTS IN LATE STAGE CLINICAL TRIALS
We have two product candidates in large, late-stage human clinical trials:
tenofovir DF for treating patients with HIV; and adefovir dipivoxil for treating
patients with hepatitis B. If these Phase III clinical trials are successful, we
will apply with the FDA and other foreign regulatory agencies for approval to
sell these drugs. We cannot determine with any certainty whether or not any of
these clinical trials will be successful and, if they are successful, whether or
not the FDA or any other regulatory agencies will approve either of these drugs
for marketing.
TENOFOVIR DISOPROXIL FUMARATE
In September 1999, we presented results from our Phase II clinical trial of
tenofovir DF. This study evaluated the safety and effectiveness of three doses
of tenofovir DF in combination with other HIV drugs in 189 patients who had been
taking other HIV drugs. This randomized, placebo controlled, double blind trial*
showed that, following 24 weeks of treatment, higher doses of tenofovir DF were
associated with lower levels of the HIV in a treatment-experienced patient
population. The study also showed that 24 weeks of dosing with tenofovir DF did
not result in an increase of serious adverse events compared to dosing with
placebo. The following chart provides more detail regarding the data that was
obtained through the 24-week period:
<TABLE>
<CAPTION>
AFFECT ON VIRAL
LEVELS IN BLOOD STATISTICAL SIGNIFICANCE
(AVERAGE % CHANGE (COMPARING VIRAL LOAD CHANGES PERCENTAGE OF PATIENTS
BETWEEN BASELINE ON TENOFOVIR TO THOSE ON EXPERIENCING SERIOUS ADVERSE
DOSE AND 24 WEEKS) PLACEBO) 1 EVENTS
- ---------------------------- ----------------- ----------------------------- ----------------------------
<S> <C> <C> <C>
Placebo (no drug)........... 34% Reduction Not Applicable 11%
75 mg....................... 64% Reduction P=0.014 2%
150 mg...................... 60% Reduction P=0.001 12%
300 mg...................... 80% Reduction P=0.001 6%
</TABLE>
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1 A smaller number indicates that the results have greater statistical
significance (reliability). In general, results begin to have reliability
when they are less than 0.05.
Based on these promising results, in November 1999 we began enrolling
patients in a 48-week randomized, placebo controlled double blind Phase III
clinical trial of a 300 mg dose of tenofovir DF as a component of combination
therapy. This trial, which is expected to enroll a total of 600 treatment-
experienced patients** at nearly 70 sites in the United States, Europe and
Australia, is designed to provide us with conclusive data regarding the safety
and effectiveness of tenofovir DF. If this data is favorable, it will, together
with data from other late stage clinical trials, form the basis of a marketing
application with the FDA. We cannot be certain that the results of our Phase III
clinical trials will be the same as the Phase II clinical results, particularly
given the much larger patient base and longer dosing period. In addition, even
if these data appear favorable to us, the FDA could reject our application for a
number of reasons including if they require a higher level of safety or
effectiveness, or more data than we anticipated, or if they disagree with our
design or interpretation of these trials.
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* Randomized means that the patients were randomly divided into four dosing
groups and were not selected to be in a particular group. This ensures that the
selection process does not affect the results. Placebo controlled means that one
of these groups received a placebo (a non-therapeutic substitute) instead of the
drug. This allows us to evaluate the health of a patient who received the drug
versus a patient who did not receive the drug. Double blind means that neither
the physician nor the patient were made aware of the particular group that the
patient was in. This ensures that the results within each group are not
influenced by any knowledge of the physician or the patient regarding which
group the patient is in.
**The patients we enroll in this trial have HIV RNA levels between 400 and 1,000
copies/ml and have maintained a stable antiretroviral regimen of not more than
three antiretroviral agents for at least 8 weeks.
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One of the major challenges in treating HIV-infected patients is drug
resistance. Because many of the existing therapies for treating HIV and AIDS
rely on similar drug processes, patients who have developed a resistance to one
drug often develop a resistance to other drugs within its class. We believe that
tenofovir DF, if eventually approved by the FDA, could be a very important drug
for treatment-experienced patients because available data has shown that
patients do not develop rapid resistance to tenofovir DF and that tenofovir DF
is effective in treating patients who have developed resistance to other
therapies. Current data also show that tenofovir DF does not cause patients to
develop resistance to currently available therapies. We cannot be certain,
however, that the resistance data we may obtain from the much broader and longer
term Phase III clinical trials, which are the data the FDA will consider, will
show similar resistance characteristics to the data we obtained from the more
limited and shorter Phase II clinical trials.
Another major concern in HIV treatment is convenience of dosing. The
combination therapies that are having a very positive impact on the health of
HIV-infected patients require these patients to take numerous different drugs.
Some of these drugs require multiple doses every day taken by injection and many
have food and timing restrictions. This results not only in discomfort and
inconvenience for patients, but also contributes to patients missing doses or
not adhering to their therapy. We believe that nucleotide analogues, like
tenofovir DF, can be administered in a once-daily oral pill without food
restrictions, a dosing form and schedule that may be very appealing to HIV
patients and their physicians.
OTHER POTENTIAL USES FOR TENOFOVIR DF
Tenofovir DF is also being studied for the following potential uses:
- The National Institutes of Health (NIH) is evaluating the use of
intravenous tenofovir DF to prevent transmission of HIV from a mother to
her unborn child; and
- The NIH is evaluating a form of tenofovir DF in a topical gel to prevent
sexual transmission of the HIV virus.
We cannot be certain that these studies will be successful or that tenofovir
DF will be approved for treatment of HIV or these other uses.
In December 1999, we discontinued developing adefovir dipivoxil for treating
HIV-infected patients. This decision followed a recommendation by an FDA
Advisory Panel not to approve a 60 mg dose of adefovir dipivoxil for treating
HIV due primarily to concerns of kidney toxicity that developed late in the
trials, as well as a desire for additional evidence of treatment benefits.
Tenofovir DF has a structure and activity very similar to adefovir dipivoxil.
While tenofovir DF has not been associated with kidney toxicity and has shown
superior treatment benefits in our Phase II clinical trials, we cannot be
certain that the kidney toxicity issues that occurred in the later stages of the
Phase III clinical trials for adefovir dipivoxil will not arise in the Phase III
clinical trials for tenofovir DF or that we will achieve adequate treatment
benefits.
We have an exclusive, worldwide license to patent rights and related
technology for tenofovir DF from IOCB/REGA, and would be obligated to pay a
percentage of any revenues from sales of tenofovir DF to IOCB/REGA. See
"Collaborative Relationships--IOCB/REGA."
ADEFOVIR DIPIVOXIL FOR HEPATITIS B
Hepatitis B is a highly contagious viral infection that can cause acute
liver failure. Some patients develop a chronic infection which over many years
can lead to complications (such as cirrhosis and cancer) that can lead to death.
The Centers for Disease Control and Prevention estimates that there are
approximately 350 million people worldwide who are infected with chronic
hepatitis B, including 1.25 million people in the United States. Adefovir
dipivoxil is a nucleotide analogue reverse
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transcriptase inhibitor with a structure similar to tenofovir DF. Adefovir
dipivoxil disables the hepatitis B virus by interfering with the activity of
certain enzymes that are necessary for the hepatitis B virus to replicate. In
randomized, double blind, placebo controlled Phase II clinical trials, a 30 mg
dose of adefovir dipivoxil reduced the median hepatitis B viral load by
over 99%.
We have two separate Phase III clinical trials to evaluate the safety and
effectiveness of adefovir dipivoxil in 10 mg and 30 mg orally-administered pills
for treating patients with chronic hepatitis B infection. Both of our Phase III
trails were designed as randomized, double blind, placebo controlled studies and
are being conducted at clinical sites in the United States, Canada, Europe,
Australia and Southeast Asia. One of these trials, which is fully enrolled with
515 patients, is evaluating adefovir dipivoxil for treating patients who test
positive for the hepatitis B "e" antigen, the most common type of hepatitis. The
other trial, which is evaluating adefovir dipivoxil for treating patients with a
type of hepatitis B known as "precore mutant hepatitis B," began enrolling
patients in January 2000 and is expected to enroll approximately 180 patients by
June 30, 2000. Precore mutant hepatitis B is most common in countries of
Southeast Asia and the Mediterranean where evidence suggests that it infects
approximately 30-80% of all hepatitis B patients.
A vaccine is available that can prevent the transmission of hepatitis B, but
it does not cure patients who become infected with the virus. It is expected
that as this vaccine becomes more widely available, the incidence of hepatitis B
will significantly decrease. Existing therapies for treating patients who are
infected with hepatitis B include the drugs Epivir-HBV (a form of lamivudine
that is sold by Glaxo Wellcome) and Intron-A (a form of alpha interferon that is
sold by Schering Plough). Epivir-HBV is an orally-administered drug that
prevents the virus from replicating in patients. Intron-A is an injectable drug
that can provide a reduction in the amount of virus in the blood of some
patients, but is often associated with side effects. We believe that if the FDA
approves adefovir dipivoxil, Epivir-HBV would be its most significant
competition. Of course we cannot be certain that adefovir dipivoxil will be
approved for the treatment of hepatitis B and we cannot determine if adefovir
dipivoxil would be competitive with Epivir-HBV. See "Competition."
As is the case with HIV, drug resistance is a serious problem with drugs
that treat hepatitis B. Available data has shown that hepatitis B patients do
not develop rapid resistance to adefovir dipivoxil and that adefovir dipivoxil
is effective in treating patients who have developed resistance to other
therapies, including Epivir-HBV. Current data also show that adefovir dipivoxil
does not cause patients to develop resistance to currently available therapies.
We believe that the resistance profile of adefovir dipivoxil could make adefovir
dipivoxil an important drug for treating chronic hepatitis B infection. We
cannot be certain, however, that the resistance data we may obtain from the much
broader and longer term Phase III clinical trials on adefovir dipivoxil will
also show these resistance characteristics.
As described above under tenofovir DF, we discontinued development of 60 mg
doses of adefovir dipivoxil for treatment of HIV due to safety and benefit
concerns from the FDA. Studies have shown that adefovir dipivoxil is more
effective against the hepatitis B virus than against the HIV virus, allowing us
to use lower doses that have not shown significant kidney toxicity in our
clinical trials. We have no clinical data demonstrating the safety or benefits
of the 10 mg dose of adefovir dipivoxil for hepatitis B and we cannot be certain
that the broad, long term studies of adefovir dipivoxil at 10 mg and 30 mg doses
will demonstrate, to the satisfaction of the FDA and other regulatory agencies,
that adefovir dipivoxil can be a safe and effective treatment for chronic
hepatitis B.
Hepatitis B is most common in China and Southeast Asian countries. We do not
have regulatory expertise or marketing capacity in these countries. Therefore,
our potential revenues from adefovir dipivoxil for chronic hepatitis B will
depend on our ability to establish a collaborative relationship with a corporate
partner for these activities. We cannot be certain that we will be able to enter
into a collaborative relationship for these activities or that the terms of any
such relationship will be favorable
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to us. It is also difficult to protect patents in these countries and we could
be adversely affected if we were unable to obtain adequate patent protection for
adefovir dipivoxil in China and Southeast Asia.
We have an exclusive, worldwide license to patent rights and related
technology for adefovir dipivoxil from IOCB/REGA, and would be obligated to pay
a percentage of any revenues from sales of adefovir dipivoxil to IOCB/REGA. See
"Collaborative Relationships--IOCB/REGA."
OTHER PRODUCTS IN DEVELOPMENT
NX 211
NX 211 is a liposomal formulation of lurtotecan, an anti-cancer compound
developed by Glaxo Wellcome. Glaxo Wellcome granted to us the exclusive right to
develop and commercialize NX 211, although Glaxo Wellcome can elect to
participate in this development and commercialization at certain specified times
during the development process. See "Collaborative Relationships--Glaxo
Wellcome--NX 211."
Prior to granting us these development and commercialization rights, Glaxo
Wellcome conducted Phase II clinical trials on non-liposomal lurtotecan as a
treatment for various forms of cancer. These Phase II clinical trials showed
that lurtotecan has anti-cancer activity but we believe that Glaxo Wellcome did
not continue pursuing development of non-liposomal lurtotecan because they were
not convinced that these Phase II clinical trials showed sufficient treatment
benefits at safe doses when compared to other available anti-cancer agents. We
entered into the development and commercialization relationship with Glaxo
Wellcome because we believe that by delivering lurtotecan in a liposome, we may
be able to increase the treatment benefits of lurtotecan and give patients doses
that are both safe and effective.
We have completed a number of preclinical experiments that indicate that
NX 211 can increase the safety and treatment benefit profile of lurtotecan.
Based upon these preclinical experiments, we are currently conducting three
Phase I clinical trials on NX 211 in the Netherlands, Canada and the United
States to determine the safety and pharmaceutical characteristics of NX 211. We
expect that the data from these trials will be available during 2000. If these
Phase I clinical trails show sufficient safety at doses that we believe could
provide significant treatment benefits, we would commence Phase II clinical
trials of NX 211 to evaluate NX 211 in ovarian cancer and small-cell lung cancer
and potentially other cancer types. We cannot accurately predict the outcome of
these clinical trials.
Lurtotecan is in a class of compounds called camptothecins. These compounds
work by disrupting a cell's ability to use "topoisomerase I," an enzyme that is
required for cells to replicate. Studies show that the ability of these
compounds to kill and stop the spread of cancer cells is directly related to the
length of time that cancer cells are exposed to the compound. We believe that by
formulating lurtotecan in a liposome, we may be able to increase its time of
exposure and its treatment benefits.
MIKASOME
MiKasome is a liposomal formulation of amikacin, an antibiotic that is
highly effective in treating serious bacterial infections, but is associated
with serious side effects such as kidney failure, hearing loss and loss of
balance. By encapsulating amikacin in a liposome, we hope to significantly
improve its safety, reduce required dosing, increase its potency and permit its
use for a broader range of infections. We are evaluating MiKasome in Phase II
clinical trials as a potential treatment for complicated urinary tract
infections, as well as other infections that are difficult to treat with
ordinary antibiotics. It is too early for us to determine if these Phase II
clinical trials will show that MiKasome can be a safe and effective treatment
for these diseases.
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NX 1838
NX 1838 is an aptamer that we identified with our proprietary SELEX
technology. We have studied NX 1838 in Phase I clinical trials as a treatment
for age-related macular degeneration (AMD). AMD is a disease that causes loss of
vision, and is the single leading cause of blindness in the United States and in
other developed countries around the world.
In medical studies, NX 1838 has shown the ability to attach to a protein
associated with AMD and prevent that protein from causing AMD. Because AMD is
not within our strategic focus, we are currently seeking a collaborative partner
to complete the development of and to commercialize NX 1838. It is our intention
to grant a collaborative partner the exclusive right to develop and
commercialize NX 1838 in exchange for the partner paying to us fees and
royalties. The partner would be responsible for all future development of NX
1838. We cannot be certain that we will find an appropriate partner for NX 1838
or that NX 1838 will ever become a commercial product.
OUR SCIENCE
We have approximately 180 research scientists in Foster City, California,
San Dimas California, Boulder Colorado and Cambridge U.K. These scientists seek
to develop new compounds and technologies that we hope will lead to new drug
candidates, and work with existing compounds to develop and test new drug
candidates. The primary focus of our scientific efforts is developing drugs to
treat patients with infectious diseases, including viral infections, fungal
infections and bacterial infections, and cancer.
NUCLEOTIDE ANALOGUES
Our scientists are working with our proprietary compounds known as "small
molecule nucleotide analogues" to develop treatments for viral infections. These
compounds treat viral infections by interfering with the activity of certain
proteins that are necessary for the virus to grow. For example, VISTIDE, which
was developed with one of these nucleotide analogues, inhibits the activity of
certain proteins in the cytomegalovirus that are essential for that virus to
spread. Tenofovir DF and adefovir dipivoxil are nucleotide analogues and work by
inhibiting the activity of reverse transcriptase, a protein necessary for
replication of the HIV virus (tenofovir DF) and the hepatitis B virus (adefovir
dipivoxil). Other viruses we are seeking to treat using nucleotide analogues
include the herpesviruses and poxviruses. Several nucleotide analogues are also
being evaluated in animals for activity against cancer.
We believe that small molecule nucleotide analogues can offer advantages as
therapeutics. These advantages include:
- These molecules have demonstrated the ability to work in both infected and
uninfected cells. This could enable us to develop drugs that not only
treat a patient who is infected with a virus, but that can also prevent a
healthy person from becoming infected in the first place; and
- Drugs developed with these molecules have been shown to have treatment
activity in a patient for longer periods of time than other available
drugs. This could enable us to develop drugs that require less frequent
dosing and that are more convenient for patients.
Given the complexity of drug development, we cannot be certain that any drug
candidates we develop with this science will have any or all of these
advantages. And, even if we do develop drug candidates with some or each of
these advantages, the FDA and other regulatory agencies could reject marketing
approval of these drug candidates for other reasons, including safety and
benefit concerns.
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LIPOSOMES
We also have scientists who are focused on applying our liposomal drug
delivery technology to develop safer, more effective and more convenient drugs.
A lipid is a compound that is made of phospholipids, the basic matter that make
up human cell walls. They are hollow spheres into which drugs can be packed. We
believe that we can influence the way compounds are released and distributed in
the body by placing them in liposomes. This can, in turn, improve the safety and
treatment benefits of that compound. For example, we developed AmBisome by
incorporating amphotericin B in a liposome. Clinical studies have shown that
AmBisome delivers amphotericin B in a manner that results in fewer side effects
and improved treatment benefits over conventional amphotericin B, including
concentrating the drug at the site of the infection, extending the time the drug
remains in the blood stream to prolong the therapeutic effect and reducing
kidney toxicity and injection related reactions.
Our current strategy is to use our liposome technology with compounds we
develop internally and to identify appropriate compounds developed by third
parties for use with this technology. Compounds developed by third parties that
are appropriate for our technology include those that, like amphotericin B, have
proven therapeutic benefits but suffer from significant side effects, or that
suffer from dosing and administration problems. We believe that we can use our
liposomal technology to improve the safety of these drugs while maintaining or
even improving their therapeutic benefits.
We have identified certain generic compounds (compounds that are not
protected by patents) and proprietary compounds owned by third parties that may
benefit substantially from our liposomal technology and have begun formulation
studies for these compounds. In addition, we have discussed, and will continue
to discuss, collaborative relationships with other companies to develop
liposomal formulations of their compounds. We also intend to continue internally
developing products based on our liposomal technology.
HIV PROTEASE INHIBITORS
We are evaluating a number of small molecule compounds known as "protease
inhibitors" for the treatment of HIV. Protease inhibitors act by interfering
with the activity of protease, an enzyme that, like transcriptase, is necessary
for replication of the HIV virus. We have conducted a number of preclinical
experiments on these compounds that have demonstrated anti-viral activity. Our
scientists are trying to increase the safety and treatment benefits of these
compounds and to reduce resistance concerns with these compounds before
conducting further preclinical development.
ANTIBACTERIAL PROGRAM
We have developed a series of small molecule compounds that have shown
antibacterial activity in bacteria cultured in test tubes as well as in
laboratory animal bacterial infection experiments. These compounds have activity
against certain bacteria, including methicillin-resistant STAPHYLOCOCCUS AUREUS,
the bacteria responsible for numerous hospital and community acquired infections
such as pneumonia, surgical wound infections, and skin and soft tissue
infections. This antibiotic resistant strain of STAPHYLOCOCCUS is responsible
for approximately 30% of all STAPHYLOCOCCUS AUREUS infections, and is more
likely to cause serious illness and death because of its antibiotic resistance.
The current focus of this program is to improve the potency of these compounds
and their ability to selectively kill bacteria while causing minimal toxic side
effects in preclinical animal models.
ADENOSINE RECEPTOR REGULATORS
We are working with the National Institute of Diabetes, Digestive and Kidney
Diseases at the National Institutes of Health to study compounds known as
"adenosine receptor agonists and antagonists" for the treatment and prevention
of neurodegenerative disorders (disorders of the brain and upper spine),
particularly stroke. We also intend to evaluate the use of these compounds in
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inflammatory and allergic conditions. NIH researchers have developed a number of
these compounds, some of which (A3 receptor agonists and antagonists) have shown
therapeutic benefits in stroke.
DRUG DISCOVERY TECHNOLOGIES
We have a technology that we call the "SELEX process" that is used to
identify potential drug candidates. This process works by identifying drug
compounds, known as "aptamers", that tend to bind to the molecule that is
causing the disease. Because these aptamers tend to bind to the disease
molecules, we believe that they can be effective for treating disease at low
doses. We also believe that the SELEX process can reduce the time and cost of
discovering and developing drug candidates. NX 1838 is an example of an aptamer
identified with the SELEX process. See "Other Products in
Development--NX 1838."
MARKETING AND SALES
We established a United States sales force of therapeutic specialists when
we began selling VISTIDE in 1996. As a result of our merger with NeXstar in
July 1999, we also have marketing subsidiaries in the United Kingdom, Germany,
Italy, Spain, France, Portugal and Australia, a marketing operation in Greece,
and sales professionals in the United States to promote and sell AmBisome and
DaunoXome. AmBisome is also sold by Fujisawa in the United States (where we
co-promote the product) and in Canada. Pharmacia & Upjohn promotes and sells
VISTIDE in countries outside of the United States and Hoffmann-La Roche promotes
and sells Tamiflu everywhere it is sold. See "Collaborative Relationships." On
March 6, 2000, we entered into a promotion agreement with The Virco Group. Under
this arrangement, our United States therapeutic specialists will promote Virco's
HIV resistance monitoring services to HIV-treating physicians through the end of
2001.
Our U.S. sales force currently consists of approximately 30 sales
representatives and five regional directors who promote VISTIDE to physicians,
hospitals, clinics, and other healthcare providers who treat AIDS patients,
AmBisome to infectious disease specialists, hospitals, home health care
providers and cancer specialists, and DaunoXome to cancer specialists and
hospitals. The U.S. sales force is supported by a managed care/national accounts
team, and a marketing and sales support staff of approximately 20 people based
at our headquarters in Foster City, California.
Our international marketing subsidiaries are each headed by a general
manager who oversees the operations in the market(s) served by that subsidiary.
We currently have approximately 140 people located mainly in Europe, including
medical, accounting and human resources personnel, who support our international
sales and marketing operations. These subsidiaries also assist in obtaining
regulatory approvals in the countries where they are located.
In the United States, we also sell VISTIDE to wholesalers and specialty
distributors who, in turn, sell the product to physicians, hospitals, clinics,
pharmacies and other healthcare providers. Outside of the United States, we have
agreements with third-party distributors, including distributors in certain of
the countries where we have marketing operations, to promote, sell and
distribute AmBisome and DaunoXome. These international distribution agreements
generally provide that the distributor has the exclusive right to sell AmBisome
and DaunoXome in a particular country or several countries for a specified
period of time.
If tenofovir DF is approved by the FDA for treatment of HIV, a larger sales
force and additional marketing resources would be required to expand our
coverage of healthcare professionals treating HIV patients. It is our current
intention to retain the commercial rights to adefovir dipivoxil for hepatitis B
in the United States and certain countries in Europe and give a marketing
partner rights to this product in Asia and the rest of the world. If we do
retain significant commercial rights to adefovir dipivoxil for hepatitis B and
the product is approved by the FDA, we would need to increase our sales force
and use additional marketing resources to sell this product.
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The revenues we receive from sales of AmBisome by Fujisawa, sales of VISTIDE
by Pharmacia & Upjohn and sales of Tamiflu by Hoffmann-La Roche depend on the
efforts of these marketing partners. We cannot be certain that the efforts by
these partners will be successful, that our interests and the interests of our
partners will not be in conflict or that any of our partners will not terminate
their relationship with us. See "Collaborative Relationships" and "Risk
Factors."
VISTIDE is returnable in its original, unopened container up to one year
beyond the expiration date or, if damaged when received by the customer. Our
customers may return AmBisome or DaunoXome if the shelf life has expired or if
the product is damaged or defective when it is received by the customer.
AmBisome has an approved shelf life of 36 months in the United States, in Canada
and most European countries. DaunoXome has a shelf life of 52 weeks in the
United States and 40 weeks in Canada and most European countries. Additionally,
certain governmental agency customers are entitled to discounts, and we are
required to provide rebates under state Medicaid programs. To date, returns,
rebates and discounts have not been material. Fujisawa establishes the return
policy for AmBisome in North America and Hoffmann-La Roche establishes the
return policy for Tamiflu.
COLLABORATIVE RELATIONSHIPS
As part of our business strategy, we establish collaborations with other
companies to assist in the clinical development and/or commercialization of
certain of our products and product candidates, and to provide support for our
research programs. We also evaluate opportunities for acquiring products or
rights to products and technologies from other companies that are complementary
to our business. Our existing collaborative relationships are as follows:
HOFFMANN-LA ROCHE
In September 1996, we entered into a collaboration agreement with
Hoffmann-La Roche to develop and commercialize therapies to treat and prevent
the flu. Under this agreement, we granted Hoffmann-La Roche exclusive worldwide
rights to all of our proprietary influenza neuraminidase inhibitors, including
Tamiflu. In October 1999, the FDA approved Tamiflu for marketing and in
November 1999, Hoffmann-La Roche began selling Tamiflu.
As of December 31, 1999, we have received license fees and milestone
payments from Hoffmann-La Roche totaling $29.1 million relating to the execution
of this agreement and to regulatory filings and approvals. Hoffmann-La Roche
also funded all of the research and development costs for Tamiflu, including
reimbursement to us of $26.7 million for the period from January 1, 1997 through
the end of 1999. In addition, under this agreement:
- Hoffmann-La Roche is responsible for pricing, promoting and selling
Tamiflu on a worldwide basis; and
- Hoffmann-La Roche pays us a percentage of its net revenues from sales of
Tamiflu and any other products developed under the collaboration. In
certain circumstances, the amount that Hoffmann-La Roche pays to us may be
reduced by a percentage of the cost of materials they use to manufacture
Tamiflu. We receive payments and recognize revenue from Hoffmann-La Roche
in the quarter following the quarter when the sales were made.
The agreement with Roche terminates on a country-by-country basis as patent
coverage for Tamiflu (or any other product that may be developed under the
agreement) expires. Hoffmann-La Roche has the right to terminate the agreement
prior to expiration at any time upon 12 months notice. See "Our Marketed
Products--Tamiflu."
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FUJISAWA
In 1991, we entered into an agreement with Fujisawa providing that:
- We have the exclusive right to promote and sell AmBisome in all countries,
except the United States and Canada;
- Fujisawa has the exclusive right to promote and sell AmBisome in Canada;
- In the United States:
- We have the right to co-promote AmBisome with Fujisawa;
- Fujisawa has primary responsibility for promoting and selling
AmBisome in the United States; and
- We receive 20% of the gross profits from the sale of AmBisome in the
United States for our co-promotion efforts;
- We receive payments and recognize revenue from Fujisawa in the month
following the month when the sales are made;
- We would be required to pay Fujisawa a 4% royalty in connection with sales
of AmBisome in significant Asian markets, including Japan, Korea, Taiwan,
China and India; and
- We manufacture AmBisome for all sales. Fujisawa purchases AmBisome from us
for sale in the United States at a price equal to our cost to manufacture
the product and in Canada at that cost plus a specified percentage.
Our agreement with Fujisawa terminates when the last patent covering
AmBisome in the United States or Japan expires.
See "Our Marketed Products--AmBisome."
IOCB/REGA
In 1991 and 1992, we entered into agreements with IOCB/REGA relating to
nucleotide compounds discovered at these institutions. Under these agreements
and later amendments to these agreements:
- We received from IOCB/REGA the exclusive right to manufacture, use and
sell the nucleotide compounds covered by this agreement; and
- We are required to pay to IOCB/REGA a percentage of any net revenues
generated from sales of our products containing these compounds.
The compounds covered by the agreements with IOCB/REGA include cidofovir,
adefovir dipivoxil and tenofovir DF but do not cover Tamiflu or any of our other
compounds in clinical or preclinical development. We are currently making
quarterly payments to IOCB/REGA based upon a percentage of sales of VISTIDE and,
if we receive marketing approval from the FDA, would be obligated to pay
additional amounts upon any future sales of adefovir dipivoxil or tenofovir DF.
The agreements with IOCB/REGA terminate on a country-by-country basis as
patent coverage for any product licensed under the agreements expires. IOCB/REGA
may terminate the licenses under these agreements for a particular product, in a
particular country, if we do not make any sales of that product in that country
within 12 months after regulatory approval. We also have an agreement with
IOCB/REGA that gives us an option to receive an exclusive license to any new
developments by IOCB/ REGA during the term of this agreement. Either of us may
terminate this agreement on six months notice.
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PHARMACIA & UPJOHN
In August 1996, we entered into an agreement with Pharmacia & Upjohn
relating to VISTIDE. Under this agreement:
- Pharmacia & Upjohn has the exclusive right to market and sell VISTIDE in
all countries outside of the United States;
- We are responsible for maintaining the patents for cidofovir;
- We are required to sell bulk cidofovir to Pharmacia & Upjohn;
- Pharmacia & Upjohn will pay to us a percentage of its net sales of VISTIDE
and any other products developed under the collaboration. We receive
payments and recognize revenue from Pharmacia & Upjohn in the quarter
following the quarter when the sales were made; and
- Pharmacia & Upjohn holds 1,133,786 shares of common stock that it
purchased in connection with this agreement. Pharmacia & Upjohn may not
sell their shares or acquire additional shares of our stock without our
approval until June 2002.
Our agreement with Pharmacia & Upjohn terminates:
- on a country-by-country basis as patent coverage for VISTIDE expires; or
- upon six months notice by Pharmacia & Upjohn.
See "Our Marketed Products--VISTIDE."
SUMITOMO PHARMACEUTICALS CO., LTD.
In 1996, we entered into an agreement with Sumitomo Pharmaceuticals Co.,
Ltd. that gave Sumitomo the right to develop and market AmBisome in Japan.
Sumitomo paid to us $7 million at the time we entered into the agreement and
$3 million in March 1998 when it made a regulatory filing to sell AmBisome in
Japan. Under the terms of this agreement:
- Sumitomo is required to make a payment of $4 million to us if AmBisome is
approved for sale in Japan;
- Sumitimo is required to pay to us a percentage of any revenue they
generate from sales of AmBisome; and
- If approved in Japan, we would manufacture AmBisome for sale by Sumitomo
in Japan. The price that we would charge Sumitomo for the supply of
AmBisome and the percentage of revenues that they would be required to pay
to us would be determined by the price of AmBisome in Japan.
This agreement terminates on the later of:
- Ten years after Sumitomo begins selling AmBisome in Japan; or
- The date the last patent for AmBisome in Japan expires.
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PROLIGO L.L.C.
We own a 49% interest in Proligo L.L.C., a company that manufactures
oligonucleotides. We also have agreements with Proligo and SKW Americas, Inc.
(the owner of the other 51% of Proligo) relating to the ownership, operations
and funding of Proligo. Under these agreements:
- We contributed a total of $4.9 million to Proligo to fund its operations
in late 1999 and early 2000;
- SKW Americas will have the right to purchase our ownership interest in
Proligo for a 90-day period beginning on July 29, 2001 for an amount equal
to the fair market value of that interest in 1999; and
- Over the next four years, SKW Americas is obligated to pay to us $400,000;
and
- Proligo agreed to manufacture oligonucleotides for us. We would pay them
an amount equal to their manufacturing cost plus a pre-determined
percentage for those oligonucleotides.
Proligo will dissolve and any remaining assets will be distributed to its
owners on August 2, 2028, unless the owners of Proligo at that time decide to
extend the term. The agreement relating to the manufacture and supply of
oligonucleotides expires on August 15, 2008.
SCHERING A.G.
In 1993, we entered into agreements with Schering A.G. Under these
agreements Schering has funded our discovery, research, and development of
aptamers for "IN VIVO DIAGNOSTICS"--diagnosing diseases and other conditions in
humans and animals. Schering funded $250,000 for these activities in 1999.
Schering discontinued funding and we discontinued further research and
development under these agreements in 1999.
Under these agreements, Schering was given the right to develop and
commercialize the aptamers we developed in the collaboration as IN VIVO
diagnostic agents or "radiotherapeutics."
If Schering decides to commercialize any product with these aptamers:
- Schering would be required to make certain payments to us upon achieving
certain goals relating to regulatory approval for that product. These
payments could total up to $6 million for each product developed; and
- Schering would be required to pay to us a percentage of any revenues it
receives from selling the product.
We have the right to develop and commercialize products based on aptamers
that Schering discovered under this agreement that are not IN VIVO diagnostic
agents or radiotherapeutics. If we did commercialize a product resulting from
this collaboration, we would be required to pay Schering a percentage of any
revenues we receive from sales of those products. The rights to use and develop
products granted under these agreements and the obligations to pay revenues from
selling products survive termination of the agreements.
GLAXO WELLCOME--NX 211
In May 1998, we entered into agreements with Glaxo Wellcome giving us rights
to Glaxo Wellcome's proprietary compound lurtotecan, and granting Glaxo Wellcome
rights to use our SELEX process to identify aptamers for therapeutic uses.
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Under the agreement relating to lurtotecan, we are developing NX 211, a
liposomal formulation of lurtotecan. This agreement provides that:
- We have the exclusive right to develop and commercialize NX 211 unless
Glaxo Wellcome elects to participate in these activities;
- We may be required to make payments to Glaxo Wellcome if we achieve
certain development goals relating to the regulatory approval of NX 211:
- If Glaxo Wellcome elects to participate in the development and
commercialization of NX 211 in certain countries, we would not need
to make these payments; and
- If NX 211 is approved for marketing, we would be required to pay to Glaxo
Wellcome a percentage of any revenues we generate from sales of NX 211 in
any country where Glaxo Wellcome does not participate in the development
and commercialization of NX 211;
- Glaxo Wellcome can exercise its right to participate in these development
and commercialization activities after we have completed Phase II clinical
trials on NX 211 and at the time we commence Phase III clinical trials on
NX 211; and
- If Glaxo Wellcome elects to participate in these development and
communication activities:
- At the time it elects, it would be required to pay to us a fee and in
some cases a percentage of the money that we spent to develop NX 211,
- If it elects to participate in certain countries, including the
United States, the major countries in Europe and in Australia, we
would have the right to sell NX 211 with Glaxo Wellcome in those
countries. We would share with Glaxo Wellcome any profits in any
territories where we sell NX 211 with Glaxo Wellcome, and
- If it elects to participate in Asia, including Japan and any of the
other countries where we do not have the right to sell the product
with Glaxo Wellcome, Glaxo Wellcome would have the exclusive right to
promote and sell NX 211 in those countries. Glaxo Wellcome would be
required to pay to us a percentage of revenues in any territories
where it has the exclusive right to sell NX 211.
NX 211 is still in an early stage of development. We cannot be certain that
the data we generate from our Phase I clinical trial for NX 211 will support
Phase II clinical trials of NX 211 or that if we complete Phase II clinical
trials, that those results would support a Phase III program.
This agreement terminates on the later of:
- Ten years after Glaxo Wellcome begins selling NX 211; or
- The date the last patent for NX 211 expires.
GLAXO WELLCOME--SELEX
At the time we entered into the agreement with Glaxo Wellcome relating to NX
211, we also entered into an agreement giving Glaxo Wellcome the non-exclusive
right to use our SELEX technology for five years to identify aptamers.
Under this agreement, if Glaxo Wellcome identifies an aptamer having certain
characteristics, they may elect to enter into an additional agreement with us to
use the SELEX process to develop and commercialize that aptamer. Under this
additional agreement:
- Glaxo Wellcome would be required to pay to us a fee at the time we enter
into the agreement;
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- Glaxo Wellcome would be required to make payments to us based on achieving
certain goals relating to the regulatory approval of any product they
develop based on the aptamer; and
- Glaxo Wellcome would be required to pay to us a percentage of any revenues
they may generate from sales of any product they develop based on the
aptamer.
This agreement terminates on May 27, 2003 except:
- Glaxo Wellcome can extend this agreement for additional one year periods
in which case Glaxo Wellcome would be required to pay to us an appropriate
fee; and
- Glaxo Wellcome can terminate this agreement earlier at any time on
90 days notice to us.
SOMALOGIC, INC.
In November 1999, we entered into an agreement with Somalogic, Inc., a
company formed by Larry Gold, the founder of NeXstar, relating to SELEX
technology. Under this agreement:
- We gave Somalogic the exclusive right to use SELEX technology to make and
sell in vitro diagnostic products (diagnostic products that are not used
in a person or animal);
- We sold to Somalogic certain patents and materials relating to in vitro
diagnostics, including robotic SELEX machines;
- We have the right to use the other drug discovery technology that is the
subject of this agreement internally to study diseases and in our drug
development and clinical trial programs; and
- Somalogic paid to us the first installment of a fee at the time we entered
into the agreement and is obligated to pay to us a second and final
installment in November 2000.
This agreement terminates on the later of:
- On a country by country basis as patent coverage for this drug discovery
technology expires; or
- November 2024.
INTERNATIONAL DISTRIBUTION AGREEMENTS
We have agreements with distributors in Western Europe, Eastern Europe,
South America, the Middle East and Africa that grant these distributors the
exclusive right to sell AmBisome, and in some cases DaunoXome, in a particular
country or countries for a specified period of time. These agreements also
provide for collaborative efforts between us and the distributor for obtaining
regulatory approval for the product in the particular country and for marketing
the product in the country. Most of these agreements establish a price that the
distributor must pay for our product and require us to deliver quantities of the
product ordered by the distributor.
ACADEMIC AND CONSULTING RELATIONSHIPS
To supplement our research and development efforts, as part of our regular
business we enter into arrangements with universities and medical research
institutions. These arrangements often provide us with rights to patents, patent
applications and technology owned by these institutions in return for payments
and fees relating to our use of these rights.
UNIVERSITY OF COLORADO
We have an ongoing collaborative arrangement with the University of Colorado
at Boulder relating to our SELEX technology. Under this arrangement:
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- The University of Colorado at Boulder has given us all of its present and
future rights to:
- inventions covered by patents and patent applications for SELEX
technology;
- improvements to SELEX technology it makes or discovers;
- oligonucleotides or other molecules it makes using SELEX technology;
- results of certain research; and
- computer software related to SELEX technology.
- We are required to pay to the University of Colorado at Boulder:
- 2% of the revenues we generate from our sales of SELEX-derived
products;
- 15% of any amounts we receive from a third party that are based upon
sales by those third parties of SELEX-derived products; and
- 5% of other payments we receive from third parties as a result of
certain arrangements we have with those third parties to develop and
sell SELEX-derived products.
MANUFACTURING
We manufacture AmBisome and DaunoXome in commercial quantities in two
separate but adjacent facilities in San Dimas, California. The Medicines Control
Agency of the United Kingdom has approved both of these facilities to
manufacture AmBisome and DaunoXome for commercial use. The FDA has approved both
these facilities to manufacture AmBisome but only one of these facilities to
manufacture DaunoXome for distribution in the United States. To import AmBisome
and DaunoXome into the European Union, we own a manufacturing facility in
Dublin, Ireland where we perform quality control testing, final labeling and
packaging for the European Union and elsewhere.
We hire third parties to manufacture our non-liposomal drugs for clinical
and commercial purposes, including VISTIDE, adefovir dipivoxil tablets and
tenofovir DF tablets. Hoffmann-La Roche manufactures Tamiflu. We have no
commercial-scale manufacturing facilities for our non-liposomal products that
are qualified under the FDA's current Good Manufacturing Practices, and we have
no current plans to establish these facilities. AmBisome is sold as a
freeze-dried product and we currently hire third parties to freeze dry some of
the product. We are installing additional freeze drying capacity and when this
equipment has been installed and approved by regulatory authorities, we expect
that we will no longer rely on third parties for this process. We cannot be
certain that the third parties we rely on will perform their obligations
effectively and on a timely basis. If these third parties do not perform
effectively and timely, our clinical trials or regulatory filings could be
delayed or we could be unable to deliver our products to customers on a timely
basis and this would adversely affect our operating results.
We use commercially available materials and equipment to manufacture our
products. Currently, we obtain the amphotericin B, daunorubicin HCl and
cholesterol that we use to manufacture AmBisome and DaunoXome from single
approved suppliers. We have one supplier that has been approved by the FDA to
manufacture the cidofovir used in VISTIDE and a single FDA approved supplier for
the final drug product. We manufacture the active ingredient in tenofovir DF in
small quantities at our own facilities and in larger quantities through a
contract manufacturer. The final tenofovir DF and adefovir tablets used in our
clinical trials are manufactured at three contract manufacturing sites. If any
of these sites we use were interrupted for any reason, our ability to complete
our clinical trials or ship our products would be impaired and this would
adversely affect us.
For our non-liposomal products in particular, we will need to develop
additional manufacturing capabilities and establish additional third party
suppliers in order to manufacture sufficient quantities of
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our product candidates to complete clinical trials and to manufacture sufficient
quantities of any candidates that are approved for commercial sale. If we are
unable to develop manufacturing capabilities internally or contract for large
scale manufacturing with third parties on acceptable terms for our non-liposomal
products, our ability to conduct large-scale clinical trials, and meet customer
demand for commercial products, would be adversely affected. Manufacturing
liposomal products is a particularly complex process and any new liposomal
product we develop will require unique and complex variations in our
manufacturing process.
We believe that the technology we use to manufacture our products and
compounds is proprietary. For our non-liposomal products, we have licensed this
technology to contract manufacturers to enable them to manufacture the products
and compounds for us. We have agreements with these manufacturers that are
intended to restrict them from using or revealing this technology but we cannot
be certain that these manufacturers will comply with these restrictions. In
addition, these manufacturers could develop their own technology related to the
work they perform for us that we may need to manufacture our products or
compounds. We could be required to enter into an agreement with that
manufacturer if we wanted to use that technology ourselves or allow another
manufacturer to use that technology. The manufacturer could refuse to allow us
to use their technology or could demand terms to use their technology that are
not acceptable.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are extremely important to our
business. If we have a properly designed and enforceable patent it can be more
difficult for our competitors to use our technology to create competitive
products and more difficult for our competitors to obtain a patent that prevents
us from using technology we create. As part of our business strategy, we
actively seek patent protection both in the U.S. and internationally and file
additional patent applications, when appropriate, to cover improvements in our
compounds, products and technology. We also rely on trade secrets, internal
know-how, technological innovations and agreements with third parties to
develop, maintain and protect our competitive position. Our ability to be
competitive will depend on the success of this strategy.
We have a number of patents, patent applications and rights to patents
related to our compounds, products and technology but we cannot be certain that
issued patents will be enforceable or provide adequate protection or that
pending patent applications will result in issued patents. The following table
shows the actual or estimated patent expiration dates in the United States and
Europe for the primary patents that cover the compounds in our marketed products
and our product candidates:
<TABLE>
<CAPTION>
PRODUCTS U.S. PATENT EXPIRATION EUROPEAN PATENT EXPIRATION
- -------- ---------------------- --------------------------
<S> <C> <C>
AmBisome........................................... 2016* 2008
Tamiflu............................................ 2016 2016*
VISTIDE............................................ 2010 2012
DaunoXome.......................................... 2009 2008
PRODUCT CANDIDATES
- ---------------------------------------------------
tenofovir DF....................................... 2017 2017*
adefovir dipivoxil................................. 2014 2011
MiKasome........................................... 2015* 2006
NX 211............................................. 2013* 2012*
NX 1838............................................ 2012* *
</TABLE>
- ------------------------
* Applications pending.
Patents covering VISTIDE, adefovir, and lurtotecan (the active ingredient in
NX 211) are held by third parties. We acquired exclusive rights to these patents
in the agreements we have with these
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parties. See "Collaborative Relationships." Patents do not cover the active
ingredients in AmBisome, DaunoXome and MiKasome. Instead, we hold patents to the
liposomal formulations of these compounds and protect these formulations through
trade secrets. We do not have patent filings covering adefovir dipivoxil in
China or in certain other Asian countries, although we do have applications
pending in various Asian countries, including China, which relate to specific
forms and formulations of adefovir dipivoxil. Asia is a major market for
hepatitis B therapies.
We may obtain patents for our compounds many years before we obtain
marketing approval for them. This limits the time that we can prevent other
companies from developing these compounds and therefore reduces the value of the
product. However, we can apply for patent term extensions. For example,
extensions for the patents on VISTIDE have been applied for or granted in the
United States and a number of European countries, compensating in part for
delays in obtaining marketing approval. Similar patent term extensions may be
available for other products that we are developing but we cannot be certain we
will obtain them.
It is also very important that we do not infringe patents or proprietary
rights of others and that we do not violate the agreements that grant
proprietary rights to us. If we do infringe patents or violate these agreements,
we could be prevented from developing or selling products or from using the
processes covered by those patents or agreements, or we could be required to
obtain a license from the third party allowing us to use their technology. We
cannot be certain that, if required, we could obtain a license to any
third-party technology or that we could obtain one at a reasonable cost. If we
were not able to obtain a required license, we could be adversely affected. In
August 1998, we were sued by Chiron who claimed that we were infringing their
patents for hepatitis C and related technology. In, December 1999, we agreed to
the terms of a settlement agreement with Chiron and, as a result, we agreed to
cease certain development activities relating to hepatitis C and made a one-time
settlement payment of $0.4 million to Chiron.
Patents relating to pharmaceutical, biopharmaceutical and biotechnology
products, compounds and processes like those that cover our existing compounds,
products and processes and those that we will likely file in the future, do not
always provide complete or adequate protection. Future litigation or
reexamination proceedings regarding the enforcement or validity of our existing
patents or any future patents could invalidate our patents or substantially
reduce their protection. In addition, our pending patent applications and patent
applications filed by our collaborative partners may not result in the issuance
of any patents or may result in patents that do not provide adequate protection.
As a result, we may not be able to prevent third parties from developing the
same compounds and products that we are developing. Also, in the United States,
patent applications are maintained in secrecy until patents are issued so we
cannot be certain that we are the inventor of technologies covered by our
pending patent applications or that we were the first to file patent
applications for those inventions.
We also rely on unpatented trade secrets and improvements, unpatented
internal know-how and technological innovation. In particular, a great deal of
our liposomal manufacturing expertise, which is a key component of our liposomal
technology, is not covered by patents but is instead protected as a trade
secret. We protect these rights mainly through confidentiality agreements with
our corporate partners, employees, consultants and vendors. These agreements
provide that all confidential information developed or made known to an
individual during the course of their relationship with us will be kept
confidential and will not be used or disclosed to third parties except in
specified circumstances. In the case of employees, the agreements provide that
all inventions made by the individual while employed by us will be our exclusive
property. We cannot be certain that these parties will comply with these
confidentiality agreements, that we would have adequate remedies for any breach,
or that our trade secrets will not otherwise become known or be independently
discovered by our competitors. Under some of our research and development
agreements, inventions discovered in certain cases become jointly owned by us
and our corporate partner and in other cases become the exclusive property of
one of us. It can be difficult to determine who owns a particular invention and
disputes could arise regarding those inventions.
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COMPETITION
Our products and development programs target a number of diseases and
conditions, including fungal infections, viral infections and cancer. There are
many commercially available products for these diseases, and a large number of
companies and institutions are spending considerable amounts of money and
resources to develop additional products to treat these diseases. Our current
products compete with other available products based primarily on:
- product performance;
- safety;
- tolerability;
- acceptance by doctors;
- patient compliance;
- patent protection;
- ease of use;
- price;
- insurance and other reimbursement coverage;
- distribution;
- marketing; and
- adaptability to various modes of dosing.
Any other products we market in the future will also compete with products
offered by our competitors. If our competitors introduce data that shows
improved characteristics of their products, improve or increase their marketing
efforts or simply lower the price of their products, sales of our products could
decrease. We also cannot be certain that any products we develop in the future
will compare favorably to products offered by our competitors, or that our
existing or future products will compare favorably to any new products that are
developed by our competitors. Our ability to be competitive also depends upon
our ability to attract and retain qualified personnel, obtain patent protection
or otherwise develop proprietary products or processes and secure sufficient
capital resources for the substantial period that it takes to develop a product.
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In markets where AmBisome has been approved as a first time therapy, it
competes against traditional amphotericin B, which is made by Bristol-Myers
Squibb Company and numerous generic manufacturers, and we expect to face more
competition from new antifungal products, including those produced or currently
being developed by major pharmaceutical companies, including Pfizer, Inc. and
Merck. There is also a number of other lipid-based amphotericin B products that
have been approved in the United States and throughout Europe, including
Abelcet, which is sold by The Liposome Company (who recently announced that they
will be acquired by Elan Corporation) and Amphotec, which is sold by ALZA
Corporation. These products compete against AmBisome as both primary and
secondary therapy and have been offered at prices that are less than AmBisome's
price.
Tamiflu competes with Relenza, an anti-flu drug that is sold by Glaxo
Wellcome, in the United States and Europe. Relenza is a neuraminidase inhibitor
that is delivered as an orally-inhaled dry powder. In addition, Johnson &
Johnson and Biocryst are developing a neuraminidase inhibitor anti-flu drug that
will represent significant competition when and if the FDA approves it. This
drug being developed by Johnson and Johnson and Biocryst may be administered as
a once-daily pill as opposed to Tamiflu, which must be taken twice daily. We
cannot be certain that Tamiflu will compare favorably to this drug based on
performance, price, length of dosing, side effects or any other criteria.
Johnson & Johnson began Phase III clinical trials of this compound in
February 2000 and it could be on the market as early as the winter 2000-2001 flu
season.
VISTIDE competes with a number of drugs that also treat CMV retinitis. These
drugs include:
- Ganciclovir, a drug that is sold in intravenous and oral formulations by
Roche Laboratories and as an ocular implant by Bausch & Lomb Incorporated;
- Foscarnet, an intravenous drug sold by AstraZeneca; and
- Formivirsen, a drug that is injected directly into the eye that is sold by
CibaVision.
In addition, we are aware that several other companies are developing drugs
to treat CMV retinitis.
If approved, tenofovir DF will face substantial competition. A number of
drugs to treat HIV infection and AIDS are currently sold or are in advanced
stages of clinical development, including 14 products currently sold in the
United States. Among the companies that are significant competitors in the
HIV/AIDS market are Glaxo Wellcome, Bristol-Myers Squibb, Hoffmann-La Roche,
Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Lamivudine is a drug that was developed by Glaxo Wellcome in collaboration
with Biochem Pharma. Lamivudine is sold in the United States, China and several
other countries and has been shown to be effective in treating patients with
hepatitis B. If adefovir dipivoxil is approved to treat hepatitis B, lamivudine
will be significant competition.
There are drugs that have been approved, or are awaiting approval, for the
treatment of Kaposi's sarcoma in the United States and Europe, including one
that is sold in a liposomal formulation. These drugs compete or are expected to
compete with DaunoXome.
A number of companies are pursuing the development of technologies
competitive with our research programs. These competing companies include
specialized pharmaceutical firms and large pharmaceutical companies acting
either independently or together with biopharmaceutical companies. Furthermore,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection and may establish
collaborative arrangements for competitive products and programs.
We anticipate that we will face increased competition in the future as our
competitors introduce new products to the market and new technologies become
available. We cannot determine if existing
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products or new products that our competitors develop will be more effective, or
more effectively marketed and sold, than any that we develop. Competitive
products could render our technology and products obsolete or noncompetitive
before we recover the money and resources we used to develop these products.
GOVERNMENT REGULATION
Our operations and activities are subject to extensive regulation by
numerous government authorities in the United States and other countries. In the
United States, drugs are subject to rigorous FDA regulation. The Federal Food,
Drug and Cosmetic Act and other federal and state statutes and regulations
govern the testing, manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our products. As a result
of these regulations, product development and approval is very expensive and
time consuming.
The FDA must approve a drug before it can be sold in the United States. The
general process for this approval is as follows:
PRE-CLINICAL TESTING
Before we can test a drug candidate in humans, we must study the drug in
laboratory experiments and in animals to generate data to support the drug's
potential safety and benefits. We submit this data to the FDA in a
"investigational new drug application" seeking their approval to test the
compound in humans.
CLINICAL TRIALS
If the FDA accepts the investigational new drug application, we study the
drug in human clinical trails to determine if the drug is safe and effective.
These clinical trials involve three separate phases, which often overlap, and
can take many years and are very expensive. These three phases, which are
themselves subject to considerable regulation, are as follows:
- PHASE I. The drug is given to a small number of healthy human subjects or
patients to test for safety, dose tolerance, pharmacokinetics, metabolism,
distribution, and excretion.
- PHASE II. The drug is given to a limited patient population to determine:
- the effect of the drug in treating the disease,
- the best dose of the drug, and
- the possible side effects and safety risks of the drug.
- PHASE III. If a compound appears to be effective and safe in Phase II
clinical trials, Phase III clinical trials are commenced to confirm those
results. Phase III clinical trials are long-term, involve a significantly
larger population, are conducted at numerous sites in different geographic
regions and are carefully designed to provide reliable and conclusive data
regarding the safety and benefits of a drug. It is not uncommon for a drug
that appears promising in Phase II clinical trials to fail in the more
rigorous and reliable Phase III clinical trials.
FDA APPROVAL PROCESS
If we believe that the data from the Phase III clinical trials show an
adequate level of safety and effectiveness, we file a "new drug application"
with the FDA seeking approval to sell the drug for a particular use. The FDA
will review the new drug application and often will hold a public hearing where
an independent advisory committee of expert advisors asks additional questions
regarding the drug. This committee makes a recommendation to the FDA that is not
binding on the FDA but is
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generally followed by the FDA. If the FDA agrees that the compound has a
required level of safety and effectiveness for a particular use, it will allow
us to sell the drug in the United States for that use. It is not unusual,
however, for the FDA to reject an application because it believes that the drug
is not safe enough or effective enough, or because the FDA does not believe that
the data submitted is reliable or conclusive.
At any point in this process, the development of a drug could be stopped for
a number of reasons including safety concerns and lack of treatment benefit. We
cannot be certain that any Phase I, Phase II or Phase III clinical trials that
we are conducting, including those for tenofovir DF for HIV and for adefovir
dipivoxil for chronic hepatitis B, or any that we conduct in the future, will be
completed successfully or within any specified time period. We may choose or the
FDA may require us to delay or suspend our clinical trials at any time if it
appears that the patients are being exposed to an unacceptable health risk or if
the drug candidate does not appear to have sufficient treatment benefit.
The FDA may also require us to complete additional testing, provide
additional data or information, improve our manufacturing processes, procedures
or facilities or require extensive post-marketing testing and surveillance to
monitor the safety or benefits of our product candidates if they determine that
our new drug application does not contain adequate evidence of the safety and
benefits of the drug. In addition, even if the FDA approves a drug, it could
limit the uses of the drug. Approvals can also be withdrawn if the FDA does not
believe that we are complying with regulatory standards or if problems are
uncovered or occur after approval.
In addition to obtaining FDA approval for each drug, the manufacturing
facilities for any drug we sell, including those of companies who manufacture
our drugs for us as well as our own, must be approved by the FDA and are subject
to periodic inspections by the FDA. Foreign establishments that manufacture
products to be sold in the United States must also be approved by the FDA and
are subject to periodic regulatory inspection. Manufacturing facilities located
in California, including our San Dimas facility and Foster City facility, also
must be licensed by the State of California in compliance with local regulatory
requirements.
Drugs that treat serious or life-threatening diseases and conditions that
are not adequately addressed by existing drugs may be designated as "fast track"
products by the FDA and may be eligible for priority (six month) review and
accelerated approval. Drugs receiving accelerated approval must be monitored in
post-marketing clinical trials in order to confirm the safety and benefits of
the drug. Certain products we are developing, including tenofovir DF for HIV,
may qualify as fast track products and be eligible for accelerated approval. We
have not determined if we would seek "fast track" status of these products if
they qualified or the impact of this status on the timing or likelihood of
approval of any of these potential products or those of our competitors.
We are also subject to other federal, state and local regulations regarding
workplace safety and protection of the environment. We use hazardous materials,
chemicals, viruses and various radioactive compounds in our research and
development activities and cannot eliminate the risk of accidental contamination
or injury from these materials. Any misuse or accidents involving these
materials could lead to significant litigation, fines and penalties.
Drugs are also subject to extensive regulation outside of the United States.
In the European Union, there is a centralized approval procedure that authorizes
marketing of a product in all countries in the European Union (which includes
most major countries in Europe). If this procedure is not used, under a
decentralized system, an approval in one country of the European Union can be
used to obtain approval in another country of the European Union under a
simplified application process. After approval under the centralized procedure,
pricing and reimbursement approvals are also required in most countries. VISTIDE
was approved by the European Union under the centralized procedure. Tamiflu is
being reviewed under the centralized procedure but has not yet been approved in
Europe.
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PRICING AND REIMBURSEMENT
Insurance companies, HMOs and other third-party payors and some governments,
seek to limit the amount we can charge for our drugs. For example, in certain
foreign markets, pricing negotiations are often required to obtain approval of a
product, and in the United States there have been, and we expect that there will
continue to be, a number of federal and state proposals to implement drug price
control. In addition, managed care organizations are becoming more common in the
United States and will continue to seek lower drug prices. The announcement of
these proposals or efforts can cause our stock price to lower, and if these
proposals are adopted, our revenues would decrease.
Our ability to sell our drugs also depends on the availability of
reimbursement from governments and private insurance companies. These
governments and insurance companies often demand rebates or predetermined
discounts from list prices. For example, a significant proportion of VISTIDE
sales is subject to reimbursement by government agencies, resulting in
significant discounts from list price and rebate obligations. We expect that
other products we are developing, particularly for AIDS indications, will be
subject to reimbursement issues. We cannot be certain that any of our other
products that obtain regulatory approval will be reimbursed by these government
and insurance companies.
Regulatory approval of prices is generally required in most foreign
countries. In particular, certain countries will condition their approval of a
product on the agreement of the seller not to sell that product for more than a
certain price in that country and in the past have required price reductions
after or in connection with product approval. We cannot be certain that
regulatory authorities in the future will not establish lower prices or that any
regulatory action reducing the price of our products in any one country will not
have the practical effect of requiring us to reduce our prices in other
countries.
HUMAN RESOURCES
As of December 31, 1999, we had approximately 760 full-time employees. We
believe that we have good relations with our employees.
RISK FACTORS
In evaluating our business, you should carefully consider the following
risks in addition to the other information in this report. Any of the following
risks could materially and adversely affect our business, operating results and
financial condition.
ANY SIGNIFICANT REDUCTION IN AMBISOME SALES WOULD SIGNIFICANTLY REDUCE OUR
OPERATING INCOME, AND COULD REQUIRE US TO SCALE BACK OUR MANUFACTURING
OPERATIONS AND REDUCE OUR SALES FORCE. AmBisome sales for the year ended
December 31, 1999 were approximately $129.2 million. During the same period,
sales of VISTIDE and DaunoXome, were approximately $5.9 million and
$4.8 million, respectively. Our corporate partner, Hoffmann-La Roche, began
selling Tamiflu in November 1999 but we have not yet recognized any revenues
from this product for 1999 sales. In March 2000, we received a payment from
Hoffman-La Roche in the amount of $5.4 million for sales in 1999, which will be
recognized as royalty revenue in the first quarter of 2000. We expect that
revenues from sales of Tamiflu in 2000 will increase, therefore decreasing the
percentage of our total revenues from sales of AmBisome, although we cannot
predict with any certainty what our actual revenues from either AmBisome or
Tamiflu will be in 2000. We do, however, expect that revenues from sales of
AmBisome in 2000 will continue to constitute a substantial majority of our total
product revenues in 2000.
Accordingly, for the foreseeable future, we expect that we will continue to
rely on sales of AmBisome to support our existing manufacturing and sales
infrastructure and to provide operating income to offset a significant portion
of our administrative, research and development expenditures. Any significant
reduction in sales of AmBisome, whether as a result of the introduction of
competitive
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products or otherwise, would have a material adverse effect on us, including the
possibility that we would have to scale back our manufacturing operations and
reduce our sales force. There are several products on the market that compete
with AmBisome and are generally priced lower than AmBisome. In addition, there
are other potentially competitive products in clinical development by major
pharmaceutical companies.
TAMIFLU IS A NEW DRUG AND IT IS TOO EARLY TO DETERMINE IF IT WILL GAIN
SIGNIFICANT MARKET ACCEPTANCE. Most people who become infected with the flu use
over-the-counter drugs to treat the flu symptoms, and rely on their immune
system to fight the infection. Tamiflu is in a class of drugs that is a new
approach to treating the flu. Tamiflu is available only by prescription and its
primary benefit is that it reduces the duration of the illness by an average of
1.3 days. Patients may be reluctant to visit a physician or seek a prescription
drug for the flu, physicians may be reluctant to prescribe a flu drug and
government reimbursers and private insurance companies may refuse to pay for an
anti-flu drug. In order for Tamiflu to be successful, our marketing partner
Hoffmann-La Roche will need to increase awareness of this new approach to
treating the flu and change the attitudes of patients, physicians, nurses,
pharmacies, government reimbursers and insurance companies regarding flu
treatment. We cannot be certain that Hoffmann-La Roche will be successful in
these efforts.
The 1999-2000 flu season was the first flu season that Tamiflu was
available. It is too early to determine if Tamiflu will achieve significant
market acceptance. If Tamiflu does not achieve significant market acceptance, we
would be adversely affected.
WE DEVELOP DRUGS TO TREAT AIDS AND AIDS-RELATED CONDITIONS, AND THEREFORE WE
CAN BE ADVERSELY AFFECTED BY CHANGES IN THE REGULATORY AND COMMERCIAL
ENVIRONMENT FOR AIDS THERAPIES. Several of our products and products in
development address AIDS or AIDS-related conditions. These products include
VISTIDE (cidofovir injection) for CMV retinitis, tenofovir DF for HIV and AIDS,
and DaunoXome for HIV-associated Kaposi's sarcoma. The medical, regulatory and
commercial environment for AIDS therapies changes quickly and often in ways that
we are unable to accurately predict. We develop our AIDS products based upon
current policy and the current marketplace for AIDS therapies, as well as our
prediction of future policy and the future marketplace for these therapies. Our
business will be subject to substantial risk because these policies and markets
change quickly and unpredictably and in ways that could have a material adverse
impact on our ability to obtain regulatory approval and commercial acceptance of
these products.
WE MAY NOT RECEIVE APPROVAL FOR EXPANDED USES FOR EXISTING PRODUCTS OR
APPROVAL OF ADDITIONAL PRODUCTS. Additional regulatory approvals will be needed
to expand the uses for which AmBisome may be marketed in the countries where it
is already approved, and those approvals may or may not be obtained. Similarly,
to the extent that we seek to expand the indications for DaunoXome beyond
Kaposi's sarcoma, the drug may not be effective for the treatment of other
diseases, and we may never obtain additional regulatory approvals. In December
1999, Bausch & Lomb terminated a collaborative program studying the use of an
eye drop formulation of cidofovir, the active ingredient in VISTIDE, for the
potential treatment of certain eye viruses, because they did not believe the
compound achieved their performance objectives.
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OUR OPERATIONS DEPEND ON COMPLIANCE WITH COMPLEX FDA AND COMPARABLE
INTERNATIONAL REGULATIONS. FAILURE TO OBTAIN BROAD APPROVALS ON A TIMELY BASIS
OR TO ACHIEVE CONTINUED COMPLIANCE COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS
AND ADVERSELY AFFECT US. The products that we will develop and sell must be
approved and will be subject to extensive regulation by the FDA and comparable
agencies in other countries. We are continuing clinical trials for both AmBisome
and DaunoXome for currently approved and additional uses. We are also conducting
clinical trials for five other products, adefovir dipivoxil for hepatitis B
infection, tenofovir DF, MiKasome, NX 211 and NX 1838. We anticipate that we
will conduct a variety of clinical trials and file for marketing approval of
additional products over the next several years. These products may fail to
receive marketing approval on a timely basis, or at all. In addition, these
products may receive marketing approvals that place limitations on their uses.
These failures, delays or limitations, as well as other regulatory changes,
actions and recalls, could delay commercialization of any products and adversely
affect our results of operations.
In addition, even after our products are marketed, the products and their
manufacturers are subject to continual review. Later discovery of previously
unknown problems with our products, our own manufacturing or the production by
third-party manufacturers may result in restrictions on our products or the
manufacture of our products, including withdrawal of the products from the
market.
RESULTS OF CLINICAL TRIALS AND APPROVAL OF PRODUCTS ARE UNCERTAIN, AND WE
MAY BE DELAYED IN OR PROHIBITED FROM SELLING OUR PRODUCTS. We have a number of
potential products that have reached the development stage. These potential
products include adefovir dipivoxil for hepatitis B, tenofovir DF, MiKasome, NX
211 and NX 1838. We will be required to demonstrate the safety and effectiveness
of these and any other products we develop in each intended use through
extensive preclinical studies and clinical trials in order to obtain regulatory
approval of these products. The results from preclinical and early clinical
studies do not always accurately predict results in later, large-scale clinical
trials for several reasons, including:
- preliminary results may not be indicative of effectiveness;
- further clinical trials may not achieve the desired result; and
- further clinical trials may reveal unduly harmful side effects or may show
the drugs to be less effective than other drugs or delivery systems for
the desired indications.
Even successfully completed large-scale clinical trials may not result in
marketable products for several reasons, including:
- the potential products are not shown to be safe and effective;
- regulatory authorities disagree with the results or design of our studies
and trials;
- required regulatory approvals are not obtained;
- the potential products are too difficult to develop into commercially
viable products; or
- the potential products do not obtain market acceptance.
On November 1, 1999, an FDA Advisory Committee recommended against approval
of our application to approve a 60 mg dose of adefovir dipivoxil to treat AIDS.
Kidney toxicity associated with this 60 mg dose, as well as a desire for
additional data, were the major concerns of this committee. Following this
recommendation, we were informed by the FDA that they would not approve our
application unless we obtained additional data that satisfied the concerns
raised by this committee. Based on these discussions, we terminated our
development of adefovir dipivoxil for the treatment of AIDS. We are using 10 and
30 milligram doses of adefovir dipivoxil in our Phase III clinical trials of
adefovir dipivoxil for hepatitis B. We believe that these lower doses will not
result in the kidney toxicity experienced with 60 milligrams and that adefovir
dipivoxil can be effective in treating hepatitis B at this lower dose. We cannot
be certain, however, that these lower doses will be both safe enough and have
28
<PAGE>
sufficient treatment benefits to receive FDA approval. Tenofovir DF is in the
same class of drugs as adefovir dipivoxil. And, while we have not yet
experienced kidney toxicity in our clinical trials of tenofovir DF, the kidney
toxicity in our clinical trials of adefovir dipivoxil for AIDS did not arise
until the later stages of our clinical trials. We cannot be certain that similar
toxicity issues will not arise later in our clinical trials of tenofovir DF. A
number of companies in our industry have suffered similar setbacks in advanced
clinical trials despite promising results in earlier trials. In the end, we may
be unable to develop additional marketable products.
DELAYS IN PATIENT ENROLLMENT FOR CLINICAL TRIALS COULD INCREASE COSTS AND
DELAY REGULATORY APPROVALS. The rate of completion of our clinical trials will
depend on the rate of patient enrollment. There will be substantial competition
to enroll patients in clinical trials for our drugs in development. This
competition has delayed our clinical trials in the past. In addition, recent
improvements in existing drug therapy, particularly for AIDS, hepatitis B and
certain cancers, may make it more difficult for us to enroll patients in our
clinical trials as the patient population may choose to enroll in clinical
trials sponsored by other companies or choose alternative therapies. Delays in
planned patient enrollment can result in increased development costs and delays
in regulatory approvals.
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO
RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET
ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES. Our success
depends on our ability to successfully develop and obtain regulatory approval to
market new pharmaceutical products. A significant portion of the research that
we will conduct will involve new and unproven technologies. Development of a
product requires substantial technical, financial and human resources even if
the product is not successfully completed.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:
- lack of sufficient treatment benefit or unacceptable toxicity during
preclinical studies or clinical trials;
- failure to receive necessary regulatory approvals;
- existence of proprietary rights of third parties; and
- inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory standards.
WE MAY UNDERESTIMATE DEVELOPMENT COSTS, ADVERSELY AFFECTING OUR
BUSINESS. Due to uncertainties that are part of the development process, we may
underestimate the costs associated with the development of a potential product.
Delays or unanticipated increases in costs of development or failure to obtain
regulatory approval or market acceptance for our products could adversely affect
our operating results.
WE DEPEND ON RELATIONSHIPS WITH OTHER COMPANIES FOR RESEARCH FUNDING,
CLINICAL DEVELOPMENT, SALES AND MARKETING PERFORMANCE AND REVENUES. FAILURE TO
MAINTAIN THESE RELATIONSHIPS WOULD NEGATIVELY IMPACT OUR BUSINESS. We rely on a
number of significant collaborative relationships with major pharmaceutical
companies for our research funding, clinical development and/or sales and
marketing performance. These include collaborations with Fujisawa USA Inc.,
Glaxo Wellcome, Hoffmann-La Roche, Pharmacia & Upjohn, Schering AG and Sumitomo
Pharmaceuticals Co. Inc. We also only rely on international distributors for
sales of AmBisome in certain countries. Reliance on collaborative relationships
poses a number of risks, including:
- we will not be able to control whether our corporate partners will devote
sufficient resources to our programs or products;
- disputes may arise in the future with respect to the ownership of rights
to technology developed with corporate partners;
29
<PAGE>
- disagreements with corporate partners could lead to delays in or
termination of the research, development or commercialization of product
candidates, or result in litigation or arbitration;
- contracts with our corporate partners may fail to provide significant
protection or may fail to be effectively enforced if one of these partners
fails to perform;
- corporate partners have considerable discretion in electing whether to
pursue the development of any additional products and may pursue
alternative technologies or products either on their own or in
collaboration with our competitors; and
- corporate partners with marketing rights may choose to devote fewer
resources to the marketing of our products than they do to products of
their own development.
Given these risks, there is a great deal of uncertainty regarding the
success of our current and future collaborative efforts. If these efforts fail,
our product development or commercialization of new products could be delayed or
revenue from existing products, including Tamiflu, AmBisome and VISTIDE, could
decline.
OUR RIGHTS TO MARKET AMBISOME IN THE UNITED STATES AND CANADA ARE LIMITED BY
AN AGREEMENT WITH FUJISAWA. FAILURE OF FUJISAWA TO EFFECTIVELY MARKET AMBISOME
MAY REDUCE REVENUES. Our rights to market AmBisome in the United States and
Canada are subject to an agreement with Fujisawa Healthcare, Inc. Under the
terms of this agreement, we have sole marketing rights to AmBisome in all
countries except the United States and Canada, but must pay royalties in
connection with sales in most significant Asian markets, including Japan. We
co-promote AmBisome with Fujisawa in the United States. We manufacture AmBisome
for sale in the United States and Canada and sell AmBisome to Fujisawa at cost
in the United States and at cost plus a specified percentage in Canada. Fujisawa
collects all revenues from AmBisome sales in the United States and pays us 20%
of the gross profits from such sales. The success of AmBisome in the United
States will be dependent primarily on the efforts of Fujisawa and in Canada the
success of AmBisome will depend entirely on Fujisawa. If Fujisawa fails in its
efforts, potential revenues from the sales of AmBisome may be substantially
reduced.
FAILURE OF HOFFMANN-LA ROCHE TO EFFECTIVELY MARKET TAMIFLU WOULD REDUCE
POTENTIAL REVENUES. Hoffmann-La Roche has sole responsibility for promoting and
selling Tamiflu on a worldwide basis and we have no control over their
activities. Therefore, we are relying on the efforts of Hoffmann-La Roche for
any revenues we receive from the sale of Tamiflu. If Hoffmann-La Roche does not
dedicate sufficient resources to the promotion of Tamiflu, or if Hoffmann-La
Roche fails in its marketing efforts, the royalties we receive from the sale of
Tamiflu would decrease and we would be adversely affected.
INABILITY TO ESTABLISH FUTURE SUCCESSFUL COLLABORATIVE RELATIONSHIPS MAY
IMPAIR OUR FINANCIAL RESULTS. We may seek future collaborative relationships
with corporate partners to fund some of our research and development expenses
and to develop and commercialize some of our potential products. For example, we
have been in discussions with several potential corporate partners about
collaborative development and commercialization of adefovir dipivoxil for
hepatitis B, particularly in Asian territories. Further, we anticipate that our
revenues from collaborative agreements will continue to be affected by existing
agreements, as well as by the timing of drug development programs of our
corporate partners. We may not be able to negotiate acceptable collaborative
arrangements in the future, and any arrangements we do negotiate may not be
successful. If we fail to establish additional collaborative relationships, we
will be required to undertake research, development, marketing and manufacturing
of our proposed products at our own expense.
WE HAVE A HISTORY OF LOSSES, EXPECT TO OPERATE AT A LOSS FOR THE FORESEEABLE
FUTURE AND MAY NEVER BE PROFITABLE. We have never been profitable on a
full-year basis. We may never become profitable. At December 31, 1999, our
accumulated deficit was $449.2 million. Our losses have resulted principally
30
<PAGE>
from expenses associated with our research and development programs and, to a
lesser extent, from sales, general and administrative expenses. Our product
sales and royalty revenues are derived from sales of AmBisome, VISTIDE and
DaunoXome and royalty arrangements related to AmBisome and VISTIDE. In addition,
we continue to integrate Gilead and NeXstar and unforeseen costs could require
us to spend substantially more financial resources that we have anticipated.
OUR EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT MAY NOT BE ACCEPTED BY
PHYSICIANS, INSURERS AND PATIENTS. Many of our products in development, if
approved for marketing, would have no established market. The ability of these
products to achieve and sustain market acceptance will depend on the receipt and
scope of regulatory approvals and whether or not government authorities and
managed care organizations will adequately reimburse patients who use these
products.
In addition, we need to convince the medical and patient advocacy community
of:
- the effectiveness of these products in treating disease;
- the safety of these products when administered to patients; and
- the advantages of these products over competitive products.
Physicians, patients, patient advocates, payors and the medical community in
general may not accept and use any products that we may develop. If our products
are not accepted, our results of operations will suffer.
MANY OTHER COMPANIES ARE TARGETING THE SAME DISEASES AND CONDITIONS AS WE
ARE. COMPETITIVE PRODUCTS FROM OTHER COMPANIES COULD SIGNIFICANTLY REDUCE THE
MARKET ACCEPTANCE OF OUR PRODUCTS. Our products and development programs target
a number of diseases and conditions, including viral infections, fungal
infections, bacterial infections and cancer. There are many commercially
available products for these diseases. Certain of these products are
well-established therapies and have generated substantial sales. In addition, a
large number of companies and institutions are conducting well-funded research
and development activities directed at developing treatments for these diseases.
Products currently on the market and those under development by our competitors
could make our technology and products obsolete or noncompetitive. We expect
that competition for the treatment of these diseases will increase in the future
as new products enter the market and advanced technologies become available. We
will also be competing to license or acquire technology from other companies.
Most of our competitors and potential competitors have substantially greater
resources than we do. Those resources include superior product development
capabilities and financial, scientific, manufacturing, marketing, managerial and
human resources. These competitors may achieve superior patent protection,
obtain key technology, receive regulatory approval or achieve product
commercialization earlier than us.
THE SIGNIFICANTLY GREATER RESOURCES OF THE MARKETING ORGANIZATIONS OF LARGE
PHARMACEUTICAL COMPANIES COULD HINDER OUR ABILITY TO COMPETE SUCCESSFULLY. Our
products compete, and the products we may develop are likely to compete, with
products of other companies that currently have extensive and well-funded
marketing and sales operations. Because these companies are capable of devoting
significantly greater resources to their marketing efforts, our marketing or
sales efforts may not compete successfully against the efforts of these other
companies.
OUR EXISTING PRODUCTS ARE SUBJECT TO REIMBURSEMENT FROM GOVERNMENT AGENCIES
AND OTHER THIRD PARTIES. PHARMACEUTICAL PRICING AND REIMBURSEMENT PRESSURES MAY
REDUCE PROFITABILITY. Successful commercialization of our products depends, in
part, on the availability of governmental and third party payor reimbursement
for the cost of such products and related treatments. Government health
administration authorities, private health insurers and other organizations
generally provide reimbursement. Government authorities and third-party payors
increasingly are challenging the price of
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medical products and services, particularly for innovative new products and
therapies. This has resulted in lower average sales prices. For example, a
majority of our sales of AmBisome, VISTIDE and DaunoXome are subject to
reimbursement by government agencies, resulting in significant discounts from
list price and rebate obligations. If Tamiflu is approved for sale in Europe,
its success will also depend largely on obtaining government reimbursement in
Europe because in many European countries, including the United Kingdom and
France, patients are reluctant to pay for prescription drugs out of their own
pockets. We also expect that several of our products in development,
particularly for AIDS indications, will have a similar reimbursement profile, if
they receive regulatory approval. Even if reimbursement is available,
reimbursement policies may adversely affect our ability to sell our products on
a profitable basis.
In addition, in many international markets, governments control the prices
of prescription pharmaceuticals. In these markets, once marketing approval is
received, pricing negotiation can take another six to twelve months or longer.
Product sales, attempts to gain market share or introductory pricing programs of
our competitors could require us to lower our prices in these countries, which
could adversely affect our results of operations.
MOST OF OUR PRODUCT SALES ARE MADE IN EUROPE, AND CURRENCY FLUCTUATIONS MAY
IMPAIR OUR FINANCIAL RESULTS. A majority of our product sales are made in
Europe, with 51.3% of our product sales for the year ending December 31, 1999
occurring in the United Kingdom, France, Germany, Italy and Spain. In most
significant European markets, we sell AmBisome and DaunoXome in the currency of
the country in which they are sold. Accordingly, the prices of these products in
U.S. Dollars will vary as the value of the U.S. Dollar fluctuates against these
foreign currencies or the Euro. Increases in the value of the U.S. Dollar
against foreign currencies may reduce our U.S. Dollar return on the sale of our
products. In addition, although we implement hedging techniques with respect to
our foreign currency accounts receivable, these techniques do not eliminate the
effects of foreign currency fluctuations with respect to anticipated revenues.
Therefore our future results will continue to be affected by foreign currency
fluctuations.
WE MAY NOT BE ABLE TO OBTAIN EFFECTIVE PATENTS TO PROTECT OUR TECHNOLOGIES
FROM USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD REQUIRE US TO STOP
USING OR PAY FOR THE USE OF REQUIRED TECHNOLOGY. Our success will depend to a
significant degree on our ability to:
- obtain patents and licenses to patent rights;
- preserve trade secrets; and
- operate without infringing on the proprietary rights of others.
We have rights to United States and foreign issued patents and have filed
and will continue to file patent applications in the United States and abroad
relating to our technologies. There is a risk, however, that patents may not
issue from any of these applications or that the patents will not be sufficient
to protect our technology. Patent applications in the United States are
confidential until a patent is granted. As a result, we would not know if our
competitors filed patent applications for technology covered by our pending
applications. We also cannot be certain that we were the first to invent the
technology that is the subject of our patent applications. Competitors may have
filed patent applications or received patents and may obtain additional patents
and proprietary rights that block or compete with our patents.
We do not have patent filings covering adefovir dipivoxil per se in China or
in certain other Asian countries, although we do have applications pending in
various Asian countries, including China, which relate to various forms and
formulations of adefovir dipivoxil. Asia is a major market for hepatitis B
therapies, one of the potential indications for adefovir dipivoxil. We may
obtain patents for certain products many years before marketing approval is
obtained for those products. Because patents have a
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<PAGE>
limited life, which may begin to run prior to commercial sale, the commercial
value of the product may be limited.
Our competitors may file patent applications covering our technology. If so,
we may have to participate in interference proceedings or litigation to
determine the right to a patent. Litigation and interference proceedings are
expensive even if successful. In August 1998, we were served with a patent
infringement lawsuit filed by Chiron Corporation alleging that our research
infringes Chiron's patents covering the hepatitis C NS-3 protein and gene
sequences and their use in screening for potential hepatitis C therapeutics. We
have ceased our activities with respect to the NS-3 protein and have settled the
litigation with Chiron.
Our success depends in large part on our ability to operate without
infringing upon the patents or other proprietary rights of third parties. If we
infringe patents of others, we may be prevented from commercializing products or
may be required to obtain licenses from these third parties. We cannot be
certain that we would be able to obtain alternative technologies or any required
license. Even if we were to obtain such technologies or licenses, we cannot be
certain that the terms would be reasonable. If we fail to obtain such licenses
or alternative technologies, we may be unable to develop some or all of our
products.
In addition, we use significant proprietary technology and rely on
unpatented trade secrets and proprietary know-how to protect certain aspects of
our production and other technologies. Our trade secrets may become known or
independently discovered by our competitors.
MANUFACTURING PROBLEMS COULD DELAY PRODUCT SHIPMENTS AND REGULATORY
APPROVALS. For VISTIDE, adefovir dipivoxil and tenofovir DF, we rely on third
parties for the manufacture of bulk drug substance and final drug product for
clinical and commercial purposes. Hoffmann-La Roche is responsible for
manufacturing Tamiflu and if they encounter problems in this process, our
revenues from the sales of Tamiflu could decrease. We depend on these third
parties to perform their obligations effectively and on a timely basis. If these
third parties fail to perform as required, our clinical trials or submission of
products for regulatory approval may be delayed. These delays could impair our
ability to deliver commercial products on a timely basis and could impair our
competitive position.
We manufacture AmBisome and DaunoXome at our facilities in San Dimas,
California. Our only formulation and manufacturing facilities are in San Dimas,
California; although we own a manufacturing facility in Ireland that performs
certain quality control testing, labeling and packaging, and we use third
parties to fill and lyophilize (freeze dry) certain batches of product as
alternate contract suppliers. In the event of a natural disaster, including an
earthquake, equipment failure, strike or other difficulty, we may be unable to
replace this manufacturing capacity in a timely manner and would be unable to
manufacture AmBisome and DaunoXome to meet market needs.
WE MAY NOT BE ABLE TO OBTAIN MATERIALS NECESSARY TO MANUFACTURE OUR
PRODUCTS. Many of the materials that we utilize in our operations are made at
only one facility. For example, we depend on single suppliers for high quality
amphotericin B, daunorubicin HC1 and high quality cholesterol, each of which is
used in the manufacture of our liposome products. We have qualified only one
supplier with the FDA for the bulk drug substance used in VISTIDE and one
different supplier for the final drug product. A shutdown in any of these
facilities due to technical, regulatory or other problems, resulting in an
interruption in supply of these materials, could have an adverse impact on our
financial results. While we have established a second source of bulk drug
substance supply for VISTIDE, we have not yet qualified this source with the FDA
and cannot be certain that the FDA will approve this second source. Because the
suppliers of key components and materials must be named in the new drug
application filed with the FDA for a product, significant delays can occur if
the qualification of a new supplier is required. If supplies from our suppliers
were interrupted for any reason, we could be unable to ship AmBisome, VISTIDE or
DaunoXome, or supply any of our products in development for clinical trials.
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WE HAVE LIMITED EXPERIENCE IN MANUFACTURING NON-LIPOSOMAL PRODUCTS AND COULD
BE ADVERSELY AFFECTED IF WE FAIL TO DEVELOP MANUFACTURING CAPACITY. For some of
our potential products, we will need to develop further our production
technologies for use on a larger scale in order to conduct clinical trials and
produce such products for commercial sale at an acceptable cost. We cannot be
certain that we will be able to implement any of these developments
successfully.
The manufacturing process for pharmaceutical products is highly regulated,
and regulators may shut down manufacturing facilities that they believe do not
comply with regulations. The FDA's current Good Manufacturing Practices are
extensive regulations governing manufacturing processes, stability testing,
record-keeping and quality standards. In addition, our manufacturing operations
are subject to routine inspections by regulatory agencies and similar
regulations are in effect in other countries.
OUR BUSINESSES MAY GIVE RISE TO PRODUCT LIABILITY CLAIMS NOT COVERED BY
INSURANCE OR INDEMNITY AGREEMENTS. The testing, manufacturing, marketing and
use of AmBisome, VISTIDE and DaunoXome, as well as products in development,
involve substantial risk of product liability claims. These claims may be made
directly by consumers, healthcare providers, pharmaceutical companies or others.
Although we maintain product liability insurance, a single product liability
claim could exceed the coverage limits, and multiple claims are possible. If
that happens, the insurance coverage we have may not be adequate. A successful
product liability claim in excess of our coverage could require us to pay
substantial amounts. This could adversely affect our results of operations.
Moreover, the amount and scope of any coverage may be inadequate to protect us
in the event of a successful product liability claim. In the future such
insurance may not be renewed at an acceptable cost or at all. If liability
insurance becomes unobtainable, our ability to clinically test and to market our
products could be significantly impaired.
Additionally, we are required by governmental regulations to test our
products even after they have been sold and used by patients. As a result of
such tests, we may be required to, or may determine that, we should recall
products already in the market. Subsequent testing and product recalls may
increase our potential exposure to product liability claims.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS, VIRUSES AND RADIOACTIVE COMPOUNDS
EXPOSES US TO POTENTIAL LIABILITIES. Our research and development involves the
controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for significant damages or fines.
ITEM 2. PROPERTIES
Our corporate headquarters, including our principal executive offices and
certain of our research facilities are located in Foster City, California. At
this location, we lease approximately 221,600 square feet of space in eight
proximately located buildings. One of the leases covering 59,039 square feet of
space in this group of buildings expires in December 2003 and there are no
renewal options. The remaining leases expire in March and September 2006 and we
have an option to renew all of these leases for two additional five-year
periods.
In Boulder, Colorado, we sublease a facility of approximately 32,000 square
feet of office space, which we use as administrative offices. This sublease
expires in July 2003. We also lease approximately 60,000 square feet of space,
which we use both as research laboratories and as administrative offices. This
lease expires in October 2001, but can be renewed at our option for two
successive five-year periods.
We also occupy a facility in San Dimas, California under a noncancelable
operating lease that expires in May 2003 with two five-year renewal options.
This facility has 51,500 square feet of space and houses research and
development activities, manufacturing and certain administrative functions.
34
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The facility has been inspected by the State of California for compliance with
"current Good Manufacturing Practices" and is licensed by the State of
California for pharmaceutical manufacturing. The license is renewable annually.
The San Dimas facility has been registered for the commercial production of
AmBisome and DaunoXome by the Medicines Control Agency in the United Kingdom
(MCA) and the FDA.
We also lease a second manufacturing facility adjacent to our other facility
in San Dimas, California. This lease expires in November 2003 with two five-year
renewal options. This second facility in San Dimas provides in excess of 70,000
square feet of space, including approximately 45,000 square feet of
manufacturing space, and is our primary injectable pharmaceutical production
plant. Both the MCA and the FDA have approved the manufacture of AmBisome at
this facility.
Finally, the Company owns a 9,700 square foot facility located in Dublin,
Ireland, in which the quality control testing, final labeling and packaging are
currently being conducted for AmBisome and DaunoXome for the European Union and
elsewhere.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 1997, we reached a settlement with The Liposome Company, Inc.
in which we each agreed to dismiss all legal proceedings involving patents
related to our liposomal formulation of amphotericin B. In the settlement
agreement, The Liposome Company agreed not to sue us in connection with the
worldwide production and sales of AmBisome and gave us rights to use some of
their patents. Under the terms of the settlement Agreement, we are required to
make payments based on AmBisome sales over the next several years.
In August 1998, we were sued by Chiron who claimed that we were infringing
their patents for hepatitis C and related technology. In December 1999, we
agreed to the terms of a settlement agreement with Chiron and, as a result, we
made a one-time settlement payment of $0.4 million to Chiron.
We are also a party to various other legal actions that arose in the
ordinary course of our business. We do not believe that any of these other legal
actions will have any significant impact on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on The Nasdaq Stock Market under the symbol
"GILD." The following table sets forth for the periods indicated the high and
low prices per share of our common stock on The Nasdaq Stock Market. These
prices represent quotations among dealers without adjustments for retail
mark-ups, mark-downs or commissions, and may not represent prices of actual
transactions.
<TABLE>
<CAPTION>
1999 CLOSING HIGH CLOSING LOW
- ---- -------------- --------------
<S> <C> <C>
First Quarter........................................ $ 56 3/4 $ 35 3/4
Second Quarter....................................... $ 52 1/4 $ 36 1/16
Third Quarter........................................ $ 92 3/8 $ 52 1/8
Fourth Quarter....................................... $ 73 25/32 $ 37 1/4
<CAPTION>
1998
- ----
First Quarter. $ 42 5/8 35
<S> <C> <C>
Second Quarter....................................... $ 43 1/4 $ 31 5/8
Third Quarter........................................ $ 30 3/8 $ 18 1/4
Fourth Quarter....................................... $ 41 1/16 $ 18 3/4
</TABLE>
As of February 25, 2000, we had 44,388,828 shares of common stock
outstanding held by approximately 586 stockholders of record. We have not paid
dividends on our common stock since our inception and we do not anticipate
paying any in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
GILEAD SCIENCES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995 (2)
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues....................... $ 168,979 $ 151,119 $ 132,258 $ 122,121 $ 50,744
Total costs and expenses............. 239,838 230,631 220,480 181,403 114,800
Loss from operations................. (70,859) (79,512) (88,222) (59,282) (64,056)
Net loss............................. (66,486) (44,758) (72,893) (45,614) (59,225)
Basic and diluted net loss per common
share.............................. $ (1.55) $ (1.09) $ (1.85) $ (1.21) $ (1.97)
Common shares used to calculate basic
and diluted net loss per common
share.............................. 42,826 41,015 39,432 37,641 30,187
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities......................... $ 294,394 $ 348,743 $ 387,361 $ 338,354 $ 182,657
Working capital...................... 324,104 359,555 396,810 332,352 180,568
Total assets......................... 436,808 487,764 516,989 450,540 275,376
Long-term obligations................ 5,253 8,883 9,658 18,120 13,330
Convertible subordinated
debentures......................... 79,533 80,000 80,000 -- --
Accumulated deficit.................. (449,232) (382,746) (337,988) (265,095) (219,481)
Total stockholders' equity (3)....... 297,292 333,699 357,726 374,649 228,931
</TABLE>
- ------------------------
(1) Periods prior to the year ended December 31, 1999 have been restated to
reflect the merger with NeXstar Pharmaceuticals, Inc. on July 29, 1999,
which has been accounted for as a pooling of interests.
(2) In October 1995, we changed our fiscal year end from March 31 to
December 31, effective with the nine months ended December 31, 1995.
(3) No dividends have been declared or paid on our common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in Delaware on June 22, 1987, and are an independent
biopharmaceutical company that seeks to provide accelerated solutions for
patients and the people who care for them. We discover, develop, manufacture and
commercialize proprietary therapeutics for challenging infectious diseases
(viral, fungal and bacterial diseases) and cancer. Currently, we market
AmBisome-Registered Trademark-((amphotericin B) liposome for injection), an
antifungal agent, DaunoXome-Registered Trademark- (daunorubicin citrate liposome
injection), a drug approved for the treatment of Kaposi's sarcoma, and
VISTIDE-Registered Trademark- (cidofovir injection) for the treatment of
cytomegalovirus ("CMV") retinitis. Hoffmann-La Roche Inc. ("Roche") markets
Tamiflu-TM- (oseltamivir phosphate) for the treatment of influenza, under a
collaborative agreement. In addition, we are developing products to treat
diseases caused by human immunodeficiency virus ("HIV"), hepatitis B virus
("HBV"), bacterial infections and cancer.
On July 29, 1999, we entered into a business combination with NeXstar
Pharmaceuticals, Inc. ("NeXstar"). The business combination has been accounted
for as a pooling of interests and our historical consolidated financial
statements for all years prior to the business combination have been restated in
the accompanying consolidated financial statements to include the financial
position, results of operations and cash flows of NeXstar.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The following discussion of our financial condition and results of
operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act that involve risks and
uncertainties. Our actual financial and operating results could differ
materially from our expectations. Some of the factors that could cause these
differences are listed below. These factors, as well as other factors that could
cause or contribute to these differences, are described in more detail under
"Risk Factors" beginning on page 26 of this report.
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MERGER INTEGRATION. We continue to integrate Gilead with NeXstar and
unforeseen integration issues could disrupt our business or require us to expend
substantially more financial resources than anticipated.
REGULATORY PROCESS. The FDA and foreign agencies could reject or limit the
commercialization of our products for a number of reasons. If these agencies
reject or limit the commercialization of our products, our financial results
would be adversely affected.
AMBISOME SALES. We rely on sales of AmBisome for a significant portion of
our operating income. If revenues from sales of AmBisome decrease, our operating
income would decrease.
MARKET ACCEPTANCE OF PRODUCTS. If our products do not achieve and sustain
market acceptance, our results of operations will suffer. Tamiflu is in a new
class of drugs that represent a new approach to treating the flu. In order for
Tamiflu to achieve significant market acceptance, our marketing partner,
Hoffmann-La Roche, must change attitudes toward flu treatment.
COLLABORATIONS. We depend on collaborations for the development and
commercialization of certain products and for revenue, including the
collaboration with Hoffmann-La Roche for sales of Tamiflu and the collaboration
with Fujisawa for sales of AmBisome in the United States and Canada. These
collaborations could fail for a number of reasons. We will also seek additional
collaborations, including a collaboration for adefovir dipivoxil for the
treatment of Hepatitis B virus infection. If our collaborations fail or if we
are unable to establish additional collaborations, our financial results would
be adversely affected.
FOREIGN CURRENCY FLUCTUATIONS. A significant portion of our sales is in
foreign currency. Increases in the value of the U.S. Dollar against foreign
currencies can reduce our U.S. Dollar return on these sales and negatively
impact our financial condition.
UNCERTAIN FINANCIAL RESULTS. We expect that our financial results will
continue to fluctuate from quarter to quarter and that such fluctuations may be
substantial. We have never been profitable on a full-year basis and may never
achieve or sustain profitability. As of December 31, 1999, our accumulated
deficit was $449.2 million.
REVENUES
We had total revenues of $169.0 million, $151.1 million and $132.3 million
for the years ended December 31, 1999, 1998 and 1997, respectively. Total
revenues include revenues from net product sales, net royalties and contracts,
including research and development ("R&D") collaborations.
Net product sales revenue was $139.9 million, $114.2 million and
$100.9 million for 1999, 1998 and 1997, respectively. Such revenues are
increasingly derived from sales of AmBisome, which represented 92%, 91% and 83%
of total product sales revenue in 1999, 1998 and 1997, respectively. We also
recognized product sales revenue of $5.9 million and $4.8 million from sales of
VISTIDE and DaunoXome, respectively, during 1999. A significant majority of our
product sales, particularly sales of AmBisome, are denominated in foreign
currencies. In future periods, the combined levels of sales of VISTIDE and
DaunoXome are expected to be relatively flat as compared to 1999 amounts.
During 1999, 1998 and 1997, we recorded net royalty revenue of
$10.4 million, $7.3 million and $1.6 million, respectively. During this
three-year period, the most significant source of royalty revenue was from sales
of AmBisome in the United States by Fujisawa Healthcare, Inc. ("Fujisawa"),
under a co-promotion arrangement we have with them. During the fourth quarter of
1999, we began recognizing royalty revenues from Fujisawa's sales of AmBisome in
the month following the month in which the related product sales occur. Prior to
the fourth quarter of 1999, we recognized this royalty revenue in the month the
sales occurred. We have recognized net royalty revenue of $8.3 million from
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Fujisawa in 1999, which represents 11 months of sales by Fujisawa to customers.
Net royalty revenues recognized from Fujisawa's sales of AmBisome in 1998 and
1997 were $4.8 million and $0.7 million, respectively. Substantially all of the
remaining net royalty revenue recognized in each year of this three-year period
represents royalties from sales of VISTIDE by Pharmacia & Upjohn S.A.
("Pharmacia & Upjohn") outside the United States. In future periods, royalties
from sales of VISTIDE are expected to be relatively flat. In October 1999, the
U.S. Food and Drug Administration approved Tamiflu for the treatment of
influenza A & B in adults. We co-developed Tamiflu with F. Hoffmann-La Roche
Ltd. and Hoffmann-La Roche Inc. (collectively, "Roche"), which owns the
worldwide commercial rights to the product and is required to pay to us a
royalty on net sales. Beginning in 2000, we expect that royalties from sales of
Tamiflu will comprise a greater portion of our net royalty revenue. We will
recognize royalty revenue from sales of Tamiflu in the quarter following that in
which the related product sales occur.
Contract revenue was $18.7 million, $29.6 million and $29.8 million in 1999,
1998 and 1997, respectively. The single most significant source of contract
revenue in each of these three years relates to the development of Tamiflu under
our R&D collaboration agreement with Roche. Tamiflu is an orally-administered
compound developed to treat and potentially to prevent viral influenza in
humans. During 1999, 1998 and 1997, we recorded approximately $14.9 million,
$16.4 million and $14.2 million, respectively, of contract revenue under this
agreement with Roche. The 1999 amount includes $2.1 million of R&D
reimbursements and $12.8 million of milestone payments. The $16.4 million
recorded during 1998 represents reimbursed R&D expenses and includes $5.2
million attributable to R&D expenses incurred in the fourth quarter of 1997,
which were subject to Roche's approval as of December 31, 1997. Such expenses
were approved for reimbursement and recognized as revenue in 1998. During 1997,
we recognized as contract revenue R&D reimbursements of $8.2 million and
milestone payments of $6.0 million. We are entitled to additional milestone
payments of up to $21.2 million upon achieving certain developmental and
regulatory milestones. While we may earn additional milestones under the Roche
agreement in 2000, R&D reimbursements under the Roche agreement are expected to
be slightly lower in 2000 as compared to 1999. Such reimbursements will
approximate actual related R&D costs we incur.
In November 1999, we entered into an agreement with Somalogic, Inc.
("Somalogic") under which we assigned to Somalogic a sole and exclusive license
to certain intellectual property, including patents and patent applications.
Under the terms of the agreement, Somalogic is required to pay to us a total of
$2.5 million in two nonrefundable installments. The first installment of $1.5
million was paid in November 1999 and is included in contract revenue in our
consolidated statement of operations for the year ended December 31, 1999. The
remaining $1.0 million installment is due in November 2000 and, because
Somalogic is a developmental stage entity that may require third party
financing, we will recognize this amount as contract revenue when received.
Contract revenue recognized in 1999 also includes a $1.0 million
performance-based milestone payment received from SKW Americas, Inc. ("SKW").
SKW is the 51% owner of Proligo L.L.C. ("Proligo"), an entity in which we hold
the remaining 49% ownership interest.
In 1998, we recorded as contract revenue a $3.0 million milestone payment
from Sumitomo Pharmaceuticals Co., Ltd., related to a license of AmBisome rights
in Japan. Also in 1998, we entered into an agreement with Isis Pharmaceuticals,
Inc. ("Isis") under which we sold to Isis the holdings of its antisense patent
estate, including patents and patent applications. Under the terms of the
agreement, Isis is required to pay to us a total of $6.0 million in four
installments. The total sale price of $6.0 million is included in contract
revenue in 1998.
Contract revenue for both 1998 and 1997 also includes reimbursement of
research expenses under our collaborative agreements with Glaxo Wellcome Inc.
("Glaxo") and Schering A.G. ("Schering"). Under our agreement with Schering
related to the discovery and development of aptamers as in vivo diagnostic
agents ("Schering Research Agreement"), we recognized $2.4 million of contract
revenue in
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both 1998 and 1997. The Schering Research Agreement expired in 1999, but a
related license agreement remains in effect. Our collaborative agreement with
Glaxo was related to its code blocker program. Contract revenue recognized in
connection with the Glaxo agreement was $1.8 million in 1998 and $3.0 million in
1997. In June 1998, the agreement and the funding for the program were
terminated, resulting in reduced revenue in 1998 as compared to 1997.
During 1997, we recognized in contract revenue a $10.0 million milestone
payment under our collaborative agreement with Pharmacia & Upjohn following the
marketing authorisation for VISTIDE in the European Union. This is the only
milestone payment provided for under that agreement.
COSTS AND EXPENSES
Cost of goods sold was $29.5 million, $23.4 million and $21.6 million for
the years ended December 31, 1999, 1998 and 1997, respectively, and resulted
from sales of AmBisome, VISTIDE, and DaunoXome. Overall, cost of goods sold has
been in the range of 20% to 21% of net product sales in each of the three years
presented. In connection with most of our European product sales, we price our
products in the currency of the country into which they are sold ("Payment
Currencies"). A significant majority of our manufacturing costs are in U.S.
Dollars. It is likely that any decline in the value of the Payment Currencies
relative to the U.S. Dollar would negatively impact our gross margins since our
manufacturing costs would remain approximately the same while our revenues,
which are reported in U.S. Dollars, would decline. Except for the potential
impact of unpredictable and uncontrollable changes in Payment Currencies
relative to the U.S. Dollar, we expect the relationship between cost of goods
sold and net product sales to be consistent for the foreseeable future, provided
there are no significant changes in the nature or mix of product sales.
Our R&D expenses for the years ended December 31, 1999, 1998 and 1997 were
$112.9 million, $127.8 million and $112.2 million, respectively. The 12%
decrease in 1999 as compared to 1998 is primarily attributable to our reduced
research activities at our Boulder, Colorado facility. In August 1998, we
transferred our Boulder-based NeXstar Technology Products division to Proligo,
our equity investee. In addition, in October 1998, we reduced our R&D workforce
in Boulder by 47 employees and recorded an expense of $1.6 million related to
severance packages for the discharged employees. In 1999, we reduced our R&D
workforce in Boulder by 30 employees upon completing our merger with NeXstar.
Finally, we had a reduced level of involvement in the development of Tamiflu in
1999 as compared to 1998. These decreases were offset in part by greater levels
of expense in 1999 for the development programs for adefovir dipivoxil for
hepatitis B infection and tenofovir disoproxil fumarate (PMPA oral prodrug) for
HIV, as well as an adjustment of $2.9 million to fully reserve our supply of
adefovir dipivoxil for HIV. This adjustment was made as a result of our decision
to discontinue the development of this product candidate in the United States
after a negative recommendation from an FDA advisory panel and discussions with
the FDA following this recommendation. The $15.6 million increase in R&D
expenses between 1997 and 1998 was primarily attributable to costs associated
with Phase III clinical trials for adefovir dipivoxil for HIV, as well as the
expanded access program for patients with HIV infection. Increased R&D expenses
in 1998 as compared to 1997 also reflect costs associated with the development
of adefovir dipivoxil for hepatitis B infection. We expect our R&D expenses to
increase in 2000 relative to 1999, primarily reflecting increased expenses
related to the continued late-stage development of tenofovir disoproxil fumarate
for HIV and adefovir dipivoxil for hepatitis B.
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Selling, general and administrative ("SG&A") expenses were $78.3 million,
$78.2 million and $70.6 million for the years ended December 31, 1999, 1998 and
1997. During 1999, we recorded $2.3 million of compensation expense related to a
NeXstar stock option plan that requires the use of variable plan accounting.
This charge was substantially offset by cost savings related to the elimination
of duplicate selling, general and administrative positions and functions within
the combined Gilead and NeXstar organization. The $7.6 million increase in SG&A
expenses in 1998 as compared to 1997 primarily represents costs incurred to:
strengthen the sales and marketing organization in Europe to support increased
levels of AmBisome sales; expand sales, marketing and operational capacity in
anticipation of the then-planned commercial launch of adefovir dipivoxil for
HIV; accrue an executive termination agreement and severance packages for a
NeXstar workforce reduction; and, to support a greater level of R&D activities.
We expect our SG&A expenses to increase during 2000 to support both ongoing
marketing and sales activities and the planned increase in research and
development activities.
Expenses attributable to our merger with NeXstar were $18.3 million for the
year ended December 31, 1999. These expenses primarily consist of transaction
costs, including professional fees, filing fees and printing costs, employee
severance costs and the write-down of certain NeXstar property and equipment
that are not expected to be used in future operations. Total employee severance
costs incurred of $5.3 million relate to the termination of 70 employees, the
majority of which were from our Boulder, Colorado facility. As of December 31,
1999, all employees for which severance costs were accrued had been terminated.
The balance of this accrued liability was $2.5 million at December 31, 1999 and
we anticipate that substantially all remaining accrued severance costs will be
paid to former employees by September 2000. We do not expect to achieve any
significant ongoing future cost savings as a result of these staff reductions,
which were primarily undertaken to functionally realign our organization during
the merger integration process. As we continue to grow, increased spending in
other areas will offset the effect of these cost savings. We do not expect to
recognize any expenses related to the NeXstar merger in future periods.
LITIGATION SETTLEMENT AND RELATED EXPENSES
We reported litigation settlement and related expenses of $0.8 million, $1.3
million and $16.0 million in 1999, 1998 and 1997, respectively. The amount for
1997 was primarily related to the August 1997 settlement with The Liposome
Company ("TLC") in which both parties agreed to dismiss all legal proceedings in
connection with two United States patents and their international counterparts
held by TLC (the "Patent Litigation"). Under the terms of the settlement
agreement, we made an initial payment to TLC of $1.8 million and are required to
make additional payments beginning in 1998 based on AmBisome sales over the next
several years. Because the payments are subject to certain minimum and maximum
amounts, $10.0 million of the accounting charge recorded in 1997 represents the
net present value of all future minimum payments we are required to make. We do
not expect the difference between the future minimum and maximum payments to TLC
to be material. During 1997, we recorded additional expenses related to the
Patent Litigation of $4.2 million.
GAIN ON SALE OF SUBSIDIARY
In 1998, we recorded a $22.1 million gain on the sale of our 51% interest
(the "Interest") in our newly established subsidiary, Proligo, a Delaware
limited liability company, to SKW. Proligo was formed in July 1998 and initially
consisted of the assets of our NeXstar Technology Products division, a
manufacturer of oligonucleotides and specialty chemicals for the pharmaceuticals
industry. As payment for the interest, we received $15.0 million and a 49%
interest in PerSeptive Biosystems GmbH, a company in Hamburg, Germany (the
"Hamburg Company"), which specializes in the manufacture of nucleoside
phosphoramidite monomers. In addition, SKW agreed to pay to us $3.0 million in
guaranteed payments and up to $20.5 million in performance-based milestones
through 2003. As part of the transaction, we contributed $4.9 million and our
49% interest in the Hamburg Company to
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Proligo. The 49% interest in the Hamburg Company had a fair value of
approximately $5.5 million. SKW contributed $5.1 million and the remaining 51%
of the Hamburg Company to Proligo.
INTEREST INCOME AND INTEREST EXPENSE
We had interest income of $16.4 million, $21.8 million and $20.7 million in
1999, 1998 and 1997, respectively. The decrease in interest income in 1999 as
compared to 1998 is due to both a declining balance of invested cash as well as
slightly lower investment returns in 1999. While the balance of invested cash
also decreased from 1997 to 1998, this decrease was offset by greater investment
returns in 1998. We expect interest income to continue to decline substantially
in 2000, primarily due to decreasing balances of invested cash.
We incurred interest expense of $6.5 million, $7.2 million and $5.1 million
in 1999, 1998 and 1997, respectively. The decrease in interest expense in 1999
as compared to 1998 is primarily due to the repayment of debt obligations.
Interest expense is greater in 1998 than in 1997 primarily due to the fact that
we incurred a full-year's interest expense on our convertible subordinated
debentures in 1998. The debentures were issued in mid-1997. We expect interest
expense to further decline in 2000 as we continue to repay our debt obligations.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
During 1999, we recorded $4.7 million as our equity in the loss of Proligo,
representing our 49% share of Proligo's net loss for Proligo's fiscal year ended
November 30, 1999. In 1998, we recorded $1.1 million as our equity in the loss
of Proligo for the period from August 15, 1998 (Proligo's inception date)
through November 30, 1998. The Proligo operating loss for December 1999 is
approximately $0.9 million of which we will recognize our 49% share
(approximately $0.4 million) in 2000. We expect to continue to recognize losses
on our equity investment in Proligo during 2000.
Our investment in Proligo is reported in other noncurrent assets on our
consolidated balance sheet. The carrying amount of this investment is $7.6
million at December 31, 1999. In October 1999 and January 2000, we funded
Proligo with a total of $4.9 million to maintain our percentage ownership
interest in Proligo. We presently have no further commitments to provide
additional funding to Proligo.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $294.4 million at
December 31, 1999, compared to $348.7 million at December 31, 1998. This
decrease of $54.3 million is primarily due to the use of cash both to fund
operating activities and to purchase capital items, offset by proceeds from
issuances of stock under employee stock plans.
Significant changes in working capital during 1999 include a $4.4 million
increase in the balance of inventories. During 1999, we began to build our
inventory of adefovir dipivoxil in anticipation of the planned launch of
adefovir dipivoxil for HIV at the end of the year. We discontinued the
development of adefovir dipivoxil for HIV in the United States after a negative
recommendation from an FDA advisory panel and discussions with the FDA following
the recommendation. While we are not carrying a finished goods component of
these inventories, $2.2 million of the $3.8 million increase in raw materials is
due to an increased supply of adefovir dipivoxil. This drug substance does not
have a limited shelf life and we intend to use it in our development of adefovir
dipivoxil for hepatitis B. Our inventories of AmBisome have also increased,
consistent with increasing sales. Prepaid expenses and other current assets also
increased by $2.5 million. This increase is primarily due to the addition of a
$1.0 million receivable from Somalogic. Other noncurrent assets decreased from
$19.9 million at December 31, 1998 to $13.4 million at December 31, 1999. In
part, this $6.5 million decrease consists of a $2.7 million reduction in the
carrying value of our investment in Proligo, a $1.8 million receipt of our
receivable from SKW and a $1.0 million repayment of our receivable from Isis.
Accrued clinical
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and preclinical expenses decreased from $12.8 million at December 31, 1998 to
$5.5 million at December 31, 1999. This decrease is largely due to timing issues
related to the completion of certain clinical trials and the commencement or
advancement of others. At December 31, 1998, other accrued liabilities includes
a $5.0 million accrued liability to Roche, which represents Roche's 1998 R&D
funding in excess of our related R&D spending. During 1999, we achieved three
milestones under our R&D agreement with Roche and recognized $12.8 million of
contract revenue as a result. Roche funded a portion of these milestone
payments, as well as the $0.7 million of R&D reimbursement revenue for the first
quarter of 1999, by permitting us to offset our liability to Roche. Accordingly,
the $5.0 million reported as an accrued liability at December 31, 1998 is
reported as contract revenue during 1999.
Our accounts receivable balance at December 31, 1999 was $45.6 million as
compared to $43.1 million at December 31, 1998. The growth in receivables was
primarily due to increased sales of AmBisome and proportionately increased sales
of our products in countries in which payments tend to be relatively slow. In
certain cases, these slow payment practices reflect the pace at which
governmental entities reimburse our customers. Sales to customers in countries
that tend to be relatively slow paying have in the past increased, and in the
future may further increase, the average length of time that accounts receivable
are outstanding. This, in turn, may increase the financial risk of certain of
our customers. In certain countries in which payments have been slow,
particularly Greece, Spain and Italy, our accounts receivable are significant.
At December 31, 1999, our past due accounts receivable for Greece, Spain and
Italy totaled approximately $15.8 million, of which approximately $5.0 million
was more than 120 days past due. To date, we have experienced only modest losses
with respect to the collection of our accounts receivable and believe that the
past due accounts receivable for Greece, Spain and Italy are collectible. We
continually seek to improve our collection process to ensure that we collect as
much as possible from our product sales and that such collections are timely.
We maintain a $10.0 million unsecured line of credit (the "Credit
Agreement") that bears interest at a floating rate with a major financial
institution. Under the terms of the Credit Agreement, we are required to
maintain certain financial ratios and there are limitations on our ability to
incur additional debt or to engage in certain significant transactions. The
Credit Agreement, which includes a foreign exchange facility, expires on
April 16, 2001. As of December 31, 1999, we had no outstanding borrowings under
the Credit Agreement.
We believe that our existing capital resources, supplemented by net product
revenues and contract and royalty revenues, will be adequate to satisfy our
capital needs for the foreseeable future. As of December 31, 1999, we were
entitled to additional cash payments of up to $21.2 million from Roche upon
achieving specific additional developmental and regulatory milestones, although
there can be no assurance that any of the milestones will be met. Our future
capital requirements will depend on many factors, including our continuing
integration with NeXstar, the progress of our research and development efforts,
the scope and results of preclinical studies and clinical trials, the cost,
timing and outcomes of regulatory reviews, the rate of technological advances,
determinations as to the commercial potential of our products under development,
the commercial performance of AmBisome and any of our products in development
that receive marketing approval, administrative expenses, the status of
competitive products, the establishment of manufacturing capacity or third-party
manufacturing arrangements, the expansion of sales and marketing capabilities,
possible geographic expansion and the establishment of additional collaborative
relationships with other companies.
We may in the future require additional funding, which could be in the form
of proceeds from equity or debt financings or additional collaborative
agreements with corporate partners. If such funding is required, there can be no
assurance that it will be available on favorable terms, if at all.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
establishes accounting and reporting standards for derivative instruments,
including forward foreign exchange contracts, and hedging activities. In June
1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000
and, therefore, we will adopt this accounting standard effective January 1,
2001. We have not yet determined the impact of SFAS No. 133 on our financial
position or results of operations.
We have recognized nonrefundable technology access fees received in
connection with collaboration agreements as revenue when received, when the
technology has been transferred and when all contractual obligations relating to
the fees are fulfilled. In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "REVENUE RECOGNITION
IN FINANCIAL STATEMENTS." Among other things, SAB No. 101 describes the SEC
Staff's position on the recognition of certain nonrefundable upfront fees
received in connection with research collaborations. We are evaluating the
applicability of SAB No. 101 to our existing collaborative agreements. Should we
conclude that the approach described in SAB No. 101 is more appropriate, we will
change our method of accounting effective January 1, 2000 to recognize such fees
over the term of the related agreement. Any required adjustment would be
recognized as a cumulative effect of a change in accounting principle.
IMPACT OF YEAR 2000
In prior years, we implemented a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. The goal of this project was to ensure that all computer software and
hardware that we use or rely upon is retired, replaced or made Year 2000
compliant before December 31, 1999. To date, we have not experienced any Year
2000-related operational issues and are not aware of any material potential
problems that may arise as a result of Year 2000 issues either from our own
internal systems or from the products and services of third parties upon which
we rely.
The total cost of our Year 2000 compliance efforts was not material to our
financial condition or results of operations. External costs of such compliance
efforts were approximately $2.1 million. Of this amount, $1.4 million was
charged to expense and the remainder has been capitalized. Any remaining
expenses related to remediation efforts will be charged to expense as incurred.
We will continue to monitor our business-critical computer applications and
those of our suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 problems that may arise are promptly addressed.
MARKET RISK DISCLOSURES
FOREIGN CURRENCY EXCHANGE RISK
Our operations include manufacturing and sales activities in the United
States as well as sales activities in Europe and Australia. As a result, our
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which we distribute our products. Our operating results are exposed
to changes in exchange rates between the U.S. Dollar and various foreign
currencies, the most significant of which are the Euro, the British Pound and
the Australian Dollar. When the U.S. Dollar strengthens against these
currencies, the relative value of sales made in the respective foreign currency
decreases. Conversely, when the U.S. Dollar weakens, the relative amounts of
such sales increase. Overall, we are a net receiver of foreign currencies and,
therefore, benefit from a weaker U.S. Dollar and are adversely
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affected by a stronger U.S. Dollar relative to those foreign currencies in which
we transact significant amounts of business.
To mitigate the impact of changes in currency exchange rates on our foreign
currency sales transactions, we enter into foreign exchange forward contracts to
hedge our foreign currency accounts receivables. These hedging activities cannot
eliminate foreign-exchange risk.
The following table summarizes the notional amounts, average currency
exchange rates and fair values of our open foreign exchange forward contracts at
December 31, 1999. None of the contracts have maturities that exceed one year.
Average rates are stated in terms of the amount of foreign currency per U.S.
Dollar. Fair values represent estimated settlement amounts at December 31, 1999
(contract amounts and fair values in thousands):
<TABLE>
<CAPTION>
FAIR VALUE
CURRENCY CONTRACT AMOUNT AVERAGE RATE DECEMBER 31, 1999
- -------- --------------- ------------ ------------------
<S> <C> <C> <C>
Australian Dollar................................. $ 2,147 1.5547 $ (54)
British Pound..................................... 7,657 0.6238 (54)
Danish Krone...................................... 34 7.3527 --
Euro.............................................. 31,448 0.9755 20
Norwegian Krone................................... 105 8.0322 --
Swedish Krona..................................... 587 8.5494 (2)
Swiss Franc....................................... 261 1.5840 1
</TABLE>
INTEREST RATE RISK
Our portfolio of available-for-sale investment securities and our fixed-rate
liabilities create an exposure to interest rate risk. With respect to the
investment portfolio, we adhere to an investment policy that requires us to
limit amounts invested in securities based on maturity, industry group,
investment type and issuer, except for securities issued by the U.S. government.
The goals of our investment policy, in order of priority, are as follows:
1. Safety and preservation of principal and diversification of risk;
2. Liquidity of investments sufficient to meet cash flow requirements; and
3. Competitive after-tax rate of return.
The following table summarizes the expected maturities and average interest
rates of our interest-bearing assets and fixed-rate liabilities at December 31,
1999 (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, FAIR VALUE
---------------------------------------------------- DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
-------- -------- -------- -------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale
Securities......... $177,018 $65,346 $18,500 $ -- $ -- $ -- $260,864 $258,341
Average interest
rate............... 6.08% 5.73% 6.32%
LIABILITIES
Minimum litigation
settlement,
including current
portion............ 1,083 1,178 1,281 1,394 1,516 2,084 8,536 8,536
Discount rate........ 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Long-term debt,
including current
portion............ 1,003 807 652 301 -- -- 2,763 2,763
Average interest
rate............... 11.54% 11.71% 11.64% 11.50%
Convertible
subordinated
debentures......... -- -- -- -- 79,533 -- 79,533 101,802
Interest rate........ 6.25% 6.25% 6.25% 6.25% 6.25%
</TABLE>
45
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth beginning at
page 53 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning our directors and executive
officers is incorporated by reference to pages 3 through 6 of our Definitive
Proxy Statement filed with the SEC pursuant to Regulation 14A in connection with
the 2000 Annual Meeting (the "Proxy Statement") under the headings "Nominees"
and "Executive Officers."
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to page
14 of the Proxy Statement under the heading "Compliance with Section 16(a) of
the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to pages
15 through 21 of the Proxy Statement under the headings "Executive Compensation"
and "Compensation Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to pages
13 through 14 of the Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
page 22 of the Proxy Statement under the heading "Certain Transactions" and by
reference to pages 15 through 21 of the Proxy Statement under the heading
"Executive Compensation."
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Schedule II is included on page 85 of this report. All other schedules
are omitted because they are not required or the required information is
included in the financial statements or notes thereto.
(2) Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -------- -----------------------
<C> <S> <C>
(1) 3.1 Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant.
(2) 3.2 Amended and Restated Certificate of Incorporation of the
Registrant
(3) 3.3 Bylaws of the Registrant, as amended and restated March 30,
1999
4.1 Reference is made to Exhibits 3.1, 3.2, and 3.3.
(4) 4.2 Rights Agreement, dated as of November 21, 1994, between
Registrant and First Interstate Bank, with exhibits.
(4) 4.3 Form of letter sent to Gilead Sciences, Inc. stockholders,
dated December 14, 1994.
(1) 4.4 First Supplemental Indenture dated July 29, 1999 among IBJ
Whitehall Bank & Trust Company, NeXstar Pharmaceuticals,
Inc. and the Registrant to the Indenture dated July 31, 1997
between IBJ Whitehall Bank & Trust Company and NeXstar
Pharmaceuticals, Inc.
(5) 4.5 Indenture dated July 31, 1997 between IBJ Whitehall Bank &
Trust Company and NeXstar Pharmaceuticals, Inc. for 6 1/4%
Convertible Subordinated Debentures.
(6) 4.6 Amended and Restated Rights Agreement dated as of
October 21, 1999 between Gilead Sciences, Inc. and
ChaseMellon Shareholder Services, LLC.
(3) 10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and executive officers.
(7) 10.3 Form of Employee Proprietary Information and Invention
Agreement entered into between Registrant and certain of its
officers and key employees.
(2) 10.4 Registrant's 1987 Incentive Stock Option Plan and related
agreements.
(2) 10.5 Registrant's 1987 Supplemental Stock Option Plan and related
agreements.
10.7 Registrant's Employee Stock Purchase Plan, as amended
March 30, 1999.
10.8 Registrant's 1991 Stock Option Plan, as amended March 30,
1999.
(2) 10.15 Form of Non-Qualified Stock Option issued to certain
executive officers and directors in 1991.
(2) 10.16 Relocation Loan Agreement, dated as of November 1, 1990
among Registrant, John C. Martin and Rosemary Martin.
(2) 10.17 Vintage Park Research and Development Net Lease by and
between Registrant and Vintage Park Associates dated
March 27, 1992 for premises located at 344B, 346 and 353
Lakeside Drive, Foster City, California with related
addendum, exhibits and amendments.
(2) 10.21 Letter Agreement, dated as of September 23, 1991 between
Registrant and IOCB/ REGA, with exhibits with certain
confidential information deleted.
(8) 10.23 Vintage Park Research and Development Net Lease by and
between Registrant and Vintage Park Associates dated
September 16, 1993 for premises located at 335 Lakeside
Drive, Foster City, California with related exhibits.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -------- -----------------------
<C> <S> <C>
(9) 10.26 Amendment Agreement, dated October 25, 1993 between
Registrant and IOCB/ REGA, and related license agreements
and exhibits with certain confidential information deleted.
(10) 10.29 License and Supply agreement between Registrant and American
Cyanamid Company dated August 1, 1994 with certain
confidential information deleted.
(4) 10.30 Loan Agreement, dated as of October 1, 1994 among Registrant
and Mark L. Perry and Melanie P. Pena.
(30) 10.33 Registrant's 1995 Non-Employee Directors' Stock Option Plan,
as amended January 26, 1999, and related form of stock
option grant.
(11) 10.34 Collaborative Research Agreement, dated as of March 25,
1996, by and between Registrant and Glaxo Wellcome Inc. with
certain confidential information deleted.
(12) 10.36 Vintage Park Research and Development Lease by and between
Registrant and WCB Sixteen Limited Partnership dated
June 24, 1996 for premises located at 333 Lakeside Drive,
Foster City, California.
(12) 10.37 Amendment No. 1 to Vintage Park Research and Development
Lease by and between Registrant and WCB Seventeen Limited
Partnership dated June 24, 1996 for premises located at 335
Lakeside Drive, Foster City, California.
(12) 10.38 Amendment No. 2 to Vintage Park Research and Development
Lease by and between Registrant and WCB Seventeen Limited
Partnership dated June 24, 1996 for premises located at
344B, 346 and 353 Lakeside Drive, Foster City, California.
(13) 10.40 License and Supply Agreement between Registrant and
Pharmacia & Upjohn S.A. dated August 7, 1996 with certain
confidential information deleted.
(13) 10.41 Series B Preferred Stock Purchase Agreement between
Registrant and Pharmacia & Upjohn S.A. dated August 7, 1996.
(13) 10.42 Development and License Agreement between Registrant and F.
Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc dated
September 27, 1996 with certain confidential information
deleted.
(14) 10.45 Amended and Restated Co-promotion Agreement between
Registrant and Roche Laboratories, Inc. dated September 12,
1997 with certain confidential information deleted.
(15) 10.46 Amendment No. 1 to Collaborative Research Agreement, dated
as of December 22, 1997, between Registrant and Glaxo
Wellcome Inc.
(31) 10.47 Patent Rights Purchase Agreement between Registrant and Isis
Pharmaceuticals, Inc. dated December 18, 1998 with certain
confidential information deleted.
(31) 10.48 Amendment No. 3 to Vintage Park Research and Development
Lease by and between Registrant and Spieker Properties, L.P.
dated August 14, 1998 for premises located at 355 Lakeside
Drive, Foster City, California.
(16) 10.49 Agreement and Plan of Merger dated February 28, 1999 by and
among Registrant, Gazelle Acquisition Sub, Inc. and NeXstar
Pharmaceuticals, Inc.
(17) 10.52 License Agreement between University Research Corporation
and NeXstar Pharmaceuticals, Inc., effective as of July 17,
1991, as amended on October 26, 1992.
(18) 10.53 Amendment No. 2, effective April 5, 1996, and Amendment No.
3, dated September 5, 1996, to the License Agreement between
University Research Corporation and NeXstar Pharmaceuticals,
Inc., effective as of July 17, 1991, as amended on
October 26, 1992.
(17) 10.55 Collaborative Research Agreement between NeXstar
Pharmaceuticals, Inc. and Schering A.G., dated as of
November 16, 1993.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -------- -----------------------
<C> <S> <C>
(18) 10.56 Letter Agreement between NeXstar Pharmaceuticals, Inc. and
Schering A.G., effective February 1, 1997, amending the
Collaborative Research Agreement between NeXstar
Pharmaceuticals, Inc. and Schering A.G., dated as of
November 16, 1993.
(17) 10.57 License Agreement between NeXstar Pharmaceuticals, Inc. and
Schering A.G., dated as of November 16, 1993.
(5) 10.60 Master Lease Agreement, dated as of September 9, 1996,
between General Electric Capital Corporation and NeXstar
Pharmaceuticals, Inc.
(5) 10.61 Master Security Agreement, dated as of March 27, 1997,
between General Electric Capital Corporation and NeXstar
Pharmaceuticals, Inc.
(5) 10.62 NeXagen, Inc. 1993 Incentive Stock Plan, adopted
February 8, 1993, as amended.
(20) 10.63 NeXstar Pharmaceuticals, Inc.'s 1995 Director Option Plan,
adopted July 25, 1995.
(21) 10.64 Vestar, Inc. 1988 Stock Option Plan.
(21) 10.65 Lease, dated March 26, 1987, between Vestar, Inc. and
Majestic Realty Co. and Patrician Associates, Inc. and
Amendment No. 1 thereto and Amendment No. 2 thereto, dated
as of June 8, 1992.
(19) 10.66 Third Amendment, dated January 11, 1996, between Majestic
Realty Co. and Patrician Associates, Inc. and the
Registrant, to Lease, dated March 26, 1987, between Vestar,
Inc. and Majestic Realty Co. and Patrician Associates, Inc.
(22) 10.67 Assignment and Royalty Agreement, dated December 21, 1990,
effective as of June 2, 1989, between Vestar, Inc. and City
of Hope National Medical Center.
(19) 10.68 License Agreement, effective as of August 12, 1986, between
Vestar, Inc. and The Regents of the University of
California.
(21) 10.69 Agreement by and between Fujisawa USA, Inc. and Vestar,
Inc., dated August 9, 1991, and Amendment No. 1 thereto,
dated as of May 17, 1994.
(20) 10.70 Amendment No. 2 to agreement between Fujisawa USA, Inc. and
Vestar, Inc., dated as of April 3, 1995, between Fujisawa
USA, Inc. and Vestar, Inc. with certain confidential
information deleted.
(19) 10.71 Amendment No. 3 to Agreement between Fujisawa USA, Inc. and
the Registrant, dated March 4, 1996, to the Agreement by and
between Fujisawa USA, Inc. and Vestar, Inc., dated
August 9, 1991.
(21) 10.72 Lease, dated April 13, 1992, between Vestar, Inc. and
Majestic Realty Co. and Patrician Associates, Inc.
(19) 10.73 First Amendment to Lease, dated April 10, 1993, between
Majestic Realty Co. and Patrician Associates, Inc. and
Vestar, Inc. amending Lease, dated April 13, 1992, between
Majestic Realty Co. and Patrician Associates, Inc. and
Vestar, Inc.
(21) 10.74 Master Lease Agreement, dated June 29, 1994, between Vestar,
Inc. and Comdisco, Inc.
(23) 10.75 Amendment No. 1, dated December 5, 1997, between NeXstar
Pharmaceuticals, Inc. and Comdisco, Inc. to the Master Lease
Agreement, dated June 29, 1994, between Vestar, Inc. and
Comdisco, Inc.
(19) 10.76 Royalty Agreement, dated October 30, 1995, between NeXstar
Pharmaceuticals, Inc. and Amplimed Corporation.
(24) 10.77 Pharmaceutical Pricing Agreement between the Secretary of
Veterans Affairs and NeXstar Pharmaceuticals, Inc., dated
April 30, 1996.
(24) 10.78 Master Agreement between Secretary of Veterans Affairs and
NeXstar Pharmaceuticals, Inc., dated April 30, 1996.
(24) 10.79 Pharmaceutical Pricing Agreement between the Secretary of
Health and Human Services and NeXstar Pharmaceuticals, Inc.,
dated April 30, 1996.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -------- -----------------------
<C> <S> <C>
(24) 10.80 Rebate Agreement between the Secretary of Health and Human
Services and the Registrant, dated April 30, 1996.
(25) 10.81 Industrial Real Estate Lease, dated July 1, 1996, by and
between Wilderness Place, Ltd. and NeXstar Pharmaceuticals,
Inc.
(26) 10.82 Sublease Agreement, dated July 31, 1996, between Sybase,
Inc. and NeXstar Pharmaceuticals, Inc.
(18) 10.83 License and Distribution Agreement, dated September 26,
1997, by and between Sumitomo Pharmaceuticals Co., Ltd. and
NeXstar Pharmaceuticals, Inc. with certain confidential
information deleted.
(27) 10.84 Settlement Agreement, dated August 11, 1997, by and among
NeXstar Pharmaceuticals, Inc., Fujisawa U.S.A., Inc. and The
Liposome Company, Inc. with certain confidential information
deleted.
(27) 10.85 Credit Agreement, dated September 1, 1997, by and between
NeXstar Pharmaceuticals, Inc. and Wells Fargo Bank, National
Association.
(28) 10.86 First Amendment to Credit Agreement, dated May 1, 1998, by
and between NeXstar Pharmaceuticals, Inc. and Wells Fargo
Bank, National Association amending Credit Agreement, dated
September 1, 1997, by and between NeXstar Pharmaceuticals,
Inc. and Wells Fargo Bank, National Association.
(28) 10.87 Letter agreement, dated September 1, 1998, between NeXstar
Pharmaceuticals, Inc. and Wells Fargo Bank, National
Association amending Credit Agreement, dated September 1,
1997, as amended, by and between NeXstar Pharmaceuticals,
Inc. and Wells Fargo Bank, National Association.
(28) 10.88 Second Amendment to Credit Agreement, dated November 1,
1998, by and between NeXstar Pharmaceuticals, Inc. and Wells
Fargo Bank, National Association amending Credit Agreement,
dated September 1, 1997, as amended, by and between NeXstar
Pharmaceuticals, Inc. and Wells Fargo Bank, National
Association.
(28) 10.89 Amended and Restated Limited Liability Company Agreement of
Proligo L.L.C., dated August 15, 1998, by and among NeXstar
Pharmaceuticals International, Inc., SKW Americas, Inc. and
NeXstar Pharmaceuticals, Inc.
(29) 10.90 Amendment, dated April 30, 1998, between Sumitomo
Pharmaceuticals Co., Ltd. (Sumitomo) and NeXstar
Pharmaceuticals, Inc. to the License and Distribution
Agreement, dated September 26, 1996, between Sumitomo and
NeXstar Pharmaceuticals, Inc.
10.91 Lease agreement between THW Partners Limited Partnership and
Registrant dated January 25, 2000.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 86.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
August 6, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-8 (No.
33-46058) and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1998 and incorporated herein by reference.
50
<PAGE>
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to NeXstar Pharmaceutical, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference.
(6) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
October 22, 1999 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
33-55680) or amendments thereto and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994 and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the nine
month period ended December 31, 1995.
(12) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(16) Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
March 9, 1999 and incorporated herein by reference.
(17) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-72142), declared effective by the
Securities and Exchange Commission on January 28, 1994, and incorporated
herein by reference.
(18) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
fiscal year ended December 31, 1996, and incorporated herein by reference.
(19) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
fiscal year ended December 31, 1995, and incorporated herein by reference.
(20) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1995, and incorporated herein by
reference.
(21) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
fiscal year ended December 31, 1994, and incorporated herein by reference.
(22) Filed on March 22, 1991 as an exhibit to NeXstar Pharmaceuticals, Inc.'s
Registration Statement on Form S-2 (File No. 33-39549), and incorporated
herein by reference.
(23) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
51
<PAGE>
(24) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarterly period ended March 31, 1996, and incorporated herein by reference.
(25) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by reference.
(26) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1996, and incorporated herein by
reference.
(27) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarterly period ended September 30, 1997, and incorporated herein by
reference.
(28) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarter ended September 30, 1998, and incorporated herein by reference.
(29) Filed as an exhibit to NeXstar Pharmaceuticals, Inc.'s Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
(30) Filed as an Exhibit to Registrant's Form 10-K/A for the year ended
December 31, 1998, and incorporated herein by reference.
(31) Filed as an Exhibit to Registrant's Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
(B) REPORTS ON FORM 8-K
On March 9, 1999, the Registrant filed a Current Report on Form 8-K
regarding the proposed merger with NeXstar Pharmaceuticals, Inc. On August 6,
1999, the Registrant filed a Current Report on Form 8-K regarding its merger
with NeXstar. On August 8, 1999, the Registrant filed a Current Report on
Form 8-K relating to the Supplemental Indenture for its 6 1/4% Convertible
Subordinated Debentures. On September 15, 1999 the Registrant filed an
additional Current Report on Form 8-K regarding its merger with NeXstar, which
included audited supplemental consolidated balance sheets of Gilead as of
December 31, 1998 and 1997 and the related supplemental consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1998 together with the related supplemental
financial statement schedule of Gilead, representing Gilead's and NeXstar's
combined operations for these periods. On October 22, 1999, the Registrant filed
a Current Report on From 8-K relating to its Amended and Restated Rights
Agreement.
52
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997,
CONTENTS
<TABLE>
<S> <C>
Reports of Independent Auditors............................. 54
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................. 56
Consolidated Statements of Operations....................... 57
Consolidated Statement of Stockholders' Equity.............. 58
Consolidated Statements of Cash Flows....................... 59
Notes to Consolidated Financial Statements.................. 60
</TABLE>
53
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gilead Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Gilead
Sciences, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Exhibit Index. These financial
statements and schedule are the responsibility of the management of Gilead
Sciences, Inc. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Proligo L.L.C., a limited liability company, the investment in
which is reflected in the accompanying consolidated financial statements using
the equity method of accounting. The investment in Proligo L.L.C. represents
1.7% and 2.1% of consolidated total assets at December 31, 1999 and 1998,
respectively, and the Company's equity in the net loss of Proligo L.L.C. is
$4,656,000 and $1,101,000 in 1999 and 1998, respectively. The 1999 and 1998
financial statements of Proligo L.L.C. have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the 1999 and 1998
consolidated financial statements relates to data included for Proligo L.L.C.,
it is based solely on their report.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Gilead Sciences, Inc.
at December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
January 24, 2000
54
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and
Members of Proligo LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of members' equity and of cash flows
present fairly, in all material respects, the financial position of Proligo LLC
and its subsidiary at November 30, 1999 and 1998, and the results of their
operations and their cash flows for the year ended November 30, 1999 and the
period from August 15, 1998 through November 30, 1998, in conformity with
generally accepted accounting principles in the United States. 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 of these financial statements in accordance
with generally accepted auditing standards in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
January 7, 2000
55
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 47,011 $ 101,136
Marketable securities..................................... 247,383 247,607
Accounts receivable, net of allowance for doubtful
accounts of $2,333 in 1999 and $1,480 in 1998........... 45,599 43,090
Inventories............................................... 20,959 16,550
Prepaid expenses and other................................ 11,029 8,506
--------- ---------
Total current assets........................................ 371,981 416,889
Property, plant and equipment, net.......................... 51,398 51,019
Other noncurrent assets..................................... 13,429 19,856
--------- ---------
$ 436,808 $ 487,764
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,481 $ 7,662
Accrued clinical and preclinical expenses................. 5,467 12,841
Accrued compensation and employee benefits................ 9,901 9,387
Other accrued liabilities................................. 15,004 19,327
Deferred revenue.......................................... 4,833 3,275
Long-term obligations due within one year................. 3,191 4,842
--------- ---------
Total current liabilities................................... 47,877 57,334
Accrued litigation settlement expenses due after one year... 6,853 7,848
Long-term obligations due after one year.................... 5,253 8,883
Convertible subordinated debentures......................... 79,533 80,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001 per share, issuable in
series; 5,000,000 shares authorized; 1,133,786 shares of
Series B convertible preferred issued and outstanding at
December 31, 1998 (liquidation preference of $40,000)... -- 1
Common stock, par value $.001 per share; 100,000,000
shares authorized; 44,092,779 shares and 41,562,837
shares issued and outstanding at December 31, 1999 and
1998, respectively...................................... 44 42
Additional paid-in capital................................ 749,081 716,964
Accumulated other comprehensive loss...................... (2,527) (337)
Deferred compensation..................................... (74) (225)
Accumulated deficit....................................... (449,232) (382,746)
--------- ---------
Total stockholders' equity.................................. 297,292 333,699
--------- ---------
$ 436,808 $ 487,764
========= =========
</TABLE>
See accompanying notes
56
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales, net........................................ $139,890 $114,176 $100,887
Royalty revenue, net...................................... 10,431 7,305 1,560
Contract revenue.......................................... 18,658 29,638 29,811
-------- -------- --------
Total revenues.............................................. 168,979 151,119 132,258
Expenses:
Cost of goods sold........................................ 29,546 23,357 21,646
Research and development.................................. 112,888 127,773 112,177
Selling, general and administrative....................... 78,347 78,234 70,626
Merger related expenses................................... 18,303 -- --
Litigation settlement and related expenses................ 754 1,267 16,031
-------- -------- --------
Total costs and expenses.................................... 239,838 230,631 220,480
-------- -------- --------
Loss from operations........................................ (70,859) (79,512) (88,222)
Gain on sale of a majority interest in a Subsidiary......... -- 22,132 --
Interest income............................................. 16,435 21,765 20,706
Interest expense............................................ (6,518) (7,183) (5,055)
-------- -------- --------
Loss before provision for income taxes and equity in loss of
unconsolidated affiliate.................................. (60,942) (42,798) (72,571)
Provision for income taxes.................................. 888 859 322
Equity in loss of unconsolidated affiliate.................. (4,656) (1,101) --
-------- -------- --------
Net loss.................................................... $(66,486) $(44,758) $(72,893)
======== ======== ========
Basic and diluted net loss per common share................. $ (1.55) $ (1.09) $ (1.85)
======== ======== ========
Common shares used to calculate basic and diluted net loss
per common share.......................................... 42,826 41,015 39,432
======== ======== ========
</TABLE>
See accompanying notes
57
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
PREFERRED --------------------- PAID-IN INCOME DEFERRED ACCUMULATED
STOCK SHARES AMOUNT CAPITAL (LOSS) COMPENSATION DEFICIT
--------- ---------- -------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... $ -- 38,757,298 $39 $640,762 $ (141) $(916) $(265,095)
Net loss......................... -- -- -- -- -- -- (72,893)
Unrealized gain on
available-for-sale short-term
investments, net............... -- -- -- -- 255 -- --
Foreign currency translation
adjustment..................... -- -- -- -- (164) -- --
Comprehensive loss............. -- -- -- -- -- -- --
Issuance of warrant to related
party.......................... -- -- -- 353 -- -- --
Stock repurchases................ -- (155) -- -- -- -- --
Employee stock purchase plan..... -- 123,909 -- 2,799 -- -- --
Option exercises................. -- 1,251,556 1 12,176 -- -- --
Warrant exercises................ -- 292,609 -- 27 -- -- --
Issuance of 1,133,786 shares of
preferred Stock................ 1 -- -- 39,999 -- -- --
Compensation expense related to
stock option transactions...... -- -- -- 44 -- (44) --
Amortization of deferred
compensation................... -- -- -- -- -- 523 --
---- ---------- --- -------- ------- ----- ---------
Balance at December 31, 1997....... 1 40,425,217 40 696,160 (50) (437) (337,988)
Net loss......................... -- -- -- -- -- -- (44,758)
Unrealized loss on
available-for-sale short-term
investments, net............... -- -- -- -- (301) -- --
Foreign currency translation
adjustment..................... -- -- -- -- 14 -- --
Comprehensive loss............. -- -- -- -- -- -- --
Private issuance of common
stock.......................... -- 364,257 1 9,982 -- -- --
Employee stock purchase plan..... -- 133,404 -- 2,879 -- -- --
Option exercises................. -- 639,959 1 7,509 -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- 212 --
Amounts recognized under
compensatory stock
transactions................... -- -- -- 434 -- -- --
---- ---------- --- -------- ------- ----- ---------
Balance at December 31, 1998....... 1 41,562,837 42 716,964 (337) (225) (382,746)
Net loss......................... -- -- -- -- -- -- (66,486)
Unrealized loss on
available-for-sale short-term
investments, net............... -- -- -- -- (1,602) -- --
Foreign currency translation
adjustment..................... -- -- -- -- (588) -- --
Comprehensive loss............. -- -- -- -- -- -- --
Employee stock purchase plan..... -- 100,166 -- 3,075 -- -- --
Option exercises, net............ -- 1,253,223 1 26,139 -- -- --
Warrant exercises, net........... -- 32,302 -- 80 -- -- --
Conversion of 1,133,786 shares of
preferred stock................ (1) 1,133,786 1 -- -- -- --
Conversion of convertible
subordinated debentures........ -- 10,465 -- 467 -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- 151 --
Amounts recognized under
compensatory stock
transactions................... -- -- -- 2,356 -- -- --
---- ---------- --- -------- ------- ----- ---------
Balance at December 31, 1999....... $ -- 44,092,779 $44 $749,081 $(2,527) $ (74) $(449,232)
==== ========== === ======== ======= ===== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996....... $374,649
Net loss......................... (72,893)
Unrealized gain on
available-for-sale short-term
investments, net............... 255
Foreign currency translation
adjustment..................... (164)
--------
Comprehensive loss............. (72,802)
Issuance of warrant to related
party.......................... 353
Stock repurchases................ --
Employee stock purchase plan..... 2,799
Option exercises................. 12,177
Warrant exercises................ 27
Issuance of 1,133,786 shares of
preferred Stock................ 40,000
Compensation expense related to
stock option transactions...... --
Amortization of deferred
compensation................... 523
--------
Balance at December 31, 1997....... 357,726
Net loss......................... (44,758)
Unrealized loss on
available-for-sale short-term
investments, net............... (301)
Foreign currency translation
adjustment..................... 14
--------
Comprehensive loss............. (45,045)
Private issuance of common
stock.......................... 9,983
Employee stock purchase plan..... 2,879
Option exercises................. 7,510
Amortization of deferred
compensation................... 212
Amounts recognized under
compensatory stock
transactions................... 434
--------
Balance at December 31, 1998....... 333,699
Net loss......................... (66,486)
Unrealized loss on
available-for-sale short-term
investments, net............... (1,602)
Foreign currency translation
adjustment..................... (588)
--------
Comprehensive loss............. (68,676)
Employee stock purchase plan..... 3,075
Option exercises, net............ 26,140
Warrant exercises, net........... 80
Conversion of 1,133,786 shares of
preferred stock................ --
Conversion of convertible
subordinated debentures........ 467
Amortization of deferred
compensation................... 151
Amounts recognized under
compensatory stock
transactions................... 2,356
--------
Balance at December 31, 1999....... $297,292
========
</TABLE>
See accompanying notes
58
<PAGE>
GILEAD SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (66,486) $ (44,758) $ (72,893)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 12,623 13,231 15,226
Compensation expense from stock option transactions..... 2,356 434 --
Gain on sale of a majority interest in a subsidiary..... -- (22,483) --
Equity in loss of unconsolidated affiliate.............. 4,656 1,101 --
Litigation settlement charges........................... 754 827 10,017
Net additions to (reductions of) allowance for doubtful
accounts.............................................. 888 (407) (114)
Reduction in allowance for note receivable.............. -- (550) --
Net unrealized loss (gain) on foreign currency
transactions.......................................... 2,846 (1,628) 100
Changes in operating assets and liabilities:
Accounts receivable................................... (7,041) (6,523) (6,118)
Inventories........................................... (4,409) 860 (1,004)
Prepaid expenses and other assets..................... (349) 5,298 (13,691)
Accounts payable...................................... 1,443 (502) (4,847)
Accrued liabilities................................... (11,389) 10,159 9,738
Deferred revenue...................................... 1,558 (6,383) 9,131
--------- --------- ---------
Net cash used in operating activities....................... (62,550) (51,324) (54,455)
INVESTING ACTIVITIES:
Purchases of marketable securities........................ (186,997) (488,407) (430,498)
Sales of marketable securities............................ 101,943 390,426 198,515
Maturities of marketable securities....................... 83,677 166,129 100,944
Capital expenditures...................................... (12,475) (11,010) (13,832)
Proceeds from sale of a majority interest in a subsidiary,
net of closing costs.................................... -- 14,652
Proceeds from sale of investment in life science
enterprise.............................................. -- -- 2,683
Investment in unconsolidated affiliate.................... (2,450) (4,900) --
Payments received on note receivable...................... -- 550 706
--------- --------- ---------
Net cash provided by (used in) investing activities......... (16,302) 67,440 (141,482)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................. -- -- 40,000
Proceeds from issuances of common stock................... 29,295 20,372 15,003
Payments on short-term borrowings, net.................... -- (5,102) (7,438)
Proceeds from issuance of long-term debt.................. 74 4,478 20,334
Repayments of long-term debt.............................. (5,394) (6,606) (32,650)
Proceeds from issuance of convertible subordinated
debentures, net of offering costs....................... -- -- 77,200
--------- --------- ---------
Net cash provided by financing activities................... 23,975 13,142 112,449
--------- --------- ---------
Effect of exchange rate changes on cash..................... 752 573 1,201
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (54,125) 29,831 (82,287)
Cash and cash equivalents at beginning of year.............. 101,136 71,305 153,592
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 47,011 $ 101,136 $ 71,305
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 6,234 $ 6,793 $ 2,815
Income taxes paid......................................... 527 790 253
DISCLOSURES OF GAIN ON SALE OF A MAJORITY INTEREST IN A
SUBSIDIARY:
Cash receipts, net of closing costs....................... $ -- $ 14,652 $ --
Receipt of 49% interest in manufacturing facility......... -- 5,500 --
Net present value of guaranteed payments.................. -- 2,668 --
Other..................................................... -- 63 --
Net book value of 51% interest sold....................... -- (751) --
--------- --------- ---------
$ -- $ 22,132 $ --
SCHEDULE OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
Purchase of equipment and leasehold improvements through
accounts payable........................................ $ 124 $ 757 $ 889
Common stock issued upon conversion of debentures......... 467 -- --
</TABLE>
See accompanying notes
59
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Gilead Sciences, Inc. (the "Company" or "Gilead") was incorporated in
Delaware on June 22, 1987, and is an independent biopharmaceutical company that
seeks to provide accelerated solutions for patients and the people who care for
them. The Company discovers, develops, manufactures and commercializes
proprietary therapeutics for challenging infectious diseases (viral, fungal and
bacterial infections) and cancer. Gilead also has expertise in liposomal drug
delivery technology. Currently, the Company markets
AmBisome-Registered Trademark- ((amphotericin B) liposome for injection), an
antifungal agent, DaunoXome-Registered Trademark- (daunorubicin citrate liposome
injection), a drug approved for the treatment of Kaposi's Sarcoma, and
VISTIDE-Registered Trademark- (cidofovir injection) for the treatment of
cytomegalovirus ("CMV") retinitis. Hoffmann-La Roche, Inc. markets Tamiflu-TM-
(oseltamivir phosphate) for the treatment of influenza, under a collaborative
agreement with the Company. In addition, the Company is developing products to
treat diseases caused by human immunodeficiency virus ("HIV") and hepatitis B
virus ("HBV"), bacterial infections and cancer.
As more fully described in Note 2, on July 29, 1999, Gilead entered into a
business combination (the "Merger") with NeXstar Pharmaceuticals, Inc.
("NeXstar"). The business combination has been accounted for as a pooling of
interests and the historical consolidated financial statements of Gilead for all
years prior to the business combination have been restated to include the
financial position, results of operations and cash flows of NeXstar. No material
adjustments were necessary to conform the accounting policies of the two
companies. Costs of the Merger were charged to operations in 1999.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries. Significant
intercompany transactions have been eliminated. Certain reclassifications have
been made to prior year amounts to be consistent with the current year
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 amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Product sales revenue is recognized upon passage of legal title of the
inventory and satisfaction of all of the Company's performance obligations. The
Company does not provide its customers with a general right of product return.
However, the Company will accept returns of product that has expired or is
deemed to be damaged or defective. Provisions are made for doubtful accounts,
estimated product returns, cash discounts and government discounts and rebates.
In connection with most of its European product sales, the Company prices
its products in the currency of the country into which they are sold ("Payment
Currencies"). A significant majority of the Company's manufacturing costs are in
U.S. Dollars. Therefore, any decline in the value of the Payment Currencies
relative to the U.S. Dollar is likely to negatively impact gross margins since
the Company's manufacturing costs would remain approximately the same while its
revenue in terms of U.S. Dollars
60
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
would decline. Periodically, the Company's gross margin is adversely affected by
such currency fluctuations.
Contract revenue recognized under the Company's collaborative research and
development ("R&D") arrangements, license and supply agreements and intellectual
property sales and license agreements is recorded as earned based upon the
performance requirements of the underlying contracts. Milestone payments are
recognized as revenue when all of the Company's performance obligations have
been met, the amount of the milestone payment is readily determinable and the
Company has a unilateral right to demand a nonrefundable payment. Payments
received in advance under such agreements are recorded as deferred revenue until
earned.
Royalty revenue from sales of AmBisome is recognized in the month following
that in which the corresponding sales occur. Royalty revenue from sales of
VISTIDE is recognized when received, which is in the quarter following that in
which the corresponding sales occur. Royalty revenue from sales of Tamiflu will
also be recognized in the quarter following that in which the related sales
occur, beginning in the first quarter of 2000.
RESEARCH AND DEVELOPMENT COSTS
All R&D costs, including those funded by third parties, are charged to
expense as incurred.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company
has elected to follow Accounting Principles Board Opinion ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its employee stock option plans. Under APB No. 25, if the
exercise price of the Company's employee and director stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expense is recognized. See Note 11 for pro forma disclosures of
stock-based compensation pursuant to SFAS No. 123.
BASIC AND DILUTED LOSS PER COMMON SHARE
For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of common shares outstanding
during the period. The impact of convertible debentures, stock options and
warrants could potentially dilute basic earnings per share in the future, but
were excluded from the computation of diluted loss per share as their effect is
antidilutive for the periods presented.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with insignificant interest
rate risk and a remaining maturity of three months or less at the purchase date
to be cash equivalents. Gilead may enter into overnight repurchase agreements
under which it purchases securities with an obligation to resell them the
following day. Securities purchased under agreements to resell are recorded at
face value and reported as cash and cash equivalents. Under the Company's
investment policy, it may enter into repurchase agreements ("repos") with major
banks and authorized dealers provided that such
61
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
repos are collateralized by U.S. government securities with a fair value of at
least 102% of the fair value of securities sold to Gilead.
MARKETABLE SECURITIES
Management determines the appropriate classification of its marketable debt
securities at the time of purchase and reevaluates such designation at each
balance sheet date. All of the Company's marketable debt securities are
classified as available-for-sale and carried at estimated fair values and
reported in either cash equivalents or marketable securities. At December 31,
1999, cash and cash equivalents include $14.3 million of securities designated
as available-for-sale ($89.2 million at December 31, 1998). Unrealized gains and
losses on available-for-sale securities are excluded from earnings and reported
as a separate component of stockholders' equity. Interest income includes
interest, dividends, amortization of purchase premiums and discounts, and
realized gains and losses on sales of securities. The cost of securities sold is
based on the specific identification method.
CONCENTRATIONS OF CREDIT RISK
Gilead is subject to credit risk from its portfolio of cash equivalents and
marketable securities. By policy, the Company limits amounts invested in such
securities by maturity, industry group, investment type and issuer, except for
securities issued by the U.S. government. Gilead is not exposed to any
significant concentrations of credit risk from these financial instruments. The
goals of the Company's investment policy, in order of priority, are as follows:
1. Safety and preservation of principal and diversification of risk;
2. Liquidity of investments sufficient to meet cash flow requirements; and
3. Competitive after-tax rate of return.
Gilead is also subject to credit risk from its accounts receivable related
to product sales. A majority of the Company's trade accounts receivable arises
from sales of AmBisome, primarily through sales to the Company's European
subsidiaries and export sales to its distributors in Europe. The Company
performs credit evaluations of its customers' financial condition and has not
required collateral. To date, the Company has experienced only modest credit
losses with respect to its accounts receivable.
INVENTORIES
Raw materials, work in process and finished goods inventories are recorded
at the lower of cost or market, with cost determined on a first-in, first-out
basis. Management periodically reviews the composition of inventory in order to
identify obsolete, slow-moving or otherwise unsaleable items. If such items are
observed and there are no alternate uses for the inventory, the Company will
take a write-down to net realizable value in the period that the units are
identified as impaired. Historically, inventory write-downs have been
insignificant and consistent with management's expectations.
62
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are recognized
using the straight-line method. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED USEFUL LIFE (IN YEARS)
- ----------- --------------------------------
<S> <C>
Building and improvements.......................... 20
Laboratory and manufacturing equipment............. 4-8
Office and computer equipment...................... 2-7
</TABLE>
Office and computer equipment includes capitalized computer software. All of
the Company's capitalized software is purchased. The Company has no internally
developed computer software. Leasehold improvements and capitalized leased
equipment are amortized over the shorter of the lease term or the item's useful
life.
LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances both internally and externally that may
suggest impairment. Specific potential indicators of impairment include:
- a significant decrease in the fair value of an asset;
- a significant change in the extent or manner in which an asset is used or
a significant physical change in an asset;
- a significant adverse change in legal factors or in the business climate
that affects the value of an asset or an adverse action or assessment by a
regulator;
- an accumulation of costs significantly in excess of the amount originally
expected to acquire or construct an asset; and
- operating or cash flow losses combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing
losses associated with an income-producing asset.
Should there be indication of impairment, the Company will confirm this by
comparing the estimated future cash flows expected to result from the use of the
asset and its eventual disposition to the carrying amount of the asset. In
estimating these future cash flows, assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows generated by other asset groups. If the sum of the expected future cash
flows (undiscounted and without interest changes) is less than the carrying
amount of the asset, an impairment loss, measured as the excess of the carrying
value of the asset over its fair value, will be recognized. The cash flow
estimates used in such calculations are based on management's best estimates,
using appropriate and customary assumptions and projections at the time.
63
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ACCRUED LIABILITIES
At December 31, 1999 and 1998, other accrued liabilities includes
$2.4 million and $2.1 million, respectively, of accrued litigation settlement
costs. See the Patent Matters discussion in Note 10.
At December 31, 1999 and 1998, other accrued liabilities includes
$1.3 million and $5.0 million, respectively, due to F. Hoffmann-La Roche, Ltd.
and Hoffmann-La Roche, Inc. (collectively, "Roche"). See the Hoffmann-La Roche
discussion in Note 4.
FOREIGN CURRENCY TRANSLATION, TRANSACTIONS AND CONTRACTS
Adjustments resulting from translating the financial statements of the
Company's foreign subsidiaries into U.S. Dollars are excluded from the
determination of net income and are accumulated in a separate component of
stockholders' equity. Net foreign exchange transaction losses are reported as a
selling, general and administrative expense in the consolidated statements of
operations. In 1999, 1998 and 1997 such amounts were $0.5 million, $0.3 million
and $0.3 million, respectively.
The Company hedges certain of its foreign currency exposures related to
outstanding trade accounts receivable and firmly committed purchase transactions
with foreign exchange forward contracts. In general, these contracts do not
expose the Company to market risk because gains and losses on the contracts
offset gains and losses on the transactions being hedged. The Company's exposure
to credit risk from these contracts is a function of changes in interest and
currency exchange rates and, therefore, varies over time. Gilead limits the risk
that counterparties to these contracts may be unable to perform by transacting
only with major U.S. banks. The Company also limits its risk of loss by entering
into contracts that provide for net settlement at maturity. Therefore, the
Company's overall risk of loss in the event of a counterparty default is limited
to the amount of any unrecognized and unrealized gains on outstanding contracts
(i.e., those contracts that have a positive fair value) at the date of default.
At December 31, 1999, the Company has recorded an immaterial net unrealized loss
on its open foreign exchange forward contracts. The Company does not enter into
speculative foreign currency transactions and does not write options.
In accounting for hedges of accounts receivable, the Company's aggregate net
foreign currency transaction gain or loss is reported as a selling, general and
administrative expense. The Company recognizes the net unrealized gain or loss
on outstanding forward contracts based on the difference between the contract
exchange rate and the market exchange rate at each balance sheet date. With
respect to hedges of firmly committed purchase transactions, unrealized gains
and losses on the underlying forward contracts are deferred and reported as a
component of the related transaction in the period in which it occurs.
At December 31, 1999 and 1998, the Company had forward exchange contracts
outstanding of $42.9 million and $42.4 million, respectively. None of these
contracts have maturities that exceed one year.
The Company presently does not hedge its net investment in any of its
foreign subsidiaries.
64
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable, certain other
non-current assets, forward foreign exchange contracts, accounts payable,
long-term obligations and convertible subordinated debentures. Cash and cash
equivalents, marketable securities and substantially all of the forward foreign
exchange contracts are reported at their respective fair values on the balance
sheet. Management believes the remaining financial instruments, with the
exception of the convertible subordinated debentures, are reported on the
balance sheet at amounts that approximate current fair values. The fair value of
the convertible subordinated debentures at December 31, 1999 and 1998 was
$101.8 million and $69.4 million, respectively (such fair values being
determined by a market maker for the convertible subordinated debentures). This
compares to a carrying value of $79.5 million and $80.0 million at December 31,
1999 and 1998, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
establishes accounting and reporting standards for derivative instruments,
including forward foreign exchange contracts, and hedging activities. In
June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
NO. 133. SFAS No. 133 is now effective for fiscal years beginning after
June 15, 2000 and, therefore, the Company will adopt this accounting standard
effective January 1, 2001. Management has not yet determined the impact of SFAS
No. 133 on its financial position or results of operations.
The Company has recognized nonrefundable technology access fees received in
connection with collaboration agreements as revenue when received, when the
technology has been transferred and when all contractual obligations of the
Company relating to the fees are fulfilled. In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"REVENUE RECOGNITION IN FINANCIAL STATEMENTS." Among other things, SAB No. 101
describes the SEC Staff's position on the recognition of certain nonrefundable
upfront fees received in connection with research collaborations. The Company is
evaluating the applicability of SAB No. 101 to its existing collaborative
agreements. Should the Company conclude that the approach described in SAB
No. 101 is more appropriate, it will change its method of accounting effective
January 1, 2000 to recognize such fees over the term of the related agreement.
Any required adjustment would be recognized as a cumulative effect of a change
in accounting principle.
2. ACQUISITION OF NEXSTAR
On July 29, 1999, the Company acquired all of the outstanding common stock
of NeXstar pursuant to an Agreement and Plan of Merger dated as of February 28,
1999. As a result, NeXstar became a wholly owned subsidiary of Gilead. In
connection with the Merger, Gilead issued a total of 11.2 million shares of
Gilead common stock, or 0.3786 of a share of Gilead common stock for each share
of NeXstar common stock, to NeXstar's stockholders as consideration for all
shares of common stock of NeXstar. In addition, holders of options and warrants
outstanding at the time of the Merger to purchase an aggregate of approximately
2.2 million shares of NeXstar common stock will receive, upon
65
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. ACQUISITION OF NEXSTAR (CONTINUED)
exercise of such options and warrants, the same fraction of a share of Gilead
common stock, and holders of $80.0 million principal amount of 6.25% Convertible
Subordinated Debentures of NeXstar ("Debentures") have the right to convert the
Debentures into approximately 1.8 million shares of Gilead common stock. The
Merger is intended to qualify as a tax-free reorganization and has been
accounted for as a pooling of interests.
The table below presents the separate results of operations for Gilead and
NeXstar for the periods prior to the merger and combined results after the
merger:
<TABLE>
<CAPTION>
MERGER-RELATED
(IN THOUSANDS) GILEAD NEXSTAR ADJUSTMENTS TOTAL
- -------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Revenues..................... $ 24,659 $144,320 $ -- $168,979
Net income (loss)............ (73,534) 25,351 (18,303)(a) (66,486)
Year ended December 31, 1998
Revenues..................... $ 32,570 $118,549 $ -- $151,119
Net income (loss)............ (56,075) 10,920 397(b) (44,758)
Year ended December 31, 1997
Revenues..................... $ 40,037 $ 92,221 $ -- $132,258
Net income (loss)............ (27,993) (43,910) (990)(b) (72,893)
</TABLE>
- ------------------------
(a) Merger-related costs
(b) Adjustment required to conform accounting policy. NeXstar's policy was to
capitalize certain patent and trademark costs, while it was Gilead's policy
to charge such items to selling, general and administrative expense in the
period incurred. The accompanying financial statements have been restated
for all periods such that all patent and trademark costs are expensed as
incurred.
As a result of its merger with NeXstar, Gilead incurred merger-related costs
consisting of transaction costs (primarily professional fees, filing fees,
printing costs and other related charges), employee severance costs and the
write-down of certain NeXstar assets that will not be used in continuing
operations. The following table shows the details of the merger-related costs
and accruals at December 31, 1999:
<TABLE>
<CAPTION>
CHARGED TO EXPENSE THROUGH DECEMBER 31, 1999
(IN THOUSANDS) DECEMBER 31, 1999 UTILIZED ACCRUAL BALANCE
- -------------- -------------------------- -------- -----------------
<S> <C> <C> <C>
Merger transaction costs.... $12,214 $12,196 $ 18
Employee severance.......... 5,309 2,821 2,488
Write-down of NeXstar
assets.................... 536 N/A N/A
Other....................... 244 244 --
------- ------- ------
Total..................... $18,303 $15,261 $2,506
======= ======= ======
</TABLE>
As of December 31, 1999, all employees for which severance costs were
accrued had been terminated. The Company anticipates that substantially all
remaining accrued severance costs will be paid to former employees by
September 2000.
66
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities. Estimated fair
values of available-for-sale securities are based on prices obtained from
commercial pricing services (in thousands).
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. treasury securities and
obligations of U.S. Government
agencies.......................... $133,444 $512 $(1,243) $132,713
Certificates of deposit............. 5,309 1 -- 5,310
Corporate debt securities........... 70,726 19 (583) 70,162
Asset-backed securities............. 39,554 2 (266) 39,290
Other debt securities............... 14,256 -- -- 14,256
-------- ---- ------- --------
Total............................. $263,289 $534 $(2,092) $261,731
======== ==== ======= ========
DECEMBER 31, 1998
U.S. treasury securities and
obligations of U.S. Government
agencies.......................... $ 78,846 $ 62 $ (123) $ 78,785
Certificates of deposit............. 38,058 65 (11) 38,112
Corporate debt securities........... 34,676 152 (18) 34,810
Asset-backed securities............. 89,565 101 (185) 89,481
Other debt securities............... 95,626 -- -- 95,626
-------- ---- ------- --------
Total............................. $336,771 $380 $ (337) $336,814
======== ==== ======= ========
</TABLE>
The following table presents certain information related to sales of
available-for-sales securities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Proceeds from sales........................... $101,943 $390,426 $198,515
Gross realized gains on sales................. $ 92 $ 1,127 $ 229
Gross realized losses on sales................ $ (475) $ (654) $ (142)
</TABLE>
At December 31, 1999, $128.4 million of the Company's portfolio of
marketable securities (excluding asset-backed securities) has a contractual
maturity of less than one year and $94.0 million of the portfolio has a
contractual maturity greater than one year but less than three years. None of
the estimated maturities of the Company's asset-backed securities exceed three
years.
4. COLLABORATIVE ARRANGEMENTS AND CONTRACTS
FUJISAWA
The Company's rights to market AmBisome are subject to an agreement between
the Company and Fujisawa Healthcare, Inc., as successor to Fujisawa USA, Inc.
("Fujisawa"). Under the terms of the Fujisawa agreement, as amended, Fujisawa
and the Company co-promote AmBisome in the United
67
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
States, Fujisawa has sole marketing rights to AmBisome in Canada and the Company
has exclusive marketing rights to AmBisome in the rest of the world, provided
the Company pays royalties to Fujisawa in connection with sales in most
significant Asian markets, including Japan. In connection with sales in the
United States, Fujisawa purchases AmBisome from the Company at cost. Fujisawa
collects all payments from the sale of AmBisome in the United States, and the
Company receives 20% of the gross profits from the sale of AmBisome in the
United States. The Company also sells AmBisome to Fujisawa Canada at cost plus a
specified percentage. In 1999, 1998 and 1997, the Company recorded
$8.3 million, $4.8 million and $0.7 million of royalty income, respectively, in
connection with the agreement between the Company and Fujisawa.
SUMITOMO
In September 1996, the Company and Sumitomo Pharmaceuticals Co., Ltd.
("Sumitomo") entered into an agreement ("Sumitomo License") pursuant to which
Sumitomo has agreed to develop and market AmBisome in Japan. Under the terms of
the Sumitomo License, Sumitomo paid the Company an initial $7.0 million
licensing fee (less withholding taxes of $0.7 million) in October 1996 and a
$3.0 million milestone payment (less withholding taxes of $0.3 million) in
March 1998. Sumitomo also is required to make additional payments to the Company
if certain clinical and commercial milestones are met and to pay the Company
royalties on all Japanese AmBisome sales. AmBisome is not yet approved for
marketing in Japan.
HOFFMANN-LA ROCHE
In September 1996, Gilead and Roche entered into a collaboration agreement
("Roche Agreement") to develop and commercialize therapies to treat and prevent
viral influenza. Under the Roche Agreement, Roche received exclusive worldwide
rights to Gilead's proprietary influenza neuraminidase inhibitors. In 1996,
Roche made an initial license fee payment to Gilead of $10.3 million. Upon
achieving certain developmental milestones, in both the second and fourth
quarters of 1997, Gilead earned cash payments of $3.0 million per quarter, for a
total of $6.0 million. During 1999, Gilead recognized a total of $12.8 million
of additional milestone payments due to the commencement of certain clinical
trials in Japan, the filing of a marketing authorisation application to market
Tamiflu in the European Union, and the filing and subsequent approval of a New
Drug Application ("NDA") to market Tamiflu in the United States. As of
December 31, 1999, Gilead is entitled to additional cash payments of up to
$21.2 million upon achieving additional developmental and regulatory milestones.
In addition, Roche is required to pay Gilead royalties on net product sales. No
revenues from Roche's sales of Tamiflu have been recognized as net royalty
revenue as of December 31, 1999. The Company will recognize royalty revenue from
sales of Tamiflu in the quarter following that in which the related product
sales occur.
Under the Roche Agreement, Roche also reimburses the Company for its related
R&D costs under the program by funding such costs quarterly and generally in
advance, based on an annual budget. Reimbursements are included in contract
revenue as the Company incurs the related R&D costs. Amounts incurred by the
Company in excess of amounts funded may also be reimbursed, subject to Roche's
approval. In this event, revenue is not recognized until such approval has been
obtained.
68
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
Conversely, if amounts funded by Roche exceed the Company's related R&D costs,
the Company may be required to repay such excess funding to Roche.
For the years ended December 31, 1999, 1998 and 1997, the Company recorded
approximately $2.1 million, $16.4 million and $8.2 million, respectively, of R&D
reimbursement revenue related to the Roche Agreement, which is reported as
contract revenue in the accompanying consolidated statements of operations. The
$16.4 million recorded as revenue during 1998 includes $5.2 million attributable
to R&D expenses incurred in the fourth quarter of 1997, which were subject to
Roche's approval as of December 31, 1997. Such expenses were approved for
reimbursement and recognized in contract revenue in 1998. Except for this
$5.2 million, R&D costs related to the Roche Agreement approximate the
reimbursement revenue in each year presented and are included in R&D expenses.
PHARMACIA & UPJOHN
In August 1996, the Company and Pharmacia & Upjohn S.A. ("Pharmacia &
Upjohn") entered into a License and Supply Agreement ("Pharmacia & Upjohn
Agreement") to market VISTIDE in all countries outside the United States. Under
the terms of the Pharmacia & Upjohn Agreement, Pharmacia & Upjohn paid Gilead an
initial license fee of $10.0 million. During the second quarter of 1997, VISTIDE
was approved for marketing in the European Union by the European Commission,
which triggered an additional cash milestone payment of $10.0 million by
Pharmacia & Upjohn to the Company. Also as a result of achieving this milestone,
in the second quarter of 1997 the Company issued and Pharmacia & Upjohn
purchased 1,133,786 shares of Series B Convertible Preferred Stock for
approximately $40.0 million, or $35.28 per share. The preferred stock
automatically converted into an equal number of shares of common stock in 1999.
For additional information about the preferred stock, refer to Note 11.
Under the terms of the Pharmacia & Upjohn Agreement and related agreements
covering expanded access programs for VISTIDE outside of the United States, the
Company is responsible for maintaining the cidofovir patent portfolio and for
supplying to Pharmacia & Upjohn bulk cidofovir used to manufacture the finished
VISTIDE product ("Product"). Gilead is entitled to receive a royalty based upon
Pharmacia & Upjohn's sales of Product. It receives a portion of the royalty upon
shipping either bulk drug substance or Product to Pharmacia & Upjohn, and the
remainder upon Pharmacia & Upjohn's sale of Product to third parties. Any
royalties that Gilead receives before Product is sold to third parties are
recorded as deferred revenue until such third-party sales occur. At
December 31, 1999, the Company has recorded on its balance sheet approximately
$3.7 million of such deferred revenue ($3.3 million at December 31, 1998). The
Company recognized royalty revenue of $2.0 million, $1.7 million and
$0.7 million in 1999, 1998 and 1997, respectively, from sales of VISTIDE outside
of the United States by Pharmacia & Upjohn.
SOMALOGIC
In November 1999, Gilead and Somalogic, Inc. ("Somalogic") entered into an
agreement whereby Gilead assigned to Somalogic under a sole and exclusive
license certain intellectual property related to the SELEX process, including
patents and patent applications. Under the terms of the agreement, Somalogic is
required to pay Gilead a total of $2.5 million in two nonrefundable
installments. The first $1.5 million was paid in November 1999 and is included
in contract revenue in the Company's
69
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
consolidated statement of operations for the year ended December 31, 1999. The
remaining $1.0 million is due in November 2000 and, because Somalogic is a
developmental stage entity that may require third party financing, Gilead will
recognize this amount as contract revenue when received. Gilead has no ongoing
research or funding obligations under the agreement. At December 31, 1999, the
$1.0 million payment due in November 2000 is reported as deferred revenue on the
consolidated balance sheet.
SCHERING A.G.
In 1993, the Company entered into a collaborative research agreement
("Schering Research Agreement") and license agreement ("Schering License
Agreement") with Schering A.G. Under the Schering Research Agreement, Schering
A.G. has funded research at Gilead for the discovery and development of aptamers
as IN VIVO diagnostic agents. The level of funding under this agreement has
varied over the five-year term, from $1.0 million to $2.4 million annually. In
March 1999, Schering A.G. agreed to fund $0.3 million under the Schering
Research Agreement for the first half of 1999, which Gilead received and
reported in contract revenue in 1999. The Schering Research Agreement expired in
1999 and the Company does not expect to receive any additional payments
thereunder.
Under the Schering License Agreement, Schering A.G. has the right to develop
and commercialize aptamers as IN VIVO diagnostic agents or radiotherapeutics
discovered and developed under the Schering Research Agreement. Schering A.G. is
required to make milestone and royalty payments to the Company upon
commercialization and sale of any products developed under the collaboration
with the Company. The milestone payments for any one product total $6.0 million
and are triggered by the filing of an Investigational New Drug application, the
initiation of Phase III clinical trials, the filing of an NDA and approval of a
product for commercial sale. The Schering License Agreement, which was still in
effect as of December 31, 1999, permits the Company to develop and commercialize
aptamers discovered under the Schering Research Agreement outside the field of
IN VIVO diagnostic agents or radiotherapeutics, subject to royalty payments to
Schering A.G.
ISIS PHARMACEUTICALS
In December 1998, Gilead and Isis Pharmaceuticals, Inc. ("Isis") entered
into an agreement under which Gilead sold to Isis certain intellectual property,
including patents and patent applications covering antisense chemistry and
antisense drug delivery systems. Under the terms of the agreement, Isis is
required to pay to Gilead a total of $6.0 million in four nonrefundable
installments. The first installment of $2.0 million was paid in December 1998,
the second installment of $1.0 million was paid in December 1999 and the
remaining $3.0 million is payable in two additional payments (one payment of
$1.0 million in 2000 and one payment of $2.0 million in 2001). The total sale
price of $6.0 million is included in contract revenue in the Company's
consolidated statement of operations for the year ended December 31, 1998.
Gilead has no ongoing research or funding obligations under the agreement.
GLAXO WELLCOME
In May 1998, the Company entered into a three-part collaboration with Glaxo
Wellcome Inc. ("Glaxo") in which (a) Glaxo received a non-exclusive right to use
the Company's proprietary SELEX process for target validation; (b) the Company
received the exclusive rights (subject to Glaxo's right to
70
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. COLLABORATIVE ARRANGEMENTS AND CONTRACTS (CONTINUED)
elect to participate in such activities) to develop and commercialize NX 211, a
liposomal formulation of Glaxo's proprietary topoisomerase I inhibitor
(lurtoctecan); and (c) Glaxo acquired 364,257 shares of the Company's common
stock for $10.0 million in a private offering.
In July 1990, the Company entered into a collaborative research agreement
with Glaxo with respect to the Company's antisense technology. Under the terms
of the Glaxo agreement, as amended over time, the Company received $1.8 million
in 1998, and $3.0 million in both 1997 and 1996, to fund research, which is
reported as contract revenue in the accompanying consolidated statements of
operations. The R&D costs reimbursed by Glaxo approximate the related revenue
and are included in R&D expense. This agreement and the related funding were
terminated in June 1998.
BAUSCH & LOMB
In August 1994, the Company entered into a license and supply agreement with
Bausch & Lomb Incorporated (formerly Storz Instrument Company, a subsidiary of
American Home Products Corporation), to develop and market an eyedrop
formulation of cidofovir for the potential treatment of topical ophthalmic
viruses. The Company received a $0.3 million annual fee under this agreement in
each of the years ended December 31, 1999 and 1997, which is reported as
contract revenue. This agreement was terminated in 1999 and the Company will not
receive any additional payments in the future.
5. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Finished goods............................................ $ 3,463 $ 3,672
Work in process........................................... 6,793 5,962
Raw materials............................................. 10,703 6,916
------- -------
$20,959 $16,550
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Building and improvements (including leasehold
improvements)......................................... $ 46,597 $ 44,700
Laboratory and manufacturing equipment.................. 27,204 26,568
Office and computer equipment........................... 20,127 18,969
Capitalized leased equipment............................ 16,042 17,385
Construction in progress................................ 5,540 639
-------- --------
115,510 108,261
Less accumulated depreciation and amortization.......... (64,112) (57,242)
-------- --------
$ 51,398 $ 51,019
======== ========
</TABLE>
71
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In late 1997, the Company established its NeXstar Technology Products
division which included the Company's proprietary technology called Product
Anchored Sequential Synthesis ("PASS"), a method of synthesizing the
oligonucleotides that are the basis for the products being developed using the
SELEX process. In July 1998, the Company established Proligo L.L.C., a Delaware
limited liability company ("Proligo"), as a wholly owned subsidiary and
transferred all of the assets of the NeXstar Technology Products division to
Proligo. Proligo supplies nucleic acid and peptide synthesis products to the
pharmaceutical and biopharmaceutical industry for sale and use as laboratory
research reagents and in therapeutic and diagnostic products.
On August 15, 1998, the Company sold a 51% interest (the "Interest") in
Proligo to SKW Americas, Inc. ("SKW"). As payment for the Interest, the Company
received $15.0 million in cash and a 49% interest in PerSeptive Biosystems GmbH,
a company in Hamburg, Germany (the "Hamburg Company"), which specializes in the
manufacture of nucleoside phosphoramidite monomers. The 49% interest in the
Hamburg Company had a fair market value of approximately $5.5 million. In
addition, SKW agreed to pay the Company $3.0 million in guaranteed payments
(discounted at 8.5% for gain recognition purposes) and up to $20.5 million in
performance-based milestones over the next four years. During 1999, the Company
received $2.6 million of the guaranteed payments from SKW. The Company also
received a performance-based milestone payment of $1.0 million, which is
reported in contract revenue on the consolidated statement of operations. As
part of the original transaction, the Company contributed $4.9 million and its
49% interest in the Hamburg Company to Proligo. The Company recorded a
$22.1 million gain in connection with this sale in 1998. SKW contributed
$5.1 million and the remaining 51% interest in the Hamburg Company to Proligo.
Also in connection with this transaction, the Company and Proligo agreed that
Proligo would manufacture oligonucleotides required by the Company at cost plus
a fixed percentage. During 1999, the Company purchased oligonucleotides from
Proligo for a total of $0.4 million. This entire amount has been charged to R&D
expense.
The Company accounts for its investment in Proligo using the equity method
of accounting. The net book value of its investment at December 31, 1999 and
1998 was approximately $7.6 million and $10.3 million, respectively, and is
reported in other noncurrent assets on the Company's consolidated balance
sheets. In 1999, the Company recorded its equity in the loss of Proligo of
$4.7 million, which represents its 49% share of Proligo's loss for its fiscal
year ended November 30, 1999. In 1998, the Company recorded its equity in the
loss of Proligo of $1.1 million for the period from August 15, 1998 through
November 30, 1998. The Proligo operating loss for December 1999 was
approximately $0.9 million, of which the Company will recognize its 49% share in
2000.
In October 1999, the Company made a capital contribution to Proligo of
$2.5 million to maintain its 49% ownership interest. The Company also agreed to
contribute an additional $2.5 million in 2000, again to maintain its 49%
ownership interest. Upon making this capital contribution in January 2000, the
Company has no commitments to provide additional funding to Proligo.
72
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Capital lease obligations: Interest payable monthly at 6.89%
to 13.91%................................................. $5,681 $7,901
Adjustable rate debt: Quarterly installments through 2000;
unsecured; interest payable quarterly based on applicable
LIBOR rates............................................... -- 1,313
Fixed rate debt: Monthly installments through 2003; secured
by equipment; interest payable monthly at 9.69% to
12.62%.................................................... 2,763 4,511
------ ------
Total long-term obligations................................. 8,444 13,725
Less current portion........................................ (3,191) (4,842)
------ ------
Long-term obligations due after one year.................... $5,253 $8,883
====== ======
</TABLE>
Maturities of all long-term obligations, including capital lease
obligations, due subsequent to December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------
<S> <C>
2000........................................................ $3,191
2001........................................................ 3,050
2002........................................................ 1,902
2003........................................................ 301
------
Total....................................................... $8,444
======
</TABLE>
The terms of the various debt agreements require the Company to comply with
certain financial and operating covenants. At December 31, 1999, the Company was
in compliance with all such covenants.
9. CONVERTIBLE SUBORDINATED DEBENTURES
During the third quarter of 1997, the Company sold $80.0 million of 6.25%
Debentures due 2004 in a private offering to SBC Warburg Inc. and Oppenheimer &
Co., Inc., which resold the Debentures to a group of private investors. The
Debentures were issued pursuant to an indenture and are convertible into a total
of up to 1,794,844 shares of the Company's common stock at $44.57 per share,
which was greater than the fair market value of the Company's common stock at
the time the Debentures were issued. The Company reserved 1,794,844 shares of
its authorized common stock for issuance upon conversion of the Debentures. The
Debentures are redeemable in whole or in part, at the option of the Company, at
any time on or after August 10, 2000, at specified redemption prices plus
accrued interest. During 1999, holders of $0.5 million of Debentures converted
their holdings into 10,465 shares of common stock.
73
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. COMMITMENTS AND CONTINGENCIES
LEASES AND FINANCING ARRANGEMENTS
The Company has entered into long-term noncancelable operating leases for
facilities in Boulder, Colorado, Foster City, California and San Dimas,
California. The leases contain the following terms:
<TABLE>
<CAPTION>
LOCATION TERMINATION DATE RENEWAL OPTIONS
- -------- ---------------- -------------------
<S> <C> <C>
Boulder, CO............................. October 2001 Two five-year terms
Boulder, CO............................. July 2003 None
Foster City, CA......................... December 2003 None
Foster City, CA......................... March 2006 Two five-year terms
Foster City, CA......................... September 2006 Two five-year terms
San Dimas, CA........................... May 2003 Two five-year terms
San Dimas, CA........................... November 2003 Two five-year terms
</TABLE>
Rent expense net of sublease income under the Company's operating leases
totaled approximately $7.9 million, $6.8 million and $6.8 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company has entered into certain financing and sale-leaseback
transactions and related equipment and facilities improvement master lease and
financing agreements for manufacturing equipment, general laboratory and
scientific equipment, office equipment, furniture, fixtures and facilities
improvements. Title to assets acquired under the Company's lease lines of credit
resides with the lessor. The Company has the option to purchase the assets at
the end of the lease terms at fair market value. The leases have terms ranging
from three to five years. At December 31, 1999, no amounts were available under
such agreements.
Aggregate noncancelable future minimum rental payments under operating and
capital leases, net of aggregate future minimum rentals to be received by the
Company under noncancelable subleases, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING LEASES, NET OF
YEARS ENDING DECEMBER 31, NONCANCELABLE SUBLEASES CAPITAL LEASES
- ------------------------- ------------------------ --------------
<S> <C> <C>
2000....................................... $ 8,458 $ 2,607
2001....................................... 8,430 2,449
2002....................................... 9,661 1,294
2003....................................... 8,999 --
2004....................................... 5,672 --
Thereafter................................. 6,870 --
------- -------
$48,090 6,350
=======
Less amount representing interest.......... (669)
-------
Total capital lease obligations............ 5,681
Less current portion....................... (2,192)
-------
Capital lease obligations due after one
year..................................... $ 3,489
=======
</TABLE>
74
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has in place a letter of credit agreement from a bank, which
secures the aggregate future payments under one of its facilities leases. At
December 31, 1999, a total of $0.5 million was secured under this letter of
credit arrangement.
CONTINGENT LIABILITIES
In connection with the August 1998 sale of a majority interest in its
subsidiary, Proligo, as described in Note 7, the Company transferred certain
property and equipment with a net book value of $4.5 million to Proligo. The
majority of such property and equipment is financed or leased by the Company in
accordance with the financing arrangements and sale-leaseback transactions
described above. Concurrent with this transfer of property and equipment, the
Company transferred the underlying debt to Proligo pursuant to various Sublease,
Consent and Assignment Agreements (collectively, the "Sublease Agreements"). As
a result, the Company is required to pay the debt financing and lease
liabilities to the financial institutions and lessors directly for Proligo's
share of the liabilities. Proligo is required to reimburse the Company for these
amounts and is bound by the same terms and conditions as those in the Company's
agreements with the financial institutions and lessors. If Proligo were to
default on its obligations under the Sublease Agreements, the Company would
continue to be liable for amounts outstanding as of the date of the default.
However, in this event, SKW would be obligated to reimburse the Company for 51%
of such amounts paid. At December 31, 1999, Proligo was current with respect to
its reimbursements to the Company and the balance of Proligo's future lease and
debt obligations under the Sublease Agreements was $1.9 million.
Additionally, the Company and Proligo entered into Assignment, Assumption
and Consent Agreements ("Agreements") with the landlords of two laboratory
facilities Proligo occupies. Under the Agreements, Proligo has assumed the
obligations to the landlords, but the Company remains contingently liable in the
event of default. The total unpaid amount of such operating lease commitments as
of December 31, 1999 was approximately $0.4 million.
Gilead has subleased certain of its facilities, primarily in California,
through 2001. If any of the sublessees default on their obligations under these
subleases, the Company would be primarily liable to the original lessor. The
total amount due under these subleases as of December 31, 1999 is $3.0 million.
SHORT-TERM BORROWINGS
In September 1997, the Company entered into an unsecured bank line of credit
for $10.0 million (the "Credit Agreement"). Under the terms of the Credit
Agreement, the Company is required to maintain certain financial ratios. There
are also limitations on the Company's ability to incur additional debt or to
engage in certain significant transactions. The Credit Agreement, which includes
a foreign exchange facility, was being renegotiated as of December 31, 1999 and
was subsequently extended until April 2001. There were no amounts outstanding
under this agreement as of either December 31, 1999 or 1998.
75
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PATENT MATTERS
On August 11, 1997, the Company and The Liposome Company, Inc. ("TLC")
reached a settlement ("Settlement Agreement") in which the two companies agreed
to dismiss all legal proceedings involving TLC's reexamined U.S. Patent
No. 4,880,635 ("TLC 635 Patent") and U.S. Patent No. 5,578,320 ("TLC 320
Patent") and their international counterparts. The legal proceedings related to
whether AmBisome, the Company's liposomal formulation of amphotericin B,
infringed TLC's patents because of the manner in which it is freeze dried
(lyophilized). In the Settlement Agreement between the parties, TLC granted the
Company immunity from suit in connection with the worldwide production and sales
of AmBisome and a worldwide right to use both the TLC 635 Patent and the TLC 320
Patent. Under the terms of the Settlement Agreement, the Company made an initial
payment to TLC of $1.8 million and was required to make payments beginning in
1998 based on AmBisome sales over the next several years. Because the payments
are subject to certain minimum and maximum amounts, the Company recorded
accounting charges in 1997 of $11.8 million, of which $10.0 million represented
the net present value of all future minimum payments and $1.8 million
represented the initial cash payment. Beginning in 1998, the Company is
recording an expense each quarter based on the difference between all future
minimum payments and the expense recorded in 1997. In addition, beginning in
1998, the Company is recognizing as cost of goods sold the difference between
the minimum and maximum payments, if any. The Company does not expect the
difference between its future minimum and maximum payments to TLC to be
material.
In August 1998, The Company was served with a patent infringement lawsuit
filed by Chiron Corporation ("Chiron") in the U.S. District Court for the
Northern District of California. In the lawsuit, Chiron alleged that Gilead
conducted scientific research that infringes Chiron patents covering the
hepatitis C protein and gene sequences and their use in screening for potential
hepatitis C therapeutics. In, December 1999, Gilead and Chiron agreed to the
terms of a settlement agreement and, as a result, the Company made a one-time
settlement payment of $0.4 million to Chiron at that time.
LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, none of these
matters is expected to have a material adverse effect on the financial position
or operations of the Company based on factors currently known to management.
11. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 5,000,000 shares of authorized preferred stock issuable in
series. The Company's Board of Directors ("Board") is authorized to determine
the designation, powers, preferences and rights of any such series. The Company
has reserved 400,000 shares of preferred stock for potential issuance under the
Preferred Share Purchase Rights Plan.
In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock ("Preferred Stock") to Pharmacia & Upjohn for approximately
$40.0 million, or $35.28 per share. On
76
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
July 15, 1999, the average of the closing price of the Company's common stock
for the thirty days then ended was $49.79. This event triggered the automatic
conversion of the Preferred Stock owned by Pharmacia & Upjohn into the Company's
common stock. Accordingly, the Preferred Stock converted into 1,133,786 shares
of common stock at the original issue price of $35.28 per share on July 16,
1999.
EMPLOYEE STOCK PURCHASE PLAN
Under Gilead's Employee Stock Purchase Plan ("ESPP"), employees can purchase
shares of Gilead common stock based on a percentage of their compensation. The
purchase price per share must equal at least the lower of 85 percent of the
market value on the date offered or the date purchased. A total of 1,580,000
shares of common stock are reserved for issuance under the ESPP. As of
December 31, 1999, 881,283 shares had been issued under the ESPP (794,049 shares
as of December 31, 1998).
Emerging Issues Task Force ("EITF") Issue No. 97-12, ACCOUNTING FOR
INCREASED SHARE AUTHORIZATIONS IN AN IRS SECTION 423 EMPLOYEE STOCK PURCHASE
PLAN UNDER APB OPINION NO. 25, provides that new shares authorized under
existing Section 423 employee stock purchase plans may give rise to compensation
expense under circumstances specified in that accounting standard. During 1998,
Gilead recognized compensation expense of $0.4 million related to an ESPP share
authorization approved in 1998 in accordance with the provisions of EITF Issue
No. 97-12. In future years, the Company will not be required to recognize
additional compensation expense related to the 1998 share authorization.
STOCK OPTION PLANS
In December 1987, Gilead adopted the 1987 Incentive Stock Option Plan and
the Supplemental Stock Option Plan for issuance of common stock to employees,
consultants and scientific advisors. In April 1991, the Board approved the
granting of certain additional nonqualified stock options with terms and
conditions substantially similar to those granted under the 1987 Supplemental
Stock Option Plan. At the grant date, none of the options described above had
exercise prices that were less than the fair value of the underlying stock on
that date. The options vest over five years pursuant to a formula determined by
the Board and expire after ten years. No shares are available for grant of
future options under any of these plans.
In November 1991, Gilead adopted the 1991 Stock Option Plan ("1991 Plan")
for issuance of common stock to employees and consultants. Options issued under
the 1991 Plan shall, at the discretion of the Board, be either incentive stock
options or nonqualified stock options. In May 1998, the 1991 Plan was amended
such that the exercise price of all stock options must be at least equal to the
fair value of Gilead's common stock on the date of grant. The options vest over
five years pursuant to a formula determined by the Board and expire after ten
years. At December 31, 1999, 3,185,020 shares were available for grant of future
options.
In November 1995, Gilead adopted the 1995 Non-Employee Directors' Stock
Option Plan ("Directors' Plan") for issuance of common stock to non-employee
Directors pursuant to a predetermined formula. The exercise price of options
granted under the Directors' Plan must be at least equal to the fair value of
Gilead's common stock on the date of grant. The options vest over five
77
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
years from the date of grant in quarterly 5 percent installments and expire
after ten years. At December 31, 1999, 239,000 shares were available for grant
of future options under the Directors' Plan.
NeXstar's stock plans include the 1988 Stock Option Plan ("1988 Plan"), the
1993 Incentive Stock Plan, and the 1995 Director Option Plan (collectively,
"NeXstar Plans"). Options pursuant to the 1988 Stock Option Plan and the 1993
Incentive Stock Plan that were issued and outstanding as of July 29, 1999 have
been converted into options to purchase Gilead common stock as a result of the
Merger and remain subject to their original terms and conditions. Options
outstanding under the 1995 Director Option Plan became fully vested at the close
of the Merger and are exercisable for a period of 24 months thereafter. No
shares are available for grant of future options under any of the NeXstar Plans.
NeXstar's 1988 Plan allows certain option holders to execute cashless
exercises of options. In a cashless exercise transaction, the option holder
specifies how many shares will be exercised and the Company issues the specified
number of shares, less the number that would be required to cover the exercise
price based on the fair value of the stock on the exercise date. During 1999,
several option holders performed cashless exercises. As a result, NeXstar' 1988
Plan is considered to be a variable plan and, therefore, the Company recognized
compensation expense of $2.3 million. Of this amount, $1.5 million relates to
exercised options and the remaining $0.8 million relates to options that remain
outstanding under the 1988 Plan at December 31, 1999.
The following table summarizes activity under all Gilead and NeXstar stock
option plans for each of the three years in the period ended December 31, 1999.
All option grants presented in the table had exercise prices not less than the
fair value of the underlying stock on the grant date (shares in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
Beginning of year.............. 5,656 $24.38 5,246 $22.36 5,569 $17.77
Granted...................... 1,669 54.84 1,428 27.49 1,263 30.67
Forfeited.................... (371) 33.61 (378) 31.20 (333) 24.49
Exercised.................... (1,323) 21.52 (640) 11.74 (1,253) 9.73
------ ------ ------ ------ ------ ------
Outstanding, end of year......... 5,631 $33.36 5,656 $24.38 5,246 $22.36
====== ====== ====== ====== ====== ======
Exercisable, end of year......... 2,276 $22.56 2,518 $20.51 2,190 $17.08
====== ====== ====== ====== ====== ======
Weighted Avg. Fair Value of
Options Granted................ $33.53 $15.46 $16.51
</TABLE>
78
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of Gilead options outstanding and options
exercisable at December 31, 1999 (options in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE WEIGHTED
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS AVERAGE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------- ----------- ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.24--$22.50 1,464 4.59 $14.61 1,162 $13.55
$22.88--$27.65 1,338 7.69 $24.88 418 $25.21
$29.63--$41.06 1,409 6.72 $34.55 601 $34.06
$41.27--$85.95 1,420 8.96 $59.50 95 $48.25
------ ------
Total....................... 5,631 6.96 $33.36 2,276 $22.56
====== ======
</TABLE>
PRO FORMA DISCLOSURES
The table below presents the combined net loss and basic and diluted loss
per common share if compensation cost for both Gilead's and NeXstar's stock
option plans had been determined based on their estimated fair values at the
grant dates for awards under those plans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss (in thousands).............. $(93,816) $(61,444) $(87,393)
Pro forma basic and diluted net loss per
share........................................ $ (2.19) $ (1.50) $ (2.22)
</TABLE>
Fair values of the options granted under the stock option plans were
estimated at grant dates using a Black-Scholes option pricing model. The Company
used the multiple option approach and the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------------ ------------
<S> <C> <C> <C>
Expected life in years (from vesting
date)--Stock options................... 1.86 1.44 to 1.78 1.00 to 1.75
Expected life in years--ESPP 1.21 1.51 0.75
Interest rate--Stock options............. 5.6% 4.7% to 5.5% 5.6% to 6.2%
Interest rate--ESPP...................... 5.0% 5.2% 5.6%
Volatility(1)............................ 67% 66% 66%
Expected dividend yield.................. 0% 0% 0%
</TABLE>
- ------------------------
(1) NeXstar's volatility rates for 1998 and 1997 were 61% and 52%, respectively.
The weighted average estimated fair value of each Gilead ESPP option granted
for the years ended December 31, 1999, 1998 and 1997 was $16.22, $11.97 and
$9.57, respectively.
79
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED SHARE PURCHASE RIGHTS PLAN
In November 1994, the Company adopted a Preferred Share Purchase Rights Plan
(the "Plan"). The Plan provides for the distribution of a preferred stock
purchase right (a "Right") as a dividend for each share of Gilead common stock
held of record at the close of business on December 14, 1994. The Rights are not
currently exercisable. Under certain conditions involving an acquisition or
proposed acquisition by any person or group of 15% or more of the Company's
common stock, the Rights permit the holders (other than the 15% holder) to
purchase Gilead common stock at a 50% discount from the market price at that
time, upon payment of an exercise price of a specified exercise price per Right.
In addition, in the event of certain business combinations, the Rights permit
the purchase of the common stock of an acquirer at a 50% discount from the
market price at that time. Under certain conditions, the Rights may be redeemed
by the Board in whole, but not in part, at a price of $.01 per Right. The Rights
have no voting privileges and are attached to and automatically trade with
Gilead common stock.
In October 1999, the Board of Directors approved an amendment to the Plan.
This amendment provides, among other things, for an increase in the exercise
price of the right under the Plan from $60 to $400 and an extension of the term
of the Plan from November 21, 2004 to October 20, 2009.
12. COMPREHENSIVE INCOME
The following reclassification adjustments are required to avoid
double-counting net realized gains on sales of securities that were previously
included in comprehensive income prior to the sales of the securities (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net gain (loss) on sales of securities included in
interest income.................................... $ (383) $ 473 $ 87
======= ===== ====
Other comprehensive income:
Net unrealized gain (loss) arising during the
year............................................. $(1,985) $ 172 $342
Reclassification adjustment........................ 383 (473) (87)
------- ----- ----
Net unrealized gain (loss) reported in other
comprehensive income............................... $(1,602) $(301) $255
======= ===== ====
</TABLE>
The balance of accumulated other comprehensive loss as reported on the
balance sheet consists of the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net unrealized (loss) gain on available-for-sale
securities................................................ $(1,559) $ 43
Cumulative loss on foreign currency translation............. (968) (380)
------- -----
Accumulated other comprehensive loss...................... $(2,527) $(337)
======= =====
</TABLE>
80
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131,
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION."
Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Company has determined that it only has one
reportable segment because management has organized the business along its
functional lines.
PRODUCT SALES REVENUES
Product sales revenues consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
AmBisome...................................... $129,177 $103,430 $ 83,918
DaunoXome..................................... 4,775 4,672 5,234
VISTIDE....................................... 5,938 6,074 11,735
-------- -------- --------
$139,890 $114,176 $100,887
======== ======== ========
</TABLE>
REVENUES FROM EXTERNAL CUSTOMERS AND COLLABORATIVE PARTNERS BY GEOGRAPHIC REGION
The following table summarizes revenues from external customers and
collaborative partners by geographic region. Revenues are attributed to
countries based on the location of the customer or collaborative partner (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States................................. $ 28,389 $ 23,601 $ 17,679
Germany....................................... 21,647 22,254 17,063
United Kingdom................................ 19,259 17,241 17,794
Switzerland................................... 15,763 16,400 14,200
Italy......................................... 16,293 13,420 10,993
Spain......................................... 14,625 11,934 8,880
France........................................ 8,347 4,993 3,155
Sweden........................................ 4,400 1,696 10,802
Other European countries...................... 27,100 25,340 23,665
Other foreign countries....................... 13,156 14,240 8,027
-------- -------- --------
Consolidated total............................ $168,979 $151,119 $132,258
======== ======== ========
</TABLE>
81
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
At December 31, 1999, the net book value of the Company's property,
plant and equipment was $51.4 million. Approximately 93% of such assets were
located in the United States. At December 31, 1998, the net book value of
the Company's property, plant and equipment was approximately
$51.0 million. Approximately 92% of such assets were located in the United
States.
MAJOR CUSTOMER
In 1999, 1998 and 1997, sales to one distributor accounted for approximately
14%, 13% and 14% of product revenues, respectively.
14. INCOME TAXES
The Company has no deferred provision for income taxes. The current
provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ 65 $160 $ --
State.............................................. 30 21 --
Foreign............................................ 793 678 322
---- ---- ----
$888 $859 $322
==== ==== ====
</TABLE>
Foreign pre-tax income (loss) was $2.0 million, 0.1 million and ($2.8)
million in 1999, 1998 and 1997, respectively.
The difference between the provision for taxes on income and the amount
computed by applying the federal statutory income tax rate to income before
provision for income taxes and equity in loss of unconsolidated affiliate is
explained below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loss before provision for income taxes......... $(60,942) $(42,798) $(72,571)
======== ======== ========
Tax at federal statutory rate.................. $(20,720) $(14,552) $(24,675)
Unbenefitted losses............................ 21,074 14,698 24,660
Other.......................................... 534 713 337
-------- -------- --------
$ 888 $ 859 $ 322
======== ======== ========
</TABLE>
At December 31, 1999, the Company had U.S. federal and state net operating
loss carryforwards of $413.3 million and $69.8 million, respectively. The
federal net operating loss carryforwards will expire at various dates beginning
in 2001 through 2019, if not utilized. The state net operating loss
carryforwards will expire at various dates from 2000 through 2012, if not
utilized. Utilization of net operating losses may be subject to an annual
limitation due to ownership change limitations provided in
82
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
14. INCOME TAXES (CONTINUED)
the Internal Revenue Code and similar state provisions. This annual limitation
may result in the expiration of the net operating losses and credits before
utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1999 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards...................... $ 144,600 $ 125,439
Research and other credits............................ 27,400 24,985
Capitalized R&D for California........................ 14,800 11,200
Other, net............................................ 7,400 8,987
--------- ---------
Total deferred tax assets........................... $ 194,200 $ 170,611
Valuation allowance................................... (194,200) (170,611)
--------- ---------
Net deferred tax assets recognized.................... $ -- $ --
========= =========
</TABLE>
The valuation allowance increased by $23.6 million and $34.2 million for the
years ended December 31, 1999 and 1998, respectively. Approximately
$24.4 million of the valuation allowance at December 31, 1999 relates to the tax
benefits of stock option deductions, which will be credited to additional
paid-in capital when realized.
15. RETIREMENT SAVINGS PLAN
As of December 31, 1999, Gilead maintained two separate retirement savings
plan pursuant to which eligible employees may defer compensation for income tax
purposes under Section 401(k) of the Internal Revenue Code of 1986 ("Savings
Plans"). One Savings Plan primarily covers NeXstar employees ("NeXstar Plan"),
while the other Savings Plan primarily covers all other eligible employees of
the combined company ("Gilead Plan"). Under the NeXstar Plan, employee
contributions are discretionary, but may not exceed 15% of eligible annual
compensation. In addition, the NeXstar Plan includes a Company match of 50% of
employee contributions up to a maximum of 6% of eligible annual compensation.
For the years ended December 31, 1999, 1998, and 1997, the Company recorded
contribution expenses related to the NeXstar Plan of approximately
$0.5 million, $0.5 million and $0.6 million, respectively. At December 31, 1999,
approximately $0.9 million, representing 17,225 shares of the Company's common
stock, was held by the NeXstar Plan in trust for plan participants. Effective
February 1995, contributions to the NeXstar Plan may not be invested in the
Company's common stock.
16. RELATED PARTY TRANSACTIONS
During 1999 and 1998, Gilead paid an aggregate of $6.7 million and
$4.7 million, respectively, to PharmaResearch Corporation, a contract research
organization, for services rendered in connection
83
<PAGE>
GILEAD SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RELATED PARTY TRANSACTIONS (CONTINUED)
with clinical studies. A member of the Board is a senior advisor to an
investment fund that owns a controlling interest in PharmaResearch Corporation.
17. QUARTERLY RESULTS (UNAUDITED)
The following table is in thousands, except per share amounts:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999
Total revenues.................. $38,276 $43,537 $38,390 $48,776
Total costs and expenses........ 54,937 55,791 69,608 59,502
Net loss........................ (15,476) (11,691) (30,365) (8,954)
Basic and diluted net loss per
share......................... (.37) (.28) (.70) (.20)
1998
Total revenues.................. $41,513 $35,289 $31,866 $42,451
Total costs and expenses........ 55,209 57,528 53,483 64,411
Net income (loss)............... (10,066) (18,287) 2,202 (18,607)
Basic and diluted net income
(loss) per share.............. (.25) (.45) .05 (.45)
</TABLE>
84
<PAGE>
GILEAD SCIENCES, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT ---------- ---------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
PERIOD EXPENSE OTHER DEDUCTIONS PERIOD
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts......... $ 1,480 $1,059 $ -- $ 206 $ 2,333
Valuation allowance for deferred tax
assets................................ 170,611 -- 23,589(3) -- 194,200
-------- ------ ------- ------ --------
$172,091 $1,059 $23,589 $ 206 $196,533
======== ====== ======= ====== ========
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts......... $ 1,883 $ (294)(1) $ -- $ 109 $ 1,480
Allowance for other noncurrent assets... 1,737 (550)(2) -- 1,187(2) --
Valuation allowance for deferred tax
assets................................ 136,411 -- 34,200(3) -- 170,611
-------- ------ ------- ------ --------
$140,031 $ (844) $34,200 $1,296 $172,091
======== ====== ======= ====== ========
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts......... $ 2,002 $ 306 $ -- $ 425 $ 1,883
Allowance for other noncurrent assets... 1,737 -- -- -- 1,737
Valuation allowance for deferred tax
assets................................ 106,380 -- 30,031(3) -- 136,411
-------- ------ ------- ------ --------
$110,119 $ 306 $30,031 $ 425 $140,031
======== ====== ======= ====== ========
</TABLE>
- ------------------------
(1) In August 1996, a major customer of the Company filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. The total
receivable outstanding from that customer as of December 31, 1996 of
$0.6 million was reserved. In 1997, the Company collected approximately
$0.1 million of this amount by assigning its claim to a third party. In
1998, the Company reversed that portion of the allowance for doubtful
accounts no longer deemed necessary.
(2) The Company accepted $550,000 in full settlement of an outstanding note
receivable that was fully reserved on the balance sheet.
(3) Charged to deferred tax benefit.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
GILEAD SCIENCES, INC.
By: /s/ JOHN C. MARTIN
-----------------------------------------
John C. Martin
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints John C. Martin and Mark L.
Perry, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN C. MARTIN President and Chief Executive
------------------------------------------- Officer, Director (Principal March 29, 2000
John C. Martin Executive Officer)
Vice President, Chief
/s/ SHARON SURREY-BARBARI Financial Officer (Principal
------------------------------------------- Financial and Accounting March 29, 2000
Sharon Surrey-Barbari Officer)
/s/ DONALD H. RUMSFELD
------------------------------------------- Chairman of the Board of March 29, 2000
Donald H. Rumsfeld Directors
/s/ PAUL BERG
------------------------------------------- Director March 29, 2000
Paul Berg
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ETIENNE F. DAVIGNON
------------------------------------------- Director March 29, 2000
Etienne F. Davignon
/s/ JAMES M. DENNY, SR.
------------------------------------------- Director March 29, 2000
James M. Denny, Sr.
/s/ GORDON E. MOORE
------------------------------------------- Director March 29, 2000
Gordon E. Moore
/s/ GEORGE P. SHULTZ
------------------------------------------- Director March 29, 2000
George P. Shultz
</TABLE>
87
<PAGE>
OFFICE/LIGHT MANUFACTURING LEASE
(2900 Center Green Court South)
(Boulder, Colorado)
LEASE SUMMARY
<TABLE>
<S> <C>
1. Landlord: THW Partners Limited Partnership, a
Colorado limited partnership
2. Tenant: Gilead Sciences, Inc., a
Delaware corporation
3. Guarantor: None
4. Premises: Second Floor, 2900 Center Green Court
South, Boulder, Colorado
5. Rentable Square Feet: Approximately 10,207 square feet
6. Commencement Date: March 1, 2000
7. Expiration Date: February 28, 2005
8. Term: Five (5) years
9. Rent Commencement Date: March 1, 2000
10. Initial Rent: $173,519
(Annually)
11. Initial Rent: $14,459.92
(Monthly)
12. Increase in Base Rent: 3% annual increase on Base Rent during
years two, three, four and five
13. Operating Expenses: Pro rata share of increases
over 1999 Base Year
14. Tenant's Pro Rata Share
of the Building Complex: 30.10%
</TABLE>
<PAGE>
<TABLE>
<S> <C>
15. Security Deposit: $14,459.92 in cash or
acceptable letter of credit
16. Parking Spaces: None assigned
17. Tenant Finish Allowance $112,277.00 per Workletter
18. Option on Additional Space: None
19. Option to Renew: Two 5-year terms @ 95% of
Market Rates
20. Right of First Offer: Yes
EXHIBITS:
A - Premises
B - Legal Description
C - Estoppel and Commencement Date Certificate
D - Work Letter Agreement
E - Rules and Regulations
F - Other Rights of Opportunity
to Lease Space
</TABLE>
Note: This Lease Summary does not in any way modify the terms of the
Lease, but rather is for information purposes only. The Lease should
be consulted for the specific terms of the Lease Agreement.
<PAGE>
OFFICE/LIGHT MANUFACTURING LEASE
(2900 Center Green Court South)
(Boulder, Colorado)
THIS LEASE is made this _____ day of January, 2000, between THW
PARTNERS LIMITED PARTNERSHIP, a Colorado limited partnership ("Landlord") and
GILEAD SCIENCES, INC., a Delaware corporation ("Tenant").
1. PREMISES: Landlord hereby leases to Tenant those certain premises
designated on the Plans attached hereto as EXHIBIT A and incorporated herein
by this reference (the "Premises"), consisting of a total of approximately
10,207 square feet of space and known as the second floor in the building at
2900 Center Green Court South in Boulder, Colorado (hereinafter the
"Building"), located on the real property more particularly described on
EXHIBIT B attached hereto and incorporated herein by this reference, together
with a non-exclusive right, subject to the provisions hereof, to use all
appurtenances thereunto, including, but not limited to, parking areas, and
any other areas designated by Landlord for use by tenants of the Building
(the Building, the real property on which the same is situated, parking
areas, other buildings thereon and areas and appurtenances are hereinafter
collectively sometimes called the "Building Complex"). This Lease is subject
to the terms, covenants and conditions set forth herein and Tenant and
Landlord each covenant as a material part of the consideration for this Lease
to keep and perform each and all of said terms, covenants and conditions to
be kept and performed by them.
2. TERM:
(a) The term of this Lease shall be for Five (5) years (the
"Primary Lease Term") commencing at 12:01 a.m. on March 1, 2000 (the
"Commencement Date") and terminating at 11:59 p.m. on February 28, 2005 (the
"Termination Date"), unless sooner terminated pursuant to the terms hereof.
If Landlord constructs the tenant improvements pursuant to the Workletter
(Exhibit D), in the event that the Premises are not "Ready for Occupancy," as
such term is defined in Paragraph 20 hereof, prior on or before the
Commencement Date, the Commencement Date (and the date for commencement of
rental payments) shall mean and refer to the date the Premises are Ready for
Occupancy. If Tenant constructs the tenant improvements pursuant to the
Workletter (Exhibit D), the Commencement Date and the date for commencement
of rental payments may be deferred as a result of any Landlord Delays, as
described in Paragraph 20 hereof.
(b) If, as a result of the postponement or acceleration of
the Commencement Date, the term would begin other than on the first day of
the month, Tenant shall pay proportionate rent at the same monthly rate set
forth herein (also in advance) for such partial month and all other terms and
conditions of this Lease shall be in force and effect during such partial
month, and the end of the term hereof shall be adjusted to a date which is
the last day of the month five (5) years after the Commencement Date. Tenant
agrees to execute and deliver to Landlord, in form attached hereto as EXHIBIT
C, an Estoppel and Commencement Date Certificate, within thirty (30) days of
the date the term commences, certifying as to the actual
<PAGE>
commencement and termination dates of the term, the rent commencement date,
if different, and such other matters as may be required by Landlord.
3. RENT: Tenant shall pay rent to Landlord for the Premises from the
Commencement Date through December 31, 2000 at the rate of One Hundred
Seventy Three Thousand, Five Hundred and Nineteen Dollars ($173,519) per
year, payable in equal monthly installments of Fourteen Thousand Four Hundred
Fifty Nine and 92/100 Dollars ($14,459.92).
A portion of the foregoing rent is Tenant's Pro-Rata Share of
Operating Expenses for the calendar year 1999, the exact amount of which
remains to be determined. The balance of the foregoing rent is defined as
"Base Rent."
On January 1, 2001, and on each January 1st thereafter throughout
the term and any extended term of this Lease, the Operating Expense component
of the rent shall be adjusted as provided in paragraph 5.b. of this Lease.
On March 1, 2001, and on each March 1st thereafter throughout the
term and any extended term of this Lease, the Base Rent due for the ensuing
year shall be increased by 3% of the Base Rent payable during the preceding
year.
All installments of Rent shall be payable in advance, on the first (1st) day
of each calendar month during the term hereof. Rent for the first and last
months of the term, hereof shall be prorated based upon the number of days
during each of said months that the Lease term was in effect. One monthly
installment of Rent shall be due and payable on the date of execution of this
Lease by Tenant. All Rent shall be paid without notice, demand, deduction or
offset, at the office of Landlord or to such other person or at such other
place as Landlord may designate in writing. Tenant shall pay to Landlord as
"Additional Rent" all other sums due under this Lease.
4. SECURITY DEPOSIT: It is agreed that Tenant, concurrently with the
execution of this Lease, has deposited with Landlord, and will keep on
deposit at all times during the term hereof, a sight draft letter of credit
from a reputable financial institution satisfactory to Landlord, payable to
Landlord, in the amount of Fourteen Thousand Four Hundred Fifty Nine and
92/100 Dollars ($14,459.92), the receipt of which is hereby acknowledged, as
security for the payment by Tenant of the rent and all other sums herein
agreed to be paid and for the faithful performance of all the terms,
conditions and covenants of this Lease. If, at any time during the term
hereof, Tenant shall be in default in the performance of any provisions of
this Lease, Landlord shall have the right, but shall not be obligated, to
draw upon said letter of credit and to use the proceeds therefrom, or so much
thereof as necessary, in payment of any rent in default, reimbursement of any
expense incurred by Landlord, and in payment of any damages incurred by the
Landlord by reason of Tenant's default. In such event, Tenant shall, on
written demand of Landlord, forthwith remit to Landlord a sufficient amount
in cash to restore said deposit to its original amount. In the event said
deposit has not been utilized as aforesaid, said deposit, or as much thereof
as has not been utilized for such purposes, shall be refunded to Tenant,
without interest, within sixty (60) days after the termination of this Lease
upon full performance of this Lease by Tenant and vacation of the Premises by
Tenant. Landlord shall have the right to commingle any cash portion
<PAGE>
of said deposit with other funds of Landlord. Landlord may assign the letter
of credit and deliver any cash funds deposited herein by Tenant to any
purchaser of Landlord's interest in the Premises who assumes all of
Landlord's obligations under this Lease and holds such letter of credit
and/or cash pursuant to the terms of this Lease, in the event such interest
is sold, and thereupon Landlord shall be discharged from further liability
with respect to such deposit. If said letter of credit is not assignable,
Tenant agrees to replace the letter of credit payable to Landlord with one
payable to any such purchaser of the Premises. If the valid claims of
Landlord exceed the amount of said deposit, Tenant shall remain liable for
the balance of such claims.
5. ADDITIONAL RENT:
(a) The following terms shall have the following meanings with
respect to the provisions of this Paragraph 5:
(1) "Building Complex Rentable Area" shall mean all
rentable space available for lease in the Building Complex, calculated on the
basis set forth in BOMA Publication #ANSIZ-65.1-1980. If there is a
significant change in the aggregate Building Complex Rentable Area, of a
permanent nature, as a result of an addition to the Building Complex, partial
destruction thereof or similar circumstance, Landlord's Accountants (as
herein defined) shall determine and make an appropriate adjustment to the
provisions herein.
(2) "Tenant's Pro Rata Share" shall mean a fraction, the
numerator of which is the BOMA Rentable Area of the Premises (i.e. 10,207
square feet) and the denominator of which is the Building Complex Rentable
Area (i.e. 33,909 square feet), and is equal to 30.10%. At such time, if
ever, any space is added to or subtracted from the Premises pursuant to the
terms of this Lease, Tenant's Pro Rata Share shall be increased or decreased
accordingly.
(3) "Operating Expenses" shall mean:
A. All operating expenses of any kind or nature
which are necessary, ordinary or customarily incurred with respect to the
operation and maintenance of the Building Complex as determined in accordance
with generally accepted accounting principles and shall include, but not be
limited to:
(i) Costs of supplies, including but not
limited to the cost of "relamping" all Building lighting as the same may be
required from time to time;
(ii) Costs incurred in connection with
obtaining and providing energy for the Building Complex, including but not
limited to costs of propane, butane, natural gas, steam, electricity, solar
energy and fuel oils, coal or any other energy sources as well as costs for
heating, ventilation, and air conditioning services ("HVAC");
(iii) Costs of water and sanitary and
storm drainage services;
(iv) Costs of janitorial and security
services, if any;
<PAGE>
(v) Costs of general maintenance and
repairs, including costs under HVAC and other mechanical maintenance
contracts; and repairs and replacements of equipment used in connection with
the maintenance and repair work;
(vi) Costs of maintenance and replacement
of landscaping, sprinkler systems; and costs of supplies, maintenance,
repair, striping and repaving of parking areas, common areas, plazas and
other areas of the Building Complex, including trash and snow removal;
(vii) Insurance premiums, including fire
and all-risk coverage, together with loss of rent endorsement; public
liability insurance; and any other insurance carried by Landlord on the
Building Complex or any component parts thereof;
(viii) Labor costs, including wages and
other payments, costs to Landlord of workmen's compensation and disability
insurance, payroll taxes, welfare fringe benefits incurred directly in
connection with the operation of the Building Complex, and all legal fees and
other costs or expenses incurred in resolving any labor disputes;
(ix) Professional building management
fees not to exceed market rate management fees in the Boulder area;
(x) Legal, accounting, inspection and
other consultation fees (including, without limitation, fees charged by
consultants retained by Landlord for services that are designed to produce a
reduction in Operating Expenses or reasonably to improve the operation,
maintenance or state of repair of the Building Complex) incurred for the
normal prudent operation of the Building Complex (but not those incurred in
connection with Landlord's business relationship or dealings with tenants or
prospective tenants);
(xi) The costs of capital improvements
and structural repairs and replacements made in or to the Building Complex or
the cost of any machinery or equipment installed in the Building Complex in
order to conform to changes, subsequent to the Lease Commencement Date, in
any applicable laws, ordinances, rules, regulations or orders of any
governmental or quasi-governmental authority having jurisdiction over the
Building Complex (herein, "Required Capital Improvement"); and the costs of
any capital improvements and structural repairs and replacements designed
primarily to reduce Operating Expenses (herein, "Cost Savings Improvements").
The expenditures for Required Capital Improvements and Cost Savings
Improvements shall be amortized and included within annual Operating Expenses
over the useful life of such capital improvement or structural repair or
replacement (as determined by Landlord's accountants), provided that the
amortized amount of any Cost Savings Improvement shall be limited in any year
to the reduction in Operating Expenses as a result thereof. Landlord shall
apprise Tenant of its plans to make any Required Capital Improvement or Cost
Savings Improvement prior to commencement of work on such improvements. The
foregoing shall not, however, imply that Tenant has any right to approve of
such improvements or be construed to
<PAGE>
require Tenant's consent to any such improvement;
(xii) All real property taxes and
assessments ("Taxes and Assessments") levied against the Building Complex by
any governmental or quasi-governmental authority, including any taxes,
assessments, surcharges, or service or other fees of a nature not presently
in effect which shall hereafter be levied on the Building Complex as a result
of the use, ownership or operation of the Building Complex or for any other
reason, whether in lieu of or in addition to any current real estate taxes
and assessments; provided, however, that any taxes which shall be levied on
the rentals of the Building Complex shall be determined as if the Building
Complex were Landlord's only property and provided further, that in no event
shall the term "Taxes and Assessments", as used herein, include any federal,
state or local income taxes levied or assessed on Landlord, unless such taxes
are a specific substitute for real property taxes; such term shall, however,
include gross taxes on rentals and expenses incurred by Landlord for tax
consultants and in contesting the amount or validity of any such Taxes or
Assessments (all of the foregoing are collectively referred to herein as
"Taxes"). "Assessments" shall include any and all so-called special
assessments, license tax, business license fee, business license tax,
commercial rental tax, levy, charge or tax imposed by any authority having
the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, water, drainage or other
improvement or special district thereof, against the Premises, the Building
or the Building Complex, or against any legal or equitable interest of
Landlord therein. For the purposes of this Lease, any special assessment
shall be deemed payable in such number of installments as is permitted by
law, whether or not actually so paid. If the Building Complex has not been
fully assessed as a completed project, for the purposes of computing the Real
Estate Taxes for any adjustment required herein, the same shall be increased
by Landlord's Accountants, in accordance with their estimate of what the
assessment will be, upon full completion of the Building Complex, including
installation of all tenant finish items. The terms "taxes" and "assessments"
as used herein shall not include any interest, penalties or fines resulting
from delinquency in payments or other causes.
(xiii) Any other expense which under
generally accepted accounting principles would be considered a normal
maintenance or operating expense. If Landlord selects an accrual accounting
basis for calculating Operating Expenses, Operating Expenses shall be deemed
to have been paid when such expenses have accrued in accordance with
generally accepted accounting principles.
B. But shall expressly exclude Landlord's income
taxes; leasing commissions, advertising and promotional expenses; interest on
debt or amortization payments on any mortgages or deeds of trust;
depreciation, costs of repairs or other work occasioned by fire, windstorm or
other casualty to the extent of insurance proceeds received; costs and
expenditures which Landlord has treated (or which Landlord should, in
accordance with U.S. Generally Accepted Accounting Principals treat), for its
accounting purposes, as a capital expenditure, other than Required Capital
Improvements and Cost Savings Improvements referred to in Paragraph
5(a)(3)(xi) above, and any other expense which under generally accepted
accounting principles would not be considered a normal maintenance or
operating expense, except as otherwise specifically provided herein.
<PAGE>
b. It is hereby agreed that Tenant shall pay to Landlord as
Additional Rent, commencing January 1, 2001, Tenant's Pro Rata Share of the
amount by which Operating Expenses for the calendar year 2000 exceed the
Operating Expenses for the calendar year 1999, payable monthly, on the same
date and at the same place Base Rent is payable. In a like manner, Additional
Rent shall be adjusted as of each January 1st during the Term. Landlord shall
deliver to Tenant, as soon as practicable following the end of any calendar
year, a calculation of the Operating Expenses for the calendar year just
ended and the adjustment in rent resulting from any excess of such Operating
Expenses over the Operating Expenses for the base year of 1999 (the "Budget
Sheet"). Until receipt of the Budget Sheet, Tenant shall continue to pay its
monthly Tenant's Pro Rata Share of Operating Expenses based upon the amount
paid during the preceding calendar year. To the extent that the Budget Sheet
reflects Tenant's Pro Rata Share of Operating Expenses for the new calendar
year greater than the amount actually paid to the date of receipt of the
Budget Sheet for the new calendar year, Tenant shall pay such amount to
Landlord within thirty (30) days of receipt of the Budget Sheet. Upon receipt
of the Budget Sheet, Tenant shall thereafter pay the amount of its monthly
Tenant's Pro Rata Share of Operating Expenses as set forth in the Budget
Sheet.
c. If the Lease term hereunder covers a period of less than
a full calendar year during the last calendar year of the term hereof,
Tenant's Pro Rata Share of Operating Expenses for such partial year shall be
adjusted accordingly to reflect the number of months in such year during
which Tenant leased the Premises.
d. Tenant shall have the right at its own expense and at a
reasonable time (after written notice to Landlord) within ninety (90) days
after receipt of the Budget Sheet to audit Landlord's books relevant to the
Additional Rent due under this Paragraph 5. Landlord shall fully cooperate
with Tenant in connection with such audit. In the event Tenant does not audit
Landlord's books and deliver the results thereof to Landlord within said
90-day period, the terms and amounts set forth in the Budget Sheet shall be
deemed conclusive and final and Tenant shall have no further right to
adjustment unless the failure to complete such audit is caused by Landlord's
failure to provide or make available to Tenant the information necessary to
complete such audit, in which case such time period shall be appropriately
expanded. In the event Tenant's examination reveals that an error has been
made in Landlord's determination of Tenant's Pro Rata Share of Operating
Expenses and Real Estate Taxes and Landlord agrees with such determination,
then the amount of such adjustment shall be payable by Landlord or Tenant, to
the other party as the case may be. In the event Tenant's examination reveals
an error has been made in Landlord's determination of Tenant's Pro Rata Share
of Operating Expenses and Real Estate Taxes, and Landlord disagrees with the
results thereof, Landlord shall have thirty (30) days to obtain, at its own
expense, an audit from an accountant of its choice to determine Tenant's Pro
Rata Share of Operating Expenses and Real Estate Taxes. In the event
Landlord's accountant and Tenant's accountant are unable to reconcile their
audits, both accountants shall mutually agree upon a third accountant, whose
determination of Tenant's Pro Rata Share of Operating Expenses and Real
Estate Taxes shall be conclusive. In the event the amount of error by
Landlord is determined to be ten percent (10%) or more, the reasonable costs
of the three audits made pursuant to this
<PAGE>
subparagraph shall be paid by Landlord. In the event the amount of error by
Landlord is determined to be less than ten percent (10%), the reasonable
costs of the three audits made pursuant to this subparagraph shall be paid by
Tenant.
e. Landlord's failure during the Lease term to prepare and
deliver any statements or bills, or Landlord's failure to make a demand under
this Paragraph or under any other provision of this Lease shall not in any
way be deemed to be a waiver of, or cause Landlord to forfeit or surrender
its rights to collect any items of Additional Rent which may have become due
pursuant to this Paragraph during the term of this Lease. Tenant's liability
for all Additional Rent due under this Paragraph 5 shall survive the
expiration or earlier termination of this Lease.
f. Notwithstanding anything in this paragraph 5 to the
contrary, Tenant shall only be responsible for Additional Rent resulting from
an increase in Operating Expenses over Base Operating Expenses commencing on
the first day of January, 2001, based on any increase or estimated increase
of Operating Expenses during the calendar year 2000 over those incurred
during 1999. Thereafter, adjustments in the amount of any Additional Rent
shall occur as of the first day of each calendar year during the remaining
Initial Term and any Extended Term of this Lease.
6. CHARACTER OF OCCUPANCY:
(a) The Premises are to be occupied for office and light
manufacturing uses not inconsistent with the character and type of tenancy
found in comparable first-class office/light manufacturing buildings in the
Boulder area and for no other purpose without the prior written consent of
Landlord. By way of limitation, the term "light manufacturing uses" shall
include only the packaging and distribution of pharmaceutical products and
not the manufacture or testing of pharmaceutical products.
(b) Tenant shall not suffer nor permit the Premises nor any
part thereof to be used in any manner, nor anything to be done therein, nor
suffer or permit anything to be brought into or kept therein, which would in
any way (i) make void or voidable any fire or liability insurance policy then
in force with respect to the Building Complex, (ii) make unobtainable from
reputable insurance companies authorized to do business in Colorado any fire
insurance with extended coverage, or liability, boiler or other insurance
required to be furnished by Landlord under the terms of any lease or mortgage
to which this Lease is subordinate, at standard rates, (iii) cause or in
Landlord's reasonable opinion be likely to cause physical damage to the
Building Complex or any part thereof, (iv) constitute a public or private
nuisance, (v) impair, in the reasonable opinion of Landlord, the appearance,
character or reputation of the Building Complex, (vi) discharge objectionable
fumes, vapors or odors into the air conditioning system or into any flues or
vents not designed to receive them or otherwise in such manner as may
unreasonably offend other occupants of the Building Complex, (vii) impair or
interfere with any of the Building Complex services or impair or interfere
with or tend to impair or interfere with the use of any of the other areas of
the Building Complex by, or occasion discomfort, or annoyance to Landlord or
any of the other tenants or occupants of the Building Complex, any such
impairment or interference to be based upon the reasonable opinion of
Landlord, (viii) increase on an ongoing
<PAGE>
periodic basis the pedestrian traffic in and out of the Premises or the
Building Complex above an ordinary level, (ix) create waste in, on or around
the Premises, Building, or Building Complex, or (x) make any noise or set up
any vibration which will disturb other tenants, except in the course of
permitted repairs or alterations at times permitted by Landlord.
(c) Tenant shall not use the Premises nor permit anything
to be done in or about the Premises or Building Complex in any way which will
conflict with any law, statute, ordinance, protective covenants affecting the
Building Complex or governmental or quasi-governmental rules or regulations
now in force or which may hereafter be enacted or promulgated. Tenant shall
give prompt written notice to Landlord of any notice it receives of the
violation of any law or requirement of any public authority with respect to
the Premises or the use or occupation thereof. Landlord shall give prompt
written notice to Tenant of any notice it receives relative to the violation
by Tenant of any law or requirement of any public authority with respect to
the Premises or the use or occupation thereof.
7. SERVICES AND UTILITIES:
(a) Landlord agrees, and in accordance with standards from
time to time prevailing for first-class office/light manufacturing buildings
in the Boulder area: (i) to furnish water to the Building for use in
lavatories and drinking fountains (and to the Premises if the plans for the
Premises so provide); (ii) to furnish heating and air conditioning service;
(iii) to furnish all gas and electric services reasonably required in and to
the Premises, (iv) to furnish such snow removal services to the Building
Complex as may, in the judgment of Landlord, be reasonably required for safe
access to the Building Complex, and (v) to provide and pay for all reasonable
and normal management and operating expenses of the Building and the
Premises, including trash removal (except janitorial services and maintenance
within the Premises).
(b) If Tenant requires water in excess of that usually
furnished or supplied for use in the Premises as general office space, Tenant
shall first procure the consent of Landlord for the use thereof. Tenant
agrees to pay to Landlord such amounts as Landlord determines are necessary
to cover the costs of such increased use of water, including, but not limited
to, the cost of installation, monitoring, maintenance and repair of any check
meter or other instrument necessary to measure the use of additional water.
Landlord additionally reserves the right and at its option shall be entitled
to cause the Premises to be separately metered for water usage.
(c) Tenant agrees that Landlord shall not be liable for
failure to supply any required services during any period when Landlord uses
reasonable diligence to supply such services, or during any period Landlord
is required to reduce or curtail such services pursuant to any applicable
laws, rules or regulations, now or hereafter in force or effect, it being
understood and agreed to by Tenant that Landlord may discontinue, reduce or
curtail such services, or any of them, at such times as it may be necessary
by reason of accident, unavailability of employees, repairs, alterations,
improvements, strikes, lockouts, riots, acts of God, application of
applicable laws, statutes, rules and regulations, or due to any other
happening beyond the reasonable control of Landlord. In the event of any such
interruption, reduction or discontinuance of Landlord's
<PAGE>
services, Landlord shall not be liable for damages to persons or property as
a result thereof, nor shall the occurrence of any such event in any way be
construed as an eviction of Tenant or cause or permit an abatement, reduction
or setoff of rent, or operate to release Tenant from any of Tenant's
obligations hereunder, so long as such services are resumed within a
reasonable period of time.
(d) In the event that Tenant has any special or additional
electrical or mechanical requirements related to its use of the Premises, any
such electrical or mechanical equipment must be located within the Premises.
Such electrical or mechanical requirements, for the purposes hereof, shall
include by way of example, but not limitation, any internal telephone system.
The foregoing shall in no way be construed as granting to Tenant additional
rights to use any such special or additional electrical or mechanical
equipment in its Premises without the prior written consent of Landlord. Any
additional cost or expense related to or resulting from such electrical or
mechanical requirements shall be the sole obligation of Tenant. Landlord
acknowledges that Tenant occupies space in other locations, and that the
Premises and the other locations will be interconnected with telephone and
computer services. However, such interconnection shall not involve any
electrical, mechanical or telecommunication equipment located on the outside
of the Building or within the Building other than in the Premises or involve
any structural penetration or wiring within walls or roof of the Building or
Premises, without the Landlord's prior written consent.
(e) Tenant at its sole cost and expense shall take good
care of the Premises, ordinary wear and tear excepted, and keep the same free
from waste at all times, and pay all charges for janitorial services
performed in the leased Premises during the term of this Lease.
8. QUIET ENJOYMENT: Subject to the provisions of this Lease,
Landlord covenants that Tenant, on paying the rent and performing the
covenants of this Lease on its part to be performed, shall and may peacefully
and quietly have, hold and enjoy the Premises for the term of this Lease.
Landlord shall not be responsible for the acts or omissions of any other
tenant or third party which may interfere with Tenant's use and enjoyment of
the Premises. In the event of any transfer or transfers of Landlord's
interest in the Premises or in the real property of which the Premises are a
part, other than a transfer for security purposes only, the transferor shall
be automatically relieved of any and all obligations and liabilities on the
part of Landlord accruing from and after the date of such transfer; provided
that the transferee agrees to accept and perform all obligations and
responsibibilities of Landlord under this Lease from and after the date of
transfer and agrees to accept and acknowledge all rights of Tenant under this
Lease from and after the date of transfer.
9. MAINTENANCE AND REPAIRS:
(a) Notwithstanding any other provisions of this Lease,
Landlord shall repair and maintain in good order, condition and repair the
roof, foundations, and exterior walls of the Building excluding store fronts,
glass windows, door closure devices, door frames and locks, except to the
extent such maintenance and repairs are caused by the negligent act or
omission of Tenant, its agents, servants, employees, licensees or invitees,
in which case Tenant shall either, at its option: (i) pay to Landlord,
<PAGE>
on demand, the cost of such maintenance and repairs performed by Landlord
less the amount of any insurance proceeds received by Landlord on account
thereof, if applicable; or (ii) promptly repair and maintain the damage it
has caused to the Premises, doing so in accordance with building standards
and in compliance with all local building codes and governmental regulations
and with the requirements of this Lease dealing with alterations, maintenance
and repairs. Landlord shall also maintain and keep in good order public
portions of the Building Complex, including but not limited to landscaping,
walkways and parking areas.
(b) Tenant, at Tenant's sole cost and expense, shall
maintain, in good order, condition and repair, the Premises, including the
interior surfaces of the ceilings, interior walls and floors, all doors,
interior and exterior glass and windows, store fronts, door closure devices,
door frames and locks, plumbing (excluding restrooms) and electrical wiring,
switches, fixtures and other mechanical items, and shall replace light bulbs
within the Premises as necessary. In the event Tenant fails to so maintain
the Premises in good order, condition and repair, ordinary wear and tear
excepted, Landlord shall give Tenant notice to do such acts as are reasonably
required to maintain the Premises. In the event Tenant fails to promptly
commence such work and diligently pursue it to completion, then Landlord
shall have the right, but shall not be required, to do such acts and expend
such funds at the expense of Tenant as are reasonably required to perform
such work. Tenant shall reimburse Landlord for all costs and expenses
incurred in performing such work within ten (10) days of invoice. Landlord
shall have no liability to Tenant for any damage, inconvenience or
interference with the use of the Premises by Tenant as a result of performing
any such work.
(c) Landlord and Tenant shall each do all acts required to
comply with all applicable laws, ordinances, regulations and rules of any
public authority relating to their respective maintenance obligations as set
forth herein.
10. ALTERATIONS AND ADDITIONS:
(a) Other than is provided for in Exhibit D, Tenant shall
make no permanent alterations, additions or improvements to the Premises or
any part thereof without obtaining the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. Tenant shall
submit any such request to Landlord at least thirty (30) days prior to the
proposed commencement date of such work. Landlord may impose, as a condition
to such consent, and at Tenant's sole cost, such reasonable requirements as
Landlord may deem necessary in its judgment, including without limitation,
the manner in which the work is done, a right of approval of the contractor
by whom the work is to be performed and the times during which the work is to
be accomplished, approval of all plans and specifications and the procurement
of all licenses and permits. Landlord shall be entitled to post notices on
and about the Premises with respect to Landlord's non-liability for
mechanics' Liens and Tenant shall not permit such notices to be defaced or
removed. Tenant further agrees not to connect any apparatus, machinery or
device to the Building systems, including electric wires, water pipes, fire
safety, heating and mechanical systems, without the prior written consent of
Landlord.
(b) All alterations, improvements and additions to the
Premises,
<PAGE>
including, by way of illustration but not by limitation, all counters,
screens, grilles, special cabinetry work, partitions, paneling, carpeting,
drapes or other window coverings and light fixtures, but excluding any
computer systems, telephone or other communication systems and similar
equipment, shall be deemed a part of the real estate and the property of
Landlord and shall remain upon and be surrendered with the Premises as a part
thereof without molestation, disturbance or injury at the end of the Lease
term, whether by lapse of time or otherwise. With respect to any alterations,
improvements and additions made to the Premises without Landlord's prior
written consent, Landlord, by notice given to Tenant no later than fifteen
(15) days prior to the end of the term, may elect to have Tenant remove all
or any of such alterations, improvements or additions (excluding non-movable
office walls), and in such event, Tenant shall promptly remove, at its sole
cost and expense, such alterations, improvements and additions and restore
the Premises to the condition in which the Premises were prior to the making
of the same, reasonable wear and tear excepted. Any such removal, whether
required or permitted by Landlord, shall be at Tenant's sole cost and
expense, and Tenant shall restore the Premises to the condition in which the
Premises were prior to the making of the same, reasonable wear and tear
excepted. All movable partitions, machines and equipment which are installed
in the Premises by or for Tenant, without expense to Landlord, and which can
be removed without structural damage to or defacement of the Building or the
Premises, and all furniture, furnishings and other articles of personal
property owned by Tenant and located in the Premises (all of which are herein
called "Tenant's Property") shall be and remain the property of Tenant. If
any of Tenant's Property is removed, however, Tenant shall repair or pay the
cost of repairing any damage to the Building or the Premises resulting from
such removal. All additions or improvements which are to be surrendered with
the Premises shall be surrendered with the Premises, as a part thereof, at
the end of the term or the earlier termination of this Lease.
(c) If Landlord permits persons requested by Tenant to
perform any alterations, repairs, modifications or additions to the Premises,
then prior to the commencement of any such work, Tenant shall deliver to
Landlord certificates issued by insurance companies qualified to do business
in the State of Colorado evidencing that workmen's compensation, public
liability insurance and property damage insurance, all in amounts, with
companies and on forms satisfactory to Landlord, are in force and maintained
by all such contractors and subcontractors engaged by Tenant to perform such
work. All such policies shall name Landlord as an additional insured and
shall provide that the same may not be canceled or modified without thirty
(30) days prior written notice to Landlord.
(d) Tenant, at its sole cost and expense, shall cause any
permitted alterations, decorations, installations, additions or improvements
in or about the Premises to be performed in compliance with all applicable
requirements of insurance bodies having jurisdiction, and in such manner as
not to interfere with, delay, or impose any additional expense upon Landlord
in the construction, maintenance or operation of the Building, and so as to
maintain harmonious labor relations in the Building.
11. ENTRY BY LANDLORD:
(a) Landlord and its agents shall have the right to enter
the Premises
<PAGE>
at all reasonable times and upon reasonable notice for the purpose of
examining or inspecting the same, to supply any services to be provided by
Landlord hereunder, to show the same to prospective purchasers and
prospective tenants of the Building, and to make such alterations, repairs,
improvements or additions to the Premises or to the Building as Landlord may
deem necessary or desirable. Landlord and its agent may enter the Premises at
all times and without advance notice and without liability to Tenant for
damage caused by such entry, whether forced or otherwise, for the purpose of
responding to an actual or apparent emergency. If, during the last 60 days of
the term hereof, Tenant shall have removed substantially all of its property
from the Premises, Landlord may immediately enter and alter, renovate and
redecorate the Premises without elimination or abatement of rent or incurring
liability to Tenant for any compensation.
12. MECHANIC'S LIENS: Except to the extent of Landlord's obligation
to pay for tenant finish, as provided for in Exhibit D, Tenant shall pay or
cause to be paid all costs for work done by or on behalf of Tenant or caused
to be done by or on behalf of Tenant on the Premises of a character which
will or may result in liens against Landlord's interest in the Premises,
Building or Building Complex and Tenant will keep the Premises, Building and
Building Complex free and clear of all mechanic's liens and other liens on
account of work done for or on behalf of Tenant or persons claiming under
Tenant. Except to the extent of Landlord's obligation to pay for tenant
finish, as provided for in Exhibit D, Tenant hereby agrees to indemnify,
defend and save Landlord harmless of and from all liability, loss, damages,
costs or expenses, including reasonable attorneys' fees, incurred in
connection with any claims of any nature whatsoever for work performed for,
or materials or supplies furnished to Tenant, including lien claims of
laborers, materialmen or others. Should any such liens be filed or recorded
against the Premises, Building or Building Complex with respect to work done
for or materials supplied to or on behalf of Tenant or should any action
affecting the title thereto be commenced, Tenant shall cause such liens to be
released of record within five (5) days after notice thereof pursuant to the
means provided therefore under Colorado statute. If Tenant desires to contest
any such claim of lien, Tenant shall nonetheless cause such lien to be
released of record by the posting of adequate security with a court of
competent jurisdiction as may be provided by Colorado's mechanics lien
statutes. If Tenant shall be in default in paying any charge for which such a
mechanics lien or suit to foreclose such a lien has been recorded or filed
and shall not have caused the lien to be released as aforesaid, after
consulting with Tenant, Landlord may (but without being required to do so)
pay such lien or claim and any costs associated therewith, and the amount so
paid, together with reasonable attorneys' fees incurred in connection
therewith, shall be immediately due from Tenant to Landlord as Additional
Rent.
13. DAMAGE TO PROPERTY, INJURY TO PERSONS:
(a) Tenant, as a material part of the consideration to be
rendered to Landlord under this Lease, hereby waives all claims of liability
that Tenant or Tenant's legal representatives, successors or assigns may have
against Landlord, and Tenant hereby indemnifies and agrees to hold Landlord
harmless from any and all claims of
<PAGE>
liability for any injury or damage to any person or property whatsoever: (1)
occurring in, on or about the Premises or any part thereof; and (2) occurring
in, on or about the Building Complex, to the extent such injury or damage is
caused by the negligent act or omission of Tenant, its agents, contractors,
employees, licensees or invitees. Tenant further agrees to indemnify and to
hold Landlord harmless from and against any and all claims arising from any
breach or default in the performance of any obligation on Tenant's part to be
performed under the terms of this Lease, or arising from any act of
negligence of Tenant, or any of its agents, contractors, employees, licensees
or invitees. Such indemnities shall include by way of example, but not
limitation, all costs, reasonable attorneys' fees, expenses and liabilities
incurred in or about any such claim, action or proceeding.
(b) Landlord shall not be liable to Tenant for: (i) any
damage by or from any act or negligence of any co-tenant or other occupant of
the Building Complex, or by any owner or occupant of adjoining or contiguous
property, or (ii) any injury or damage to persons or property resulting in
whole or in part from the criminal activities of others, unless Landlord has
received actual and timely knowledge of any threat, occurrance or event which
poses a risk of injury or damage to Tenant, unless Landlord has a legal and
practical remedy available to it to abate, remedy or eliminate such risk, and
unless Landlord has failed to take reasonable steps to abate, remedy or
eliminate such risk. To the extent not covered by normal fire and extended
coverage insurance, Tenant agrees to pay for all damage to the Building
Complex, as well as all damage to persons or property of other tenants or
occupants thereof, caused by the misuse or negligent act or omission of
Tenant or any of its agents, contractors, employees, licensees or invitees.
(c) Neither party nor their agents or employees shall be
liable to the other party for the loss or damage to any property occurring by
theft or otherwise, nor for any injury or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas, electricity,
water or rain which may leak from any part of the Building Complex or from
the pipes, appliances or plumbing works therein or from the roof, street or
subsurface or from any other place or resulting from dampness, or any other
cause whatsoever; provided, however, nothing contained herein shall be
construed to relieve either party from liability for any personal injury or
property damage resulting from its negligence. Neither Landlord nor its
agents or employees shall be liable for interference with the lights, view or
other incorporeal hereditaments, nor shall Landlord be liable to Tenant or
its officers, employees, guests or invitees for any damages arising from any
latent defect in the Premises or in the Building or Building Complex unless
resulting from Landlord's negligence. Each party shall give prompt notice to
the other in case of fire or accidents in or about the Premises or the
Building or of defects therein or in the fixtures or equipment located
therein.
(d) In case any claim, demand, action or proceeding is made
or brought against Landlord or Tenant, its agents or employees, by reason of
any obligation on the other party's part to be performed under the terms of
this Lease, or arising from any act or negligence of either party, its agents
or employees, or which gives rise to either party's obligation to indemnify
the other, the party shall be responsible for all costs and expenses,
including but not limited to reasonable attorneys' fees incurred in defending
or prosecution of the same, as applicable.
<PAGE>
(e) Landlord, as a material part of the consideration to be
rendered to Tenant under this Lease, hereby waives all claims of liability
that Landlord or Landlord's legal representatives, successors or assigns may
have against Tenant and Landlord hereby indemnifies and agrees to hold Tenant
harmless from any and all claims of liability for any injury or damage to any
person or property whatsoever: (1) occurring in, on or about the Premises or
any part thereof: and (2) occurring in, on or about the Building Complex, to
the extent such injury or damage is caused by the negligent act or omission
of Landlord, its agents, contractors, or employees. Landlord further agrees
to indemnify and hold Tenant harmless from and against any and all claims
arising from any breach or default in the performance of any obligation on
Landlord's part to be performed under the terms of this Lease, or arising
from any act of negligence of Landlord, or any of its agents, contractors, or
employees. Such indemnities shall include by way of example, but not
limitation, all costs, reasonable attorneys' fees, expenses and liabilities
incurred in or about any such claim, action or proceeding.
14. INSURANCE:
(a) Landlord agrees to carry and maintain the following
insurance during the term of this Lease and any extension hereof: fire and
extended coverage and general public liability insurance against claims for
personal injury, including death and property damage in or about the Premises
and the Building or the Building Complex (excluding Tenant's Property), such
insurance to be in amounts sufficient to provide reasonable protection for
the Building Complex. Such insurance may expressly exclude property paid for
by tenants or paid for by Landlord for which tenants have reimbursed Landlord
located in or constituting a part of the Building or the Building Complex.
Such insurance shall afford coverage for damages resulting from (a) fire, (b)
perils covered by extended coverage insurance, and (c) explosion of steam and
pressure boilers and similar apparatus located in the Building or the
Building Complex. All such insurance shall be procured from a responsible
insurance company or companies authorized to do business in Colorado and may
be obtained by Landlord by endorsement on its blanket insurance policies.
(b) Tenant shall procure and maintain at its own cost at
all times during the term of this Lease and any extensions hereof, hazard,
fire and extended coverage on Tenant's property and the contents of the
Premises, comprehensive general liability insurance, including coverage for
bodily injury, property damage, personal injury, products, host liquor legal
liability and broad form property damage with the following limits of
liability: One Million Dollars ($1,000,000.00) each occurrence combined
single limit for bodily injury, property damage and personal injury; One
Million Dollars ($1,000,000.00) aggregate for bodily injury and property
damage and for products liability. All such insurance shall be procured from
a responsible insurance company or companies authorized to do business in
Colorado, and shall be otherwise satisfactory to Landlord. All such policies
shall name Landlord as an additional insured, and shall provide that the same
may not be canceled or materially altered except upon thirty (30) days prior
written notice to Landlord. All insurance maintained by Tenant shall be
primary to any insurance provided by Landlord. If Tenant obtains any general
liability insurance policy on a claims-made basis, Tenant shall provide
continuous liability coverage for claims arising during the entire term of
this Lease, regardless of when
<PAGE>
such claims are made, either by obtaining an endorsement providing for an
unlimited extended reporting period in the event such policy is canceled or
not renewed for any reason whatsoever or by obtaining new coverage with a
retroactive date the same as or earlier than the expiration date of the
canceled or expired policy. Tenant shall provide certificate(s) of such
insurance to Landlord upon commencement of the Lease term and at least thirty
(30) days prior to any annual renewal date thereof and upon request from time
to time and such certificate(s) shall disclose that such insurance names
Landlord as an additional insured, in addition to the other requirements set
forth herein. The limits of such insurance shall not, under any
circumstances, limit the liability of Tenant hereunder.
(c) Each party agrees to use its best efforts to include in
each of its policies insuring against loss, damage or destruction by fire or
other casualty a waiver of the insurer's right of subrogation against the
other party, or if such waiver should be unobtainable or unenforceable (i) an
express agreement that such policy shall not be invalidated if the insured
waives the right of recovery against any party responsible for a casualty
covered by the policy before the casualty; or (ii) any other form of
permission for the release of the other party. If such waiver, agreement or
permission shall not be, or shall cease to be, obtainable without additional
charge or at all, the insured party shall so notify the other party promptly
after learning thereof. In such case, if the other party shall so elect and
shall pay the insurer's additional charge therefor, such waiver, agreement or
permission shall be included in the policy, or the other party shall be named
as an additional insured in the policy. Each such policy which shall so name
a party hereto as an additional insured shall contain, if obtainable,
agreements by the insurer that the policy will not be canceled without at
least thirty (30) days prior notice to both insureds and that the act or
omission of one insured will not invalidate the policy as to the other
insured. Any failure by either party, if named as an additional insured,
promptly to endorse to the order of the other party, without recourse, any
instrument for the payment of money under or with respect to the policy of
which the other party is the owner or original or primary insured, shall be
deemed a default under this Lease.
(d) Each party hereby releases the other party with respect
to any claim (including a claim for negligence) which it might otherwise have
against the other party for loss, damage or destruction with respect to its
property (including the Building, Building Complex, the Premises and rental
value or business interruption) occurring during the term of this Lease to
the extent to which it is insured under a policy or policies containing a
waiver of subrogation or permission to release liability or naming the above
party as an additional insured as provided above.
15. DAMAGE OR DESTRUCTION TO BUILDING:
(a) In the event that the Premises or the Building are
damaged by fire or other insured casualty and the insurance proceeds have
been made available therefor by the holder or holders of any mortgages or
deeds of trust covering the Building, the damage shall be repaired by and at
the expense of Landlord to the extent of such insurance proceeds are
available therefor, provided such repairs and restoration can, in Landlord's
reasonable opinion, be made within one hundred fifty (150) days after the
occurrence of such damage without the payment of overtime or
<PAGE>
other premiums, and until such repairs and restoration are completed, the
Base Rent shall be abated in proportion to the part of the Premises which is
unusable by Tenant in the conduct of its business, as may be reasonably
determined by Landlord, (but there shall be no abatement of Base Rent by
reason of any portion of the Premises being unusable for a period equal to
one day or less). Landlord agrees to notify Tenant within forty-five (45)
days after such casualty if it estimates that it will be unable to repair and
restore the Premises within said one hundred fifty (150) day period. Such
notice shall set forth the approximate length of time Landlord estimates will
be required to complete such repairs and restoration. Notwithstanding
anything to the contrary contained herein, if Landlord cannot or estimates it
cannot make such repairs and restoration within said one hundred fifty (150)
day period or fails to do complete such repairs and restoration within said
150-day period, then Tenant may, by written notice to Landlord, cancel this
Lease, provided such notice is given to Landlord within fifteen (15) days
after Landlord notifies Tenant of the estimated time for completion of such
repairs and restoration, or within 15 days following the expiration of said
150-day period, as the case may be. Notwithstanding the preceding sentence,
Tenant may not cancel this Lease as hereinabove stated if the damage to the
Premises or the Building is in whole or in part the result of the act,
omission, fault or negligence of Tenant, its agents, contractors, employees,
licensees or invitees. Except as provided in this Paragraph 15, there shall
be no abatement of rent and no liability of Landlord by reason of any injury
to or interference with Tenant's business or property arising from the making
of any such repairs, alterations or improvements in or to the Building,
Premises or fixtures, appurtenances and equipment. Tenant understands that
Landlord will not carry insurance of any kind on Tenant's Property, including
furniture and furnishings, or on any fixtures or equipment removable by
Tenant under the provisions of this Lease, or any improvement installed in
the Premises by or on behalf of Tenant, and that Landlord shall not be
obligated to repair any damage thereto or replace the same.
(b) In case the Building throughout shall be so injured or
damaged, whether by fire or otherwise (though the Premises may not be
affected, or if affected, can be repaired within said 150 days) that
Landlord, within sixty (60) days after the happening of such injury, shall
decide not to reconstruct or rebuild the Building, then notwithstanding
anything contained herein to the contrary, upon notice in writing to that
effect given by Landlord to Tenant within said sixty (60) days, Tenant shall
pay the rent, properly apportioned up to date of such casualty, this Lease
shall terminate from the date of delivery of said written notice, and both
parties hereto shall be released and discharged from all further obligations
hereunder (except those obligations which expressly survive termination of
the Lease term). A total destruction of the Building shall automatically
terminate this Lease.
16. CONDEMNATION:
(a) If the whole of the Premises or so much thereof as to
render the balance unusable by Tenant for the proper conduct of its business (in
the reasonable opinion of Tenant) shall be taken under power of eminent domain
or transferred under threat thereof, then this Lease, at the option of either
Landlord or Tenant exercised by either party giving notice to the other of such
election within thirty (30) days after such conveyance or taking possession,
whichever is earlier, shall forthwith cease and terminate and the rent shall be
duly apportioned as of the date of such taking or
<PAGE>
conveyance. No award for any partial or entire taking of the real property
and its fixtures which constitute part of the real property under the terms
of this Lease shall be apportioned and Tenant hereby assigns to Landlord any
award which may be made in such taking or condemnation, together with any and
all rights of Tenant now or hereafter arising in or to the same or any part
thereof. Notwithstanding the foregoing, Tenant shall be entitled to seek,
directly from the condemning authority, an award for its removable trade
fixtures, equipment and personal property and relocation expenses, if any, to
the extent Landlord's award is not diminished. In the event of a partial
taking which does not result in a termination of this Lease, Base Rent and
Additional Rent and other obligations hereunder shall be reduced in
proportion to the reduction in the size of the Premises so taken and this
Lease shall be modified accordingly. Promptly after obtaining knowledge
thereof, Landlord or Tenant, as the case may be, shall notify the other of
any pending or threatened condemnation or taking affecting the Premises or
the Building.
(b) If all or any portion of the Premises shall be
condemned or taken for governmental occupancy for a limited period, this
Lease shall not terminate and Landlord shall be entitled to receive the
entire amount of any such award or payment thereof as damages, rent or
otherwise. Tenant hereby assigns to Landlord any award which may be made in
such temporary taking, together with any and all rights of Tenant now or
hereafter arising in or to the same or any part thereof. Tenant shall be
entitled to receive an abatement of Base Rent and Additional Rent and other
rental obligations hereunder during the period of time possession is taken
and in proportion to the reduction in the size of the Premises so taken.
17. ASSIGNMENT AND SUBLETTING:
(a) Except as expressly provided in this Paragraph 17,
Tenant shall not, voluntarity, involuntarily or otherwise, sublet all or any
portion of the Premises or assign all or any portion of Tenant's rights under
this Lease or permit any part of the Premises to be used or occupied by any
persons other than Tenant and its employees, nor shall Tenant permit any part
of the Premises to be used or occupied by any licensee or concessionaire or
permit any persons other than Tenant, its employees and invitees, to be upon
the Premises. Tenant shall not voluntarily, by operation of law, or
otherwise, assign, transfer or encumber this Lease or any interest herein nor
sublet or part with possession of all or any part of the Premises (any and
all of which shall hereinafter be referred to as "Transfer") without
Landlord's prior written consent, which consent shall not be unreasonably
withheld or delayed.
Landlord shall be under no obligation to consent to any sublease,
transfer or assignment if: (i) Tenant is then in default of any term or
condition of this Lease or (ii) any event has occurred which, with the giving
of notice, the passage of time, or both would constitute a default hereunder.
No such sublease or assignment shall relieve Tenant of its
obligations hereunder, except as expressly provided for in this Paragraph 17.
Any Transfer without the prior written consent of Landlord shall
constitute a
<PAGE>
default hereunder and shall be void AB INITIO and shall confer no rights upon
any third party, notwithstanding Landlord's acceptance of rent payments from
any purported transferee.
Tenant may, without Landlord's consent being first required, assign
this Lease or sublet all or any portion of the Premises to a wholly owned
subsidiary of Tenant, to a corporate parent of Tenant owning a majority of
the issued and outstanding common stock of Tenant, or to a corporation the
majority of whose stock is held by a corporate parent of Tenant. No such
assignment or subletting shall relieve Tenant of its obligations hereunder.
Landlord's consent to any requested assignment of this Lease or
subletting of all or any part of the Premises (other than those expressly
permitted in the preceding paragraph) shall be subject to the following
conditions:
(1) such consent and resulting subletting or
assignment shall not relieve Tenant of its primary obligations hereunder,
including the obligation for payment of all rents due hereunder;
(2) Should Tenant default of the payment of Rent
or Additional Rent hereunder, Landlord, at its option and from time to time,
may collect the rent from the subtenant or assignee, and apply the net amount
collected to the rent herein reserved, but no such collection shall be deemed
an acceptance by Landlord of the subtenant or assignee as the tenant hereof,
or a release of Tenant from further performance of covenants on the part of
Tenant herein contained;
(3) any such subtenant or assignee shall be a
company or other entity of good repute, engaged in a business or profession
compatible with and in keeping with the then standards of the Building and
financially capable of performing its obligations with respect to the
Premises; and
(4) such subtenant or assignee shall assume and
agree to perform all of Tenant's obligations under this Lease insofar as they
pertain to the space so sublet or assigned.
(5) Tenant is not in default of any term or
condition of this Lease at the time it requests Landlord's consent.
(b) In the event of any Transfer of this Lease or all or
any part of the Premises by Tenant without Landlord's consent (other than
those expressly permitted above), Landlord in addition to any rights
contained herein, shall have the following options at its reasonable
discretion:
(1) To collect and receive the excess of rent due
to Tenant from such sublessee or assignee over the Base Rent due hereunder;
(2) To give Tenant written notice of Landlord's
intention to terminate this Lease on the date such notice is given or on any
later date specified therein, whereupon, on the date specified in such
notice, Tenant's right to possession
<PAGE>
of the Premises shall cease and this Lease shall thereupon be terminated,
except as to any uncompleted obligations of Tenant; or
(3) To re-enter and take possession of the
Premises or the part thereof subject to such Transfer, and to enforce all
rights of Tenant, and receive and collect all rents and other payments due to
Tenant, in accordance with such sublet or assignment of the Premises, or any
part thereof, as if Landlord was the sublettor or assignor, and to do
whatever Tenant is permitted to do pursuant to the terms of such sublease or
assignment.
(c) The sale of all or a majority of the stock of Tenant,
or the sale of all or substantially all of the assets of Tenant shall
constitute a Transfer for purposes of this Lease, unless such sale is to a
"Permitted Transferee." A Permitted Transferee is any entity that (i) has a
tangible net worth of not less that $15,000,000, (ii) has cash or cash
equivalents of not less than $5,000,000, (iii) whose total liabilities to
tangible net worth do not exceed 1/5 to 1, and (iv) agrees in writing to
honor each of the provisions of this Lease. Without limiting the generality
of the foregoing and notwithstanding any other provisions of this Lease, no
consent shall be required for, and no default shall occur as a result of: (i)
the transfer of all or more than a majority of the capital stock of Tenant to
any Permitted Transferee, or the transfer of all or substantially all of the
assets of Tenant to any Permitted Transferee, or (ii) the assignment of this
Lease to any Permitted Transferee who becomes the holder of all or more than
a majority of the capital stock of Tenant or all or substantially all of the
assets of Tenant.
(d) At the time of making a request for Landlord's consent
to a Transfer and not less than thirty (30) days prior to the proposed
effective date thereof, Tenant shall provide to Landlord such information as
Landlord, its accountants and attorneys, shall reasonably require with
respect to such proposed Transfer, including but not limited to name and
address of the proposed transferee, description of business operations,
financial information and certificate of corporate authority and good
standing or partnership certificate, as applicable.
(e) Consent of Landlord to a Transfer shall not relieve
Tenant from seeking consent to any subsequent Transfers.
(f) Subletting or assignments of a sublease by subtenants
shall not be permitted under any circumstances. Further, no option to renew
or extend the term of this Lease or to lease additional space, if any, shall
be exercisable by any subtenant. If Tenant obtains Landlord's consent to an
assigment of this Lease, the assignee shall be entitled to sublease and
further assign this Lease and to exercise the Tenant's rights to renew or
extend the term of this Lease or to lease additional space, all as provided
herein and subject to the terms and conditions as herein prescribed.
(g) All subleases or assignments shall be in writing and a
copy thereof provided to Landlord within ten (10) days of its effective date.
All subleases shall further contain an express provision that in the event of
any default by Tenant in the payment of rent or additional rent due hereunder
and upon notice thereof to the Tenant and subtenant from Landlord, all
rentals payable by the subtenant shall be paid directly to Landlord, for the
Tenant's account, until subsequent notice from Landlord that such
<PAGE>
default has been cured. Notwithstanding the foregoing, receipt by Landlord of
rent directly from the subtenant shall not be considered a waiver of the
default on the part of Tenant, nor an acceptance of such subtenant.
18. ESTOPPEL CERTIFICATE: Landlord and Tenant agree that, at any
time and from time to time, on or before five (5) days after written request
by the other party, to execute, acknowledge and deliver to the requesting
party and the requesting party's lender or purchaser an estoppel certificate
certifying (to the extent it believes the same to be true) that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified, and stating the
modifications), that there have been no defaults thereunder by Landlord or
Tenant (or if there have been defaults, setting forth the nature thereof),
the date to which the rent and other charges have been paid, if any, that
Tenant claims no present charge, lien, claim or offset against rent, the rent
is not prepaid for more than one month in advance and such other matters as
may be reasonably required by the requesting party, its lender or mortgagee,
or any potential purchaser of the Building or Tenant's leasehold estate, it
being intended that any such statement delivered pursuant to this Paragraph
may be relied upon by any prospective purchaser of all or any portion of
Landlord's interest herein, or a holder of any mortgage or deed of trust
encumbering any portion of the Building Complex or the leasehold estate of
Tenant. Landlord's or Tenant's failure or refusal to deliver such statement
within such time shall be a default under this Lease. Notwithstanding the
foregoing, in the event that Tenant does not execute the statement required
by this Paragraph within 10 business days of written request, then, so long
as such failure or delay is not due to Tenant's refusal to include additional
matters that are not reasonable, or the requesting party's refusal to permit
disclosure by Tenant of exceptions to such statement, Tenant hereby grants to
Landlord a power of attorney coupled with an interest to act as Tenant's
attorney in fact for the purpose of executing such statement or statements
required by this Paragraph. Such power of attorney shall not grant Landlord
the right to execute a statement that includes any matters that are not
expressly covered in this Paragraph or that does not include any exceptions
that may have been raised by Tenant or of which Landlord is aware.
19. DEFAULT:
(a) The following events (herein referred to as an "event
of default") shall constitute a default by Tenant hereunder;
(1) Tenant shall fail to pay when due any
installment of Base Rent, Additional Rent or any other amounts payable
hereunder;
(2) This Lease or the estate of Tenant hereunder
shall be transferred to or shall pass to or devolve upon any other person or
party in violation of the provisions of this Lease;
(3) This Lease or the Premises or any part thereof
shall be taken upon execution or by other process of law directed against
Tenant, or shall be taken upon or subject to any attachment at the instance
of any creditor or claimant against Tenant, and said attachment shall not be
discharged or disposed of within forty-five (45) days after the levy thereof;
<PAGE>
(4) Tenant shall file a petition in bankruptcy or
insolvency or for reorganization or arrangement under the bankruptcy laws of
the United States or under any insolvency act of any state, or shall
voluntarily take advantage of any such law or act by answer or otherwise, or
shall be dissolved or shall make an assignment for the benefit of creditors;
(5) Involuntary proceedings under any such
bankruptcy law or insolvency act or for the dissolution of Tenant shall be
instituted against Tenant, or a receiver or trustee shall be appointed of all
or substantially all of the property of Tenant, and such proceedings shall
not be dismissed or such receivership or trusteeship vacated within thirty
(30) days after such institution or appointment;
(6) Tenant shall abandon or permanently vacate the
Premises for ten (10) consecutive days while in default in the payent of rent
or additional rent due hereunder;
(7) Tenant shall fail to perform any of the other
agreements, terms, covenants or conditions hereof on Tenant's part to be
performed, and such nonperformance shall continue for a period of fifteen
(15) days after notice thereof by Landlord to Tenant; provided, however, that
if Tenant cannot reasonably cure such nonperformance within fifteen (15)
days, Tenant shall not be in default if it commences cure within said fifteen
(15) days and diligently pursues the same to completion, with completion
occurring in all instances within sixty (60) days;
(8) Tenant shall fail to obtain a release of any
mechanic's lien, as required herein;
(9) All or any part of the personal property of
Tenant is seized, subject to levy or attachment, or similarly repossessed or
removed from the Premises and Tenant is consequently unable to conduct its
business operations from the Premises.
(b) Upon the occurrence of an event of default, Landlord
shall have the right, at its election, then or at any time thereafter and
while any such event of default shall continue, either:
(1) To give Tenant written notice of Landlord's
intention to terminate this Lease on the date such notice is given or on any
later date specified herein, whereupon, on the date specified in such notice,
Tenant's right to possession of the Premises shall cease and this Lease shall
thereupon be terminated; PROVIDED, HOWEVER, all of Tenant's obligations,
including, but not limited to, repayment of the Tenant Build-Out Allowance
paid by Landlord on behalf of Tenant pursuant to the terms of the Work Letter
Agreement executed by Landlord and Tenant in the form attached hereto as
EXHIBIT D, with interest at the rate of 18% per annum, compounded annually,
<PAGE>
computed from the date(s) of payment by Landlord (such sum with interest
hereinafter referred to as the "Allowance Recovery") and the amount of Base
Rent and other obligations reserved in this Lease for the balance of the term
hereof, shall immediately be accelerated and due and payable in the manner
and to the extent provided in paragraph 19(d), below.
(2) To re-enter and take possession of the
Premises or any part thereof and repossess the same as Landlord's former
estate and expel Tenant and those claiming through or under Tenant, and
remove the effects of both or either, using such force for such purposes as
may be reasonably necessary, without being liable for prosecution thereof,
without being deemed guilty of any manner of trespass and without prejudice
to any remedies for arrears of rent or preceding breach of covenants or
conditions; PROVIDED, HOWEVER, any such action shall be in compliance with
the provisions of Article 40 of Title 13, Colorado Revised Statutes. Should
Landlord elect to re-enter the Premises as provided in this Paragraph
19(b)(2) or should Landlord take possession pursuant to legal proceedings or
pursuant to any notice provided for by law, Landlord may, from time to time,
without terminating this Lease, relet the Premises or any part thereof, in
Landlord's or Tenant's name, but for the account of Tenant, for such term or
terms (which may be greater or less than the period which would otherwise
have constituted the balance of the term of this Lease) and on such
conditions and upon such other terms (which may include concessions of free
rent and alteration and repair of the Premises) as Landlord, in its
discretion, may determine, and Landlord may collect and receive the rents
therefor. Landlord shall use commercially reasonable efforts to relet the
Premises or any part thereof. No such re-entry or taking possession of the
Premises by Landlord shall be construed as an election on Landlord's part to
terminate this Lease unless a written notice of such intention be given to
Tenant. No notice from Landlord hereunder or under a forcible entry and
detainer statute or similar law shall constitute an election by Landlord to
terminate this Lease unless such notice specifically so states. Landlord
reserves the right following any such re-entry and/or reletting, to exercise
its right to terminate this Lease by giving Tenant such written notice, in
which event, this Lease will terminate as specified in said notice.
(c) In the event that Landlord does not elect to terminate
this Lease as permitted in Paragraph 19(b)(1) hereof, but on the contrary,
elects to take possession as provided in Paragraph 19(b)(2), Tenant shall pay
to Landlord (i) the rent and other sums as herein provided, which would be
payable hereunder if such repossession had not occurred, plus (ii) the amount
of the Allowance Recovery, less (iii) the net proceeds, if any, of any
reletting of the Premises after deducting all Landlord's expenses in
connection with such reletting, including but without limitation, all
repossession costs, brokerage commissions, legal expenses, reasonable
attorneys' fees, expenses of employees, alteration and repair costs and
expenses of preparation for such reletting. If, in connection with any
reletting, the new lease term extends beyond the existing term, or the
premises covered thereby include other premises not part of the Premises, a
fair apportionment of the rent received from such reletting and the expenses
incurred in connection therewith as provided aforesaid will be made in
determining the net proceeds from such reletting. Tenant shall pay such rent
and other sums to Landlord monthly on the days on which the rent would have
been payable hereunder if possession had not been retaken.
<PAGE>
(d) In the event this Lease is terminated pursuant to
Paragraph 19(b)(1) hereof, Landlord shall be entitled to recover forthwith
against Tenant as damages for loss of the bargain and not as a penalty, an
aggregate sum which, at the time of such termination of this Lease,
represents the excess, if any, of the aggregate of the rent and all other
sums payable by Tenant hereunder that would have accrued for the balance of
the term over the aggregate rental value of the Premises (such rental value
to be computed on the basis of a tenant paying not only a rent to Landlord
for the use and occupation of the Premises, but also such other charges as
are required to be paid by Tenant under the terms of this Lease) for the
balance of such term, both discounted to present worth at the rate of eight
percent (8%) per annum, plus the amount of the Allowance Recovery.
Alternatively, at Landlord's option, Tenant shall pay to Landlord upon demand
the amount of the Allowance Recovery, and Tenant shall remain liable to
Landlord for damages in an amount equal to the rent and other sums arising
under the Lease for the balance of the term had the Lease not been
terminated, less the net proceeds, if any, from any subsequent reletting,
after deducting all expenses associated therewith and as enumerated above.
Landlord shall be entitled to receipt of such amounts from Tenant monthly on
the days on which such sums would have otherwise been payable.
(e) Suit or suits for the recovery of the amounts and
damages set forth above may be brought by Landlord, from time to time, at
Landlord's election and nothing herein shall be deemed to require Landlord to
await the date whereon this Lease or the term hereof would have expired had
there been no such default by Tenant or no such termination, as the case may
be.
(f) After an event of default by Tenant, Landlord may sue
for or otherwise collect all rents, issues and profits payable under all
subleases on the Premises including those past due and unpaid.
(g) After an event of default by Tenant, Landlord may,
without terminating this Lease, enter upon the Premises, with force if
necessary without being liable for prosecution of any claim for damages,
without being deemed guilty of any manner of trespass and without prejudice
to any other remedies, and do whatever Tenant is obligated to do under the
terms of this Lease. Tenant agrees to reimburse Landlord on demand for any
expenses which Landlord may incur in effecting compliance with the Tenant's
obligations under this Lease; further, Tenant agrees that Landlord shall not
be liable for any damages resulting to Tenant from effecting compliance with
Tenant's obligations under this subparagraph caused by the negligence of
Landlord.
(h) No failure by Landlord to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to
exercise any right or remedy consequent upon a breach thereof, and no
acceptance of full or partial rent during the continuance of any such breach,
shall constitute a waiver of any such breach of such agreement, term,
covenant or condition. No agreement, term, covenant or condition hereof to be
performed or complied with by Tenant, and no breach thereof, shall be waived,
altered or modified except by written instrument executed by Landlord. No
waiver of any breach shall affect or alter this Lease, but each and every
agreement, term, covenant and condition hereof shall continue in full force
and effect with respect
<PAGE>
to any other then existing or subsequent breach thereof. Notwithstanding any
unilateral termination of this Lease, this Lease shall continue in force and
effect as to any provisions hereof which require observance or performance of
Landlord or Tenant subsequent to termination.
(i) Nothing contained in this Paragraph shall limit or
prejudice the right of Landlord to prove and obtain as liquidated damages in
any bankruptcy, insolvency, receivership, reorganization or dissolution
proceeding, an amount equal to the maximum allowed by any statute or rule of
law governing such proceeding and in effect at the time when such damages are
to be proved, whether or not such amount be greater, equal to or less than
the amounts recoverable, either as damages or rent, referred to in any of the
preceding provisions of this Paragraph.
(j) Any rents or other amounts owing to Landlord hereunder
which are not paid within ten (10) days of the date they are due, shall
thereafter bear interest from the due date at the rate of eighteen percent
(18%) per annum ("Interest Rate") until paid. Similarly, any amounts paid by
Landlord to cure any default of Tenant or to perform any obligation of
Tenant, shall, if not repaid by the Tenant within five (5) days of demand by
Landlord, thereafter bear interest from the date paid by Landlord at the
Interest Rate until paid. In addition to the foregoing, Tenant shall pay to
Landlord whenever any Base Rent, Additional Rent or any other sums due
hereunder remain unpaid more than ten (10) days after the due date thereof, a
late charge equal to five percent (5%) of the amount due.
(k) Each right and remedy provided for in this Lease shall
be cumulative and shall be in addition to every other right or remedy
provided for in this Lease now or hereafter existing at law or in equity or
of statute or otherwise, including, but not limited to, suits for injunctive
or declaratory relief and specific performance. The exercise or commencement
of the exercise by either party of any one or more of the rights or remedies
provided for in this Lease now or hereafter existing at law or in equity or
by statute or otherwise shall not preclude the simultaneous or subsequent
exercise by said party of any or all other rights or remedies provided for in
this Lease, or now or hereafter existing at law or in equity or by statute or
otherwise. All costs incurred by either party in connection with collecting
any amounts and damages owing by the other party pursuant to the provisions
of this Lease or to enforce any provision of this Lease, including, by way of
example, but not limitation, reasonable attorneys' fees from the date any
such matter is turned over to an attorney, shall also be recoverable by the
prevailing party. Landlord and Tenant agree that any action or proceeding
arising out of this Lease shall be heard by a court sitting without a jury
and thus hereby waive all rights to a trial by jury.
20. COMPLETION OF PREMISES:
(a) Landlord and Tenant have yet to agree on which of the
parties is to be responsible for construction of the tenant improvements to
the Premises as more fully set forth in the work letter ("Work Letter")
attached hereto and incorporated herein as EXHIBIT D.
(1) Should Tenant be the Contracting Party, as
defined in Exhibit D, the "Commencement Date" as used herein, and the
obligation of Tenant to
<PAGE>
commence the payment of rent and additional rent hereunder, shall be March 1,
2000, subject only to the deferral of such date by the number of days, if
any, which Landlord fails or refuses to approve plans, specifications,
contractors, bonds, insurance coverages, or the like, beyond the number of
day alloted for such approvals in Exhibit D.
(2) Should Landlord be the Contracting Party, as
defined in Exhibit D, the "Commencement Date" as used herein, and the
obligation of Tenant to commence the payment of rent and additional rent
hereunder, shall be March 1, 2000, subject only to the deferral of such date
as a result of delays in construction of the tenant improvements that were
within Landlord's control. Matters within Landlord's control shall include
delays caused by the contractor constructing such improvements, but shall not
include delays resulting from protracted negotiations of the terms of this
Lease or delays caused by Tenant's review of plans and specifications or in
negotiating costs, or delays by the City of Boulder in issuing permits. If
there are delays within Landlord's control, the Commencement Date shall be
deferred beyond March 1, 2000, by the number of days of delay caused by
Landlord.
(b) Other than as set forth in the Work Letter, Landlord shall have
no obligation for the completion of the Premises, and Tenant shall accept the
Premises in its "as is" condition on the Commencement Date.
(c) Subsequent to the Commencement Date, Landlord shall not have any
obligation for the repair or replacement of any portions of the interior of
the Premises, including, but not limited to, carpeting, draperies, window
coverings, wall coverings or painting, which are damaged or wear out during
the term hereof, regardless of the cause therefor, except as may otherwise be
specifically set forth in this Lease.
(d) If Landlord is the Contracting Party, and if Tenant wishes to
complete improvements to the interior of the Premises prior to the
Commencement Date, Tenant may do so, at Tenant's sole risk and with no
obligation to pay rent provided that (i) Tenant has delivered to Landlord
written evidence that Tenant's insurance obligations under Paragraph 14
hereof are then met, (ii) such entry and work do not unreasonably interfere
in any way with the performance of Landlord's work or other workers in and
about the Building, and (iii) such entry and work comply in all respects with
the provisions of this Lease. At any time during such period of early entry,
if Landlord notifies Tenant that Tenant's entry or work is interfering with
or delaying the performance of work to be performed by Landlord or other
workers in and about the Building, or causing any disruption whatsoever,
Tenant shall forthwith discontinue any further work and shall vacate the
Premises, and shall cause its workmen or contractors to remove therefrom, any
equipment, materials or installations which are the subject of Landlord's
notice.
21. REMOVAL OF TENANT'S PROPERTY: All movable furniture and personal
effects of Tenant not removed from the Premises upon the vacation or
abandonment thereof coupled with non-payment of Base Rent or upon the
termination of this Lease for any cause whatsoever shall conclusively be
deemed to have been abandoned and may be appropriated, sold, stored,
destroyed or otherwise disposed of by Landlord without notice to Tenant and
without obligation to account therefor, and Tenant shall reimburse Landlord
for all expenses incurred in connection with the disposition of such property.
<PAGE>
22. HOLDING OVER: Should Tenant, with Landlord's written consent,
hold over after the termination of this Lease and continue to pay rent,
Tenant shall become a tenant from month to month only upon each and all of
the terms herein provided as may be applicable to such month to month tenancy
and any such holding over shall not constitute an extension of this Lease.
During such holding over, Tenant shall pay monthly rent equal to the last
monthly rental rate and the other monetary charges as provided herein. Such
tenancy shall continue until terminated by Landlord, as provided by law, or
until Tenant shall have given to Landlord at least thirty (30) days written
notice prior to the last day of the calendar month intended as the date of
termination of such month to month tenancy.
23. PARKING AND COMMON AREAS: Tenant shall have the non-exclusive
use of parking areas within the Building Complex. Landlord shall have the
right, without obligation, and from time to time, to change the number, size,
location, shape and arrangement of parking areas and other common areas,
restrict parking of tenants or their guests to designated areas, designate
loading or handicap loading areas, and to change the level or grade of
parking; PROVIDED, HOWEVER, that Landlord shall at all times during the term
of this Lease maintain a parking ratio of 1 parking space per 400 square feet
of rentable floor space, considering all parking spaces available and all
rentable square footage in the Building Complex and in the complex at 2905,
2945, and 2995 Center Green Court South. Except as otherwise specifically
provided herein, all access roads, courtyards, and other areas, facilities or
improvements furnished by Landlord are for the general and nonexclusive use
in common of all tenants of the Building, and those persons invited upon the
land upon which the Building is situated and shall be subject to the
exclusive control and management of Landlord, and Landlord shall have the
right, without obligation to establish, modify and enforce such rules and
regulations which the Landlord may deem reasonable and/or necessary. Unless
as otherwise provided, Tenant's use of the parking area, as herein set forth,
shall be in common with other tenants of the Building and any other parties
permitted by Landlord to use the parking area. The parking rights herein
granted shall not be deemed a lease but shall be construed as a license
granted by Landlord to Tenant for the term of this Lease.
24. SURRENDER AND NOTICE: Upon the expiration or earlier termination
of this Lease, Tenant shall promptly quit and surrender to Landlord the
Premises broom clean, in good order and condition, ordinary wear and tear and
loss by fire or other casualty excepted, and Tenant shall remove all of its
movable furniture and other effects and such alterations, additions and
improvements as Landlord shall require Tenant to remove pursuant to Paragraph
10 hereof. In the event Tenant fails to so vacate the Premises on a timely
basis as required, Tenant shall be responsible to Landlord for all costs and
damages, including, but not limited to, any amounts required to be paid to
third parties who were to have occupied the Premises, incurred by Landlord as
a result of such failure, plus interest thereon at the Interest Rate on all
amounts not paid by Tenant within five (5) days of demand, until paid in full.
25. ACCEPTANCE OF PREMISES BY TENANT: Taking possession of the
Premises by Tenant shall be conclusive evidence as against Tenant that the
Premises were in the condition agreed upon between Landlord and Tenant, and
acknowledgment of satisfactory completion of the fix-up work which Landlord
has agreed in writing to
<PAGE>
perform, except as otherwise set forth herein.
26. SUBORDINATION AND ATTORNMENT:
(a) This Lease, and all rights of Tenant hereunder, are and
shall be subject and subordinate in all respects to all deeds of trust,
mortgages and building loan agreements, including leasehold mortgages and
building loan agreements, which may now or hereafter affect the Building or
the Building Complex, whether or not such deeds of trust or mortgages shall
also cover other lands or buildings, to each and every advance made or
hereafter to be made under such deeds of trust or mortgages, and to all
renewals, modifications, replacements and extensions of such deeds of trust
and mortgages. The provisions of this Paragraph shall be self-operative and
no further instrument of subordination shall be required. However, in
confirmation of such subordination, Tenant shall promptly execute and deliver
to Landlord (or such other party so designated by Landlord) at Tenant's own
cost and expense, within fifteen (15) days after request from Landlord an
instrument, in recordable form if required, that Landlord or the holder of
any such deed of trust or mortgage or any of their respective successors in
interest or assigns may request evidencing such subordination. Failure by
Tenant to comply with the requirements of this Paragraph shall be a default
hereunder. Notwithstanding the foregoing, in the event that Tenant fails to
execute such documents as may be required to confirm the subordination set
forth in this Paragraph, then, so long as such failure or delay is not due to
Tenant's refusal to execute docuuments that contain unreasonable terms or
conditions beyond what is required by this Paragraph, or the requesting
party's refusal to accept reasonable changes to such documents that will not
diminish the subordination granted by this Paragraph, Tenant hereby grants to
Landlord a power of attorney coupled with an interest to act as Tenant's
attorney in fact for the purposes of executing such documents. Such power of
attorney shall not grant Landlord the right to execute documets that grant
rights or impose obligations beyond the subordination covered in this
Paragraph. The deeds of trust or mortgages to which this Lease is, at the
time referred to, subject and subordinate are hereinafter sometimes called
"superior deeds of trust" or "superior mortgages". The beneficiary of a
superior deed of trust or superior mortgage or their successors in interest
or assigns are hereinafter sometimes collectively referred to as a "superior
party". The subordination provided by this Section 26 shall be subject to the
provision that, and any subordination entered into by Tenant after the date
of this Lease must contain a non-disturbance agreement in the form then being
used by such superior party for such purposes, providing that, in any case,
Tenant, notwithstanding such subordination or a default by Landlord, shall be
entitled to remain in possession of the Premises in accordance with the terms
of this Lease for so long as Tenant shall not be in default of any term,
condition or covenant of this Lease. Further, Tenant shall attorn to such
superior party.
(b) Tenant shall take no steps to terminate this Lease,
without giving written notice to such superior party, and a reasonable
opportunity to cure (without such superior party being obligated to cure),
any default on the part of Landlord under this Lease, provided Tenant shall
be obliged to notify only such superior parties of which Tenant has actual
knowledge by virtue of a prior written communication from Landlord or such
superior party.
<PAGE>
(c) If, in connection with the procurement, continuation or
renewal of any financing for which the Building or the Building Complex
represents collateral in whole or in part, a lender shall request reasonable
modifications of this Lease as a condition of such financing, Tenant will not
unreasonably withhold its consent thereto provided that such modifications do
not increase the obligations of Tenant under this Lease or adversely affect
any rights of Tenant or decrease the obligations of Landlord under this Lease.
27. PAYMENTS AFTER TERMINATION: No payments of money by Tenant to
Landlord after the termination of this Lease, in any manner, or after giving
of any notice (other than a demand for payment of money) by Landlord to
Tenant, shall reinstate, continue or extend the term of this Lease or affect
any notice given to Tenant prior to the payment of such money, it being
agreed that after the service of notice of the commencement of a suit or
other final judgment granting Landlord possession of the Premises, Landlord
may receive and collect any sums of rent due, or any other sums of money due
under the terms of this Lease or otherwise exercise its rights and remedies
hereunder. The payment of such sums of money, whether as rent or otherwise,
shall not waive said notice or in any manner affect any pending suit or
judgment theretofore obtained.
28. AUTHORITIES FOR ACTION AND NOTICE:
(a) Except as otherwise provided herein, Landlord may, for
any matter pertaining to this Lease, act by and through its building manager
or any other person designated in writing from time to time.
(b) All notices or demands required or permitted to be
given to Landlord hereunder shall be in writing, and shall be deemed duly
served when received, if hand delivered, or five (5) days after deposited in
the United States mail, with proper postage prepaid, certified or registered,
return receipt requested, addressed to Landlord in care of Hast & Company,
525 Canyon Boulevard, Boulder, Colorado 80302, with a copy to Joel C. Davis,
Dietze and Davis, P.C., 2060 Broadway, Suite 400, Boulder, Colorado 80302.
All notices or demands required to be given to Tenant hereunder shall be in
writing, and shall be deemed duly served when received, if hand delivered, or
five (5) days after deposited in the United States mail, with proper postage
prepaid, certified or registered, return receipt requested, addressed to
Tenant as follows:
Gilead Sciences, Inc.
333 Lakeside Drive
Foster City, CA 94404
ATTN: General Counsel
Either party shall have the right to designate in writing,
served as above provided, a different address to which notice is to be
provided. The foregoing shall in no event prohibit notice from being given as
provided in Rule 4 of the Colorado Rules of Civil Procedure, as the same may
be amended from time to time.
29. LIABILITY OF LANDLORD: Landlord's liability under this Lease
shall be limited to
<PAGE>
Landlord's estate and interest in the Building (or to the proceeds thereof)
and no other property or other assets of Landlord shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to this Lease, the relationship of Landlord
and Tenant hereunder or Tenant's use and occupancy of the Premises. Nothing
contained in this Paragraph shall be construed to permit Tenant to offset
against rents due a successor landlord, a judgment (or other judicial
process) requiring the payment of money by reason of any default of a prior
landlord, except as otherwise specifically set forth herein.
30. BROKERAGE: Landlord and Tenant represent and warrant to each
other that they have dealt only with CRESA Partners and Key, Whiteside & Hart
and Hast and Company ("Brokers") in the negotiation of this Lease. Landlord
shall make payment of the brokerage fee due to the Brokers pursuant to and in
accordance with Landlord's separate agreement with Keys, Whiteside & Hart and
Hast and Company. In the event that any of Landlord's or Tenant's
representations and warranties made in this Paragraph 30 is untrue at any
time in any respect, each party hereby agrees to indemnify and hold the the
other harmless of and from any and all loss, costs, damages or expenses
(including, without limitation, all reasonable attorneys' fees and
disbursements) by reason of any claim of or liability to any other broker or
person claiming through the representing party arising out of or in
connection with the negotiation, execution and delivery of this Lease.
Additionally, Tenant acknowledges and agrees that Landlord shall have no
obligation for payment of any brokerage fee or similar compensation to any
person with whom Tenant has dealt or may in the future deal with respect to
leasing of any additional or expansion space in the Building or renewals or
extensions of this Lease, except as may be provided by Landlord's separate
written agreement. In the event any claim shall be made against either party
by any other broker who shall claim to have negotiated this Lease on behalf
of the other party or to have introduced the other party to the Building or
to the other party, the party who allegedly engaged such broker shall be
liable for payment of all reasonable attorneys' fees, costs and expenses
incurred by the other party in defending against the same, and in the event
such broker shall be successful in any such action, the party who allegedly
engaged such broker shall, in addition, make payment to such broker.
31. TAXES:
(a) Tenant shall be liable for and shall pay at least ten
(10) days before delinquency and Tenant hereby agrees to indemnify and hold
Landlord harmless from and against any liability in connection with, all
taxes levied against any personal property, fixtures, machinery, equipment,
apparatus, systems and appurtenances placed by or on behalf of Tenant in or
about or utilized by Tenant in, upon or in connection with the Premises
("Equipment Taxes"). If any Equipment Taxes are levied against Landlord or
Landlord's property or if the assessed value of Landlord's property is
increased by the inclusion therein of a value placed upon such personal
property, fixtures, machinery equipment, apparatus, systems or appurtenances
of Tenant, and if Landlord, after written notice to Tenant, pays the
Equipment Taxes or taxes based upon such an increased assessment (which
Landlord shall have the right to do regardless of the validity of such levy,
but under proper protest if requested by Tenant prior to such payment and if
payment under protest is permissible), Tenant shall pay to Landlord upon
demand, as Additional Rent hereunder, the taxes so levied against
<PAGE>
Landlord or the proportion of such taxes resulting from such increase in the
assessment; provided, however, that in any such event, Tenant shall have the
right, on behalf of Landlord and with Landlord's full cooperation, but at no
cost to Landlord, to bring suit in any court of competent jurisdiction to
recover the amount of any such tax so paid under protest, and any amount so
recovered shall belong to Tenant (provided Tenant has previously paid such
amount to Landlord). Notwithstanding the foregoing to the contrary, Tenant
shall cooperate with Landlord to the extent reasonably necessary to cause the
fixtures, furnishings, equipment and other personal property to be assessed
and billed separately from the real property of which the Premises form a
part, and Landlord shall use reasonable efforts to treat all other Tenants on
the same basis.
(b) Tenant shall pay to Landlord, as Additional Rent, any
excise, sales, privilege or other tax, assessment or other charge (other than
income or franchise taxes) imposed, assessed or levied by any governmental or
quasi-governmental authority or agency upon Landlord on account of this
Lease, the rent or other payments made by Tenant hereunder, any other benefit
received by Landlord hereunder, Landlord's business as a lessor hereunder, or
other in respect of or as a result of the agreement or relationship of
Landlord and Tenant hereunder.
32. RIGHTS RESERVED TO LANDLORD:
(a) Landlord shall have the following rights without
liability to Tenant for damage or injury to property, person or business (all
claims for damage being hereby waived and released), and without effecting an
eviction or disturbance of Tenant's use or possession of the Premises or
giving rise to any claim for setoffs or abatement of rent:
(1) To enter the Premises as more fully provided
in this Lease.
(2) To install and maintain signs on the exterior
of the Building in accordance with the terms of this Lease.
(3) To decorate, remodel, repair, alter or
otherwise prepare the Premises for reoccupancy during the last six (6) months
of the term hereof if, during or prior to such time, Tenant has vacated the
Premises, or at any time after Tenant abandons the Premises.
(4) To have access to all mail chutes according to
the rules of the United States Postal Service.
(5) To do or permit to be done any work in or
about the exterior of the Building or any adjacent or nearby building, land,
street or alley.
(6) To grant to anyone the exclusive right to
conduct any business or render any service in the Building, provided such
exclusive right shall not operate to interfere with Tenant's quiet enjoyment
of the Premises as granted in this
<PAGE>
Lease.
33. FORCE MAJEURE CLAUSE: Wherever there is provided in this Lease a
time limitation for performance by Landlord or Tenant of any obligation
including, but not limited to, obligations related to construction, repair,
maintenance or service, but excluding the payment by Tenant of any regularly
scheduled installment of rent or additional rent payable hereunder, the time
provided for shall be extended for as long as and to the extent that delay in
compliance with such limitation is due to an act of God, governmental control
or other factors beyond the reasonable control of the party to so perform.
34. SIGNAGE:
(a) No sign, advertisement or notice shall be inscribed,
painted or affixed on any part of the inside or outside of the Building
unless of such color, size and style and in such place upon or in the
Building as shall (i) comply with all applicable covenants, conditions, and
restrictions applicable to the Building and the rules and regulations of any
local authority with jurisdiction over the Building, and (ii) be approved in
writing by Landlord, which approval shall not be unreasonably withheld.
Landlord shall have the right to remove all nonpermitted signs without notice
to Tenant and at the expense of Tenant.
35. ATTORNEYS' FEES: In the event of any dispute hereunder, or any
default in the performance of any term or condition of this Lease, the
prevailing party shall be entitled to recover all costs and expenses
associated therewith including reasonable attorneys' fees.
36. BANKRUPTCY OR INSOLVENCY: If the Tenant becomes a debtor under
Chapter 7 of the United States Bankruptcy Code, or in the event that a
petition for reorganization or adjustment of debts is filed concerning the
Tenant under Chapter 11 or Chapter 13 of the Bankruptcy Code, or a proceeding
filed under Chapter 7 is transferred to Chapter 11 or 13, the Trustee or the
Tenant, as Debtor-in-Possession, shall be deemed to have rejected this Lease.
No election by the Trustee or Debtor-in-Possession to assume this Lease shall
be effective unless each of the following conditions, which Landlord and
Tenant hereby acknowledge to be commercially reasonable in the context of a
bankruptcy proceeding, has been satisfied, and the Landlord has so
acknowledged in writing:
(a) The Trustee or Debtor-in-Possession has cured, or has
provided the Landlord "adequate assurance" (as hereinafter defined) that from
the date of such assumption, the Trustee or Debtor-in-Possession will
promptly cure all monetary and non-monetary defaults under this Lease.
(b) The Trustee or Debtor-in-Possession has compensated, or
has provided to the Landlord adequate assurance that within ten (10) days of
the date of assumption, the Landlord will be compensated, for any pecuniary
loss incurred by the Landlord arising from default of the Tenant, the Trustee
or the Debtor-in-Possession as recited in the Landlord's written statement of
pecuniary loss sent to the Trustee or Debtor-in-Possession.
<PAGE>
(c) The Trustee or Debtor-in-Possession has provided the
Landlord with adequate assurance of future performance of each of the
Tenant's, the Trustee's, or Debtor-in-Possession's obligations under this
Lease; provided, however, that:
(1) The Trustee or Debtor-in-Possession shall also
deposit with the Landlord, as security for the timely payment of rent and
other sums due hereunder, an amount equal to three months Base Rent,
Additional Rent and other monetary charges accruing under this Lease; and
(2) The obligations imposed upon the Trustee or
Debtor-in-Possession shall continue with respect to the Tenant or any
assignee of this Lease after the completion of the bankruptcy proceedings.
(d) For purposes of this Paragraph, Landlord and Tenant
acknowledge that, in the context of the bankruptcy proceeding of the Tenant,
"adequate assurance" shall mean:
(1) The Trustee or Debtor-in-Possession will
continue to have sufficient unencumbered assets after the payment of all
secured obligations and administrative expenses to assure the Landlord that
the Trustee or Debtor-in-Possession will have sufficient funds to fulfill all
of the obligations of Tenant under this Lease, or
(2) The Bankruptcy Court shall have entered an
order segregating sufficient cash payable to the Landlord, and the Trustee or
Debtor-in-Possession shall have granted to the Landlord a valid and perfected
first lien and security interest or mortgage in property of the Tenant, the
Trustee or Debtor-in-Possession, acceptable as to value and kind to the
Landlord, in order to secure to the Landlord the obligation of the Tenant,
Trustee or Debtor-in-Possession to cure the monetary or non-monetary defaults
under the Lease within the time period set forth above.
(e) The following conditions shall apply to any assignment
of this Lease in Bankruptcy Proceedings:
(1) If the Trustee or Debtor-in-Possession has
assumed this Lease and elects to assign the Lease to any other person, such
interest or estate of Tenant in this Lease may be so assigned only if the
Landlord has acknowledged in writing that the intended assignee can provide
to the Landlord "adequate assurance of future performance" (as hereinafter
defined) of all of the terms, covenants and conditions of this Lease to be
performed by the Tenant.
(2) For the purposes of this provision, Landlord
and Tenant acknowledge that, in the context of a bankruptcy proceeding,
"adequate assurance of future performance" shall mean that each of the
following conditions has been satisfied or exceeded, and the Landlord has so
acknowledged in writing:
A. The proposed assignee has submitted a
current
<PAGE>
financial statement audited by a Certified Public Accountant which shows the
net worth and working capital and amounts determined by Landlord to be
sufficient to assure the future performance by such assignee of all of
Tenant's obligations under this Lease, or, if such financial statements are
deemed by the Landlord to be insufficient, that;
B. The proposed assignee shall have
obtained guarantees in form and substance satisfactory to the Landlord from
one or more persons who satisfy the Landlord's standards of creditworthiness;
and
C. The Landlord has obtained all consents
or waivers from any third party required under any lease, mortgage, financing
arrangements or other agreement by which the Landlord is bound, in order to
permit the Landlord to consent to such assignment.
37. MISCELLANEOUS:
(a) The rules and regulations attached hereto as EXHIBIT E,
as well as such rules and regulations as may hereafter be adopted by Landlord
for the safety, care and cleanliness of the Premises, the Building and the
Building Complex and the preservation of good order thereon, are hereby
expressly made a part hereof, and Tenant agrees to obey all such rules and
regulations. The violation of any of such rules and regulations by Tenant
shall be deemed a breach of this Lease by Tenant affording Landlord all the
remedies set forth herein. Landlord shall not be responsible to Tenant for
the nonperformance by any other tenant or occupant of the Building of any of
said rules and regulations.
(b) The term "Landlord" as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners of the Building at the
time in question, and in the event of any transfer or transfers of the title
thereto, Landlord herein named (and in the case of any subsequent transfers
or conveyances, the then grantor) shall be automatically released from and
after the date of such transfer or conveyance of all liability in respect to
the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed and relating to events
occurring thereafter; provided that the transferee has expressly agreed in
writing to assume all obligations of Landlord under this Lease; provided that
any funds in the hands of Landlord or the then grantor at the time of such
transfer in which Tenant has an interest shall be turned over to the grantee,
and any amount then due and payable to Tenant by Landlord or the then grantor
under any provisions of this Lease shall be paid to Tenant.
(c) This Lease shall be construed as though the covenants
herein between Landlord and Tenant are independent and not dependent and Tenant
shall not be entitled to any setoff of the rent or other amounts owing hereunder
against Landlord, and Landlord shall not be entitled to exercise any of its
remedies hereunder, if Landlord or Tenant as the case may be, fails to perform
its obligations set forth herein, except as herein specifically set forth;
provided, however, the foregoing shall in no way impair the right of either
party to commence a separate action against the other party for any violation by
a breaching party of the provisions hereof so long as notice is first given to
the breaching party and any holder of a mortgage or deed of trust covering the
Building
<PAGE>
Complex or any portion thereof whose address Tenant has been notified in
writing and so long as an opportunity has been granted to the breaching party
and such holder to correct such violation as provided in subparagraph (g)
hereof.
(d) If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws effective during the
term of this Lease, then and in that event, it is the intention of the
parties hereto that the remainder of this Lease shall not be affected
thereby, and it is also the intention of the parties to this Lease that in
lieu of each clause or provision of this Lease that is illegal, invalid or
unenforceable, there shall be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and be legal, valid and enforceable,
provided such addition does not increase or decrease the obligations of or
derogate from the rights or powers of either Landlord or Tenant.
(e) The captions of each paragraph are added as a matter of
convenience only and shall be considered of no effect in the construction of
any provision or provisions of this Lease.
(f) Except as herein specifically set forth, all terms,
conditions and covenants to be observed and performed by the parties hereto
shall be applicable to and binding upon their respective heirs,
administrators, executors, successors and assigns. The terms, conditions and
covenants hereof shall also be considered to be covenants running with the
land.
(g) Except as otherwise specifically provided herein, in
the event either party shall fail to perform any of the agreements, terms,
covenants or conditions hereof on its part to be performed (such party being
referred to as the "Non-Performing Party"), and such nonperformance shall
continue for a period of thirty (30) days after written notice thereof from
the other party (the "Notifying Party") to the Non-Performing Party, or if
such performance cannot be reasonably had within such thirty (30) day period,
and the Non-Performing Party shall not in good faith have commenced such
performance within such thirty (30) day period and proceed therewith to
completion, it shall be considered a default of the Non-Performing Party
under this Lease. Notifying Party shall give written notice to the
Non-Performing Party in the matter herein set forth and shall afford the
Non-Performing Party a reasonable opportunity to cure any such default. In
addition, Tenant shall send notice of such default by certified or registered
mail, with proper postage prepaid, to the holder of any mortgages or deeds of
trust covering the Building Complex or any portion thereof of whose address
Tenant has been notified in writing and shall afford such holder a reasonable
opportunity to cure any alleged default on Landlord's behalf. The provisions
of this subparagraph (g) shall not apply to any failure of Tenant to make,
when due, any regularly scheduled installment payment of Rent or Additional
Rent due under this Lease.
(h) If there is more than one entity or person which or who
are the Tenants or Landlords under this Lease, the obligations imposed upon
Tenants or Landlords under this Lease shall be joint and several.
(i) No act or thing done by Landlord or Landlord's agent
during the term hereof, including but not limited to any agreement to accept
surrender of the
<PAGE>
Premises or to amend or modify this Lease, shall be deemed to be binding upon
Landlord unless such act or things shall be by an officer of Landlord or a
party designated in writing by Landlord as so authorized to act. The delivery
of keys to Landlord, or Landlord's agent, employees or officers shall not
operate as a termination of this Lease or a surrender of the Premises. No
payment by Tenant or receipt by Landlord of a lesser amount than the monthly
rent herein stipulated shall be deemed to be other than on account of the
earliest stipulated rent, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as rent be deemed an accord
and satisfaction and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue
any other remedy available to Landlord.
(j) Landlord shall have the right to construct other
buildings or improvements in any plaza or any other area designated by
Landlord for use by tenants or to change the location, character or make
alterations of or additions to any of said plazas or other areas provided the
same does not breach Tenant's right of quiet enjoyment of the Premises.
Landlord, during the entire term of this Lease, shall have the right to
change the number and name of the Building or Building Complex at any time
without liability to Tenant.
(k) Tenant acknowledges and agrees that it has not relied
upon any statements, representations, agreements or warranties, except such
as are expressed in this Lease.
(l) Notwithstanding anything to the contrary contained
herein, Landlord's liability under this Lease shall be limited to its
interests in this Building.
(m) Time is of the essence hereof.
(n) Tenant and Landlord and the parties executing this
Lease on behalf of each of them represent to each other that they are
authorized to do so by requisite action of the board of directors or
partners, as the case may be, and agree upon request to deliver to each other
a resolution or similar document to that effect.
(o) This Lease shall be governed by and construed in
accordance with the laws of the State of Colorado.
(p) This Lease, together with the exhibits attached hereto,
contains the entire agreement of the parties and may not be amended or
modified in any manner except by an instrument in writing signed by both
parties.
(q) Tenant shall not use the name of the Building, the
Building Complex or the development in which the Building is situated as part
of its legal or trade name, nor for any purpose other than as an address for
the business to be conducted by Tenant in the Premises.
(r) The submission or delivery of this document for
examination and review does not constitute an option, an offer to lease space
in the Building, or an agreement to lease. This document shall have no
binding effect on the parties unless
<PAGE>
and until executed by both Landlord and Tenant.
(s) Whenever a consent, permission, approval or
acknowledgment is required under this Lease or any Exhibit hereto, such
consent, approval, permission or acknowlegment shall not be unreasonably
withheld or delayed.
38. HAZARDOUS MATERIALS:
(a) Tenant shall (i) not cause or permit any Hazardous
Material to be brought upon, kept, or used in or about the Premises by
Tenant, its agents, employees, contractors, licensees or invitees, without
prior written consent of Landlord (which Landlord shall not unreasonably
withhold or delay as long as Tenant demonstrates to Landlord's reasonable
satisfaction that such Hazardous Material is necessary or useful to Tenant's
business and will be used, kept and stored in a manner that complies with all
laws regulating any such Hazardous Materials so brought upon or used or kept
in or about the Premises). If Tenant breaches the obligations stated in the
preceding sentence, or if the presence of Hazardous Material on the Premises
caused or permitted by Tenant results in contamination of the Premises or
Building Complex, or any part thereof, or if contamination of the Premises or
Building Complex by Hazardous Material otherwise occurs for which Tenant is
legally liable to Landlord for damage resulting therefrom, then Tenant shall
indemnify, defend and hold Landlord, its agents, employees, legal
representatives, successors and assigns, harmless from any and all claims,
judgments, damages, penalties, fines, costs, liabilities, or losses
(including, without limitation, diminution in value of the Premises and
building Complex, damages for the loss or restriction on use of any rentable
or usable space or of any amenity of the Premises or Building Complex,
damages arising from any adverse impact on marketing of space in the
Building, and sums paid in settlement of claims, reasonable attorneys' fees,
consultant fees and expert fees) which arise during or after the Lease term
as a result of such contamination. This indemnification of Landlord by Tenant
includes, without limitation, such costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state, or local governmental agency
or political subdivision because of Hazardous Material caused or permitted by
Tenant to be present in or about the Building Complex or the soil or ground
water on or under the Building Complex. Without limiting the foregoing, if
the presence of any Hazardous Material on or about the Building Complex
caused or permitted by Tenant results in any contamination of any portion
thereof, Tenant shall promptly take all actions at its sole expense as are
necessary to return the Building Complex to the condition existing prior to
the introduction of any such Hazardous Material, subject to obtaining
Landlord's prior written consent to the actions to be taken by Tenant.
Landlord may properly require its consent to the selection of the contractors
and other experts involved in the inspection, testing and removal or
abatement activities, the scope of activities to be performed, the manner and
method for performance of such activities, and such other matters as may be
required or requested by Landlord for the safety of and continued use of the
Building Complex and all occupants thereof. The obligations and liabilities
of Tenant herein shall survive expiration or termination of this Lease.
<PAGE>
(b) "Hazardous Material," as used in this Lease, shall be
construed in its broadest sense and shall include asbestos, other asbestotic
material (which is currently or may be designated in the future as a
Hazardous Material), any petroleum base products, pesticides, paints and
solvents, polychlorinated biphenyl, lead, cyanide, DDT, acids, ammonium
compounds and other chemical products (excluding commercially used cleaning
materials in ordinary quantities) and any substance or material if defined or
designated as hazardous or toxic substance, or other similar term, by any
federal, state or local law, statute, regulation, or ordinance affecting the
Building Complex or Premises presently in effect or that may be promulgated
in the future, as such statutes, regulations and ordinances may be amended
from time to time.
(c) In the event Tenant causes or permits Hazardous
Material to be brought upon, kept, or used in or about the Premise, with or
without Landlord's consent, and Landlord has reason to believe that such
Hazardous Materials are contaminating or may contaminate the Building Complex
or soils or water, or pose a threat to the health of other occupants of the
Building Complex, Landlord shall be entitled to have an environmental audit
performed , the reasonable costs and expense of which shall be paid by
Tenant. Except in the case of an obvious and immediate threat and danger,
Landlord's "reason to believe," as used above, shall be established by a
study conducted, at Landlord's expense, by a reputable environmental
consultant into the materials present, Tenant's handling of the same, safety
measures in place, and compliance with all local state and federal laws,
rules and regulations regulating such materials and the use, transportation
and disposal of the same.
39. OPTION TO EXTEND:
Tenant shall have the right, if not in default at the time of
exercise of the option, to extend the original term of this Lease for two
renewal terms of five (5) years each (each hereinafter called a "Renewal
Term"). Each Renewal Term shall begin upon the expiration of the original
Lease Term, or upon expiration of the first Renewal Term, as the case may be.
All of the terms, provisions, and covenants of this Lease shall apply to each
Renewal Term; PROVIDED, HOWEVER, the Base Rent payable during each Renewal
Term shall be at ninety-five percent (95%) of the fair market rental value
determined as hereinafter set forth, at the commencement of each Renewal
Term. Tenant shall exercise such option by delivering to Landlord written
notice of its election to renew no later than six (6) months prior to the
expiration of the original Lease Term or the first Renewal Term. For the
purposes of this Lease, the term "Lease Term" shall mean the original Lease
Term plus any applicable Renewal Term.
Within fourteen (14) days after the Landlord's receipt of the
Tenant's Notice of its election to renew, Landlord and Tenant shall meet and
shall seek to establish the fair market rental value of the Premises as of
the last day of the original Lease term or the first Renewal Term, as the
case may be. The term fair market rental value of the Premises shall mean the
rental rate that a ready, willing, and able tenant would agree to pay to
lease the Premises then under this Lease, from a nonaffiliated landlord after
arm's length negotiations, assuming that neither this Lease nor any other
lease of the Premises were in effect. If the parties are unable to agree upon
a fair market rental
<PAGE>
value within such fourteen (14) day period, Tenant shall, within seven (7)
days of the expiration of such fourteen (14) day period, appoint an
appraiser, who shall be an M.A.I. real estate professional with at least two
(2) years experience in commercial real estate appraisal in Boulder County to
determine such fair market value, and shall give prompt written notice to the
Landlord identifying such appraiser. Said appraiser shall, within fifteen
(15) days following his or her appointment, render his or her report to
Tenant. If Tenant accepts the fair market rental value reflected by such
report, Tenant shall immediately provide a copy thereof to Landlord. If
Tenant does not accept the value of such appraisal, it shall have an
additional ten (10) days to obtain a second appraisal and shall immediately
provide a copy thereof to Landlord. If Landlord does not accept and agree to
the fair market rental value of the Premises as reflected in Tenant's
appraisal, it shall notify Tenant of that fact within five (5) days following
receipt of the Tenants appraisal report, and Landlord shall, within seven (7)
days following rejection of the Tenant's appraisal report, appoint an
appraiser with the qualifications set forth above, who shall independently
render his or her opinion of the fair market rental value of the Premises
within fifteen (15) days after appointment. Failure of either party to
appoint an appraiser and to cause such appraiser to agree in writing to be
bound by the provisions of this Section within the respective seven (7) day
period shall be deemed to be an irrevocable election to accept the
determination of the fair market value made by the appraiser of the other
party. Should Tenant reject the fair market rental value determined by
Landlord's appraiser, and if the parties are unable to reach agreement upon
the fair market rental value based upon the values reflected by the two
appraisals in hand, within seven (7) days after receipt of the Landlord's
appraisal, the Tenant's appraiser and the Landlord's appraiser shall appoint
a third, similarly-qualified appraiser, and cause such appraiser to agree in
writing to be bound by the provisions of this Section, and give Landlord and
Tenant written notice of his or her identify. In the event the Appraisers are
unable to agree on the third appraiser within said fourteen (14) day period,
the parties hereto shall request that the President of the Boulder County Bar
Association (or such other individual as to whom the parties may agree)
appoint the third appraiser within seven (7) days. The third appraiser shall,
within fourteen (14) days of his appointment, express to both Landlord and
Tenant his or her determination of the fair market rental value of the
Demised Premises, and such determination shall be determinative of the
Demised Premises' fair market rental value at such time, shall be final, and
shall govern for the purposes of this Section. If the appraisal procedure is
used, each party shall bear the cost of the appraiser appointed by it, and
the parties shall share equally the cost of the third appraiser. If only one
appraiser shall be appointed, each party shall share equally the cost of such
appraiser. The three percent (3%) fixed annual increase in Base Rent provided
for during the initial Lease Term shall apply during each Renewal Term.
40. RIGHT OF OPPORTUNITY ON ADDITIONAL SPACE:
Every instance of any equal or superior right of first opportunity
given by Landlord to any other tenant in the Building is listed on EXHIBIT F
to this Lease. Landlord will not grant any additional rights of opportunity
that are equal or superior to Tenant's rights, beyond those listed on Exhibit
F. Should Landlord become aware that additional space in the Building will
become available for lease, at any time during the term of this Lease,
Landlord agrees to provide to Tenant written notice of the availability of
such space, which notice shall identify the space, the date the same will be
available
<PAGE>
for occupancy, and the rental rate which Landlord will offer such space for
rental to the public. Tenant shall have thirty (30) days following the
effective date of Landlord's notice within which to notify Landlord that
Tenant elects to rent such space, at the rental rate specified in Landlord's
notice, for a term concurrent with the Term of this Lease. Should Tenant fail
to give notice electing to rent such additional space within said thirty
(30)-day period, then Landlord may offer such space for lease to the public
and may lease the same at any time thereafter at a rental rate equal to or
greater than 90% of the rental rate stated in the original notice from
Landlord to Tenant. If Landlord desires to lease such space at a rental rate
less than 90% of that stated in the notice to Tenant, Landlord shall once
again offer the same to Tenant for a period of ten (10) days, at the lower
rental rate.
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Lease the day and year first above written.
LANDLORD:
THW PARTNERS LIMITED PARTNERSHIP,
a Colorado limited partnership
By: THW, Inc., a Florida corporation
General Partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
TENANT:
GILEAD SCIENCES, INC.,
a Delaware corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION
Lot 2,
Center Green South, Replat A
Boulder County, Colorado
<PAGE>
EXHIBIT "C"
ESTOPPEL AND COMMENCEMENT DATE CERTIFICATE
THIS ESTOPPEL AND COMMENCEMENT DATE CERTIFICATE ("Certificate") is
executed this ____ day of _____________, _____, by THW Partners Limited
Partnership, A Colorado limited partnership ("Landlord") and Gilead Sciences,
Inc. ("Tenant") with respect to and forming a part of that certain
office/light manufacturing building lease ("Lease") dated _____________,
1999, for the premises commonly known as the second floor, 2900 Center Green
Court South, Boulder, Colorado ("Premises").
WITNESSETH:
WHEREAS, the parties desire to reaffirm and/or amend and certify to
certain provisions of the Lease; and
WHEREAS, the parties desire that the matters set forth herein be
conclusive and binding on the parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The Lease Commencement Date is deemed and agreed to be
____________, 19__, and the Lease Termination Date is ____________, 19__,
unless sooner terminated, as provided therein.
2. Tenant's first installment of Base Rent in the amount of
______________ Dollars ($______) for the period of ________________ (is due
on) (was paid on) ___________, 19__.
3. By execution hereof, Tenant acknowledges and agrees that all
improvements or other work required of Landlord has been satisfactorily
performed and Tenant hereby accepts the Premises in full compliance with the
terms and conditions of the Lease.
4. Except as may be amended herein, all terms and conditions of the
Lease shall continue in full force and effect and are hereby republished and
reaffirmed in their entirety.
5. This Certificate shall be binding upon and may be relied upon by
the parties hereto and their respective legal representatives, successors,
and assigns.
IN WITNESS WHEREOF, the parties have executed this Certificate as of
the day and year first above written.
LANDLORD:
<PAGE>
THW PARTNERS LIMITED PARTNERSHIP,
a Colorado limited partnership
By: THW, Inc., a Florida corporation
General Partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
TENANT:
GILEAD SCIENCES, INC.,
a Delaware corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT "D"
WORK LETTER AGREEMENT
This Agreement supplements that certain lease (hereinafter referred
to as the "Lease") dated and executed concurrently herewith by and between
THW PARTNERS LIMITED PARTNERSHIP, a Colorado limited partnership (hereinafter
referred to as "Landlord") and GILEAD SCIENCES, INC. (hereinafter referred to
as "Tenant") with the terms defined in the Lease to have the same definition
where used herein.
WHEREAS, Landlord has leased to Tenant the second floor (the
"Premises") in that certain building located at 2900 Center Green Court
South, Boulder, Colorado ("Building");
WHEREAS, Landlord and Tenant desire to set forth their
understandings and agreement as to processes and procedures for constructing
tenant improvements within the Premises (collectively, the "Work").
NOW, THEREFORE, in consideration of the mutual benefits to be
derived by Landlord and Tenant, and the covenants and conditions contained
herein and for such other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Within ten (10) days following the date this Lease has been
executed by both parties, Landlord and Tenant shall reach agreement as to
which party, that is Landlord or Tenant, will contract to have tenant finish
work performed within the Premises. The party who will contract for such work
is hereinafter referred to as the "Contracting Party."
2. The Contracting Party shall cause all necessary drawings, plans,
and specifications for the Work to be drawn by arranging therefor with an
architect or space planner selected by the Contracting Party. If Landlord is
not the Contracting Party, the selection of an architect or space planner
shall first be approved by Landlord in Landlord's reasonable discretion. The
final drawings, plans, and specifications shall be subject to Landlord's
written approval (not unreasonably withheld or delayed), and shall be
submitted on or before February 29, 2000, in order to allow the Contracting
Party to substantially complete the Work on or before the Lease Commencement
Date. A copy of the Landlord-approved final drawings, plans, and
specifications shall be attached hereto as EXHIBIT D-1. The Contracting Party
agrees to complete the construction of improvements within the Premises
pursuant to the drawings, plans, and specifications approved by Landlord and
a construction contract or construction contracts to be negotiated and
entered into by the Contracting Party, which contractor or contractors must
first be approved by Landlord in its sole discretion (collectively,
"Construction Contract"). A copy of the Construction Contract shall be
attached hereto as EXHIBIT D-2. Tenant agrees to accept, when completed, the
tenant improvements constructed in accordance with such drawings, plans, and
specifications. Other than the Work described in the Construction Contract,
if Landlord is to be the Contracting Party, or other than the obligations of
Landlord to pay the Tenant Build-Out Allowance as set forth in Paragraph 2,
below, if Tenant is the Contracting Party,
<PAGE>
Landlord shall have no obligation for the completion of the Premises, and
Tenant shall accept the Premises in their "as is" condition as of the Date of
the Lease.
2. Landlord shall pay in a timely fashion (as prescribed in the
Construction Contract), either in reimbursement to Tenant if Tenant is the
Contracting Party or directly to the contractor and/or its subcontractors and
suppliers if Landlord is the Contracting Party, all authorized and approved
construction draws submitted by the contractor, until Landlord has disbursed
the sum of One Hundred Twelve Thousand Two Hundred Seventy Seven and no/100
Dollars ($112,277.00) with respect to Work completed in the Premises (the
"Tenant Build-Out Allowance"). No distribution of the Tenant Build-Out
Allowance shall be made unless each draw thereon is accompanied by lien
waivers evidencing payment to all contractors, subcontractors and suppliers
by and through the preceding disbursement. All amounts in excess of the
Tenant Build-Out Allowance required to pay for the Work shall be paid in a
timely fashion (as prescribed in the Construction Contract) by Tenant as
authorized and approved construction draws are submitted by the contractor.
Tenant shall reimburse Landlord a proportionate amount of the Tenant
Build-Out Allowance in the event Tenant defaults in the performance of any of
its obligations under the Lease as provided in Paragraph 19 of the Lease,
such proportionate amount to be determined by multiplying the Tenant
Build-Out Allowance times a fraction, the numerator of which is the number of
months remaining during the initial Term of the Lease, and the denominator of
which is sixty (60) months.
3. If Landlord is the Contracting Party, Tenant shall have the right
to negotiate with the contractor in an effort to achieve any and all
reasonable costs savings by changes to the drawings, plans, and
specifications and/or the Construction Contract. Once the Construction
Contract has been finalized and executed by the Contracting Party, no change
orders, as referred to in the Construction Contract, shall be made,
authorized or valid unless and until the same are signed by both Landlord and
Tenant.
4. If Tenant is the Contracting Party, no delay in arriving at
substantial completion of the tenant improvements and no deferral of the
Commencement Date shall occur as a result of delays in finalizing plans,
specifications, Construction Contract or completing construction, unless such
delay is a "Landlord Delay" as hereafter defined. A "Landlord Delay" shall
mean the number of days in excess of five (5) business days taken by Landlord
to approve of or consent to an architect or space planner, final drawings,
plans and specification, the contractor or a change order, after the date a
request for approval or consent of the same is submitted to Landlord. In the
event of a Landlord Delay, the Commencement Date shall be postponed by the
number of days involved in any such Landlord Delay.
5. Landlord will allow Tenant to enter into the Premises for the
purpose of installing furniture, fixtures and equipment and other leasehold
improvements, including, but not limited to wall and floor coverings,
millwork and draperies, prior to the Lease Commencement Date, all subject,
however, to the terms and conditions of the Construction Contract; PROVIDED,
HOWEVER, that any such entry shall be at Tenant's sole risk and provided
further that such entry and work do not unreasonably interfere in any way
with the performance of Landlord's work or other workers in and about the
Building. At any time during such period of early entry, if Landlord notifies
Tenant that Tenant's
<PAGE>
entry or work is interfering with or delaying the performance of work to be
performed by Landlord or other workers in and about the Building, or causing
any disruption whatsoever, Tenant shall forthwith discontinue any further
work and shall vacate the Premises, and shall cause its workmen or
contractors to remove therefrom, any equipment, materials or installations
which are the subject of Landlord's notice.
6. The parties agree that the foregoing procedures are adopted for
the convenience of the parties, and that nothing herein is intended to
change, modify, amend or abrogate any of the terms, provisions, covenants and
conditions expressed in the Lease between the parties as heretofore amended.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Work Letter
Agreement this __ day of November, 1999.
LANDLORD:
THW PARTNERS LIMITED PARTNERSHIP,
a Colorado limited partnership
By: THW, Inc., a Florida corporation
General Partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
TENANT:
GILEAD SCIENCES, INC.,
a Delaware corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
<PAGE>
EXHIBIT "E"
RULES AND REGULATIONS
Landlord and Tenant agree that the following Rules and Regulations
shall be and hereby are made a part of this Lease, and Tenant agrees that
Tenant's employees and agents, or any others permitted by Tenant to occupy or
enter the Premises or the Building Complex, will at all times abide by said
Rules and Regulations:
1. The sidewalks and entries of the Building shall not be obstructed
by Tenant, or Tenant's agents or employees, or used for any purpose other
than ingress to and egress from the Premises.
2. Furniture, equipment or supplies will be moved in or out of the
Building only during such hours and in such manner as may be prescribed by
Landlord. Tenant shall cause its movers to use only the loading facilities
designated by Landlord. In the event Tenant's movers damage any part of the
Building, Tenant shall forthwith pay to Landlord the amount required to
repair said damage.
3. No safe or articles, the weight of which may in the opinion of
Landlord constitute a hazard or damage to the Building or Building's
equipment, shall be moved into the Premises.
4. Safes and other equipment, the weight of which is not excessive,
shall be moved into, from and about the Building only during such hours and
in such manner as shall be prescribed by Landlord; and Landlord shall have
the right to designate the location of such articles in the Premises.
5. No sign, advertisement or notice shall be inscribed, painted or
affixed on any part of the inside or outside of the Building unless of such
color, size and style and in such place upon or in the Building, as shall be
first designated and approved in writing by Landlord, provided, however,
there shall be no obligation or duty on Landlord to allow any sign,
advertisement or notice to be inscribed, painted or affixed on any part of
the inside or outside of the Building except as otherwise provided in the
Lease. No furniture shall be placed in front of the Building or in any lobby
or corridor, without the prior written discretionary consent of Landlord.
Landlord shall have the right to remove all non-permitted signs and
furniture, without notice to Tenant, and at the expense of Tenant.
6. Tenant shall not do or permit anything to be done in the
Premises, or bring or keep anything therein which would in any way increase
the rate of fire insurance on the Building or on property kept therein,
constitute a nuisance or waste, or obstruct or interfere with the rights of
other tenants, or in any way injure or annoy them, or conflict with any of
the rules or ordinances of the Fire Department or of the Department of Health
of the City and County where the Building is located.
7. No animals (other than guide animals for the handicapped) shall
be allowed in the Building. No person shall disturb the occupants of this or
adjoining buildings or premises by the use of any radio, sound equipment or
musical instrument
<PAGE>
or by the making of loud or improper noises.
8. No vehicles shall be permitted in the Building nor shall any
vehicles be permitted to obstruct the sidewalks or entrances of the Building.
9. Tenant shall not allow anything to be placed on the outside of
the Building, nor allow anything to be thrown by Tenant, Tenant's agents or
employees, out of the windows or doors of the Building. Tenant, except in
case of fire or other emergency, shall not open any outside window.
10. No additional lock or locks shall be placed by Tenant on any
door in the Building unless written consent of Landlord shall first have been
obtained. A reasonable number of keys to the toilet rooms if locked by
Landlord will be furnished by Landlord, and neither Tenant, Tenant's agents
or employees shall have any duplicate keys made. At the termination of this
tenancy, Tenant shall promptly return to Landlord all keys to offices, toilet
rooms or vaults.
11. No window shades, blinds, screens, draperies or other window
coverings will be attached or detached by Tenant without Landlord's prior
written consent. Tenant agrees to abide by Landlord's rules with respect to
maintaining uniform curtains, draperies and/or Awnings at all windows and
hallways.
12. No awnings shall be placed over any window.
13. If Tenant desires telegraphic, telephonic or other electric
connections, Landlord or Landlord's agents will direct the electricians as to
where and how the wires may be introduced and without such directions, no
boring or cutting for wires will be permitted. Any such installation and
connection shall be made at Tenant's expense.
14. Tenant shall not install or operate any steam or gas engine or
boiler, or carry on any mechanical operation in the Premises without
Landlord's prior consent. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited. Explosives or
other articles deemed extra hazardous shall not be brought into the Building
Complex.
15. Any painting or decorating as may be agreed to be done by and at
the expense of Landlord shall be done during regular weekday working hours.
Should Tenant desire such work on Saturdays, Sundays, holidays or outside of
regular working hours, Tenant shall pay for the extra cost thereof, if any
(i.e. the difference in the cost of such work if done on an evening, weeked
or holiday, versus the cost of the work if done during regular weekday
working hours.
16. Except as permitted by Landlord, and except for normal office
decorating, Tenant shall not mark upon, paint signs upon, cut, drill into,
drive nails or screws into, or in any way deface the walls, ceilings,
partitions or floors of the Premises or of the Building, and any defacement,
damage or injury caused by Tenant, Tenant's agents or employees, shall be
paid for by Tenant.
17. Landlord shall, after reasonable notice to Tenant and during
normal
<PAGE>
working hours of Tenant, have the right, by Landlord's representatives or
agents, to enter the Premises and show the same to persons wishing to lease
them, and may, at any time within sixty (60) days preceding the termination
of Tenant's Lease term, place upon the doors and windows of the Premises a
"For Rent" sign, which notice shall not be removed by Tenant.
18. Tenant shall not obstruct or interfere with the rights of other
tenants of the Building Complex, or of persons having business in the
Building Complex, or in any way injure or annoy such tenants or persons.
19. Tenant shall not commit any act or permit anything in or about
the Building Complex which shall or might subject Landlord to any liability
or responsibility for injury to any person or property by reason of any
business or operation being carried on in or about the Building Complex or
for any other reason.
20. Tenant shall not use the Building for lodging, sleeping, or for
any immoral or illegal purpose or for any purpose that will damage the
Building, or the reputation thereof, or for any purposes other than those
specified in the Lease.
21. Canvassing, soliciting, and peddling in the Building Complex are
prohibited, and Tenant shall cooperate to prevent such activities.
22. Tenant shall not conduct mechanical or manufacturing operations
other than those expressly permitted in Section 6 of the Lease without
Landlord's prior consent, nor place or use any inflammable combustible
explosive, or hazardous fluid, chemical, device, substance or material in or
about the Building. Tenant shall comply with all statutes, ordinances, rules,
orders, regulations and requirements imposed by governmental or
quasi-governmental authorities in connection with fire and panic safety and
fire prevention and shall not commit any act or permit any object to be
brought or kept in the Building, which shall result in a changed use of the
general public, and Landlord shall, in all cases, retain the right to control
or prevent access thereto by all persons whose presence in the judgment of
the Landlord, shall be prejudicial to the safety, character, reputation or
interests of the Building Complex and its tenants. Tenant shall not go upon
the roof of the Building without the express prior written consent of
Landlord.
23. Tenant shall not deposit any trash, refuse, cigarettes, or other
substances of any kind within or out of the Building except in the refuse
containers provided therefore.
24. Tenant shall use the Common Areas only as a means of ingress and
egress, and Tenant shall permit no loitering by any persons upon Common Areas
or elsewhere within the Building Complex.
25. Landlord its agents or representatives reserve the right to
exclude or expel from the Building Complex any person, who, in the judgment
of Landlord, is intoxicated or under the influence of liquor or drugs or who
shall in any manner act in violation of the rules and regulations of the
Building Complex.
26. Tenant shall not use the washrooms, restrooms and plumbing
fixtures of
<PAGE>
the Building, and appurtenances thereto, for any other purpose then the
purposes for which they were constructed, and Tenant shall not deposit any
sweepings, rubbish, rags or other improper substances therein. Tenant shall
not waste water by interfering or tampering with the faucets or otherwise. If
Tenant or Tenant's servants, employees, contractors, jobbers, agents,
licensees, invitees, guests or visitors cause any damage to such washrooms,
restrooms, plumbing fixtures or appurtenances, such damage shall be repaired
at Tenant's expense and Landlord shall not be responsible therefor.
27. During the term of the Lease, Tenant shall comply with all
statutes, ordinances, rules, orders, regulations and requirements of the
federal, state, county and city governments and all departments thereof
applicable to the presence, storage, user maintenance and removal of toxic,
hazardous or contaminated substances (collectively, "hazardous material") in,
on or about the Premises, which presence, storage, use, maintenance or
removal is caused or permitted by Tenant. In no event shall the aforesaid be
construed to mean that Landlord has given or will give its consent to
Tenant's storing, using, maintaining or removing hazardous materials in, on
or about the Premises.
28. Tenant shall not permit its employees or agents to smoke in any
lobby, hallway or restroom within the Building Complex or in any other areas
of the Building Complex posted as a non-smoking area.
29. Tenant agrees that Landlord may reasonably amend, modify, delete
or add new and additional reasonable rules and regulations to the use and
care of the Premises and the Building Complex, provided such changes shall
not interfere with Tenant's quiet enjoyment of the Premises for its intended
purposes. Tenant agrees to comply with all such rules and regulations upon
notice to Tenant from Landlord thereof. In the event of any breach of any
rules and regulations herein set forth or any reasonable amendments,
modifications or additions thereto Landlord shall have all remedies in this
Lease provided for in the event of default by Tenant.
<PAGE>
EXHIBIT F
List of equal or superior rights of opportunity on vacant space within
the Building.
None
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF GILEAD SCIENCES, INC.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Name of Subsidiary Country/State in Which Incorporated
- ----------------------------------------------------------------------------------------
<S> <C>
Gilead Sciences Limited United Kingdom
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals, Inc. United States (Delaware)
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals International, Inc. United States (Delaware)
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals GmbH Germany
- ----------------------------------------------------------------------------------------
NeXstar Farmaceutica, S.A. Spain
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals Italia, Srl Italy
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals Limited United Kingdom
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals International Limited United Kingdom
- ----------------------------------------------------------------------------------------
NeXstar Farmaceutica Porugal, LDA Portugal
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals B.V. The Netherlands
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceutique Sarl France
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals PTY Limited Australia
- ----------------------------------------------------------------------------------------
NeXstar Pharmaceuticals Limited Ireland
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-46058) pertaining to the Gilead Sciences, Inc. 1987
Incentive Stock Option Plan, 1987 Supplemental Stock Option Plan, 1991 Stock
Option Plan, Employee Stock Purchase Plan, and 1995 Non-Employee Directors'
Stock Option Plan, the Registration Statement (Form S-8 No. 33-62060)
pertaining to the Gilead Sciences, Inc. 1991 Stock Option Plan, the
Registration Statement (Form S-8 No. 33-81670) pertaining to the Gilead
Sciences, Inc. Employee Stock Purchase Plan, the Registration Statement (Form
S-8 No. 333-84719) pertaining to the 1991 Stock Option Plan, 1995
Non-Employee Directors' Stock Option Plan and Employee Stock Purchase Plan,
the Registration Statement (Form S-8 No. 333-84713) pertaining to the NeXstar
Pharmaceuticals, Inc. 1993 Incentive Stock Plan, NeXstar Pharmaceuticals,
Inc. 1995 Director Option Plan and Vestar, Inc. 1998 Stock Option Plan, and
the Registration Statement (Form S-3 No. 333-87167) and related Prospectus
for the registration of 3,033,928 shares of the common stock of Gilead
Sciences, Inc. of our report dated February 18, 2000, with respect to the
consolidated financial statements of Gilead Sciences, Inc., included in the
Annual Report (Form 10-K) of Gilead Sciences, Inc. for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 28, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference, in Gilead Sciences
Inc.'s Annual Report on Form 10-K, of our report dated January 7, 2000 relating
to the financial statements of Proligo, LLC for the year ended November 30,
1999.
<TABLE>
<S> <C>
/s/ PRICEWATERHOUSECOOPERS LLP
- -------------------------------------------
PricewaterhouseCoopers LLP
</TABLE>
Denver, CO
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 56 AND 57 OF THE COMPANY'S 10K FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 47,011
<SECURITIES> 247,383
<RECEIVABLES> 45,599<F1>
<ALLOWANCES> 0
<INVENTORY> 20,959
<CURRENT-ASSETS> 371,981
<PP&E> 51,398<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 436,808
<CURRENT-LIABILITIES> 47,877
<BONDS> 84,786
0
0
<COMMON> 44
<OTHER-SE> 297,248
<TOTAL-LIABILITY-AND-EQUITY> 436,808
<SALES> 139,890
<TOTAL-REVENUES> 168,979
<CGS> 29,546
<TOTAL-COSTS> 239,838
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,518
<INCOME-PRETAX> (60,942)
<INCOME-TAX> 888
<INCOME-CONTINUING> (66,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,486)
<EPS-BASIC> (1.55)
<EPS-DILUTED> (1.55)
<FN>
<F1>RECEIVABLES IS NET OF AN ALLOWANCE FOR DOUBTFUL ACCOUNTS
<F2>PP&E IS NET OF ACCUMULATED DEPRECIATION
</FN>
</TABLE>
