-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IvGJRwfliCQYmsPORNkNZsFaLr9fv2tqvMP9mf5EhnaHNP3m7DZmNoZw8jR7O9/E aXRQHILrfotAdOe8dGDvyQ== /in/edgar/work/0000891618-00-005037/0000891618-00-005037.txt : 20001115 0000891618-00-005037.hdr.sgml : 20001115 ACCESSION NUMBER: 0000891618-00-005037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARADIGM CORP CENTRAL INDEX KEY: 0001013238 STANDARD INDUSTRIAL CLASSIFICATION: [3845 ] IRS NUMBER: 943133088 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72037 FILM NUMBER: 762412 BUSINESS ADDRESS: STREET 1: 3929 POINT EDEN WAY CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5102659000 MAIL ADDRESS: STREET 1: 3929 POINT EDEN WAY CITY: HAYWARD STATE: CA ZIP: 94545 10-Q 1 f66816e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPT.30, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-28402 ARADIGM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3133088 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3929 POINT EDEN WAY HAYWARD, CA 94545 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) (510) 265-9000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value 18,091,675 (CLASS) (OUTSTANDING AT OCTOBER 31, 2000)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 ARADIGM CORPORATION INDEX
PAGE NO. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Operations (Unaudited) Three months ended September 30, 2000 and 1999.............. 1 Nine months ended September 30, 2000 and 1999............... 2 Balance Sheets September 30, 2000 (Unaudited) and December 31, 1999........ 3 Statements of Cash Flows (Unaudited) Nine months ended September 30, 2000 and 1999............... 4 Notes to Unaudited Financial Statements..................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk... 11 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds................... 12 Item 6. Exhibits and Reports on Form 8-K............................ 12 Signature............................................................. 13 Exhibits.............................................................. 14
i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, ------------------ 2000 1999 ------- ------- (UNAUDITED) Contract revenues........................................... $ 4,715 $ 5,017 ------- ------- Expenses: Research and development.................................. 11,974 9,155 General and administrative................................ 2,399 2,227 ------- ------- Total expenses.................................... 14,373 11,382 ------- ------- Loss from operations........................................ (9,658) (6,365) Interest income............................................. 936 500 Interest expense and other.................................. (413) (183) ------- ------- Net loss.................................................... $(9,135) $(6,048) ======= ======= Basic and diluted net loss per share........................ $ (0.51) $ (0.41) ------- ------- Shares used in computing basic and diluted net loss per share..................................................... 17,967 14,693 ======= =======
See accompanying notes. 1 4 ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2000 1999 -------- -------- (UNAUDITED) Contract revenues........................................... $ 15,219 $ 12,154 -------- -------- Expenses: Research and development.................................. 34,379 24,362 General and administrative................................ 6,925 6,148 -------- -------- Total expenses.................................... 41,304 30,510 -------- -------- Loss from operations........................................ (26,085) (18,356) Interest income............................................. 2,300 1,494 Interest expense and other.................................. (1,101) (691) -------- -------- Net loss.................................................... $(24,886) $(17,553) ======== ======== Basic and diluted net loss per share........................ $ (1.47) $ (1.25) -------- -------- Shares used in computing basic and diluted net loss per share..................................................... 16,878 14,038 ======== ========
See accompanying notes. 2 5 ARADIGM CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 44,081 $ 9,347 Short-term investments.................................... 9,382 21,912 Receivables............................................... 1,761 3,886 Other current assets...................................... 1,001 1,187 -------- -------- Total current assets.............................. 56,225 36,332 Property and equipment, net................................. 16,671 14,160 Notes receivable from officers.............................. 119 130 Other assets................................................ 417 168 -------- -------- Total assets...................................... $ 73,432 $ 50,790 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,919 $ 2,506 Accrued compensation...................................... 3,062 1,275 Deferred revenue.......................................... 4,481 7,361 Other accrued liabilities................................. 2,244 356 Current portion of capital lease obligations.............. 2,416 1,863 -------- -------- Total current liabilities......................... 14,122 13,361 Notes payable............................................... 6,712 3,956 Noncurrent portion of deferred revenue...................... 2,689 3,663 Capital lease obligations, less current portion............. 4,759 5,653 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; no shares issued or outstanding............ -- -- Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares: September 30, 2000 -- 18,002,644; December 31, 1999 -- 14,749,777.... 145,325 99,603 Shareholder notes receivable................................ (138) (163) Deferred compensation....................................... (257) (379) Accumulated deficit......................................... (99,780) (74,904) -------- -------- Total shareholders' equity........................ 45,150 24,157 -------- -------- Total liabilities and shareholders' equity........ $ 73,432 $ 50,790 ======== ========
See accompanying notes. 3 6 ARADIGM CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 2000 1999 -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(24,886) $(17,553) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization.......................... 2,289 1,733 Amortization of deferred compensation.................. 122 122 Changes in operating assets and liabilities: Receivables.......................................... 2,125 (1,973) Other current assets................................. 186 (9) Other assets......................................... -- (89) Accounts payable..................................... (587) 943 Accrued compensation................................. 1,787 1,353 Other accrued liabilities............................ 1,888 (829) Deferred revenue..................................... (3,854) (700) -------- -------- Net cash used in operating activities............. (20,930) (17,002) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (4,800) (2,982) Purchase of available-for-sale investments................ (10,191) (10,575) Proceeds from maturities of available-for-sale investments............................................ 22,731 16,419 -------- -------- Net cash provided by investing activities......... 7,740 2,862 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net............... 45,473 25,477 Issuance of notes payable................................. 2,756 2,273 Proceeds from repayments of shareholder notes............. 11 42 Notes receivable from officers............................ 25 7 Proceeds from equipment loans............................. 1,275 3,294 Payments on lease obligations and equipment loans......... (1,616) (1,290) -------- -------- Net cash provided by financing activities......... 47,924 29,803 -------- -------- Net increase in cash and cash equivalents................... 34,734 15,663 Cash and cash equivalents at beginning of period............ 9,347 10,765 -------- -------- Cash and cash equivalents at end of period.................. $ 44,081 $ 26,428 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 652 $ 674 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of warrants for services......................... $ 249 $ 221 ======== ========
See accompanying notes. 4 7 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Aradigm Corporation (the "Company") is a California corporation. Since inception, Aradigm has been engaged in the development and commercialization of non-invasive pulmonary drug delivery systems. Through June 1997, the Company was in the development stage. The Company does not anticipate receiving significant revenue from the sale of products in the upcoming year. Principal activities to date have included obtaining financing, recruiting management and technical personnel, securing operating facilities, conducting research and development, and expanding commercial production capabilities. These factors indicate that the Company's ability to continue its research, development and commercialization activities is dependent upon the ability of management to obtain additional financing as required. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company's Annual Report on Form 10-K, as amended. The results of the Company's operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents and Investments The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in money market funds, commercial paper and corporate notes. The Company's short-term investments consist of commercial paper and corporate notes with maturities ranging from three to twelve months. The Company classifies its investments as available-for-sale. Available-for-sale investments are recorded at fair value with unrealized gains and losses reported in the statement of shareholders' equity. Fair values of investments are based on quoted market prices, where available. Realized gains and losses, which have been immaterial to date, are included in interest and other income and are derived using the specific identification method for determining the cost of investments sold. Dividend and interest income is recognized when earned. Depreciation and Amortization The Company records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Machinery and equipment acquired under capital leases is amortized over the useful lives of the assets. Leasehold improvements are amortized over the shorter of the term of the lease or useful lives of the improvements. Revenue Recognition Contract revenues consist of revenue from collaboration agreements and feasibility studies. The Company recognizes revenue under the agreements as reimbursable costs are incurred. Deferred revenue represents the portion of research payments received that has not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are generally recognized as revenue either upon successful completion of the 5 8 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 milestone effort when payments are contingent upon completion of the effort or are based on actual efforts expended over the remaining terms of the agreements when payments precede the required efforts. Costs of contract revenues approximate such revenue and are included in research and development expenses. Refundable development and license fee payments are deferred until the specified performance criteria are achieved. Net Loss Per Share Basic net loss per share has been computed using the weighted average number of shares of common stock outstanding less the weighted average number of shares subject to repurchase during the period. No diluted loss per share information has been presented in the accompanying statements of operations since potential common shares from stock options and warrants are antidilutive. 2. SHAREHOLDERS' EQUITY In April 2000, the Company completed a follow-on public offering of common stock, which raised approximately $42.6 million in net proceeds with the issuance of 2,875,000 shares of common stock. In March 1999, the Company completed a private offering, which raised approximately $24.8 million in net proceeds with the issuance of 2,428,338 shares of common stock. 3. CONTINGENCIES In June 1998, Eli Lilly and Company ("Lilly") filed a complaint against the Company in the United States District Court for the Southern District of Indiana. The complaint made various allegations against the Company, arising from the Company's decision to enter into an exclusive collaboration with Novo Nordisk A/S with respect to the development and commercialization of a pulmonary delivery system for insulin and insulin analogs. The Company has sponsored various studies of the pulmonary delivery of insulin analogs using materials supplied by Lilly under a series of agreements dating from January 1996. The Company and Lilly had also conducted negotiations concerning a long-term supply agreement under which Lilly would supply bulk insulin to the Company for commercialization in the Company's AERx Diabetes Management System, and a separate agreement under which the Company would license certain intellectual property to Lilly. These negotiations were terminated after the Company proceeded with its agreement with Novo Nordisk A/S. The complaint seeks a declaration that Lilly scientists were co-inventors of a patent application filed by the Company relating to pulmonary delivery of an insulin analog or, in the alternative, enforcement of an alleged agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contains allegations of misappropriation of trade secrets, breach of fiduciary duty, conversion and unjust enrichment and seeks unspecified damages and injunctive relief. The Company filed an answer denying all material allegations of the complaint and a motion for summary judgment directed against all claims in Eli Lilly's complaint. The Court has issued two written rulings on the Company's motion substantially limiting the claims against the Company. Specifically, the Court granted the Company's motion as to Lilly's claim to enforce an alleged license agreement, for misappropriation of trade secrets, breach of fiduciary duty, conversion, estoppel and breach of contract (in part) and dismissed those claims from the case. The Court denied the Company's motion to Lilly's claims for declaratory relief, unjust enrichment and breach of contract (in part), based on factual disputes between the parties, and those issues remain to be resolved. No trial date has been set. Management believes that it has meritorious defenses against each of Eli Lilly's claims and that this litigation will not have a material adverse effect on the Company's results of operations, cash flows or financial position. However, there can be no assurance that the Company will prevail in this case. 6 9 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 2000 4. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes some of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In September 2000, the SEC issued Staff Accounting Bulletin No. 101B, which defers the effective date of SAB 101 until no later than the fourth quarter 2000. The Company is currently evaluating the effect of SAB 101 on its operations and financial position. In June 1998, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities" ("SFAS 133"), which provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. In June 1999, FASB issued Financial Accounting Standards No. 137, which deferred the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS 133 is not anticipated to have an impact on the Company's operations and financial position when adopted as the Company holds no derivative financial instruments and does not currently engage in hedging activities. In March 2000, the FASB issued No. 44 ("FIN 44") "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB 25." This Interpretation clarifies (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. The adoption of FIN 44 does not have a material impact on the Company's operations and financial position. 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to management. Future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those discussed in this section as well as in the section entitled "Risk Factors" and elsewhere in the Company's Form 10-K/A filed with the Securities and Exchange Commission on March 30, 2000. The business is subject to significant risks including, but not limited to, the success of research and development efforts, dependence on corporate partners for marketing and distribution resources, obtaining and enforcing patents important to the business, clearing the lengthy and expensive regulatory process and possible competition from other products. Even if the products appear promising at various stages of development they may not reach the market or may not be commercially successful for a number of reasons. Such reasons include, but are not limited to, the possibilities that the potential products may be found to be ineffective during clinical trials, fail to receive necessary regulatory approvals, are difficult to manufacture on a large scale, are uneconomical to market, are precluded from commercialization by proprietary rights of third parties or may not gain acceptance from health care professionals and patients. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Since our inception in 1991, we have been engaged in the development of pulmonary drug delivery systems. As of September 30, 2000, we had an accumulated deficit of $99.8 million. We have not been profitable since inception and expect to incur additional operating losses over the next several years as research and development efforts, preclinical and clinical testing activities and manufacturing scale-up efforts expand and as we plan and build our late-stage clinical and early commercial production capabilities. To date, we have not had any material product sales and do not anticipate receiving significant revenue from product sales during 2000. The sources of working capital have been equity financings, equipment lease financings, contract revenues and interest earned on investments. We have performed initial feasibility work on a number of compounds and have been compensated for expenses incurred while performing this work in several cases pursuant to feasibility study agreements with third parties. Once feasibility is demonstrated with respect to a potential product, we seek to enter into development contracts with pharmaceutical corporate partners. We currently have such agreements pursuant to which we are developing pulmonary delivery systems with Genentech, Inc., to manage cystic fibrosis with dornase alfa, the active ingredient in Pulmozyme, with Novo Nordisk A/S, to manage diabetes using insulin and other blood glucose regulating compounds and with SmithKline Beecham PLC, to manage acute and breakthrough pain using opioid analgesics. Our collaborative agreements with Novo Nordisk and SmithKline Beecham provide for reimbursement of research and development expenses as well as additional payments to us as we achieve certain significant milestones. We also expect to receive royalties from these development partners based on revenues from partner sales of product and to receive revenue from the manufacturing of unit dose packets and hand-held devices. We recognize revenues under the terms of these collaborative agreements as research and development expenses are incurred, but only to the extent that they are reimbursable. Our collaborative development agreement with Genentech, entered into May 21, 1999, provides that certain expense reimbursements received from Genentech under this agreement are subject to repayment if the product does not receive approval from the Food and Drug Administration ("FDA"). Genentech reimburses development expenses incurred in the form of loans supported by promissory notes bearing interest at 2% over the prime rate. Upon receipt of FDA approval, we will receive a milestone payment that is larger than the loan principal and accrued interest, allowing the loan to be fully repaid at that time. We will also receive certain milestone payments at various points of product development. 8 11 RESULTS OF OPERATIONS Three Months Ended September 30, 2000 and 1999 Contract Revenues: Contract revenues for the three months ended September 30, 2000 decreased to $4.7 million from $5.0 million for the same period in 1999. The revenue decrease results primarily from a reduction in partner-funded project development revenue from SmithKline Beecham offset by an increase in partner-funded project development revenue from Novo Nordisk and the receipt of a milestone payment from Genentech. Costs associated with contract revenues are included in research and development expenses. Research and Development Expenses: Research and development expenses for the three months ended September 30, 2000 increased to $12.0 million from $9.2 million for the same period in 1999. The increase results primarily from the hiring of additional scientific personnel and the expansion of research and development efforts to support the ongoing programs with Novo Nordisk, SmithKline Beecham and Genentech. These expenses represent proprietary research expenses as well as costs related to contract revenues and include salaries and benefits of scientific and development personnel, laboratory supplies, consulting services and expenses associated with the development of manufacturing processes. We expect research and development spending to increase over the next few years as we continue to expand our development activities to support current and potential future collaborations and initiate commercial manufacturing of the AERx systems. The increase in research and development expenditures cannot be predicted accurately as it depends in part upon future success in pursuing existing development collaborations, as well as obtaining new collaborative agreements. General and Administrative Expenses: General and administrative expenses for the three months ended September 30, 2000 increased to $2.4 million from $2.2 million for the same period in 1999. The increase results primarily from additional personnel and leased facilities to support our expansion of research, development and manufacturing activities, and increased efforts to develop collaborative relationships with corporate partners. Interest Income: Interest income for the three months ended September 30, 2000 increased to $936,000 from $500,000 for the same period in 1999. The increase is due to the Company maintaining larger cash and investment balances. The higher cash and investment balances in the current period are due to the Company receiving net proceeds from a follow-on public offering of common stock for approximately $42.6 million in April 2000. The cash and investment balances for the same prior year period are due to the Company receiving net proceeds from a private offering of common stock for approximately $24.8 million in March 1999. Interest Expense and Other: Interest expense and other for the three months ended September 30, 2000 increased to $413,000 from $183,000 for the same period in 1999. The increase is primarily due to higher interest expense on increasing loan balances that result from reimbursement of development expenses from Genentech and interest expense on capital lease and equipment loan balances. Nine Months Ended September 30, 2000 and 1999 Contract Revenues: Contract revenues for the nine months ended September 30, 2000 increased to $15.2 million from $12.2 million for the same period in 1999. The revenue increase resulted primarily from the expansion of partner-funded project development revenue from Novo Nordisk and the receipt of a milestone payment from Genentech offset by a reduction in partner-funded project development revenue from SmithKline Beecham. Costs associated with contract revenues are included in research and development expenses. Research and Development Expenses: Research and development expenses for the nine months ended September 30, 2000 increased to $34.4 million from $24.4 million for the same period in 1999. The increase is primarily attributable to the hiring of additional scientific personnel and the expansion of research and 9 12 development efforts to support the ongoing programs with Novo Nordisk, SmithKline Beecham and Genentech. General and Administrative Expenses: General and administrative expenses for the nine months ended September 30, 2000 increased to $6.9 million from $6.1 million for the same period in 1999. The increase results primarily from additional personnel and leased facilities to support our expansion of research, development and manufacturing activities, and increased efforts to develop collaborative relationships with corporate partners. Interest Income: Interest income for the nine months ended September 30, 2000 increased to $2.3 million from $1.5 million for the same period in 1999. The increase is due to the Company maintaining larger cash and investment balances. The higher cash and investment balances in the current period are due to the Company receiving net proceeds from a follow-on public offering of common stock for approximately $42.6 million in April 2000. The cash and investment balances in the same prior year period are due to the Company receiving net proceeds from a private offering of common stock for approximately $24.8 million in March 1999. Interest Expense and Other: Interest expense and other for the nine months ended September 30, 2000 increased to $1.1 million from $700,000 for the same period in 1999. The increase is primarily due to higher interest expense on increasing loan balances that result from reimbursement of development expenses from Genentech and interest expense on capital lease and equipment loan balances. LIQUIDITY AND CAPITAL RESOURCES The business has financed its operations since inception primarily through private placements and public offerings of capital stock, proceeds from equipment lease financing, contract revenues and interest earned on investments. As of September 30, 2000, we have received approximately $145.3 million in net proceeds from sales of capital stock. During the quarter, the company established three new and negotiated an increase in one existing equipment lines of credit, which total approximately $15.7 million. None of these new equipment lines of credit had been utilized by September 30, 2000. As of September 30, 2000, we had cash, cash equivalents and short-term investments of approximately $53.5 million. In April 2000, we completed a follow-on public offering of common stock, which raised approximately $42.6 million in net proceeds with the issuance of 2,875,000 shares of common stock. During November 2000, the Company announced that it entered into a definitive agreement with Acqua Wellington North American Equities Fund Ltd. for an equity financing agreement covering the sale of up to $50 million of the Company's common stock over the next 20 months. The total number of shares may be sold over time with the Company controlling the amount and timing of stock sales. Net cash used in operating activities for the nine months ended September 30, 2000 increased to $20.9 million from $17.0 million for the same period in 1999. The increase in net cash used resulted from decreases in receivables, other current assets, accounts payable and deferred revenue combined with increases in accrued compensation and other accrued liabilities offset by an increase in the net loss. Net cash provided by investing activities for the nine months ended September 30, 2000 increased to $7.7 million from $2.9 million for the same period in 1999. The increase results primarily from increased maturities of available-for-sale investments partially offset by increased purchases of investments and capital expenditures. Net cash provided by financing activities for the nine months ended September 30, 2000 increased to $47.9 million from $29.8 million for the same period in 1999. The increase primarily reflects receipt of proceeds from the completion of a follow-on public offering of common stock in April 2000 which raised approximately $42.6 million in net proceeds, exercise of incentive stock options by Company employees and the issuance of notes payable supporting loans received under a collaborative development agreement with Genentech reduced by net payments from the use of equipment lines of credit. 10 13 The development of our technology and proposed products will require a commitment of substantial funds to conduct the costly and time-consuming research, preclinical studies and clinical trial activities necessary to develop and refine the technology and proposed products and bring such products to market. Future capital requirements will depend on many factors, including continued progress and results from research and development for the technology and drug delivery systems, the ability to establish and maintain favorable collaborative arrangements with others, progress with preclinical studies and clinical trials and the results thereof, the time and costs involved in obtaining regulatory approvals, the cost of development and the rate of scale-up for the required production technologies, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and the need to acquire licenses or other rights to new technology. We expect that our cash requirements will increase in future periods and that the business will need to raise additional capital before it becomes profitable. Based on projected cash requirements, we believe that existing capital resources and committed funding from the collaborative partners, together with the proceeds from the April 2000 offering, projected interest income and the new equity financing agreement covering the sale of additional common stock should enable the business to maintain current and planned operations, including anticipated capital spending requirements of approximately $50 million, through the end of 2001. However, there can be no assurance the business will not need to raise substantial additional capital to fund the operations and capital spending during this period. We may seek additional funding through collaborations or through public or private equity or debt financing. There cannot be any assurance that additional financing can be obtained on acceptable terms, or at all. If additional funds are raised by issuing equity securities, dilution to shareholders may result. If adequate funds are not available, the business may be required to delay, reduce the scope of, or eliminate one or more of the research and development programs, or obtain funds through arrangements with collaborative partners or other sources that may require the business to relinquish rights to certain technologies or products that would otherwise not be relinquished. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Disclosures In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas. As of September 30, 2000, we had cash and cash equivalents and short-term investments of $53.5 million consisting of cash and highly liquid short-term investments. Our short-term investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes has been immaterial. Declines of interest rates over time will, however, reduce our interest income from our short-term investments. Our outstanding capital lease obligations are all at fixed interest rates and, therefore, have minimal exposure to changes in interest rates. 11 14 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Changes in Securities Pursuant to a Lease between the Company and Hayward Point Eden I Limited Partnership ("Hayward"), dated July 1, 2000 (the "Lease"), the Company agreed to issue a warrant to purchase 25,000 shares of Common Stock of the Company (the "Warrant") to Hayward in connection with the execution of a Lease. The Warrant will have an exercise price of $21.72 per share and will be exercisable for a period of seven years from the Initial Grant Date (as defined in the Lease). The Warrant will be issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. EXHIBITS (a) Exhibits 10.26 Lease agreement for property located at 2704 West Winton Avenue, Hayward, California, dated September 11, 2000, between the Company and Winton Industrial Center, Inc. 10.27 Lease agreement for property located at 3930 Point Eden Way, Hayward, California, dated July 1, 2000, between the Company and Hayward Point Eden I Limited Partnership. 27.1.1 Financial Data Schedule
(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 2000. 12 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 13, 2000 ARADIGM CORPORATION (Registrant) /s/ RICHARD P. THOMPSON -------------------------------------- Richard P. Thompson President and Chief Executive Officer /s/ NORMAN HALLEEN -------------------------------------- Norman Halleen Vice President, Finance and Administration and Chief Financial Officer 13 16 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.26 Lease agreement for property located at 2704 West Winton Avenue, Hayward, California, dated September 11, 2000, between the Company and Winton Industrial Center, Inc. 10.27 Lease agreement for property located at 3930 Point Eden Way, Hayward, California, dated July 1, 2000, between the Company and Hayward Point Eden I Limited Partnership. 27.1 Financial Data Schedule
14 EX-10.26 2 f66816ex10-26.txt EXHIBIT 10.26 1 EXHIBIT 10.26 OFFICE/WAREHOUSE LEASE THIS LEASE, made this 11th Day of September, 2000, by and between Winton Industrial Center, Inc. (hereinafter referred as "Landlord"), and Aradigm Corporation, a California corporation (hereinafter referred to as "Tenant"); WITNESSETH: 1. LEASED PREMISES. Landlord hereby demises and leases to Tenant that certain space located at 2704 West Winton Avenue, Hayward, California, which space contains approximately 125,880 square feet which the northern section of Building #5 containing a total of 212,971 square feet, as more fully described on Exhibit "A", attached hereto and made a part hereof (hereinafter referred to as the "Premises"), plus the use of all common areas in and about Landlord's building, and the real estate thereunder (hereinafter referred to as the "Property"). Tenant has inspected the Premises and accepts the same in its present "AS IS" condition, acknowledging that the Premises are in good order and satisfactory condition as of the date of Tenant's possession. Tenant further acknowledges that Landlord has made no representations to Tenant with respect to any alterations, repairs or improvements to be constructed within the Premises. 2. USE. The Premises shall be used only for the purpose of general offices and/or receiving, storing, shipping materials and light manufacturing of products and merchandise made and/or distributed by Tenant. Outside storage including, without limitation, drop shipments, dock storage, trucks and other vehicles, is prohibited without Landlord's prior written consent. Tenant shall obtain, at Tenant's sole cost and expense, any and all licenses and permits necessary for Tenant's contemplated use of the Premises. Tenant shall comply with all existing and future governmental laws, ordinances and regulations applicable to the use of the Premises, as well as all requirements of Landlord's insurance carrier. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any other action which would constitute a nuisance or which would disturb or endanger any third-party tenants of the Property, or unreasonably interfere with such third-party tenants' use of their respective space. Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly inflammable. Tenant shall comply with all statutes, ordinances, rules, codes, regulations and requirements of any federal, state, municipal or other governmental or quasi-governmental authority with respect to any hazardous wastes (as such term is defined from time to time by any governmental or regulatory authority) which are stored, produced, manufactured, treated, or disposed of by Tenant within the Premises; and Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all liabilities or claims by reason of any injury to persons or damage to property arising out of the discharge, disbursement, release, or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, hazardous wastes, liquid or gasses, waste materials or other irritants, contaminants or pollutants into or about the Premises or Property, which originate from any products stored, produced, manufactured, treated, or disposed of by Tenant within the Premises. The aforesaid indemnification and defenses shall survive the term of this Lease. 3. COMMENCEMENT. The term of this Lease shall be five (5) years and three (3) months commencing on the 1st day of October, 2000, and expiring on the 31st day of December, 2005, both inclusive. 4. RENT. Tenant shall pay the following Base Rent and Additional Rent (hereinafter collectively referred to as "Rent") during the term of this Lease, in advance, on the first day of each calendar month, or as otherwise set forth in this Lease, without setoff or deduction, at the office of Landlord. In the event any Rent is due for a partial calendar month or year, the Rent shall be equitably adjusted to reflect that portion of the lease term within such month or year. All accrued Rent shall survive the lease term. 1 2 (a) BASE. Tenant shall pay to Landlord, as Base Rent, the sum of Fifty Nine Thousand One Hundred Sixty-Three and 60/100 Dollars ($59,163.60), payable in equal monthly installments of each month. The rent shall be adjusted annually based on the following schedule: RENT SCHEDULE
Period (Months) Monthly Base Rent --------------- ----------------- 01 - 12 $ 59,163.60 13 - 24 $ 61,681.20 25 - 36 $ 64,198.80 37 - 48 $ 66,716.40 49 - 63 $ 69,234.00
(b) ADDITIONAL. Tenant shall pay to Landlord, as Additional Rent, Tenant's pro rata share of the taxes, insurance and common area maintenance charges (as such terms are hereinafter defined) incurred by Landlord for and on behalf of the Property. (i) TAXES. Taxes shall include, without limitation, any tax, assessment, or governmental charge (herein collectively referred to as "Tax") imposed against the Property, or against any of Landlord's personal property located therein. Taxes, as herein defined, are predicated upon the present system of taxation in the state of California. Therefore, if due to a future change in the method of taxation any rent, franchise, use, profit or other tax shall be levied against Landlord in lieu of any Tax which would otherwise constitute a "real estate tax", such rent, franchise, use, profit or other tax shall be deemed to be a Tax for the purposes herein. In the event Landlord is assessed with a Tax which Landlord, in its sole discretion, deems excessive, Landlord may challenge said Tax or may defer compliance therewith to the extent legally permitted; and, in the event thereof, Tenant shall be liable for Tenant's pro rata share of all costs in connection with such challenge. (ii) INSURANCE. Insurance shall include, without limitation, premiums for liability, property damage, fire, workers compensation, rent and any and all other insurance (herein collectively referred to as "Insurance") which Landlord deems necessary to carry on, for, or in connection with Landlord's operation of the Property. In addition thereto, in the event Tenant's use of the Premises shall result in an increase of any of Landlord's Insurance premiums, Tenant shall pay to Landlord, upon demand, as Additional Rent, an amount equal to such increase in Insurance. Such payments of Insurance shall be in addition to all premiums of insurance which Tenant is required to carry pursuant to Paragraph 18 of this Lease. (iii) COMMON AREA MAINTENANCE. Common area maintenance charges (hereinafter referred to as "CAM") shall include without limitation:. the maintenance, repair and replacement, if necessary, of the downspouts, gutters and the non-structural portions of the roof; the paving of all parking facilities, access roads, driveways, sidewalks and passageways; trunk-line plumbing (as opposed to branch-line plumbing); common utilities and exterior lighting; landscaping; snow removal; fire protection; exterior painting and interior painting of the common areas of the Property; management fees; and all other expenses actually and reasonably incurred by Landlord for or on behalf of the Property. Notwithstanding the aforesaid, in no event shall CAM expenses include any expense chargeable to a capital account or capital improvement under generally accepted accounting principles as currently employed by Landlord; nor shall it include any expense for which Landlord is otherwise reimbursed or any leasing expenses (commissions, improvement costs), debt or ground lease payments. (iv) PAYMENT OF ADDITIONAL RENT. Landlord shall have the right to invoice Tenant monthly, quarterly, or otherwise from time to time, for Tenant's pro rata share of the actual Taxes, Insurance and CAM expenses payable by Tenant under this Lease; and Tenant shall pay to Landlord, as Additional Rent, those amounts for which Tenant is invoiced within thirty (30) days after receipt of said invoice. 2 3 Alternatively, at Landlord's election, Landlord shall have the right to invoice Tenant monthly for Tenant's pro rata share of such expenses, as reasonably estimated by Landlord. Any monies paid in advance to Landlord by Tenant shall not accrue interest thereon. At the end of each calendar year or property fiscal year, Landlord shall deliver a statement to Tenant setting forth the difference between Tenant's actual pro rata share of Taxes, Insurance and/or CAM expenses and the total amount of monthly payments, paid by Tenant to Landlord. Tenant shall thereafter pay to Landlord the full amount of any difference between Tenant's actual obligation over the total amount of Tenant's estimated payments, within thirty (30) days after receipt of said statement; conversely, in the event Tenant's estimated payments exceed Tenant's actual obligation, Landlord shall either refund the overpayment to Tenant or credit said overpayment against Tenant's monthly obligation in the forthcoming year. For purposes of this Lease, Tenant's pro rata share is hereinafter defined as a fraction, the numerator of which shall be the square footage of the Premises, and the denominator of which shall be the square footage of the rentable area of the Property, which pro rata share is hereby agreed to be equal to 15.2%. In the event this Lease expires on a date other than the end of a billing period, Tenant's obligation with respect to any amounts owed to Landlord shall survive the expiration of the lease term, and shall be invoiced to Tenant when the same have been accurately determined or, at Landlord's option, such amounts shall be reasonably estimated by Landlord to reflect the period of time the Lease was in effect during such billing period. Landlord shall maintain complete and accurate records of all Taxes, Insurance and CAM expenses incurred in connection with the Property. Tenant shall have the right to inspect such records at Tenant's sole cost and expense, at the office of Landlord's managing agent during said agent's normal business hours, upon five (5) days prior written notice. Landlord shall not be obligated to provide Tenant with detailed summaries or receipts for any expenses incurred by or on behalf of the Property; but Landlord shall provide Tenant with one or more statements setting forth such expenses, categorized by class and amount. Notwithstanding the aforesaid, unless Tenant asserts specific errors within ninety (90) days after receipt of any invoice, or year-end statement, it shall be deemed that said invoice, or year-end statement, is correct. 5. LATE CHARGE. In the event Tenant is late in the payment of any Rent or other charge due Landlord, Tenant shall be assessed a late charge for Landlord's increased administrative expenses, which late charge shall be equal to five percent (5%), per month, of all outstanding amounts owed Landlord. Landlord shall provide Tenant with a written notice of the delinquency. However, such notice will notify Tenant only and not preclude Landlord from charging the Tenant with a Late Charge for any outstanding amounts owed Landlord. 6. UTILITIES. Landlord agrees to supply water, gas, electricity and sewer connections to the Premises. Tenant shall pay for all gas, electricity, water and sewer used by Tenant within the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto, and Tenant shall be liable for all maintenance and equipment with respect to the continued operation thereof including, without limitation, all electric light bulbs, tubes and starters. In no event shall Landlord be liable for any interruption or failure of any utility servicing the Property unless caused by the act, omission or neglect of Landlord or its employees or contractors. 7. LANDLORD'S REPAIRS AND MAINTENANCE. Landlord, at Landlord's sole cost and expense, shall maintain, repair and replace, if necessary, the structural portions of the roof and the exterior walls. Notwithstanding the aforesaid, in the event any such maintenance or repairs are caused by the negligence of Tenant or Tenant's employees, agents or invitees, Tenant shall reimburse to Landlord, as Additional Rent, the cost of all such maintenance and repairs within thirty (30) days after receipt of Landlord's invoice for same. For purposes of this Paragraph, the term "exterior walls" shall not include windows, plate glass, office doors, dock doors, dock bumpers, office entries, or any exterior improvement made by Tenant. Landlord reserves the right to designate all sources of services in connection with Landlord's obligations under this Lease. Tenant hereby grants to Landlord the right to enter upon the Premises, at reasonable times, and upon reasonable notice, except in emergencies exclusively determined by Landlord, for the 3 4 purpose of making inspections and/or repairs. Tenant shall have the duty to periodically inspect the Premises and notify Landlord should Tenant observe a need for repairs or maintenance of any obligation to be performed by Landlord under this Lease. Upon receipt of Tenant's notice, Landlord shall have a reasonable period of time to make such repairs or maintenance; however, it is expressly understood that Landlord's liability with respect to the failure or delay to make any such repairs or maintenance shall be limited to the cost of such repairs or maintenance. 8. TENANT'S REPAIRS AND MAINTENANCE. Tenant, at Tenant's sole cost and expense, shall have the affirmative duty to periodically inspect, maintain, service, repair and replace, if necessary, all portions of the Premises which are not expressly the responsibility of Landlord including, but not limited to, any windows, plate glass, office doors, dock doors, office entries, interior walls and finish work, floors and floor coverings, water heaters, electrical systems and fixtures, sprinkler systems, dock bumpers, branch plumbing and fixtures, and pest extermination. In addition thereto, Tenant shall keep the Premises and the dock area servicing the Premises in a clean and sanitary condition, and shall keep the common parking areas, driveways and loading docks free of Tenant's debris. Tenant shall not store materials, waste or pallets outside of the Premises, and shall timely arrange for the removal and/or disposal of all pallets, crates and refuge owned by Tenant which cannot be disposed of in the dumpster servicing the Property. Tenant, at its own cost and expense, shall enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor approved by Landlord for servicing all hot water, heating and air conditioning systems and equipment within the Premises. The service contract must include all services suggested by the equipment manufacturer in its operations/maintenance manual and an executed copy of such contract must be provided to Landlord prior to the date Tenant takes possession of the Premises. Notwithstanding the aforesaid, Landlord shall have the option to enter into a regularly scheduled preventative maintenance/service contract on items for and on behalf of Tenant. Such contract may include, without limitation, all services suggested or recommended by the equipment manufacturer in the operation and maintenance of such system. In the event Landlord elects such option, Tenant shall reimburse to Landlord, as Additional Rent, Tenant's share of Landlord's costs in connection with said contract, as well as Landlord's actual costs of repair and maintenance of the HVAC system. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord in substantially the same condition as when received, reasonable wear and tear excepted. Tenant shall perform all repairs and maintenance in a good and workmanlike manner, using materials and labor of the same character, kind and quality as originally employed within the Property; and all such repairs and maintenance shall be in compliance with all governmental and quasi-governmental laws, ordinances and regulations, as well as all requirements of Landlord's insurance carrier. In the event Tenant fails to properly perform any such repairs or maintenance within a reasonable period of time, Landlord shall have the option to perform such repairs on behalf of Tenant, in which event Tenant shall reimburse to Landlord, as Additional Rent, the costs thereof within thirty (30) days after receipt of Landlord's invoice for same. 9. ALTERATIONS. Tenant shall not make any alterations, additions or improvements to the Premises or Property without the prior written consent of Landlord. Notwithstanding the aforesaid, Tenant, at Tenant's sole cost and expense, may install such trade fixtures as Tenant may deem necessary, so long as such trade fixtures do not penetrate or disturb the structural integrity and support provided by the roof, exterior walls or subfloors. All such trade fixtures shall be constructed and/or installed by contractors approved by Landlord, in a good and workmanlike manner, and in compliance with all applicable governmental and quasi-governmental laws, ordinances and regulations, as well as all requirements of Landlord's insurance carrier. Upon the expiration or earlier termination of this Lease, Tenant shall remove all trade fixtures and any other alterations, additions or improvements installed by Tenant within the Premises; and, upon such removal, Tenant shall restore the Premises to a condition substantially similar to that condition when received by Tenant. However, notwithstanding the aforesaid, upon Landlord's written election, such alterations, additions and improvements shall revert to Landlord and shall remain within the Premises. In no event shall Landlord have any right to any of Tenant's trade fixtures; and, except as otherwise set forth 4 5 in this Lease, Tenant may remove such trade fixtures upon the termination of this Lease, provided Tenant repairs any damage caused by such removal. 10. DESTRUCTION. If the Premises or the Property are damaged in whole or in part by casualty so as to render all or a substantial portion of the Premises untenantable, and if the damages cannot be repaired within one hundred eighty (180) days from the date of said casualty, this Lease shall terminate as of the date of such casualty at the election of either party. If such damage can be repaired within said one hundred eighty (180) days, and Landlord does not elect within sixty (60) days after the date of such casualty to repair same, then either party may terminate this Lease by written notice served upon the other. In the event of any such termination, the parties shall have no further obligations to the other, except for those obligations accrued through the effective date of such termination; and, upon such termination, Tenant shall immediately surrender possession of the Premises to Landlord. Should Landlord elect to make such repairs, this Lease shall remain in full force and effect, and Landlord shall proceed with all due diligence to repair and restore the Premises to a condition substantially similar to that condition which existed prior to such casualty. In the event the repair and restoration of the Premises extends beyond one hundred eighty (180) days after the date of such casualty due to causes beyond the control of Landlord, this Lease shall remain in full force and effect, and Landlord shall not be liable therefor; but Landlord shall continue to complete such repairs and restoration with all due diligence. Tenant shall not be required to pay any Rent for any period in which the Premises are untenantable. In the event only a portion of the Premises are untenantable, Tenant's Rent shall be equitably abated in proportion to that portion of the Premises which are so unfit. However, there shall be no Rent abatement if said damage is due to the fault or negligence of Tenant or Tenant's agents, employees or invitees. 11. INSPECTION. Landlord shall have the right to enter and inspect the Premises at any reasonable time for the purpose of ascertaining the condition of the Premises, or in order to make such repairs as may be required or permitted to be made by Landlord under the terms of this Lease. In addition thereto, during the last six (6) months of the lease term, Landlord shall have the right to enter the Premises at any reasonable time for the purpose of showing the Premises to prospective third-party tenants; and, during said six (6) months, Landlord shall have the right to erect on the Property and/or Premises suitable signs indicating that the Premises are available for lease. Tenant shall give Landlord thirty (30) days written notice prior to Tenant vacating the Premises, for the purpose of arranging a joint inspection of the Premises with respect to any obligation to be performed therein by Tenant including, without limitation, the necessity of any repair or restoration of the Premises. In the event Tenant fails to notify Landlord of such inspection, Landlord's inspection after Tenant vacates shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 12. SIGNS. Tenant shall not place or permit any signs, lights, awnings or poles in or about the Premises or the Property, other than the standard building signage as per Landlord specifications, without the prior written consent of Landlord; nor shall Tenant change the uniform architecture, paint, landscape, or otherwise alter or modify the exterior of the Property without the prior written consent of Landlord. 13. SUBLETTING AND ASSIGNING. Tenant shall not assign or sublet the Premises, or any portion thereof, nor allow the same to be used or occupied by any other person or for any other use than herein specified, without the prior written consent of Landlord which shall not be unreasonably withheld or delayed. For purposes of this Paragraph, the transfer of any majority interest in any corporation or partnership shall be deemed to be an assignment of this Lease. In the event Landlord consents to any sublease or assignment, the same shall not constitute a release of Tenant from the full performance of Tenant's obligations under this Lease. Notwithstanding the above, Tenant may assign or sublease this Lease without Landlord's consent to any entity affiliated with Tenant or which succeeds to Tenant's interest by way of merger, stock or asset sale or as a result of a non-bankruptcy reorganization (a "Permitted Transferee"). Tenant shall provide written notice of such assignment and the new entity or Assignee shall have equal or greater creditworthiness as the original Tenant. In the event of a sublease, Landlord shall receive 50% of any net profit after deducting costs for tenant improvements, lease 5 6 commission and legal costs associated with the sublease. Further, in the event of any such sublease or assignment, Tenant shall reimburse Landlord for all reasonable attorneys' fees in connection with reviewing and/or drafting any appropriate documents to effect such transfer of Tenant's interests. 14. DEFAULT. This Lease and Tenant's right to possession of the Premises is made subject to and condition upon Tenant performing all of the covenants and obligations to be performed by Tenant hereunder, at the times and pursuant to terms and conditions set forth herein. If Tenant should fail to pay any Rent or other charge when the same is due, or if Tenant should fail to perform any other obligation to be performed by Tenant within the time or times set forth herein, Tenant shall be in Default under this Lease. In the event any Default shall continue for five (5) days after receipt of written notice from Landlord, or if Tenant makes an assignment for the benefit of creditors, vacates or abandons the Premises for more than thirty (30) days, files or has filed against it a petition in bankruptcy, has a receiver, trustee or liquidator appointed over a substantial portion of its property, or is adjudicated insolvent, Landlord may either (a) terminate this Lease, or (b) enforce the remedy described in California Civil Code Section 1951.4. In either event, Landlord shall have the right to dispossess Tenant, or any other person in occupancy, together with their property, and re-enter the Premises. Upon such re-entry, Tenant shall be liable for all expenses incurred by Landlord in recovering the Premises, including, without limitation, clean-up costs, legal fees, removal, storage or disposal of Tenant's property, and restoration costs. In the event Landlord elects to terminate this Lease, all Rent through the effective date of termination shall immediately become due, together with any late fees payable to Landlord and the aforesaid expenses incurred by Landlord to recover possession, plus an amount equal to all tenant concessions granted to Tenant including, but not limited to, free or reduced rent, all tenant finish constructed within the Premises, or any contribution paid to Tenant in lieu thereof. Landlord shall use reasonable efforts to mitigate its damages and relet the Premises upon terms and conditions satisfactory to Landlord; however, Landlord shall have no duty to prioritize the reletting of the Premises over the leasing of other vacant space within the Property. Tenant shall remain liable for all past due Rent and late fees, plus the aforesaid expenses incurred by Landlord to recover possession of the Premises. In addition, Tenant shall be liable for all Rent thereafter accruing under this Lease, payable at Landlord's election: (a) monthly as such Rent accrues, in an amount equal to the Rent payable under this Lease less the rent (if any) collected from any reletting, or (b) in a lump sum within thirty (30) days after Landlord repossesses the Premises, in an amount equal to the total Rent payable under this Lease for the unexpired term, discounted at the rate of six percent (6%), per annum. In the event the Premises are relet, Tenant shall also be liable for all costs of reletting, including, without limitation, any brokers fees, legal fees, and/or tenant finish required to be paid in connection with any reletting. No payment of money by Tenant after the termination of this Lease, service of any notice, commencement of any suit, or after final judgment for possession of the Premises, shall reinstate this Lease or affect any such notice, demand or suit, or imply consent for any action for which Landlord's consent is required. Tenant shall pay all costs and attorney's fees incurred by Landlord from enforcing the covenants of this Lease. Should Landlord elect not to exercise its rights in the event of a Default, it shall not be deemed a waiver of such rights as to subsequent Defaults. 15. HOLDOVER. Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord, without demand, in as good condition as when delivered to Tenant, reasonable wear and tear and casualty excepted. If Tenant shall remain in possession of the Premises after the termination of this Lease, and hold over for any reason, Tenant shall be deemed guilty of unlawful detainer; or, at Landlord's election, Tenant,shall be deemed a holdover tenant and shall pay to Landlord monthly Rent equal to one hundred fifty percent (150%) of the Base Rent payable hereunder during the last month prior to any such holdover, as well as any other damages incurred by Landlord as a result of such holdover. Should any of Tenant's property remain within the Premises after the termination of this Lease, it shall be deemed abandoned, and Landlord shall have the right to store or dispose of it at Tenant's cost and expense. 6 7 16. RIGHT TO CURE TENANT'S DEFAULT. In the event Tenant is in Default under any provision of this Lease, other than for the payment of Rent, and Tenant has not cured same within ten (10) days after receipt of Landlord's written notice, Landlord may cure such Default on behalf of Tenant, at Tenant's expense. Landlord may also perform any obligation of Tenant, without notice to Tenant, should Landlord deem the performance of same to be an emergency. Any monies expended by Landlord to cure any such Default(s), or resolve any deemed emergency shall be payable by Tenant as Additional Rent. If Landlord incurs any expense, including reasonable attorney's fees, in prosecuting and/or defending any action or proceeding by reason of any emergency or Default, Tenant shall reimburse Landlord for same, as Additional Rent, with interest thereon at thirteen percent (13%) annually from the date such payment is due Landlord. 17. HOLD HARMLESS. Landlord shall not be liable to Tenant for any damages to the Premises or the Property, nor for any damages to Tenant on or about the Property, nor for any other damages arising from the action or negligence of Landlord, Tenant, co-tenants or other occupants of the Property; and Tenant hereby releases, discharges and shall indemnify, hold harmless and defend Landlord, at Tenant's sole cost and expense, from all losses, claims, liability, damages, and expenses (including reasonable attorney's fees) ("Claims") due to any damage or injury to persons or property of the parties hereto or of third persons, caused by Tenant's use or occupancy of the Premises, Tenant's breach of any covenant under this Lease, or Tenant's use of any equipment, facilities or property in, on, or adjacent to the Property except, in each case, to the extent any such Claims are a result of the negligence of Landlord or its contractors. In the event any suit shall be instituted against Landlord by any third person for which Tenant is hereby indemnifying and holding Landlord harmless, Tenant shall defend such suit at Tenant's sole cost and expense with counsel reasonably satisfactory to Landlord; or, in Landlord's discretion, Landlord may elect to defend such suit, in which event Tenant shall pay Landlord, as Additional Rent, Landlord's costs of such defense. 18. CONDEMNATION. If the whole or any part of the Property or the Premises shall be taken in condemnation, or transferred by agreement in lieu of condemnation, either Tenant or Landlord may terminate this Lease by serving the other party with written notice of same, effective as of the taking date; provided in the case of termination by Tenant that the Premises (or the remaining portion thereof) may no longer be adequately used for the purpose set forth in Paragraph 2 of this Lease. If neither Tenant nor Landlord elect to terminate this Lease as aforesaid, then this Lease shall terminate on the taking date only as to that portion of the Premises so taken, and the Rent and other charges payable by Tenant shall be reduced proportionally. Landlord shall be entitled to the entire condemnation award for all realty and improvements. Tenant shall only be entitled to an award for Tenant's fixtures, personal property, and moving expenses, provided Tenant independently petitions the condemning authority for same. Notwithstanding the aforesaid, if any condemnation takes a portion of the parking area the result of which does not reduce the minimum required parking ratio below that established by local code or ordinance, this Lease shall continue in full force and effect without modification. 19. INSURANCE. Landlord shall maintain in full force and effect policies of insurance covering the Property in an amount not less than eighty percent (80%) of the Property's "replacement cost", as such term is defined in the Replacement Cost Endorsement attached to such policy, insuring against physical loss or damage generally included in the classification of "all risk" coverage. Except as set forth below, such insurance shall be for the sole benefit of Landlord, and under Landlord's sole control. Tenant shall maintain in full force and effect throughout the term of-this Lease policies providing "all risk" insurance coverage protecting against physical damage (including, but not limited to, fire, lightning, extended coverage perils, vandalism, sprinkler leakage, water damage, collapse, and other special extended perils) to the extent of 100% of the replacement cost of Tenant's property and improvements, as well as broad form comprehensive or commercial general liability insurance, in an occurrence form, insuring Landlord and Tenant jointly against any liability (including bodily injury, property damage and contractual liability) arising out of Tenant's use or occupancy of the Premises, with a combined single limit of not less than $2,000,000, or for a greater amount as may be reasonably required by Landlord from time to time. All such policies shall be of a form and content satisfactory to Landlord; and Landlord, its Property Manager, any Mortgagee and PMRealty Advisors, shall be named as an additional insured on all such 7 8 policies. All policies shall be with companies licensed to do business in the State of California, and rated A+:XV in the most current issue of Best's Key Rating Guide. Tenant shall furnish Landlord with certificates of all policies at least ten (10) days prior to occupancy; and, Tenant shall use best efforts to assure that such policies shall provide that not less than thirty (30) days written notice be given to Landlord before any such policies are canceled or substantially changed to reduce the insurance provided thereby. All such policies shall be primary and non-contributing with or in excess of any insurance carried by Landlord. Tenant shall not do any act which may make void or voidable any insurance on the Premises or Property; and, in the event Tenant's use of the Premises shall result in an increase in Landlord's insurance premiums, Tenant shall pay to Landlord upon demand, as Additional Rent, an amount equal to such increase in insurance. Landlord and Tenant hereby mutually waive any and all right of recovery against one another, directly or by way of subrogation or otherwise, due to the negligence of either party, their agents or employees, for real or personal property damage occurring to the Premises, the Property, or any personal property located therein, from perils agreed to be insured against in the aforesaid policies (whether or not such insurance is actually carried). Each party shall have the affirmative duty to inform their respective insurance carriers of this Paragraph and the mutual waiver of subrogation contained herein. 20. MORTGAGES. This Lease is subject and subordinated to any mortgages, deeds of trust or underlying leases, as well as to any extensions or modifications thereof (hereinafter collectively referred to as "Mortgages"), now of record or hereafter placed of record provided that so long as Tenant is not in default hereunder, its peaceable occupancy and use shall not be disturbed. In the event Landlord exercises its option to further subordinate this Lease, Tenant shall at the option of the holder of said Mortgage attorn to said holder. Any subordination shall be self-executing, but Tenant shall, at the written request of Landlord, execute such further assurances as Landlord deems desirable to confirm such subordination. In the event Tenant should fail or refuse to execute any instrument required under this Paragraph, within fifteen (15) days after Landlord's request, Landlord shall be granted a limited power of attorney to execute such instrument in the name of Tenant. In the event any existing or future lender, holding a mortgage, deed of trust or other commercial paper, requires a modification of this Lease which does not increase Tenant's Rent hereunder, or does not materially change any obligation of Tenant hereunder, Tenant agrees to execute appropriate instruments to reflect such modification, upon request by Landlord. 21. LIENS. Tenant shall not mortgage or otherwise encumber or allow to be encumbered its interest herein without obtaining the prior written consent of Landlord. Should Tenant cause any mortgage, lien or other encumbrance (hereinafter singularly or collectively referred to as "Encumbrance") to be filed, against the Premises or the Property, Tenant shall dismiss or bond against same within 30 days after the filing thereof. If Tenant fails to remove said Encumbrance within said 30 days, Landlord shall have the absolute right to remove said Encumbrance by whatever measures Landlord shall deem convenient including, without limitation, payment of such Encumbrance, in which event Tenant shall reimburse Landlord, as Additional Rent, all costs expended by Landlord, including reasonable attorneys fees, in removing said Encumbrance. All of the aforesaid rights of Landlord shall be in addition to any remedies which either Landlord or Tenant may have available to them at law or in equity. 22. GOVERNMENT REGULATIONS. To the best of Landlord's knowledge, the Premises and Building comply with applicable laws as of the Commencement Date. Subject to the foregoing, Tenant, at Tenant's sole cost and expense, shall conform with all laws and requirements of any Municipal, State, or Federal, authorities now in force, or which may hereafter be in force, pertaining to its use of the Premises, as well as any requirement of Landlord's insurance carrier with respect to Tenant's use of the Premises. The judgment of any court, or an admission of Tenant in any action or proceeding at law, whether Landlord be a party thereto or not, shall be conclusive of the fact as between Landlord and Tenant. In complying with the foregoing, Tenant shall not be required to make any structural modifications to the Premises or Building unless triggered by Tenant's alterations to the Premises. 23. NOTICES. All Rents which are required to be paid by Tenant shall be delivered to Landlord by the United States Mail, postage prepaid, at Landlord's address set forth below or other address Landlord 8 9 may specify from time to time. All notices which are required to be given hereunder shall be in writing, and delivered by either (a) United States registered or certified mail, or (b) an overnight commercial package courier/delivery service with a follow-up letter sent by United States mail; and such notices shall be sent postage prepaid, addressed to the parties hereto at their respective addresses below: Tenant: ARADIGM CORPORATION 3929 Point Eden Way Hayward, CA 94545 Attn: CFO Landlord: WINTON INDUSTRIAL CENTER, INC. c/o PMRealty Advisors, Inc. 800 Newport Center Drive, Suite 300 Newport Beach, CA 92660 Attn: Mr. Scott Amling Either party may designate a different address by giving notice to the other party of same at the address set forth above. Notices shall be deemed received on the date of the return receipt. If any such notices are refused, or if the party to whom any such notice is sent has relocated without leaving a forwarding address, then the notice shall be deemed received on the date the notice-receipt is returned stating that the same was refused or is undeliverable at such address. 24. PARKING. Tenant shall be liable for all vehicles owned, rented or used by Tenant or Tenant's agents and invitees in or about the Property. Tenant shall not store any equipment, inventory or other property in any trucks, nor store any trucks on the parking lot of the Property. Notwithstanding the aforesaid, in the event the Premises have access to a loading dock which exclusively services the Premises, and no other space, Tenant may store one or more of its vehicles in and about such dock area, provided such storage does not restrict truck access or maneuverability for any other tenant or person to or from any other loading dock servicing the Property. In the event the Premises have access to a loading dock which does not exclusively service the Premises, Tenant shall not park its trucks in the dock area longer than the time it takes to reasonably load or unload its trucks. In no event shall Tenant park any vehicle in or about a loading dock which exclusively services another tenant within the Property, or in a thoroughfare, driveway, street, or other area not specifically designated for parking. Landlord reserves the right to establish uniform rules and regulations for the loading and unloading of trucks upon the Property, which rules may include the right to designate specific parking spaces for tenants' use. Upon request by Landlord, Tenant shall move its trucks and vehicles if, in Landlord's reasonable opinion, said vehicles are in violation of any of the above restrictions. 25. OWNERSHIP. Notwithstanding anything in this Lease to the contrary, the term "Landlord" as used in this Lease, shall be defined as the current owner of the Property. In the event of any transfer of the Property, the party conveying same shall thereafter be automatically released from all liability with respect to Landlord's performance of any obligations thereafter occurring or covenants thereafter to be performed. It is expressly understood and agreed that none of Landlord's covenants under this Lease are personal in nature, and that Tenant agrees to look solely to the Property for recovery of any damages for breach or non-performance of any of the obligations of Landlord hereunder. 9 10 26. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of Eighty Thousand, Five Hundred Sixty-Three and 20/100 Dollars ($80,563.20), as security for the full and faithful performance of Tenant's obligations under this Lease. The parties agree that, unless otherwise required by law, Landlord shall not be required to keep said security deposit separate from its general funds, nor pay any interest thereon to Tenant. Such security deposit shall not be construed as an advance Rent payment, or as a measure of Landlord's damages in the event of a Default by Tenant. If Tenant should be placed in Default with respect to any provision of this Lease, Landlord may apply all or a portion of said security deposit for the payment of any sum in Default or for the payment of any amount which Landlord expends by reason of such Default. If any portion of said deposit is so applied, Tenant shall deposit with Landlord, within five (5) days after receipt of Landlord's written demand, an amount sufficient to restore said security deposit to its original amount. Upon the expiration of this Lease, Landlord shall return said security deposit to Tenant, provided Tenant has paid to Landlord all sums owing to Landlord under this Lease, and Tenant has returned the Premises to Landlord in as good order and satisfactory condition as when Tenant took possession. 27. ESTOPPEL CERTIFICATES. Upon Landlord's written request, Tenant shall execute and return to Landlord, within fifteen (15) days, a statement in writing certifying that this Lease is unmodified and in full force and effect, that Tenant has no defenses, offsets or counterclaims against its obligations to pay any Rent or to perform any other covenants under this Lease, that there are no uncured Defaults of Landlord or Tenant, and setting forth the dates to which the Rent and other charges have been paid, and any other information reasonably requested by Landlord. In the event Tenant fails to return such statement within said fifteen (15) days, setting forth the above or, alternatively, setting forth those lease modifications, defenses and/or uncured Defaults, Tenant shall be in default hereunder or, at Landlord's election, it shall be deemed that Landlord's statement is correct with respect to the information therein contained. Any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser, mortgagee, or assignee of any mortgagee of the Property. 28. PERSONAL PROPERTY TAXES. Tenant shall timely pay all taxes assessed against Tenant's personal property and all improvements to the Premises in excess of Landlord's standard installations. If said personal property and improvements are assessed with the property of Landlord, Tenant shall pay to Landlord an amount equal to Tenant's share of such taxes, within ten (10) days after receipt of Landlord's statement for same. 29. BROKERAGE. The parties warrant that they have dealt with no other broker or person in connection with this transaction other than Colliers International, representing Landlord and Cornish and Carey representing Tenant. Any real estate fee due as a result of a completed transaction shall be paid for by Landlord. This provision shall survive the termination of this Lease. 30. SEVERABILITY. In the event any provision of this Lease is invalid or unenforceable, the same shall not affect or impair the validity or enforceability of any other provision. 31. MISCELLANEOUS. (a) In addition to the terms and conditions set forth herein, Landlord and Tenant shall be bound by those certain Rules and Regulations, set forth on Exhibit "B", attached hereto and made a part hereof. (b) All of the covenants of Tenant hereunder shall be deemed and construed to be "conditions" as well as "covenants" as though both words were used in each separate instance. (c) This Lease shall not be recorded by Tenant without the prior written consent of Landlord. (d) The paragraph headings appearing in this Lease are inserted only as a matter of convenience, and in no way define or limit the scope of any paragraph. 10 11 (e) Except with respect to Tenant's obligation for the payment of Rent hereunder, in the event any obligation to be performed by either Landlord or Tenant is prevented or delayed due to labor disputes, acts of God, inability to obtain materials, government restrictions, casualty, or other causes beyond the control of the parties hereto, the party liable to perform such obligation shall be excused from performing same for a period of time equal to any aforesaid delay. (f) Submission of this Lease shall not be deemed to be an offer, or an acceptance, or a reservation of the Premises; and Landlord shall not be bound hereby until Landlord has delivered to Tenant a fully executed copy of this Lease, signed by both of the parties on the last page of this Lease in the spaces herein provided. Until such delivery, Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything contained herein to the contrary, Landlord may withhold possession of the Premises from Tenant until such time as Tenant has paid to Landlord the security deposit required by Paragraph 25 of this Lease, and the first month of Base Rent as set forth in Paragraph 4 of this Lease. (g) All of the terms of this Lease shall extend to and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. (h) This Lease and the parties' respective rights hereunder shall be governed by the laws of the State of California. In the event of litigation, suit shall be brought in Alameda County, California. Landlord and Tenant hereby waive any and all right to a trial by jury on any issue to enforce any term or condition of this Lease, or with respect to Landlord's right to terminate this Lease, or terminate Tenant's right of possession. (i) This Lease is modified and affected by the following Exhibits which are attached hereto and made a part hereof. Exhibit "A": Floor Plan Exhibit "B": Rules and Regulations Exhibit "C": Option to Extend 11 12 WHEREFORE, Landlord and Tenant have respectively signed and sealed this Lease the day and year first above written. LANDLORD: TENANT: WINTON INDUSTRIAL CENTER, INC. ARADIGM CORPORATION, A DELAWARE CORPORATION A CALIFORNIA CORPORATION By By /S/ [SIGNATURE ILLEGIBLE] --------------------------------- ---------------------------------- Title: Title: PRESIDENT ----------------------------- ------------------------------ By By /S/ [SIGNATURE ILLEGIBLE] --------------------------------- ---------------------------------- Title: Title: CFO ----------------------------- ------------------------------ 12 13 EXHIBIT "B" RULES AND REGULATIONS Tenant agrees to comply with the following rules and regulations, and any subsequent rules or regulations which Landlord may reasonably adopt or modify from time to time. Tenant shall be bound by such rules and regulations to the same extent as if such rules and regulations were covenants of this Lease; and any non-compliance thereof shall constitute grounds for Default under this Lease. Landlord shall not be liable for the non-observance of said rules and regulations by any other tenant. (1) Tenant shall not use any picture or likeness of the Property in any notices or advertisements, without Landlord's prior written consent. (2) In the event Tenant requires any telegraph, telephone or satellite dish connections, Landlord shall have the right to prescribe additional rules and regulations regarding the same including, but not limited to, the size, manner, location and attachment of such equipment and connections. (3) No additional locks shall be placed upon any door of the Premises, and Tenant shall not permit any duplicate keys to be made, without the prior consent of Landlord. Upon the expiration or earlier termination of this Lease, Tenant shall surrender to Landlord all keys to the Premises and Property. (4) Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, or carry on any mechanical business within the Premises. Tenant shall not use any fuel source within the Premises other than the fuel source(s) provided by Landlord. (5) Tenant shall not permit within the Premises any animals other than service animals; nor shall Tenant create or allow any foul or noxious gas, noise, odors, sounds, and/or vibrations to emanate from the Premises, or create any interference with the operation of any equipment or radio or television broadcasting/reception from within or about the Property, which may obstruct or interfere with the rights of other tenant(s) in the Property. (6) All sidewalks, loading areas, stairways, doorways, corridors, and other common areas shall not be obstructed by Tenant or used for any purpose other than for ingress and egress. Landlord retains the right to control all public and other areas not specifically designated as the Premises, provided nothing herein shall be construed to prevent access to the Premises or the common areas of the Property by Tenant or Tenant's invitees. (7) Tenant shall not install any window treatments other than existing treatments or otherwise obstruct the windows of the Premises without Landlord's prior written consent. (8) After business hours, Tenant shall lock all doors and windows of the Premises which enter upon any common areas of the Property; and Tenant shall be liable for all damages sustained by Landlord or other tenants within the Property resulting from Tenant's default or carelessness in this respect. (9) Any person(s) who shall, be employed by Tenant for the purpose of cleaning the Premises shall be employed at Tenant's cost. Tenant shall indemnify and hold Landlord harmless from all losses, claims, liability, damages, and expenses for any injury to person or damage to property of Tenant, or third persons, caused by Tenant's cleaning contractor. 13 14 (10) Tenant shall not canvass or solicit business, or allow any employee of Tenant to canvass or solicit business, from other tenants in the Property, unless the same is within the scope of Tenant's normal business. (11) Landlord reserves the right to place into effect a "no smoking" policy within all or selected portions of the common areas of the Property, wherein Tenant, its agents, employees and invitees shall not be allowed to smoke. Tenant shall not be allowed to smoke in any common stairwells, elevators or bathrooms; nor shall Tenant dispose of any smoking material including, without limitation, matches, ashes and cigarette butts on the floors of the Property, about the grounds of the Property, or in any receptacle other than a specifically designated receptacle for smoking. 14 15 EXHIBIT A PREMISES [IMAGE] 16 Exhibit "C" OPTION TO EXTEND A. Tenant shall have the right, at its option, to extend the term of this Lease for two periods of five (5) years, provided that (i) Tenant is current with respect to all of its monetary obligations under this lease and no default exists with respect to any of its non-monetary obligations hereunder, both at the time of the exercise of the option and at the commencement of the option period, (ii) Tenant gives Landlord written notice of its intent to extend the term of this Lease for the two (2) additional five (5) year periods at least nine (9) months before the end of the initial Lease term or the first Option Term, and (iii) during the initial term of this Lease, Tenant has not been late with any rent payment three (3) or more times (a rental payment shall be considered late for purposes of this option if it is received by Landlord on or after the fifth calendar day of the month and Tenant has received notice from Landlord that it is late). These options to extend are personal to Tenant and may not be exercised by any assignee of Tenant, other than an Permitted Transferee, even if Landlord has consented to the assignment (from Tenant to the assignee). Both five (5) year extended teams shall be governed by all of the provisions of this Lease applicable to the initial term, except that the monthly Base Rent for said extended term shall be an amount based on "Current Market Rent" as defined and described below. B. "Current Market Rent" will be the prevailing market rent (including reimbursements of operating expenses and of property taxes and other periodic rental adjustments) per square foot per month as of the date which is six months prior to the expiration of the initial Lease Term for comparable space at Winton Industrial Center and for a comparable (to both five (5) year extended terms) lease term. If there is no such comparable space at The Project being offered to prospective tenants for a comparable lease term, the Current Marker Rent shall be based upon the then current (i.e., six months prior to the expiration of the initial Lease term) prevailing market rent (including reimbursements of operating expenses and of property taxes, as well as other periodic rental adjustments) for comparable space and lease term in projects comparable to the Project in the Hayward area. Regardless of whether the proposed new monthly base rent (to be charged for the Premises during both five (5) year extended terms) is based upon the prevailing market rent for comparable space and lease term at the Project, or based upon the prevailing market rent for comparable leases in comparable buildings in the aforementioned market area, items 1-5 below shall apply (in either instance): 17 1. In determining "comparable space", the particular location in the Project shall be relevant. 2. Charges for parking will be taken into consideration in determining Current Market Rent. 3. In no event will rent which has not been set or adjusted during the immediately preceding twelve months be considered "prevailing" or "current". 4. Notwithstanding anything herein contained to the contrary, in no event shall the new monthly base rent for both five (5) year extended terms be less than the monthly base rent for the last year of the Lease term. 5. Landlord shall notify Tenant (in writing) of the proposed new monthly Base Rent (as well as any periodic rental adjustments during both five (5) year extended terms) and the applicable reimbursement of operating expenses and property taxes for said extended term at least ninety (90) days prior to the commencement of said extended term. Unless Tenant objects in writing within fifteen days after its receipt of such notice, the amount stated in such notice as the proposed new monthly Base Rent (plus any periodic rental adjustments) and the proposed reimbursements of operating expenses and property taxes (all as stated in such notice) shall be deemed to be the new monthly base rent and periodic adjustments for the five (5) year extended term. C. If Tenant timely objects to Landlord's proposal, the new monthly Base Rent for both five (5) year extended terms shall be determined as follows: 1. In its letter objecting to Landlord's proposal, Tenant shall nominate an MAI appraiser of its choice, and promptly after its receipt of such letter, Landlord will notify Tenant of its choice (as Landlord's MAI appraiser). 2. Tenants and Landlord's appraisers (both of whom must be familiar with commercial real estate values in the aforementioned relevant market area) shall attempt to jointly determine the Current Market Rent, and (if they agree) shall send a joint notice to both Landlord and Tenant, specifying such Current Market Rent, not later than forty-five days after Landlord's receipt of Tenant's aforementioned letter, (objecting to Landlord's proposal and nominating Tenant's MAI appraiser). 18 3. If the MAI appraisers cannot agree on the Current Market Rent within such forty-five day period, each of the two appraisers shall select a third independent MAI appraiser within fifteen days. The third MAI appraiser will review the findings of the ocher two appraisers and make a determination as to Current Market Rent within thirty days. 4. The Current Market Rent determined under each either sub-paragraph C(2) or C(3) shall become the basis for computing the new monthly Base Rent for the Premises for relevant five (5) year extended term. 5. Landlord and Tenant shall each be responsible for the fees and costs of its own appraiser and will share equally in the cost of the third appraiser, if needed. D. The new monthly Base Rent for the applicable five (5) year extended term, as determined pursuant to either Paragraph B or Paragraph C above, shall thereafter fee paid by Tenant on a monthly basis in accordance with Paragraph 4 of this Lease, plus any other periodic rental adjustments, reimbursements (for operating expenses and property taxes) acid parking charges as otherwise provided herein. Landlord's Initials ------------ ------------ Tenant's Initials /s/ [ILLEGIBLE] ------------ ------------ EX-10.27 3 f66816ex10-27.txt EXHIBIT 10.27 1 EXHIBIT 10.27 LEASE Landlord: HAYWARD POINT EDEN I LIMITED PARTNERSHIP Tenant: ARADIGM CORPORATION Date: July 1, 2000 TABLE OF CONTENTS 1. PREMISES............................................................................ 1 1.1. Premises.................................................................... 1 1.2. Landlord's Reserved Rights.................................................. 2 2. TERM................................................................................ 2 2.1. Term........................................................................ 2 2.2. [Omitted.].................................................................. 2 2.3. Delay In Possession......................................................... 2 2.4. Construction................................................................ 2 2.5. Acknowledgment Of Third Commencement Date................................... 4 2.6. Holding Over................................................................ 4 3. RENTAL.............................................................................. 4 3.1. Minimum Rental; Additional Rent............................................. 4 3.2. Late Charge................................................................. 6 4. TAXES............................................................................... 7 4.1. Personal Property........................................................... 7 4.2. Real Property............................................................... 7 5. OPERATING EXPENSES.................................................................. 7 5.1. Payment Of Operating Expenses............................................... 7 5.2. Definition Of Operating Expenses............................................ 8 5.3. Determination Of Operating Expenses......................................... 10 5.4. Final Accounting For Lease Year............................................. 10 5.5. Proration................................................................... 11 6. UTILITIES........................................................................... 11 6.1. Payment..................................................................... 11 6.2. Interruption................................................................ 11 7. ALTERATIONS......................................................................... 11 7.1. Right To Make Alterations................................................... 11 7.2. Title To Alterations........................................................ 11 7.3. Tenant Fixtures............................................................. 12 7.4. No Liens.................................................................... 12 8. MAINTENANCE AND REPAIRS............................................................. 12 8.1. Landlord's Work............................................................. 12 8.2. Tenant's Obligation For Maintenance......................................... 13 (a) Good Order, Condition And Repair.................................... 13 (b) Landlord's Remedy................................................... 13 (c) Condition Upon Surrender............................................ 13
2 9. USE OF PREMISES..................................................................... 13 9.1. Permitted Use............................................................... 13 9.2. Requirement Of Continued Use................................................ 14 9.3. No Nuisance................................................................. 14 9.4. Compliance With Laws........................................................ 14 9.5. Liquidation Sales........................................................... 14 9.6. Environmental Compliance.................................................... 14 9.7. ADA/Title 24 Compliance..................................................... 16 10. INSURANCE AND INDEMNITY............................................................. 16 10.1. Liability Insurance......................................................... 16 10.2. Quality Of Policies And Certificates........................................ 17 10.3. Workers' Compensation....................................................... 17 10.4. Waiver Of Subrogation....................................................... 17 10.5. Increase In Premiums........................................................ 17 10.6. Indemnification............................................................. 17 10.7. Blanket Policy.............................................................. 18 11. SUBLEASE AND ASSIGNMENT............................................................. 18 11.1. Assignment And Sublease Of Premises......................................... 18 11.2. Rights Of Landlord.......................................................... 19 12. RIGHT OF ENTRY AND QUIET ENJOYMENT.................................................. 19 12.1. Right Of Entry.............................................................. 19 12.2. Quiet Enjoyment............................................................. 19 13. CASUALTY AND TAKING................................................................. 19 13.1. Termination Or Reconstruction............................................... 19 13.2. Tenant's Rights............................................................. 21 13.3. Lease To Remain In Effect................................................... 21 13.4. Reservation Of Compensation................................................. 21 13.5. Restoration Of Fixtures..................................................... 21 14. DEFAULT............................................................................. 22 14.1. Events Of Default........................................................... 22 (a) Abandonment......................................................... 22 (b) Nonpayment.......................................................... 22 (c) Other Obligations................................................... 22 (d) General Assignment.................................................. 22 (e) Bankruptcy.......................................................... 22 (f) Receivership........................................................ 22 (g) Attachment.......................................................... 22 (h) Insolvency.......................................................... 22 (i) Cross-Default....................................................... 23 14.2. Remedies Upon Tenant's Default.............................................. 23 14.3. Remedies Cumulative......................................................... 24 15. SUBORDINATION, ATTORNMENT AND SALE.................................................. 24 15.1. Subordination To Mortgage................................................... 24 15.2. Sale Of Landlord's Interest................................................. 25 15.3. Estoppel Certificates....................................................... 25 15.4. Subordination to CC&R's..................................................... 25 16. SECURITY............................................................................ 25 16.1. Deposit..................................................................... 25
3 17. MISCELLANEOUS....................................................................... 26 17.1. Notices..................................................................... 26 17.2. Successors And Assigns...................................................... 27 17.3. No Waiver................................................................... 27 17.4. Severability................................................................ 27 17.5. Litigation Between Parties.................................................. 28 17.6. Surrender................................................................... 28 17.7. Interpretation.............................................................. 28 17.8. Entire Agreement............................................................ 28 17.9. Governing Law............................................................... 28 17.10. No Partnership.............................................................. 28 17.11. Financial Information....................................................... 28 17.12. Costs....................................................................... 29 17.13. Time........................................................................ 29 17.14. Rules And Regulations....................................................... 29 17.15. Brokers..................................................................... 29 17.16. Memorandum Of Lease......................................................... 29 17.17. Corporate Authority......................................................... 29 17.18. Execution and Delivery...................................................... 29 17.19. Stock Warrants.............................................................. 29
EXHIBITS A Location of Premises B Real Property Description C Construction D Acknowledgment of Third Commencement Date 4 LEASE THIS LEASE is made and entered into as of July 1, 2000, by and between HAYWARD POINT EDEN I LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord") and ARADIGM CORPORATION, a California corporation ("Tenant"). THE PARTIES AGREE AS FOLLOWS: 1. PREMISES 1.1. Premises. (a) Landlord leases to Tenant and Tenant hires and leases from Landlord, on the terms, covenants and conditions hereinafter set forth, the premises (the "Premises") designated in Exhibit A attached hereto and incorporated herein by this reference, consisting of 40,387 square feet of space constituting all of Building E (the "Building") in the Britannia Point Eden Business Park (the "Center") in the City of Hayward, County of Alameda, State of California, commonly known as 3930 Point Eden Way, Hayward, California 94545 and located on the real property (the "Property") described in Exhibit B attached hereto and incorporated herein by this reference, together with the nonexclusive right to use any common areas designated from time to time in any Declaration of Covenants, Conditions and Restrictions or similar document affecting the Center. (b) The Premises as designated in Exhibit A consist of the following subspaces: (i) the "First Space," consisting of 13,564 square feet of space heretofore occupied by Tenant pursuant to a lease dated as of February 21, 1996 between Landlord and Tenant, as amended (the "Existing Lease"), which Existing Lease expired by its terms as to the First Space on June 30, 2000; (ii) the "Second Space," consisting of 9,286 square feet of space heretofore and presently occupied by Tenant pursuant to the Existing Lease, which Existing Lease is scheduled to expire by its terms as to the Second Space on December 31, 2000; and (iii) the "Third Space," consisting of 17,537 square feet of space presently occupied by AllAdvantage.com pursuant to an Option Agreement dated September __, 1999 between Landlord and AllAdvantage.com, which occupancy is scheduled to expire by the terms of such Option Agreement on December 31, 2000. The term "Premises" as used herein shall be construed to mean the First Space during the period from and including the First Commencement Date until the earlier of the Second Commencement Date or the Third Commencement Date, to include the Second Space as well from and after the Second Commencement Date, and to include the Third Space as well from and after the Third Commencement Date. (c) Effective as of the First Commencement Date (as hereinafter defined), the Existing Lease shall be terminated as to the First Space and shall be of no further force or effect, except that the provisions thereof shall be deemed to remain in effect as between Landlord and Tenant for the sole purpose of establishing their respective rights and obligations with respect to matters arising during or in connection with Tenant's occupancy of the First Space pursuant to the Existing Lease during the period prior to the First Commencement Date (including, but not limited to, any indemnification obligations with respect to third party claims or other liabilities, and any necessary adjustment between the parties, when 2000 year-end figures are available, for estimated Operating Expense payments and actual Operating Expense obligations relating to the First Space for the portion of calendar year 2000 prior to the First Commencement Date). (d) The Existing Lease shall remain in effect, in accordance with its terms, as to the Second Space until the Second Commencement Date (as hereinafter defined). Effective as of the Second Commencement Date, the Existing Lease shall be terminated as to the Second Space and shall be of no further force or effect, except that the provisions thereof shall be deemed to remain in effect as between Landlord and Tenant for the sole purpose of establishing their respective rights and obligations with respect to matters arising during or in connection with Tenant's occupancy of -1- 5 the Second Space pursuant to the Existing Lease during the period prior to the Second Commencement Date (including, but not limited to, any indemnification obligations with respect to third party claims or other liabilities, and any necessary adjustment between the parties, when 2000 year-end figures are available, for estimated Operating Expense payments and actual Operating Expense obligations relating to the Second Space for calendar year 2000). 1.2. Landlord's Reserved Rights. Landlord reserves the right from time to time to (i) install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service to other parts of the Building above the ceiling surfaces, below the floor surfaces, within the walls or leading through the Premises in locations which will not materially interfere with Tenant's use thereof, (ii) relocate any pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are so located or located elsewhere outside the Premises, (iii) make alterations or additions to the Building, (iv) construct, alter or add to other buildings or improvements on the Property, (v) build adjoining to the Property, and (vi) lease any part of the Property for the construction of improvements or buildings. Landlord may modify or enlarge the common area, alter or relocate accesses to the Premises, or alter or relocate any common facility. Landlord shall not exercise rights reserved to it pursuant to this Section 1.2 in such a manner as to materially impair Tenant's ability to conduct its activities in the normal manner; provided, however, that the foregoing shall not limit or restrict Landlord's right to undertake reasonable construction activity and Tenant's use of the Premises shall be subject to reasonable temporary disruption incidental to such activity diligently prosecuted. 2. TERM 2.1. Term. The term of this Lease shall commence as to the First Space on July 1, 2000 (the "First Commencement Date"), shall commence as to the Second Space on January 1, 2001 (the "Second Commencement Date"), shall commence as to the Third Space on the date Landlord tenders possession of the Third Space to Tenant (which Landlord shall do as soon as the Third Space is vacated by the existing tenant, presently expected by the parties to occur no later than December 31, 2000, and possibly as early as September 30, 2000) (the "Third Commencement Date"), and shall end as to the entire Premises on May 1, 2014, unless sooner terminated as hereinafter provided. 2.2. [Omitted.] 2.3. Delay In Possession. As noted above, Tenant is already in possession of the First Space and the Second Space. Landlord agrees to use its best reasonable efforts to deliver possession of the Third Space to Tenant on or before January 1, 2001, subject to the effects of any circumstances beyond Landlord's reasonable control (such as, but not limited to, any delays by the existing tenant and subtenant in vacating the Third Space); provided, however, Landlord shall not be liable for any damages caused by any delay in the availability of the Third Space, nor shall any such delay affect the validity of this Lease or the obligations of Tenant hereunder, except that notwithstanding any other provisions of this Lease, Tenant's obligations with respect to the Third Space shall not commence until the Third Commencement Date. 2.4. Construction. -2- 6 (a) Except as set forth in this Section 2.4 (including paragraph (b) below) and in Exhibit C, Landlord shall have no responsibilities or obligations with respect to preparation of the Premises for Tenant's occupancy. It is generally the intention of the parties that Tenant shall continue to occupy the First Space and the Second Space on an "as is" basis and shall accept possession of the Third Space on an "as is" basis, subject to Landlord's warranties in Section 2.4(b) below with respect to the Third Space and subject to the provisions of this Section 2.4 and of Exhibit C regarding the construction of tenant improvements by Landlord or Tenant, as applicable, and regarding the provision of a Tenant Improvement Allowance by Landlord with respect to such tenant improvements. Acceptance by Tenant of possession of the respective portions of the Premises on their respective Commencement Dates shall constitute acceptance by Tenant of such portions of the Premises in their then existing condition, as applicable, subject to the terms of this Section 2.4 (including paragraph (b) below) and Exhibit C, and Landlord shall have no further responsibility of any kind or character for improvement of such respective portions of the Premises, except as expressly set forth in this Section 2.4 and in Exhibit C; provided, however, that to the extent Landlord constructs any tenant improvements in any phase of the Premises pursuant to this Lease, within fifteen (15) days after Landlord tenders to Tenant possession of such tenant improvements constructed by Landlord pursuant to this Lease, Tenant may furnish to Landlord a "punch list" identifying any items or matters in such tenant improvements which are not constructed in accordance with the plans and specifications approved under Exhibit C hereto and Landlord shall promptly and diligently correct all such matters within thirty (30) days after receipt of such punch list at its sole cost and expense. (b) Notwithstanding the provisions of paragraph (a) above, Landlord warrants to Tenant that on the date the Third Space is tendered to Tenant for Tenant's possession and commencement of business therein, the Building systems serving the Third Space shall be in good operating order, and the Building shell (as it relates to the Third Space) and the tenant improvements previously constructed by Landlord in the Third Space (i) shall be free from material structural defects and (ii) shall comply with all applicable covenants and restrictions of record, statutes, ordinances, codes, rules, regulations, orders and requirements in effect on the date of such tender, including Title 24 of the California Administrative Code and the Americans with Disabilities Act; provided, however, that the foregoing warranty shall not be construed to apply to any particular use which Tenant will make of the Third Space. If it is determined that the foregoing warranty has been violated in any respect, then it shall be the obligation of Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to promptly, at Landlord's sole cost and expense, correct the condition(s) constituting such violation. Landlord shall also protect, indemnify, defend and hold Tenant harmless from and against any and all liability, loss, suits, claims, actions, costs and expenses (including, but not limited to, reasonable attorneys' fees) arising from any breach of the foregoing warranty. The provisions of this Section 2.4(b) shall survive the termination of this Lease. With respect to the foregoing warranty regarding systems being in good operating order, Tenant's failure to give such written notice to Landlord within ninety (90) days after tender of possession of the Third Space to Tenant shall give rise to a conclusive presumption that Landlord has complied with such warranty as to the Third Space. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty as to the present or future suitability of the Third Space (or any other portion of the Premises) for the conduct of Tenant's business or proposed business therein, except as expressly set forth in this Lease. (c) Notwithstanding any other provisions of this Section 2.4 or of Exhibit C to the contrary, to the extent Tenant, by mutual agreement of Landlord and Tenant as contemplated in Exhibit C, enters into contracts directly with the architect and/or contractor(s) for any of the tenant improvement work in the Premises, Landlord's sole obligation with respect to such work contracted for by Tenant shall be to make payments with respect thereto when and as required under Exhibit C and to cooperate with Tenant with respect to any approvals or other actions required of Landlord under Exhibit C in connection with such work; Landlord's warranties under Section 2.4(b) and Landlord's obligations to make improvements and correct "punch list" items under Section 2.4(a) and Exhibit C shall not apply to any improvement work designed and/or constructed under direct contract with Tenant, it being the intention of the parties that Tenant's sole recourse with respect to any such work designed and/or constructed under direct contracts with Tenant shall be solely against the applicable contracting parties and not against Landlord. -3- 7 (d) TENANT ACKNOWLEDGES THAT THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PHYSICAL CONDITION OF THE BUILDING AND IMPROVEMENTS CONSTRUCTED OR TO BE CONSTRUCTED BY LANDLORD AND THAT LANDLORD MAKES NO OTHER WARRANTIES EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE. 2.5. Acknowledgment Of Third Commencement Date. Promptly following the Third Commencement Date, Landlord and Tenant shall execute a written acknowledgment of the Third Commencement Date, date of termination and related matters, substantially in the form attached hereto as Exhibit D (with appropriate insertions), which acknowledgment shall be deemed to be incorporated herein by this reference. Notwithstanding the foregoing requirements, the failure of one or both parties to execute any such written acknowledgment shall not affect the determination of the Third Commencement Date, date of termination, square footage of the Premises and related matters in accordance with the provisions of this Lease. 2.6. Holding Over. If Tenant holds possession of the Premises after the term of this Lease with Landlord's written consent, then except as otherwise specified in such consent, Tenant shall become a tenant from month to month at one hundred percent (100%) for the first thirty (30) days of such holding over, and at one hundred twenty-five percent (125%) thereafter, of the rental in effect for the period immediately prior to such holding over and otherwise upon the terms herein specified for the period immediately prior to such holding over, and shall continue in such status until the tenancy is terminated by either party upon not less than thirty (30) days prior written notice. If Tenant holds possession of the Premises after the term of this Lease without Landlord's written consent, then Landlord in its sole discretion may elect (by written notice to Tenant) to have Tenant become a tenant either from month to month or at will, at one hundred fifty percent (150%) of the rental (prorated on a daily basis for an at-will tenancy, if applicable) and otherwise upon the terms herein specified for the period immediately prior to such holding over, or may elect to pursue any and all legal remedies available to Landlord under applicable law with respect to such unconsented holding over by Tenant. Tenant shall indemnify and hold Landlord harmless from any loss, damage, claim, liability, cost or expense (including reasonable attorneys' fees) resulting from any delay by Tenant in surrendering the Premises (except with Landlord's prior written consent), including but not limited to any claims made by a succeeding tenant by reason of such delay. Acceptance of rent by Landlord following expiration or termination of this Lease shall not constitute a renewal of this Lease. 3. RENTAL 3.1. Minimum Rental; Additional Rent. (a) Tenant shall pay to Landlord as minimum rental for the Premises, in advance, without deduction, offset, notice or demand, on or before the First Commencement Date and on or before the first day of each subsequent calendar month of the term of this Lease, the following amounts per month (which amounts assume occurrence of both the Second Commencement Date and the Third Commencement Date on January 1, 2001, and shall be adjusted appropriately in proportion to the square footage of the Third Space if the Third Commencement Date occurs before or after January 1, 2001): [rest of page intentionally left blank] -4- 8
Months After First Commencement Date Minimum Monthly Rental ----------------- ------------------------------- 001 - 006 $ 16,955.00/mo ($1.2500/sq ft) 007 - 012 50,483.76/mo ($1.2500/sq ft) 013 - 024 52,503.10/mo ($1.3000/sq ft) 025 - 036 54,603.22/mo ($1.3520/sq ft) 037 - 048 56,787.35/mo ($1.4061/sq ft) 049 - 060 59,058.85/mo ($1.4623/sq ft) 061 - 072 61,421.20/mo ($1.5208/sq ft) 073 - 084 63,878.05/mo ($1.5816/sq ft) 085 - 096 66,433.17/mo ($1.6449/sq ft) 097 - 108 69,090.50/mo ($1.7107/sq ft) 109 - 120 71,854.12/mo ($1.7791/sq ft) 121 - 132 74,728.28/mo ($1.8503/sq ft) 133 - 144 77,717.41/mo ($1.9243/sq ft) 145 - 156 80,826.11/mo ($2.0013/sq ft) 157 - 166 84,059.15/mo ($2.0813/sq ft)
If the obligation to pay minimum rental hereunder commences on other than the first day of a calendar month or if the term of this Lease terminates on other than the last day of a calendar month, the minimum rental for such first or last month of the term of this Lease, as the case may be, shall be prorated based on the number of days the term of this Lease is in effect during such month. If an increase in minimum rental becomes effective on a day other than the first day of a calendar month, the minimum rental for that month shall be the sum of the two applicable rates, each prorated for the portion of the month during which such rate is in effect. (b) In determining the square footage of the Premises or of relevant portions thereof for purposes of applying the rates per square foot set forth in Section 3.1(a) or for any other purpose under this Lease, square footages shall be as determined in good faith by Landlord's architect on a basis consistent with that used in measuring other leased premises within the Center, which basis consists of measuring from the exterior faces of exterior walls, from the dripline of overhangs and recessed areas, and from the centerline of interior demising walls. (c) The minimum rental amounts specified in this Section 3.1 are based upon Tenant's taking the entire Premises "as is," without any tenant improvements. As set forth in Exhibit C, however, Landlord has agreed to make available to Tenant a maximum tenant improvement allowance of Seventy and No/100 Dollars ($70.00) per square foot, or an estimated total of Two Million Eight Hundred Twenty-Seven Thousand Ninety and No/100 Dollars ($2,827,090.00) (the "Tenant Improvement Allowance"), for the work to be performed by Landlord and/or Tenant, as applicable, on the Premises under Section 2.4 and Exhibit C. Beginning on the first day of the first calendar month after the date on which Landlord first expends any portion of the Tenant Improvement Allowance, Tenant shall pay additional monthly rent to Landlord for the Premises ("Additional Rent") as follows: (i) Starting on the first day of the first calendar month following the first expenditure of any portion of the Tenant Improvement Allowance by Landlord until the Additional Rent Amortization Date (as hereinafter defined), Tenant shall pay Additional Rent to Landlord on the first day of each calendar month in an amount equal to the sum of (A) one and eight hundredths percent (1.08%) of the aggregate amount of the Tenant Improvement Allowance expended by Landlord prior to the first day of the immediately preceding calendar month plus (B) one and eight hundredths percent (1.08%) of the aggregate amount of the Tenant Improvement Allowance expended by Landlord during the immediately preceding calendar month times a fraction, the numerator of which is the number of days from (and including) the date of such expenditure by Landlord through the last day of the immediately preceding calendar month and the denominator of which is the total number of days in the immediately preceding calendar month. If Landlord makes expenditures of the Tenant Improvement Allowance on more than one day in a calendar -5- 9 month, then the calculation of the amounts due under clause (B) of the preceding sentence for the immediately following calendar month shall be performed separately for each such expenditure and the total of such separate calculations shall be the total amount due under such clause (B) for such immediately following calendar month. The term "Additional Rent Amortization Date" shall mean the earliest to occur of (x) the first day of the first calendar month after the date on which the entire Tenant Improvement Allowance has been fully expended by Landlord, or (y) the first day of the first calendar month after construction of all tenant improvements to be constructed in the Premises pursuant to Section 2.4 and Exhibit C has been completed (except for correction of punch list items that do not, in the aggregate, materially affect Tenant's ability to use the tenant improvements in the Premises for their intended purposes), or (z) July 1, 2001. (ii) Beginning on the Additional Rent Amortization Date and continuing on the first day of each of the next eighty-three (83) calendar months after the calendar month in which the Additional Rent Amortization Date occurs (for a total of eighty-four (84) monthly payments under this subparagraph (ii)), Tenant shall pay Additional Rent to Landlord on the first day of each calendar month in an amount equal to the sum necessary to fully amortize the total amount of the Tenant Improvement Allowance expended by Landlord as of the Additional Rent Amortization Date on a level-payment basis over eighty-four (84) months with an imputed rate of return of thirteen percent (13%) per annum. If and to the extent that Landlord has not fully expended the Tenant Improvement Allowance as of the Additional Rent Amortization Date and thereafter expends additional portions of the Tenant Improvement Allowance after the Additional Rent Amortization Date (each such subsequent additional expenditure, if any, of part of the Tenant Improvement Allowance being hereinafter referred to as a "Supplemental TI Expenditure"), then beginning on the first day of the first calendar month following the date on which such Supplemental TI Expenditure is made and continuing throughout the remaining balance of the original 84- month amortization period which began on the Additional Rent Amortization Date, the Additional Rent due from Tenant each month shall be increased by an amount equal to the sum necessary to fully amortize the Supplemental TI Expenditure on a level-payment basis over the number of months remaining in such original 84-month amortization period with an imputed rate of return of thirteen percent (13%) per annum. 3.2. Late Charge. If Tenant fails to pay when due rental or other amounts due Landlord hereunder on or before the fifth (5th) day after such rental or other amount is due, such unpaid amounts shall bear interest for the benefit of Landlord at a rate equal to the lesser of fifteen percent (15%) per annum or the maximum rate permitted by law, from the date due to the date of payment. In addition to such interest, Tenant shall pay to Landlord a late charge in an amount equal to ten percent (10%) of any installment of rental and any other amounts due Landlord if not paid in full on or before the fifth (5th) day after such rental or other amount is due. Tenant acknowledges that late payment by Tenant to Landlord of rental or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, including, without limitation, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any loan relating to the Property. Tenant further acknowledges that it is extremely difficult and impractical to fix the exact amount of such costs and that the late charge set forth in this Section 3.2 represents a fair and reasonable estimate thereof. Acceptance of any late charge by Landlord shall not constitute a waiver of Tenant's default with respect to overdue rental or other amounts, nor shall such acceptance prevent Landlord from exercising any other rights and remedies available to it. Acceptance of rent or other payments by Landlord shall not constitute a waiver of late charges or interest accrued with respect to such rent or other payments or any prior installments thereof, nor of any other defaults by Tenant, whether monetary or non-monetary in nature, remaining uncured at the time of such acceptance of rent or other payments. -6- 10 4. TAXES 4.1. Personal Property. Tenant shall be responsible for and shall pay prior to delinquency all taxes and assessments levied against or by reason of all alterations and additions and all other items installed or paid for by Tenant under this Lease, and the personal property, trade fixtures and other property placed by Tenant in or about the Premises. Upon request by Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment thereof. If at any time during the term of this Lease any of said alterations, additions or personal property, whether or not belonging to Tenant, shall be taxed or assessed as part of the Property, then such tax or assessment shall be paid by Tenant to Landlord immediately upon presentation by Landlord of copies of the tax bills in which such taxes and assessments are included and shall, for the purposes of this Lease, be deemed to be personal property taxes or assessments under this Section 4.1. 4.2. Real Property. To the extent that real property taxes and assessments on the Premises are assessed separately from the remainder of the Property, Tenant shall be responsible for and shall pay prior to delinquency all such taxes and assessments levied against the Premises. Upon request by Landlord, Tenant shall furnish Landlord with satisfactory evidence of payment thereof. To the extent the Premises are taxed or assessed as part of the Property, such real property taxes and assessments shall constitute Operating Expenses (as that term is defined in Section 5.2 of this Lease) and shall be paid in accordance with the provisions of Article 5 of this Lease. In no event, however, shall Tenant be required to pay, under this Article 4 or under Article 5, any income, franchise or inheritance taxes of Landlord. 5. OPERATING EXPENSES 5.1. Payment Of Operating Expenses. (a) Tenant shall pay to Landlord, at the time and in the manner hereinafter set forth, beginning on the First Commencement Date and continuing throughout the term of this Lease, as additional rental, a share of the Operating Expenses defined in Section 5.2 ("Tenant's Operating Cost Share") equal to (i) four and sixty-two hundredths percent (4.62%) for the period from and including the First Commencement Date until the Second Commencement Date and (ii) thirteen and seventy-five hundredths percent (13.75%) for the period from and including the Second Commencement Date throughout the remaining term of this Lease. (b) Tenant's Operating Cost Share as specified in paragraph (a) of this Section is based upon an area of 13,564 square feet for the First Space, 9,286 square feet for the Second Space, 17,537 square feet for the Third Space, and an aggregate area of 293,722 square feet for the buildings owned by Landlord on the Property and operated, for common area and Operating Expense purposes, on an integrated basis with the Building, and upon the assumption that the Second Commencement Date and Third Commencement Date will occur on the same date. If the Second Commencement Date and the Third Commencement Date do not occur on the same date, then Tenant's Operating Cost Share shall be adjusted separately on the Second Commencement Date and the Third Commencement Date in proportion to the respective areas of the Second Space and the Third Space as set forth above. If and when the actual area of the Premises or of the buildings owned by Landlord on the Property and operated, for common area and Operating Expense purposes, on an integrated basis with the Building, as such areas are determined in good faith by Landlord's architect on a basis consistent with that used in measuring other leased premises within the Center, differs from the numbers set forth above, then Tenant's Operating Cost Share shall be adjusted to reflect the actual areas so determined. (c) If Landlord constructs additional buildings on the Property (or on any adjacent property owned by Landlord and operated, for common area and Operating Expense purposes, on an integrated basis with the Property) from time to time, Tenant's Operating Cost Share shall be adjusted to be equal to the percentage determined by dividing the gross square footage of the Premises as they then exist by the gross square footage of all buildings located on portions of the Property owned by Landlord (or on any applicable adjacent property owned by Landlord as -7- 11 described above). In determining said percentage, a new building shall be taken into account from and after the date on which costs and expenses attributable to such building are first included in Operating Expenses under Section 5.2 hereof, and the good faith determination of the gross square footage of any such building by Landlord's architects shall be final and binding upon the parties, absent manifest error. 5.2. Definition Of Operating Expenses. Subject to the exclusions and provisions hereinafter contained, the term "Operating Expenses" shall mean the total costs and expenses incurred by or allocable to Landlord for management, operation and maintenance of the Building and the Property (and any applicable adjacent property owned by Landlord and operated, for common area and Operating Expense purposes, on an integrated basis with the Property as described above), including, without limitation, costs and expenses of (i) insurance, property management, landscaping, and operation, repair and maintenance of buildings and common areas; (ii) all utilities and services; (iii) real and personal property taxes and assessments or substitutes therefor, including (but not limited to) any possessory interest, use, business, license or other taxes or fees, any taxes imposed directly on rents or services, any assessments or charges for police or fire protection, housing, transit, open space, street or sidewalk construction or maintenance or other similar services from time to time by any governmental or quasi-governmental entity, and any other new taxes on landlords in addition to taxes now in effect (but excluding corporate income, franchise and inheritance taxes); (iv) supplies, equipment, utilities and tools used in management, operation and maintenance of the Property; (v) capital improvements to the Property or the Building, amortized over the useful life of such capital improvements, (aa) which reduce or will cause future reduction of other items of Operating Expenses for which Tenant is otherwise required to contribute or (bb) which are required by law, ordinance, regulation or order of any governmental authority or (cc) which constitute repairs or replacements of existing improvements in the Premises or common areas of the Property with items of similar quality and function, as a result of obsolescence or ordinary wear and tear, in order to maintain and preserve the quality, safety and usefulness of the Property, to the extent such repairs or replacements are treated as capital items under generally accepted accounting principles; and (vi) any other costs (including, but not limited to, any parking or utilities fees or surcharges) allocable to or paid by Landlord, as owner of the Property or Building, pursuant to any applicable laws, ordinances, regulations or orders of any governmental or quasi-governmental authority or pursuant to the terms of any declarations of covenants, conditions and restrictions now or hereafter affecting the Property (or any applicable adjacent property owned by Landlord as described above). Operating Expenses shall not include any costs attributable to increasing the size of or otherwise expanding the Building or the costs of the work for which Landlord is required to pay under Section 2.4 or Exhibit C. The distinction between items of ordinary operating maintenance and repair and items of a capital nature shall be made in accordance with generally accepted accounting principles applied on a consistent basis. Notwithstanding anything to the contrary contained in this Section 5.2, the following shall not be included in Operating Expenses under this Lease: (A) Leasing commissions, attorneys' fees, costs, disbursements and other expenses incurred in connection with negotiations or disputes with tenants, or in connection with leasing, renovating or improving space for tenants or other occupants or prospective tenants or other occupants of the Building or of the land on which the Premises are located; (B) The cost of any service sold to any tenant (including Tenant) or other occupant for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under Landlord's lease with that tenant; (C) Any depreciation on the Building; (D) Costs of a capital nature, including but not limited to capital improvements and alterations, capital repairs, capital equipment and capital tools, as determined in accordance with generally accepted accounting principles consistently applied, except to the extent expressly provided in clause (v) above; -8- 12 (E) Expenses in connection with services or other benefits of a type that are not offered to Tenant but that are provided to another tenant or occupant of the Building or land upon which the Premises are located; (F) Overhead profit increments paid to Landlord's subsidiaries or affiliates for management or other services relating to the Building or the Property, or for supplies or other materials, to the extent the cost of such services, supplies or materials exceeds a reasonable market rate for obtaining such services, supplies or materials from unaffiliated parties; (G) All interest, loan fees and other carrying costs related to any mortgage or deed of trust or related to any capital item, and all rental and other payments due under any ground or underlying lease, or any lease for any equipment ordinarily considered to be of a capital nature (except janitorial equipment which is not affixed to the Building); (H) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord; (I) Advertising and promotional expenditures; (J) Costs of repairs and other work occasioned by fire, windstorm or other casualty of an insurable nature; (K) Any costs, fines or penalties incurred due to violations by Landlord of any governmental rule or authority, this Lease or any other lease affecting the Building or the land on which the Premises are located, or due to Landlord's negligence or willful misconduct; (L) Management costs, to the extent they exceed a reasonable market rate for management services provided to comparable projects in Hayward, California and surrounding areas; (M) Costs for sculpture, paintings or other objects of art, including (but not limited to) any costs for insurance thereon or extraordinary security in connection therewith; (N) Wages, salaries or other compensation paid to any executive employee above the grade of building manager; (O) The cost of correcting any building code or other violations of applicable law which, on the First Commencement Date, were existing violations of laws or codes then in effect; (P) The cost of containing, removing or otherwise remediating any contamination of the Building or Property (including the underlying land and groundwater) by any toxic or hazardous materials (including, without limitation, asbestos and PCB's); (Q) Any increase in real property taxes or assessments on the Property as a result of a change in ownership of the Property; provided, however, that the exclusion contained in this clause (Q) shall apply only in the determination of Operating Expenses with respect to periods prior to the third (3rd) anniversary of the First Commencement Date, and shall not apply in the determination of Operating Expenses with respect to any subsequent periods during the term of this Lease; and (R) Any other expense not specifically included or excluded above which, under generally accepted accounting principles and practices consistently applied, would not be considered a normal maintenance or operating expense. -9- 13 5.3. Determination Of Operating Expenses. On or before the First Commencement Date and during the last month of each calendar year of the term of this Lease ("Lease Year"), or as soon thereafter as practical, Landlord shall provide Tenant notice of Landlord's estimate of the Operating Expenses for the ensuing Lease Year or applicable portion thereof. On or before the first day of each month during the ensuing Lease Year or applicable portion thereof, beginning on the First Commencement Date, Tenant shall pay to Landlord Tenant's Operating Cost Share of the portion of such estimated Operating Expenses allocable (on a prorata basis) to such month; provided, however, that if such notice is not given in the last month of a Lease Year, Tenant shall continue to pay on the basis of the prior year's estimate, if any, until the month after such notice is given. If at any time or times it appears to Landlord that the actual Operating Expenses will vary from Landlord's estimate by more than five percent (5%), Landlord may, by notice to Tenant, revise its estimate for such year and subsequent payments by Tenant for such year shall be based upon such revised estimate. In no event shall Landlord collect more than one hundred percent (100%) of actual Operating Expenses from Tenant and all other tenants and occupants of the buildings located on the Property, collectively. 5.4. Final Accounting For Lease Year. (a) Within ninety (90) days after the close of each Lease Year, or as soon after such 90-day period as practicable, Landlord shall deliver to Tenant a statement of Tenant's Operating Cost Share of the Operating Expenses for such Lease Year prepared by Landlord from Landlord's books and records, which statement shall be final and binding on Landlord and Tenant, subject to Tenant's audit right set forth below. If on the basis of such statement Tenant owes an amount that is more or less than the estimated payments for such calendar year previously made by Tenant, Tenant or Landlord, as the case may be, shall pay the deficiency to the other party within thirty (30) days after delivery of the statement. Failure or inability of Landlord to deliver the annual statement within such ninety (90) day period shall not impair or constitute a waiver of Tenant's obligation to pay Operating Expenses, or cause Landlord to incur any liability for damages. (b) Notwithstanding any other provisions of this Section 5.4, within one (1) year after receipt of a final statement from Landlord setting forth actual Operating Expenses and Tenant's Operating Cost Share for any period (a "Statement"), Tenant shall have the right to audit or inspect Landlord's books and records relating to Operating Expenses (and to any other additional rent payable by Tenant under this Lease) for the period covered by the Statement, provided that such audit shall be conducted only during normal business hours, on not less than ten (10) days prior written notice to Landlord, at a location reasonably specified by Landlord, and at Tenant's sole cost and expense, except as hereinafter provided. Landlord shall cooperate with Tenant in all reasonable respects in the course of such audit, and Tenant and its employees and agents shall be permitted to make photocopies (at Tenant's expense) of any pertinent portions of Landlord's books and records. Landlord shall retain its books and records for each Lease Year for a period of at least one (1) year after delivery to Tenant of Landlord's Statement for the applicable Lease Year. To the extent that Tenant, on the basis of such audit, disputes any item in the applicable Statement or in the calculation of Tenant's obligations thereunder, Tenant shall give Landlord written notice of the disputed items, in reasonable detail and with reasonable supporting information, within thirty (30) days after the earlier to occur of the completion of Tenant's audit or the expiration of Tenant's 1-year audit period. If Landlord and Tenant are not able to resolve such dispute by good faith negotiations within thirty (30) days after Tenant notifies Landlord in writing of the disputed items, then Tenant may, by written notice to Landlord, request an independent audit of such books and records. The independent audit of the books and records shall be conducted by a certified public accountant acceptable to both Landlord and Tenant or, if the parties are unable to agree, by a "Big Five" accounting firm designated by Landlord and not then employed by Landlord or Tenant. The audit shall be limited to the determination of the amount of Operating Expenses and of Tenant's share thereof for the Lease Year covered by the Statement, and shall be based on generally accepted accounting principles and tax accounting principles, consistently applied, subject to any modifications or limitations expressly set forth in Section 5.2 hereof. If it is determined, by mutual agreement of Landlord and Tenant or by independent audit, that the amount paid by Tenant for Operating Expenses for the period covered by the Statement was incorrect, then the appropriate party shall pay to the other party the deficiency or overpayment, as applicable, within thirty (30) days after the final determination of -10- 14 such deficiency or overpayment. All costs and expenses of the audit shall be paid by Tenant unless the audit shows that Landlord overstated Operating Expenses for the period covered by the Statement by more than four percent (4%), in which event Landlord shall pay all costs and expenses of the audit. Each party agrees to maintain the confidentiality of the findings of any audit in accordance with the provisions of this Section 5.4. The provisions of this Section 5.4 shall survive the expiration or sooner termination of this Lease. 5.5. Proration. If the First Commencement Date falls on a day other than the first day of a Lease Year or if this Lease terminates on a day other than the last day of a Lease Year, the amount of Tenant's Operating Cost Share payable by Tenant applicable to such first and last partial Lease Year shall be prorated on the basis which the number of days during such Lease Year in which this Lease is in effect bears to 365. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section 5.4 to be performed after such termination. 6. UTILITIES 6.1. Payment. Commencing with the First Commencement Date and thereafter throughout the term of this Lease, Tenant shall pay, before delinquency, all charges for water, gas, heat, light, electricity, power, sewer, telephone, alarm system, janitorial and other services or utilities supplied to or consumed in or upon the Premises, including any taxes on such services and utilities. It is the intention of the parties that all such services shall be separately metered to the Premises. In the event that any of such services supplied to the Premises are not separately metered, then the amount thereof shall be an item of Operating Expenses and shall be paid as provided in Article 5. 6.2. Interruption. There shall be no abatement of rent or other charges required to be paid hereunder and Landlord shall not be liable in damages or otherwise for interruption or failure of any service or utility furnished to or used in the Premises because of accident, making of repairs, alterations or improvements, severe weather, difficulty or inability in obtaining services or supplies, labor difficulties or any other cause, excluding the negligence and willful misconduct and omissions of Landlord and its agents. 7. ALTERATIONS 7.1. Right To Make Alterations. Tenant shall make no alterations, additions or improvements to the Premises, other than interior non-structural alterations costing less than Fifteen Thousand Dollars ($15,000.00) in each instance, without the prior written consent of Landlord. All such alterations, additions and improvements shall be completed with due diligence in a first-class workmanlike manner and in compliance with plans and specifications approved in writing by Landlord and all applicable laws, ordinances, rules and regulations. 7.2. Title To Alterations. All alterations, additions and improvements installed pursuant to this Lease shall be part of the Building and the property of Landlord, unless Landlord elects to require Tenant to remove the same upon the termination of this Lease; provided, however, that the foregoing shall not apply to Tenant's movable furniture and trade fixtures not affixed to the Property. Under no circumstances, however, shall Tenant be required to remove any alterations, additions or improvements installed by Landlord as part of Landlord's work under Section 2.4 and Exhibit C. Moreover, if Tenant, in connection with requesting Landlord's approval for any alteration, addition or improvement, requests in writing that Landlord specify whether Landlord will require Tenant to remove such alteration, addition or improvement upon termination of this Lease, then Landlord shall not be entitled to require such removal unless Landlord states its intention to do so in writing to Tenant concurrently with or prior to Landlord's approval of the requested alteration, addition or improvement. 7.3. Tenant Fixtures. Notwithstanding the provisions of Sections 7.1 and 7.2, Tenant may install, remove and reinstall trade fixtures without Landlord's prior written consent, except that any fixtures which are affixed to the Premises or which affect the exterior or structural portions of -11- 15 the Building shall require Landlord's written approval. The foregoing shall apply to Tenant's signs, logos and insignia, all of which Tenant shall have the right to place and remove and replace solely with Landlord's prior written consent as to location, size and composition. Tenant shall immediately repair any damage caused by installation and removal of fixtures under this Section 7.3. 7.4. No Liens. Tenant shall at all times keep the Premises free from all liens and claims of any contractors, subcontractors, materialmen, suppliers or any other parties employed either directly or indirectly by Tenant in construction work on the Premises. Tenant may contest any claim of lien, but only if, prior to such contest, Tenant either (i) posts security in the amount of the claim, plus estimated costs and interest, or (ii) records a bond of a responsible corporate surety in such amount as may be required to release the lien from the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any and all liability, loss, damage, cost and other expenses, including, without limitation, reasonable attorneys' fees, arising out of claims of any lien for work performed or materials or supplies furnished at the request of Tenant or persons claiming under Tenant. Nothing in this Section 7.4 shall be construed to prevent Tenant from obtaining financing on Tenant's movable furniture, equipment and trade fixtures or from granting a security interest in such items to one or more lenders, provided that Tenant shall not be entitled, pursuant to this sentence or otherwise, to encumber any alterations, additions or improvements that are the property of Landlord and that must remain with the Premises upon termination of this Lease, as provided in Sections 7.2 and 7.3 hereof. Without limiting the generality of the preceding sentence, Landlord acknowledges that it has been advised by Tenant that Tenant is presently a party to agreements creating liens on some or all of Tenant's existing and/or after-acquired equipment, furniture, trade fixtures and other personal property in favor of (a) Transamerica Business Credit, (b) Comdisco and (c) GE Capital - Life Science and Technology Finance; nothing in this sentence shall be construed, however, as a waiver or release by Landlord with respect to the proviso set forth in the preceding sentence regarding limitations on the property that Tenant is entitled to encumber. 8. MAINTENANCE AND REPAIRS 8.1. Landlord's Work. (a) Landlord shall repair and maintain or cause to be repaired and maintained in a prompt and expeditious manner those portions of the Building outside of the Premises, the common areas of the Property, and the roof, foundation, exterior walls and other structural portions of the Building. The cost of all work performed by Landlord under this Section 8.1 shall be an Operating Expense hereunder, except to the extent such work (i) is required due to the negligence of Landlord or any other tenant of the Building, (ii) is a service to a specific tenant or tenants, other than Tenant, for which Landlord has received or has the right to receive full reimbursement, (iii) is a capital expense not includible as an Operating Expense under Section 5.2 hereof, or (iv) is required due to the negligence or willful misconduct of Tenant or its agents, employees or invitees (in which event Tenant shall bear the full cost of such work pursuant to the indemnification provided in Section 10.6 hereof). Tenant knowingly and voluntarily waives the right to make repairs at Landlord's expense, or to offset the cost thereof against rent, under any law, statute, regulation or ordinance now or hereafter in effect. (b) If Landlord fails to perform, within fifteen (15) days after written request from Tenant (except in the case of conditions which cannot reasonably be repaired within fifteen (15) days, in which event this paragraph (b) shall apply only to the extent Landlord fails to commence the applicable maintenance or repair within such 15-day period or thereafter fails to proceed diligently to complete the applicable maintenance or repair), any maintenance or repair obligation under Section 8.1(a) which relates specifically to the Premises or the common areas immediately adjacent to the Premises and such failure creates (or permits to exist) a risk of material harm to persons or property, then Tenant shall have the right to perform such maintenance or repair and Landlord shall be obligated to reimburse Tenant for the reasonable cost thereof, together with interest at the rate specified in the first sentence of Section 3.2 hereof from the date of payment by Tenant to the date of reimbursement by Landlord, within fifteen (15) days after written notice from Tenant of the completion and cost of such work, accompanied by copies of invoices or other -12- 16 appropriate supporting documentation. Under no circumstances, however, shall this paragraph (b) be construed to create any contractual right of Tenant to offset the cost of any such work against rent or other charges falling due from time to time under this Lease. 8.2. Tenant's Obligation For Maintenance. (a) Good Order, Condition And Repair. By accepting possession of the Premises, and subject to Section 2.4, Tenant acknowledges that the Premises are in good and sanitary order, condition and repair. Except as provided in Section 8.1 hereof, Tenant at its sole cost and expense shall keep and maintain in good and sanitary order, condition and repair the interior non-structural portions of the Premises, including but not limited to the signs, interior, the face of the ceiling over Tenant's floor space, HVAC equipment and related mechanical systems exclusively serving the Premises (for which equipment and systems Tenant shall enter into a service contract with a person or entity designated or approved by Landlord, such approval not to be unreasonably withheld or delayed), all doors, door checks, windows, plate glass, door fronts, exposed plumbing and sewage and other utility facilities, fixtures, lighting, wall surfaces, floor surfaces and ceiling surfaces and all other interior repairs, foreseen and unforeseen, as required. (b) Landlord's Remedy. If Tenant, after notice from Landlord, fails to make or perform promptly any repairs or maintenance which are the obligation of Tenant hereunder, Landlord shall have the right, but shall not be required, to enter the Premises and make the repairs or perform the maintenance necessary to restore the Premises to good and sanitary order, condition and repair. Immediately on demand from Landlord, the cost of such repairs shall be due and payable by Tenant to Landlord. (c) Condition Upon Surrender. At the expiration or sooner termination of this Lease, Tenant shall surrender the Premises, including any additions, alterations and improvements thereto not removed in accordance with the terms of this Lease, broom clean, in good and sanitary order, condition and repair, ordinary wear and tear and damage by casualty or condemnation (the latter of which shall be governed by Article 13 hereof) excepted, first, however, removing all goods and effects of Tenant and any and all fixtures and items required to be removed or specified to be removed at Landlord's election pursuant to this Lease, and repairing any damage caused by such removal. Tenant expressly waives any and all interest in any personal property and trade fixtures not removed from the Premises by Tenant at the expiration or termination of this Lease, agrees that any such personal property and trade fixtures may, at Landlord's election, be deemed to have been abandoned by Tenant, and authorizes Landlord (at its election and without prejudice to any other remedies under this Lease or under applicable law) to remove and either retain, store or dispose of such property at Tenant's cost and expense (provided that before incurring any such charges for Tenant's account, Landlord shall first give Tenant ten (10) days prior written notice of Landlord's intention to do so, so that Tenant may have an opportunity first to correct the situation on its own behalf), and Tenant waives all claims against Landlord for any damages resulting from any such removal, storage, retention or disposal, except to the extent (if any) that such damages result from the negligence or willful misconduct or omission of Landlord or its agents. 9. USE OF PREMISES 9.1. Permitted Use. Tenant shall use the Premises solely for general office, sales, administrative marketing and the design, development, testing and manufacturing of medical equipment and pharmaceutical products, and for no other purpose. 9.2. Requirement Of Continued Use. Tenant shall not at any time abandon the Premises and shall continuously during the term of this Lease (except during any period when improvements are being constructed by Landlord under Section 2.4 and Exhibit C and/or when the Premises are unusable by reason of events described in Article 13 hereof) conduct and carry on in the Premises the use permitted hereunder. 9.3. No Nuisance. Tenant shall not use the Premises for or carry on or permit upon the Premises or any part thereof any offensive, noisy or dangerous trade, business, manufacture, -13- 17 occupation, odor or fumes, or any nuisance or anything against public policy, nor interfere with the rights or business of any other tenants or of Landlord in the Building or the Property, nor commit or allow to be committed any waste in, on or about the Premises, nor make any other unreasonable use of the Premises. Tenant shall not do or permit anything to be done in or about the Premises, nor bring nor keep anything therein, which will in any way cause the Premises to be uninsurable with respect to the insurance required by this Lease or with respect to standard fire and extended coverage insurance with vandalism, malicious mischief and riot endorsements. 9.4. Compliance With Laws. Tenant shall not use the Premises or permit the Premises to be used in whole or in part for any purpose or use that is in violation of any applicable laws, ordinances, regulations or rules of any governmental agency or public authority. Tenant shall keep the Premises equipped with all safety appliances required by law, ordinance or insurance on the Premises or any order or regulation of any public authority because of Tenant's particular use of the Premises. Tenant shall procure all licenses and permits required for use of the Premises, excluding building permits and an initial certificate of occupancy or reasonable local equivalent thereof for Landlord's work (if any) under Section 2.4 and Exhibit C, both of which it shall be Landlord's responsibility to procure (if applicable) with respect to any such work by Landlord. Tenant shall use the Premises in strict accordance with all applicable ordinances, rules, laws and regulations and shall comply with all requirements of all governmental authorities now in force or which may hereafter be in force pertaining to the use of the Premises by Tenant, including, without limitation, regulations applicable to noise, water, soil and air pollution, and making such nonstructural alterations and additions thereto as may be required from time to time by such laws, ordinances, rules, regulations and requirements of governmental authorities or insurers of the Premises (collectively, "Requirements") because of Tenant's construction of improvements in or other particular use of the Premises. Any structural alterations or additions required from time to time by applicable Requirements because of Tenant's construction of improvements in or other particular use of the Premises shall, at Landlord's election, either (i) be made by Tenant, at Tenant's sole cost and expense, in accordance with the procedures and standards set forth in Section 7.1 for alterations by Tenant, or (ii) be made by Landlord at Tenant's sole cost and expense, in which event Tenant shall pay to Landlord as additional rent, within thirty (30) days after demand by Landlord, an amount equal to all reasonable costs incurred by Landlord in connection with such alterations or additions. Any structural alterations or additions required from time to time by applicable Requirements for any other reason shall be Landlord's sole obligation and expense, subject to the possible characterization of such expenses as Operating Expenses in accordance with Section 5.2 hereof (if applicable). The judgment of any court, or the admission by Tenant in any proceeding against Tenant, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement shall be conclusive of such violation as between Landlord and Tenant. 9.5. Liquidation Sales. Tenant shall not conduct or permit to be conducted any auction, bankruptcy sale, liquidation sale, or going out of business sale, in, upon or about the Premises or the Property, whether said auction or sale be voluntary, involuntary or pursuant to any assignment for the benefit of creditors, or pursuant to any bankruptcy or other insolvency proceeding. 9.6. Environmental Compliance. (a) Landlord warrants and represents to Tenant that the Premises, the Building and the Property presently comply with all environmental laws and Landlord will use its best efforts to ensure that the Premises, the Building and the Property remain in compliance with all environmental laws during the term hereof, including without limitation reasonably monitoring the condition of the Property, the Building and the Premises and the activities of other tenants. Landlord's obligations under this Section 9.6(a) are not intended to impose a greater burden on Landlord than that set forth in Section 9.6(d) herein or as otherwise required by law, regulation or statute, nor to relieve Tenant of any of its express obligations under this Section 9.6. (b) Without limiting the generality of Tenant's obligations set forth in Section 9.4 of this Lease: -14- 18 (i) Tenant shall not cause or permit any hazardous or toxic substance or hazardous waste (as defined in any federal, state or local law, ordinance or regulation applicable to such substances or wastes) to be brought upon, kept, stored or used on or about the Property without the prior written consent of Landlord, which consent shall not be unreasonably withheld, except that Tenant, in connection with its permitted use of the Property as provided in Section 9.1, may keep, store and use materials that constitute hazardous materials which are customary for such permitted use, provided such hazardous materials are kept, stored and used in quantities which are customary for such permitted use and are kept, stored and used in full compliance with clauses (ii) and (iii) immediately below; (ii) Tenant shall comply with all applicable laws, rules, regulations, orders, permits, licenses and operating plans of any governmental authority with respect to the receipt, use, handling, generation, transportation, storage, treatment, release and/or disposal of hazardous or toxic substances or wastes in the course of or in connection with the conduct of Tenant's business on the Property, and shall provide Landlord with copies of any and all permits, licenses, registrations and other similar documents that authorize Tenant to conduct any such activities in connection with Tenant's use of the Property from time to time; (iii) Tenant shall not (A) operate on or about the Property any facility required to be permitted or licensed as a hazardous waste facility or for which interim status as such is required, nor (B) store any hazardous wastes on or about the Property for ninety (90) days or more, nor (C) conduct any other activities on or about the Property that could result in the property being deemed to be a "hazardous waste facility" (including, but not limited to, any storage or treatment of hazardous substances or hazardous wastes which could have such a result); and (iv) Tenant shall provide to Landlord from time to time, upon written request by Landlord, (A) a list of all hazardous substances and/or wastes that Tenant receives, uses, handles, generates, transports, stores, treats or disposes of from time to time in connection with its operations on the Property, and (B) copies of any Material Safety Data Sheets, hazardous waste manifests, Hazardous Materials Management Plans, Contingency Plans and Emergency Procedures, hazardous substance reports to the California Department of Health Services, industrial wastewater discharge permits, and any other lists or inventories of hazardous substances and/or wastes on or about the Property that Tenant is otherwise required to prepare and file from time to time with any governmental or regulatory authority; provided, however, that nothing in this clause (iv) is intended to require Tenant to prepare specially for Landlord any lists or other documents that Tenant does not otherwise prepare or have available in the course of Tenant's business; and provided further, however, that if Tenant reasonably determines that the volume of any such materials requested by Landlord is so substantial as to make the furnishing of such materials to Landlord unreasonably burdensome, Tenant may instead, by written notice to Landlord, elect simply to maintain copies of such materials to such extent and for such periods as may be required by applicable law and to permit Landlord or its representatives to inspect and copy (at Landlord's expense) such materials during normal business hours at any time and from time to time upon reasonable notice to Tenant. (c) Tenant shall fully indemnify and hold harmless Landlord, its successors and assigns against (i) any damages, claims, liabilities, demands, losses, costs or expenses (including reasonable attorneys' fees) arising from (A) any violation of Section 9.6(b) herein, or (B) any release of hazardous or toxic substances, or any other violation of environmental law with respect to the Premises or Property, to the extent any such release or violation described in this clause (B) is caused by Tenant or its employees, agents, contractors or assigns, and (ii) any fines, penalty payments, reasonable attorneys' fees, sums paid in connection with any judicial or administrative investigation or proceedings, costs of cleanup assessed by a governmental or quasi-governmental agency, and similar expenditures, incurred by Landlord that relate in any way to a release of hazardous or toxic substances, or to any other violation of environmental law with respect to the Premises or Property, to the extent any such release or violation described in this clause (ii) is caused by Tenant or its agents, employees, contractors or assigns. (d) Landlord shall fully indemnify and hold harmless Tenant, its successors and assigns against (i) any damages, claims, liabilities, demands, losses, costs or expenses (including -15- 19 reasonable attorneys' fees) arising from any violation of Section 9.6(a) herein, including without limitation any condition of the Premises, the Building and/or the Property existing at the First Commencement Date (except to the extent any applicable condition of the Premises, the Building and/or the Property existing at the First Commencement Date is attributable or caused by Tenant or its employees, agents, contractors or assigns, in connection with Tenant's occupancy of the First Space and/or Second Space under the Existing Lease or otherwise); (ii) any damages, claims, liabilities, demands, losses, costs or expenses (including reasonable attorneys' fees) arising from any release of hazardous or toxic substances, or from any other violation of environmental law with respect to the Property, the Building or the Premises, to the extent the same is not caused by Tenant or its employees, agents, contractors or assigns; and (iii) any fines, penalty payments, reasonable attorneys' fees, sums paid in connection with any judicial or administrative investigation or proceedings, costs of cleanup assessed by a governmental or quasi-governmental agency, and similar expenditures, incurred by Tenant that relate in any way to a breach by Landlord of Section 9.6(a), to any condition of the Property, the Building or the Premises existing on the First Commencement Date (except to the extent any applicable condition of the Premises, the Building and/or the Property existing on the First Commencement Date is attributable or caused by Tenant or its employees, agents, contractors or assigns, in connection with Tenant's occupancy of the First Space and/or Second Space under the Existing Lease or otherwise), or to any release of hazardous or toxic substances or other violation of environmental law caused by Landlord or its employees, agents, contractors or assigns. (e) The provisions of this Section 9.6 shall survive the termination of this Lease. 9.7. ADA/Title 24 Compliance. Landlord shall deliver and maintain the Premises at its expense in compliance, as and when required by law, with the Americans with Disabilities Act, California Title 24 and any and all other related governmental requirements. 10. INSURANCE AND INDEMNITY 10.1. Liability Insurance. (a) Tenant shall procure and maintain in full force and effect at all times during the term of this Lease, at Tenant's cost and expense, comprehensive public liability and property damage insurance to protect against any liability to the public, or to any invitee of Tenant or Landlord, arising out of or related to the use of or resulting from any accident occurring in, upon or about the Premises, with limits of liability of not less than (i) One Million Dollars ($1,000,000.00) for injury to or death of one person, (ii) Three Million Dollars ($3,000,000.00) for personal injury or death, per occurrence, and (iii) Five Hundred Thousand Dollars ($500,000.00) for property damage, or a combined single limit of public liability and property damage insurance of not less than Five Million Dollars ($5,000,000.00). Such insurance shall name Landlord and its general partners and Property Manager as additional insureds thereunder. The amount of such insurance shall not be construed to limit any liability or obligation of Tenant under this Lease. (b) Landlord shall procure and maintain in full force and effect at all times during the term of this Lease, at Landlord's cost and expense (but reimbursable as an Operating Expense under Section 5.2 hereof), fire and "all risk" extended coverage property damage insurance for the Building and interior improvements that are the property of Landlord and for the improvements in the common areas of the Property, on a full replacement cost basis, with rental loss insurance. Such insurance may include earthquake and/or flood coverage to the extent Landlord in its discretion elects to carry such coverage, and shall have such commercially reasonable deductibles and other terms as Landlord in its discretion determines to be appropriate. Landlord shall have no obligation to carry property damage insurance for any alterations, additions, improvements, trade fixtures or personal property installed or maintained by Tenant on or about the Premises. 10.2. Quality Of Policies And Certificates. All policies of insurance required hereunder shall be issued by responsible insurers and shall be written as primary policies not contributing with -16- 20 and not in excess of any coverage that Landlord may carry. Tenant shall deliver to Landlord copies of policies or certificates of insurance showing that said policies are in effect. The coverage provided by such policies shall include the clause or endorsement referred to in Section 10.4. If Tenant fails to acquire, maintain or renew any insurance required to be maintained by it under this Article 10 or to pay the premium therefor, then Landlord, at its option and in addition to its other remedies, but without obligation so to do, may procure such insurance, and any sums expended by it to procure any such insurance shall be repaid upon demand, with interest as provided in Section 3.2 hereof. Tenant shall obtain written undertakings from each insurer under policies required to be maintained by it to notify all insureds thereunder at least thirty (30) days prior to cancellation, amendment or revision of coverage. 10.3. Workers' Compensation. Tenant shall maintain in full force and effect during the term of this Lease workers' compensation insurance covering all of Tenant's employees working on the Premises. 10.4. Waiver Of Subrogation. To the extent permitted by law and without affecting the coverage provided by insurance required to be maintained hereunder, Landlord and Tenant each waive any right to recover against the other (i) damages for injury to or death of persons, (ii) damage to property, (iii) damage to the Premises or any part thereof, or (iv) claims arising by reason of any of the foregoing, but only to the extent that any of the foregoing damages and claims under subparts (i)-(iv) hereof are covered, and only to the extent of such coverage, by casualty insurance actually carried or required to be carried hereunder by either Landlord or Tenant. This provision is intended to waive fully, and for the benefit of each party, any rights and claims which might give rise to a right of subrogation in any casualty insurance carrier. Each party shall procure a clause or endorsement on any casualty insurance policy required under this Article 10 denying to the insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Coverage provided by insurance maintained by Tenant or Landlord under this Article 10 shall not be limited, reduced or diminished by virtue of the subrogation waiver herein contained. 10.5. Increase In Premiums. Tenant shall do all acts and pay all expenses necessary to insure that the Premises are not used for purposes prohibited by any applicable fire insurance, and that Tenant's use of the Premises complies with all requirements necessary to obtain any such insurance. If Tenant uses or permits the Premises to be used in a manner which increases the existing rate of any insurance on the Premises carried by Landlord, Tenant shall pay the amount of the increase in premium caused thereby, and Landlord's costs of obtaining other replacement insurance policies, including any increase in premium, within ten (10) days after demand therefor by Landlord, which demand shall be accompanied by reasonably detailed documentation supporting such demand. 10.6. Indemnification. (a) Tenant shall indemnify, defend and hold Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person, or loss of or damage to the property of any person, and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Landlord or which Landlord may pay or incur by reason of the use, occupancy and enjoyment of the Premises by Tenant or any invitees, sublessees, licensees, assignees, employees, agents or contractors of Tenant or holding under Tenant arising during the term of this Lease from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents or employees. Landlord, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such persons for, damages to goods, wares and merchandise in or upon the Premises, or for injuries to Tenant, its agents or third persons in or upon the Premises, arising during the term of this Lease from any cause whatsoever other than negligence or willful misconduct or omission by Landlord, its agents or employees. Tenant shall give prompt notice to Landlord of any casualty or accident of a material nature in, on or about the Premises. -17- 21 (b) Landlord shall indemnify, defend and hold Tenant, its partners, shareholders, officers, directors, affiliates, agents, employees and contractors, harmless from any and all liability for injury to or death of any person or loss of or damage to the property of any person, and all actions, claims, demands, costs (including, without limitation, reasonable attorneys' fees), damages or expenses of any kind arising therefrom which may be brought or made against Tenant or which Tenant may pay or incur, to the extent such liabilities or other matters arise by reason of (i) any negligence or willful misconduct or omission by Landlord, its agents or employees, (ii) any breach by Landlord, its agents or employees of any term of this Lease and (iii) any causes of action or obligations the due date of performance of which arose prior to the First Commencement Date (except to the extent that Tenant is required to indemnify Landlord with respect to such causes of action or obligations pursuant to the provisions of the Existing Lease as it applies to the First Space and/or the Second Space). 10.7. Blanket Policy. Any policy required to be maintained hereunder may be maintained under a so-called "blanket policy" insuring other parties and other locations so long as the amount of insurance required to be provided hereunder is not thereby diminished. 11. SUBLEASE AND ASSIGNMENT 11.1. Assignment And Sublease Of Premises. Tenant shall not have the right or power to assign its interest in this Lease, or make any sublease, nor shall any interest of Tenant under this Lease be assignable involuntarily or by operation of law, without on each occasion obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Any purported sublease or assignment of Tenant's interest in this Lease requiring but not having received Landlord's consent thereto shall be void. Without limiting the generality of the foregoing, Landlord may withhold consent to any proposed subletting or assignment solely on the ground that the use by the proposed subtenant or assignee is reasonably likely to be incompatible with Landlord's use of the balance of the Building or the Property. Notwithstanding the foregoing provisions, however, Tenant may assign this Lease or sublet the Premises, or any portion thereof, without Landlord's consent (but with prior or substantially concurrent written notice to Landlord), to any entity which controls, is controlled by, or is under common control with Tenant; to any entity which results from a merger or consolidation with Tenant; to any entity engaged in a joint venture with Tenant; or to any entity which acquires substantially all of the stock or assets of Tenant, as a going concern, with respect to the business that is being conducted in the Premises (hereinafter each a "Permitted Transfer"). In addition, any sale or transfer of the capital stock of Tenant shall be deemed a Permitted Transfer if (i) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Tenant, or (ii) such sale or transfer occurs in connection with Tenant's status as a publicly traded corporation. Landlord shall have no right to terminate this Lease in connection with, and shall have no right to any sums or other economic consideration resulting from, any Permitted Transfer. In the event of a permitted subleasing of the Premises or any portion thereof by Tenant, Tenant will retain all sublease profits net of its underlying obligations under this Lease. Landlord will not have the right or option under any circumstances, other than pursuant to the default provisions of this Lease (to the extent applicable), to recapture any space that Tenant assigns or subleases during the initial Lease term. 11.2. Rights Of Landlord. Consent by Landlord to one or more assignments of this Lease, or to one or more sublettings of the Premises, or collection of rent by Landlord from any assignee or sublessee, shall not operate to exhaust Landlord's rights under this Article 11, nor constitute consent to any subsequent assignment or subletting. No assignment of Tenant's interest in this Lease and no sublease shall relieve Tenant of its obligations hereunder, notwithstanding any waiver or extension of time granted by Landlord to any assignee or sublessee, or the failure of Landlord to assert its rights against any assignee or sublessee, and regardless of whether Landlord's consent thereto is given or required to be given hereunder. In the event of a default by any assignee, sublessee or other successor of Tenant in the performance of any of the terms or obligations of Tenant under this -18- 22 Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against any such assignee, sublessee or other successor. In addition, Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted under this Lease, and Landlord, as Tenant's assignee, or any receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; except that, until the occurrence of an act of default by Tenant, beyond the expiration of any applicable grace period, Tenant shall have the right to collect such rent. 12. RIGHT OF ENTRY AND QUIET ENJOYMENT 12.1. Right Of Entry. Landlord and its authorized representatives shall have the right to enter the Premises at any time during the term of this Lease during normal business hours and upon not less than twenty-four (24) hours prior notice, except in the case of emergency (in which event no notice shall be required and entry may be made at any time), for the purpose of inspecting and determining the condition of the Premises or for any other proper purpose including, without limitation, to make repairs, replacements or improvements which Landlord may deem necessary, to show the Premises to prospective purchasers, to show the Premises to prospective tenants, and to post notices of nonresponsibility; provided, however, that notwithstanding anything to the contrary contained in the preceding portion of this sentence, Landlord shall not enter any portions of Tenant's facility designated by Tenant as "secure" areas except on reasonable prior notice to Tenant and except in compliance with all conditions reasonably imposed by Tenant and/or by any governmental authority with respect to such access (which conditions may, by way of example but not limitation, include a requirement that any visitors to such areas be accompanied by a representative of Tenant at all times). Landlord shall not be liable for inconvenience, annoyance, disturbance, loss of business, quiet enjoyment or other damage or loss to Tenant by reason of making any repairs or performing any work upon the Premises unless such are the result of the negligence or willful misconduct of Landlord or its agents, and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever, provided, however, Landlord shall use reasonable efforts to minimize the inconvenience to Tenant's normal business operations caused thereby. 12.2. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the rent and performing its obligations hereunder and subject to all the terms and conditions of this Lease, shall peacefully and quietly have, hold and enjoy the Premises throughout the term of this Lease, or until this Lease is terminated as provided by this Lease. 13. CASUALTY AND TAKING -19- 23 13.1. Termination Or Reconstruction. If during the term of this Lease the Premises or Building, or any substantial part of either, (i) is damaged materially by fire or other casualty or by action of public or other authority in consequence thereof, (ii) is taken by eminent domain or by reason of any public improvement or condemnation proceeding, or in any manner by exercise of the right of eminent domain (including any transfer in avoidance of an exercise of the power of eminent domain), or (iii) receives irreparable damage by reason of anything lawfully done under color of public or other authority, this Lease shall terminate as to the entire Premises at Landlord's or Tenant's election by written notice given to the other party within thirty (30) days after the damage or taking has occurred; provided, however, that with respect to events of damage or destruction described in clause (i) above, Landlord's termination right shall be exercisable only if either (A) the time reasonably estimated by Landlord's architect or contractor to be required for the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein exceeds six (6) months from the date of the damage or destruction in the case of damage or destruction occurring prior to the last year of the term of this Lease, or exceeds sixty (60) days from the date of the damage or destruction in the case of damage or destruction occurring during the last year of the term of this Lease, or (B) the reasonably estimated cost of such repair or restoration is more than one hundred five percent (105%) of the insurance proceeds reasonably available for such repair or restoration under the insurance required to be maintained by Landlord pursuant to Section 10.1(b) hereof (including, in the case of any failure by Landlord to maintain such required insurance, any proceeds that would have been reasonably available for such repair or restoration if Landlord had maintained such required insurance) and Landlord, in its reasonable and good faith judgment, determines that it is not economically and commercially reasonable to use such proceeds for the repair or restoration of the Premises; provided further, that with respect to events of damage or destruction described in clause (i) above, Tenant's termination right shall be exercisable only if either (I) the time reasonably estimated by Landlord's architect or contractor to be required for the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein exceeds six (6) months from the date of the damage or destruction in the case of damage or destruction occurring prior to the last year of the term of this Lease, or exceeds sixty (60) days from the date of the damage or destruction in the case of damage or destruction occurring during the last year of the term of this Lease, or (II) Landlord fails to complete the repair or restoration of the Building to the extent necessary to permit Tenant to resume substantially all of its normal business activities therein within six (6) months after the date of the damage or destruction in the case of damage or destruction occurring prior to the last year of the term of this Lease or within sixty (60) days from the date of the damage or destruction in the case of damage or destruction occurring during the last year of the term of this Lease (provided, however, that so long as Landlord is proceeding diligently and with reasonable good faith efforts, such periods shall be extended, day for day, by a number of days equal to the number of days of actual delay in Landlord's completion of such repair or restoration that are caused by weather, acts of God, strikes, shortage of labor or materials or other circumstances beyond Landlord's reasonable control (excluding financial inability), including (but not limited to) acts or omissions of Tenant or its agents or employees), or (III) Landlord advises Tenant that Landlord intends to perform only a Partial Restoration (as defined below) and Tenant determines reasonably and in good faith, within thirty (30) days after Tenant is advised of the nature and scope of the proposed Partial Restoration, that the Premises available to Tenant following such Partial Restoration will not be sufficient to permit Tenant to resume normal business operations in the Premises for the uses permitted hereunder; and provided further, that with respect to takings or damage described in clause (ii) or (iii) above, Landlord's and Tenant's respective termination rights shall be exercisable only if Landlord or Tenant, as applicable, determines reasonably and in good faith that the extent and nature of such taking or damage is to substantially and permanently impair Tenant's ability to conduct normal business operations in the balance of the Premises for the uses permitted hereunder. If neither Landlord nor Tenant elects to terminate this Lease as hereinabove provided, Landlord shall repair any such damage and restore the Premises (to the extent of Landlord's work therein under Section 2.4 and Exhibit C) and the Building as nearly as reasonably possible to the condition existing before the damage or taking, with an equitable abatement of Tenant's rent and Operating Expense obligations pending completion of such repair or restoration as contemplated in Section 13.3 below; provided, however, that in the case of any damage or destruction described in clause (i) above, if the reasonably estimated cost of such repair or restoration is more than one hundred five percent (105%) of the insurance proceeds (if any) -20- 24 reasonably available for such repair or restoration under the insurance required to be maintained by Landlord pursuant to Section 10.1(b) hereof (including, in the case of any failure by Landlord to maintain such required insurance, any proceeds that would have been reasonably available for such repair or restoration if Landlord had maintained such required insurance), Landlord may elect to perform such repair or restoration (to the extent of Landlord's work under Section 2.4 and Exhibit C) only to the extent of such insurance proceeds that are (or would have been) available (a "Partial Restoration"); and provided further, that upon completion of such Partial Restoration, Tenant's minimum monthly rental and Operating Expense obligations shall be permanently adjusted, for the balance of the remaining term of this Lease, in a fair and equitable manner reflecting any decrease in the size and/or functionality of the partially restored Premises for the uses contemplated hereunder. In the event of any termination of this Lease by Tenant or Landlord pursuant to this Section 13.1 or Section 13.2, Landlord agrees that to the extent any portion of the Premises can still be lawfully occupied and used by Tenant, Tenant shall have the right, at its option, to remain in and continue to use such portion of the Premises on a month-to-month holdover basis, terminable by Landlord or Tenant at any time on thirty (30) days' written notice (except that no such termination by Landlord may be effective sooner than six (6) months after the date of the damage, destruction or taking pursuant to which such termination arose), and Tenant's minimum monthly rental and Operating Expense obligations shall be adjusted, for the duration of such holdover occupancy, in a fair and equitable manner reflecting any decrease in the size and/or functionality of the remaining Premises for the uses contemplated hereunder. The provisions of the preceding sentence shall supersede any inconsistent provisions in Section 2.6 of this Lease. 13.2. Tenant's Rights. If any portion of the Premises is so taken by condemnation, Tenant may elect to terminate this Lease if the portion of the Premises taken is of such extent and nature as substantially to handicap, impede or permanently impair Tenant's use of the balance of the Premises. Tenant must exercise its right to terminate by giving notice to Landlord within thirty (30) days after the nature and extent of the taking have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than thirty (30) days nor later than ninety (90) days after Tenant has notified Landlord of its election to terminate, except that this Lease shall terminate on the date of taking if the date of taking falls on any date before the date of termination designated by Tenant. 13.3. Lease To Remain In Effect. If neither Landlord nor Tenant terminates this Lease as hereinabove provided, this Lease shall continue in full force and effect, except that minimum monthly rental and Tenant's Operating Expense obligations shall abate to the extent Tenant's use of the Premises is impaired for any period that any portion of the Premises is unusable or inaccessible because of a casualty or taking hereinabove described. Each party waives the provisions of Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial condemnation of the Premises. 13.4. Reservation Of Compensation. Landlord reserves, and Tenant waives and assigns to Landlord, all rights to any award or compensation for damage to the Premises, Building, Property and the leasehold estate created hereby, accruing by reason of any taking in any public improvement, condemnation or eminent domain proceeding or in any other manner by exercise of the right of eminent domain or of anything lawfully done by public authority, except that Tenant shall be entitled to any and all compensation or damages paid for or on account of Tenant's moving expenses, trade fixtures, equipment, personal property and any leasehold improvements in the Premises, the cost of which was borne by Tenant, but only to the extent of the then remaining unamortized value of such improvements computed on a straight-line basis over the term of this Lease. Tenant covenants to deliver such further assignments of the foregoing as Landlord may from time to time reasonably request. 13.5. Restoration Of Fixtures. If Landlord repairs or causes repair of the Premises after such damage or taking, Tenant at its sole expense shall repair and replace promptly all fixtures, equipment and other property of Tenant located at, in or upon the Premises and all additions, alterations and improvements and all other items installed or paid for by Tenant under this Lease that were damaged or taken, so as to restore the same to a condition reasonably consistent with the conduct of the permitted uses contemplated in Section 9.1 hereof. Tenant shall have the right to -21- 25 make modifications to the Premises, fixtures and improvements, subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed. In its review of Tenant's plans and specifications, Landlord may take into consideration the effect of the proposed modifications on the exterior appearance, the structural integrity and the mechanical and other operating systems of the Building. 14. DEFAULT 14.1. Events Of Default. The occurrence of any of the following shall constitute an event of default on the part of Tenant: (a) Abandonment. Abandonment of the Premises. Tenant waives any right Tenant may have to notice under Section 1951.3 of the California Civil Code, the terms of this subsection (a) being deemed such notice to Tenant as required by said Section 1951.3; (b) Nonpayment. Failure to pay, when due, any amount payable to Landlord hereunder, such failure continuing for a period of five (5) days after written notice of such failure; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 et seq., as amended from time to time; (c) Other Obligations. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subsection (b) hereof, such failure continuing for fifteen (15) days after written notice of such failure, or, if it is not possible to cure such default within fifteen (15) days, failure to commence cure within said fifteen (15) day period and thereafter to proceed diligently to complete cure; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 et seq., as amended from time to time; (d) General Assignment. A general assignment by Tenant for the benefit of creditors; (e) Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of thirty (30) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be reasonably necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease. Specifically, but without limiting the generality of the foregoing, such adequate assurances must include assurances that the Premises continue to be operated only for the use permitted hereunder. The provisions hereof are to assure that the basic understandings between Landlord and Tenant with respect to Tenant's use of the Premises and the benefits to Landlord therefrom are preserved, consistent with the purpose and intent of applicable bankruptcy laws; (f) Receivership. The employment of a receiver appointed by court order to take possession of substantially all of Tenant's assets or the Premises, if such receivership remains undissolved for a period of thirty (30) days; (g) Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of thirty (30) days after the levy thereof; (h) Insolvency. The admission by Tenant in writing of its inability to pay its debts as they become due, the filing by Tenant of a petition seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the filing by Tenant of an answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any such proceeding or, if within -22- 26 thirty (30) days after the commencement of any proceeding against Tenant seeking any reorganization or arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed; or (i) Cross-Default. Any event of default by Tenant under any other lease between Landlord and Tenant covering any other portion of the Property or of Phase V of the Center from time to time during the term of this Lease, to the extent such default continues beyond any applicable cure periods provided in the applicable lease, and to the extent Landlord therefore has (and exercises concurrently with any termination of this Lease) a right to terminate such other applicable lease; provided, however, that the default event set forth in this Section 14.1(i) shall not apply with respect to any default under a lease described herein to the extent Tenant has previously assigned or transferred all of its right, title and interest under the lease as to which such default then exists and, as a result of such transfer, the holder of the lessee's interest under the lease as to which such default then exists is not a person or entity which controls, is controlled by or is under common control with the person or entity which is then the holder of the lessee's interest under this Lease. 14.2. Remedies Upon Tenant's Default. (a) Upon the occurrence of any event of default described in Section 14.1 hereof, Landlord, in addition to and without prejudice to any other rights or remedies it may have, shall have the immediate right to re-enter the Premises or any part thereof and repossess the same, expelling and removing therefrom all persons and property (which property may be stored in a public warehouse or elsewhere at the cost and risk of and for the account of Tenant), using such force as may be lawful and reasonably necessary to do so (as to which Tenant hereby waives any claim for loss or damage that may thereby occur, except for any such loss or damage arising from the negligence or willful misconduct or omission of Landlord or its agents). In addition to or in lieu of such re-entry, and without prejudice to any other rights or remedies it may have, Landlord shall have the right either (i) to terminate this Lease and recover from Tenant all damages incurred by Landlord as a result of Tenant's default, as hereinafter provided, or (ii) to continue this Lease in effect and recover rent and other charges and amounts as they become due. (b) Even if Tenant has breached this Lease or abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under subsection (a) hereof and Landlord may enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a lessor under California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations), or any successor Code section. Acts of maintenance, preservation or efforts to relet the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interests under this Lease shall not constitute a termination of Tenant's right to possession. (c) If Landlord terminates this Lease pursuant to this Section 14.2, Landlord shall have all of the rights and remedies of a landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor Code section, which remedies include Landlord's right to recover from Tenant (i) the worth at the time of award of the unpaid rent and additional rent which had been earned at the time of termination, (ii) the worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided, (iii) the worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the cost of recovering possession of the Premises, expenses of reletting, including necessary repair, renovation and alteration of the Premises (provided that the cost of any such renovation or alteration shall be recoverable only to the extent reasonably necessary to make -23- 27 the Premises suitable for use and occupancy by the new tenant and shall be allocated reasonably between the unexpired portion of the term of this Lease at the date of termination thereof and the balance, if any, of the term of such new tenant's lease falling after the scheduled expiration date of the term of this Lease), reasonable attorneys' fees, and other reasonable costs. The "worth at the time of award" of the amounts referred to in clauses (i) and (ii) above shall be computed by allowing interest at ten percent (10%) per annum from the date such amounts accrued to Landlord. The "worth at the time of award" of the amounts referred to in clause (iii) above shall be computed by discounting such amount at one percentage point above the discount rate of the Federal Reserve Bank of San Francisco at the time of award. 14.3. Remedies Cumulative. All rights, privileges and elections or remedies of Landlord contained in this Article 14 are cumulative and not alternative to the extent permitted by law and except as otherwise provided herein. 15. SUBORDINATION, ATTORNMENT AND SALE 15.1. Subordination To Mortgage. (a) This Lease, and any sublease entered into by Tenant under the provisions of this Lease, shall be subject and subordinate to any ground lease, mortgage, deed of trust, sale/leaseback transaction or any other hypothecation for security now or hereafter placed upon the Building, the Property, or both, and the rights of any assignee of Landlord or of any ground lessor, mortgagee, trustee, beneficiary or leaseback lessor under any of the foregoing, and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. If any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee elects to have this Lease be an encumbrance upon the Property prior to the lien of its mortgage, deed of trust, ground lease or leaseback lease or other security arrangement and gives notice thereof to Tenant, this Lease shall be deemed prior thereto, whether this Lease is dated prior or subsequent to the date thereof or the date of recording thereof. Tenant, and any sublessee, shall execute such documents as may reasonably be requested by any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee to evidence the subordination herein set forth or to make this Lease prior to the lien of any mortgage, deed of trust, ground lease, leaseback lease or other security arrangement, as the case may be. Upon any default by Landlord in the performance of its obligations under any mortgage, deed of trust, ground lease, leaseback lease or assignment, Tenant (and any sublessee) shall attorn to the mortgagee, trustee, beneficiary, ground lessor, leaseback lessor or assignee thereunder upon demand and shall execute and deliver any instrument or instruments confirming the attornment herein provided for. Landlord shall obtain and deliver to Tenant, within ninety (90) days after mutual execution of this Lease, a written nondisturbance agreement from Northwestern Mutual Life Insurance Company (the beneficiary under the existing deed of trust on the Property) providing that Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default beyond the expiration of any applicable cure period and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms; such written nondisturbance agreement shall be substantially in the form of the written nondisturbance agreements previously entered into by Tenant and Northwestern Mutual Life Insurance Company with respect to Tenant's occupancy of other buildings on the Property (such as, for example, Building G). If Landlord fails to deliver such agreement to Tenant within the required time, Tenant shall have the right to terminate this Lease by written notice to Landlord at any time prior to Landlord's subsequent delivery (if any) of an executed agreement meeting such requirements. (b) Landlord specifically agrees that (i) Tenant may conclusively rely upon any written notice Tenant receives from any mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or assignee ("Beneficiary"), notwithstanding any claim by Landlord contesting the validity of any term or condition of such notice, including, but not limited to, any default by such Beneficiary or any default claimed by Landlord to have been committed by such Beneficiary, and (ii) Landlord shall not make any claim of any kind against Tenant or Tenant's leasehold interest with -24- 28 respect to amounts paid to any such Beneficiary by Tenant or any acts performed by Tenant pursuant to such written notice from any Beneficiary. (c) Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be required to subordinate its interest under this Lease unless (i) such subordination does not materially increase Tenant's obligations or materially decrease its rights under this Lease, and (ii) Landlord first obtains from the Beneficiary requesting such subordination a written agreement that provides that Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default beyond the expiration of any applicable cure period and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. 15.2. Sale Of Landlord's Interest. Upon sale, transfer or assignment of Landlord's entire interest in the Building and Property, Landlord shall be relieved of its obligations hereunder with respect to liabilities accruing from and after the date of such sale, transfer or assignment. 15.3. Estoppel Certificates. Tenant shall at any time and from time to time, within ten (10) days after written request by Landlord, execute, acknowledge and deliver to Landlord a certificate in writing stating: (i) that this Lease is unmodified and in full force and effect, or if there have been any modifications, that this Lease is in full force and effect as modified and stating the date and the nature of each modification; (ii) the date to which rental and all other sums payable hereunder have been paid; (iii) that to Tenant's actual knowledge Landlord is not in default in the performance of any of its obligations under this Lease, that Tenant has given no notice of default to Landlord and that to Tenant's actual knowledge, no event has occurred which, but for the expiration of the applicable time period, would constitute an event of default hereunder; and (iv) such other matters as may reasonably be requested by Landlord or any institutional lender, mortgagee, trustee, beneficiary, ground lessor, sale/leaseback lessor or prospective purchaser of the Property. Any such certificate provided under this Section 15.3 may be relied upon by any lender, mortgagee, trustee, beneficiary, assignee or successor in interest to Landlord, by any prospective purchaser, by any purchaser on foreclosure or sale, or by any grantee under a deed in lieu of foreclosure of any mortgage or deed of trust on the Property or Premises. Failure to execute and return within the required time any estoppel certificate requested hereunder shall be deemed to be an admission of the truth of the matters set forth in the form of certificate submitted to Tenant for execution. 15.4. Subordination to CC&R's. This Lease, and any permitted sublease entered into by Tenant under the provisions of this Lease, shall be subject and subordinate (a) to any declarations of covenants, conditions and restrictions recorded by Landlord with respect to the Property from time to time, provided that the terms of such declarations are reasonable and do not discriminate against Tenant relative to other tenants occupying portions of the Property, and (b) to the Declaration of Covenants, Conditions and Restrictions dated June 20, 1979 and recorded on July 5, 1979 as Instrument No. 79-130777, Alameda County Records, as amended from time to time (the "Master Declaration"), the provisions of which Master Declaration are an integral part of this Lease. Tenant agrees to execute, upon request by Landlord, any documents reasonably required from time to time to evidence the subordination provided in this Section 15.4. 16. SECURITY 16.1. Deposit. -25- 29 (a) Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of Fifty Thousand Four Hundred Eighty-Three and 75/100 Dollars ($50,483.75), which sum (the "Security Deposit") shall be held by Landlord as security for the faithful performance of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults, beyond the expiration of any applicable grace period, with respect to any provision of this Lease, including, without limitation, the provisions relating to the payment of rental and other sums due hereunder, Landlord shall have the right, but shall not be required, to use, apply or retain all or any part of the Security Deposit for the payment of rental or any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within thirty (30) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep any deposit under this Section separate from Landlord's general funds, and Tenant shall not be entitled to interest thereon. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit, or any balance thereof, shall be returned to Tenant or, at Tenant's direction, to the last assignee of Tenant's interest hereunder, at the expiration of the term of this Lease and within ten (10) days after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer all deposits then held by Landlord under this Section to Landlord's successor in interest, whereupon Tenant agrees to release Landlord from all liability for the return of such deposit or the accounting thereof. (b) In lieu of the Security Deposit, Tenant may deliver to Landlord at any time, and shall thereafter maintain in full force and effect during the remaining term of this Lease, an irrevocable standby letter of credit in the amount of the required Security Deposit, issued in favor of Landlord by a commercial bank or trust company approved in writing by Landlord (which approval shall not be unreasonably withheld or delayed), in form reasonably satisfactory to Landlord (the "Letter of Credit"), to be held by Landlord as security for the faithful performance of all the payment obligations of Tenant under this Lease during the term hereof, subject to the following terms and conditions (and upon delivery of any such Letter of Credit by Tenant, if Landlord is then already holding a cash Security Deposit from Tenant, Landlord shall promptly return such cash Security Deposit to Tenant): (i) Landlord shall be entitled (but shall not be required) to draw against the Letter of Credit and receive and retain proceeds thereof upon any default by Tenant, beyond the expiration of any applicable cure periods, in the payment of any rent or other amounts required to be paid by Tenant under this Lease (a "monetary default") or upon any other default, beyond the expiration of any applicable cure periods, in Tenant's obligations under this Lease (a "non-monetary default"). The amount of any such draw shall be, with respect to a monetary default, the amount due from Tenant to Landlord, and, in the event of a non-monetary default, an amount estimated by Landlord, in its reasonable discretion, to be the amount necessary to cure such default. Within thirty (30) days following any draw by Landlord against the Letter of Credit, Tenant shall cause the amount of the Letter of Credit to be restored to the full amount of the required Security Deposit pursuant to paragraph (a) above. Landlord's entitlement to draw against the Letter of Credit shall not limit or impair in any way Landlord's other rights and remedies, following any default by Tenant, under any other applicable provision of this Lease or under applicable law. (ii) Notwithstanding any provisions of subparagraph (i) above, Landlord shall also be entitled (but shall not be required) to draw against the then remaining balance of the Letter of Credit in full and to receive the entire proceeds of such draw if the Letter of Credit will expire as of a date prior to the expiration of the initial term of this Lease and Tenant fails to provide to Landlord an extension or replacement of such Letter of Credit, in at least the amount of the required Security Deposit, at least thirty (30) days prior to the scheduled expiration date of such existing Letter of Credit. (iii) Any amount drawn or received by Landlord pursuant to a draw under the Letter of Credit that is not immediately used or applied by Landlord to remedy a default -26- 30 by Tenant shall be retained by Landlord as a cash Security Deposit on the terms set forth in paragraph (a) above. 17. MISCELLANEOUS 17.1. Notices. All notices, consents, waivers and other communications which this Lease requires or permits either party to give to the other shall be in writing and shall be deemed given when delivered personally (including delivery by private courier or express delivery service) or when delivered by United States mail if sent via registered or certified mail, postage prepaid, or upon refusal of a party to accept delivery of a notice sent in accordance with this Section, in each instance addressed to the parties at their respective addresses as follows: To Tenant: Aradigm Corporation 3929 Point Eden Way Hayward, CA 94545 Attn: Richard P. Thompson, President and CEO with a copy to: Norman Halleen, Vice President Finance & CFO Aradigm Corporation 3929 Point Eden Way Hayward, CA 94545 and a copy to: Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, CA 94111 Attn: Dina E. Alexander, Esq. To Landlord: Hayward Point Eden I Limited Partnership c/o Britannia Property Management, Inc. 1939 Harrison Street, Suite 715 Park Plaza Building Oakland, CA 94612 Attn: T. J. Bristow with a copy to: Slough Estates USA Inc. 33 West Monroe St., Suite 2000 Chicago, IL 60603 Attn: Bill Rogalla and a copy to: Folger Levin & Kahn LLP Embarcadero Center West 275 Battery Street, 23rd Floor San Francisco, CA 94111 Attn: Donald E. Kelley, Jr. or to such other address as may be contained in a notice at least fifteen (15) days prior to the address change from either party to the other given pursuant to this Section. Rental payments and other sums required by this Lease to be paid by Tenant shall be delivered to Landlord at Landlord's address provided in this Section, or to such other address as Landlord may from time to time specify in writing to Tenant, and shall be deemed to be paid only upon actual receipt. 17.2. Successors And Assigns. The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the original Landlord named herein and each successive Landlord under this Lease shall be liable only for obligations accruing during the period of its ownership of the Property, which liability shall survive, but future liability under the Lease shall then pass to the successor lessor. -27- 31 17.3. No Waiver. The failure of either party to seek redress for violation, or to insist upon the strict performance, of any covenant or condition of this Lease shall not be deemed a waiver of such violation, or prevent a subsequent act which would originally have constituted a violation from having all the force and effect of an original violation. 17.4. Severability. If any provision of this Lease or the application thereof is held to be invalid or unenforceable, the remainder of this Lease or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable shall not be affected thereby, and each of the provisions of this Lease shall be valid and enforceable, unless enforcement of this Lease as so invalidated would be unreasonable or grossly inequitable under all the circumstances or would materially frustrate the purposes of this Lease. 17.5. Litigation Between Parties. In the event of any litigation between the parties hereto growing out of this Lease, the prevailing party shall be reimbursed for all reasonable costs, including, but not limited to, reasonable accountants' fees and attorneys' fees. "Prevailing party" within the meaning of this Section shall include, without limitation, a party who dismisses an action for recovery hereunder in exchange for payment of the sums allegedly due, performance of covenants allegedly breached or consideration substantially equal to the relief sought in the action. 17.6. Surrender. A voluntary or other surrender of this Lease by Tenant, or a mutual termination thereof between Landlord and Tenant, shall not result in a merger but shall, at the option of Landlord, operate either as an assignment to Landlord of any and all existing subleases and subtenancies, or a termination of all or any existing subleases and subtenancies. This provision shall be contained in any and all assignments or subleases made pursuant to this Lease. 17.7. Interpretation. The provisions of this Lease shall be construed as a whole, according to their common meaning, and not strictly for or against Landlord or Tenant. The captions preceding the text of each Section and subsection hereof are included only for convenience of reference and shall be disregarded in the construction or interpretation of this Lease. 17.8. Entire Agreement. This written Lease, together with the exhibits hereto, contains all the representations and the entire understanding between the parties hereto with respect to the subject matter hereof. Any prior correspondence, memoranda or agreements are replaced in total by this Lease and the exhibits hereto, except as otherwise expressly provided herein. This Lease may be modified only by an agreement in writing signed by each of the parties. 17.9. Governing Law. This Lease and all exhibits hereto shall be construed and interpreted in accordance with and be governed by all the provisions of the laws of the State of California. 17.10. No Partnership. Nothing contained in this Lease shall be construed as creating any type or manner of partnership, joint venture or joint enterprise with or between Landlord and Tenant. 17.11. Financial Information. From time to time Tenant shall promptly provide directly to prospective lenders and purchasers of the Property designated by Landlord such financial information pertaining to the financial status of Tenant as Landlord may reasonably request; provided, Tenant shall be permitted to provide such financial information in a manner which Tenant deems reasonably necessary to protect the confidentiality of such information. In addition, from time to time, Tenant shall provide Landlord with such financial information pertaining to the financial status of Tenant as Landlord may reasonably request. Landlord agrees that all financial information supplied to Landlord by Tenant shall be treated as confidential material, and shall not be disseminated to any person or entity (including any entity affiliated with Landlord, except as otherwise expressly provided below) without Tenant's prior written consent, except that Landlord shall be entitled to provide such information, subject to reasonable precautions to protect the confidential nature thereof, (i) to Landlord's partners and professional advisors, solely for use in connection with Landlord's execution and enforcement of this Lease, and (ii) to prospective lenders and/or purchasers of the Property, solely for use in connection with their bona fide consideration of -28- 32 a proposed financing or purchase of the Property, provided that such prospective lenders and/or purchasers are not engaged in businesses directly competitive with the business then being conducted by Tenant. For purposes of this Section, without limiting the generality of the obligations provided herein, (A) it shall be deemed reasonable for Landlord to request copies of Tenant's most recent audited annual financial statements, or, if audited statements have not been prepared, unaudited financial statements for Tenant's most recent fiscal year, accompanied by a certificate of Tenant's chief financial officer that such financial statements fairly present Tenant's financial condition as of the date(s) indicated, and (B) during any period when Tenant has a class of publicly-traded securities and is a reporting company under the Securities Exchange Act of 1934, it shall be deemed sufficient compliance with Tenant's obligations under this Section for Tenant to provide, upon Landlord's request, copies of Tenant's most recent quarterly and annual filings (and any Form 8-K filings since the most recent of such quarterly or annual filings) with the Securities and Exchange Commission. Landlord and Tenant recognize the need of Tenant to maintain the confidentiality of information regarding its financial status and the need of Landlord to be informed of, and to provide to its partners and to prospective lenders and purchasers of the Property financial information pertaining to, Tenant's financial status. Landlord and Tenant agree to cooperate with each other in achieving these needs within the context of the obligations set forth in this Section. 17.12. Costs. If Tenant requests the consent of Landlord under any provision of this Lease for any act that Tenant proposes to do hereunder, including, without limitation, assignment or subletting of the Premises, Tenant shall, as a condition to doing any such act and the receipt of such consent, reimburse Landlord promptly for any and all reasonable costs and expenses incurred by Landlord in connection therewith, including, without limitation, reasonable attorneys' fees. 17.13. Time. Time is of the essence of this Lease, and of every term and condition hereof. 17.14. Rules And Regulations. Tenant shall observe and obey such non-discriminatory rules and regulations as Landlord may promulgate from time to time for the safety, care, cleanliness, order and use of the Premises, the Building and the Property, provided that any such rules and regulations shall not unreasonably interfere with Tenant's access to, or use of, the Premises. 17.15. Brokers. Landlord and Tenant each represents and warrants to the other that no broker participated in the consummation of this Lease, and each agrees to indemnify, defend and hold the other party harmless against any liability, cost or expense, including, without limitation, reasonable attorneys' fees, arising out of any claims for brokerage commissions or other similar compensation in connection with any conversations, prior negotiations or other dealings by the indemnifying party with any such other broker or other claimant. 17.16. Memorandum Of Lease. At any time during the term of this Lease, either party, at its sole expense, shall be entitled to record a memorandum of this Lease and, if either party so elects, both parties agree to cooperate in the preparation, execution, acknowledgment and recordation of such document in reasonable form. 17.17. Corporate Authority. Each of the persons signing this Lease on behalf of Landlord and Tenant, respectively, warrants that he or she is fully authorized to do so and, by so doing, to bind Landlord or Tenant, as applicable. 17.18. Execution and Delivery. Submission of this Lease for examination or signature by Tenant does not constitute an agreement or reservation of or option for lease of the Premises. This instrument shall not be effective or binding upon either party, as a lease or otherwise, until executed and delivered by both Landlord and Tenant. This Lease may be executed in one or more counterparts and by separate parties on separate counterparts, but each such counterpart shall constitute an original and all such counterparts together shall constitute one and the same instrument. 17.19. Stock Warrants. As a material inducement to Landlord's execution of this Lease, within thirty (30) days after mutual execution of this Lease Tenant shall deliver to Landlord, subject -29- 33 to compliance with all applicable securities laws, a warrant or warrants, registered in the name(s) of Landlord or its designee(s) (provided that such designee(s) are partners of Landlord or are shareholders, members or affiliates, directly or indirectly, of Landlord or of one or more of its partners or are approved in writing by Tenant, which approval shall not be unreasonably withheld or delayed) and in form and substance reasonably satisfactory to Landlord, providing for the purchase of an aggregate of Twenty-Five Thousand (25,000) shares of Tenant's common stock. Such warrants shall have an exercise price equal to one hundred twenty-five percent (125%) of the closing market price of Tenant's common stock on the date of mutual execution of this Lease, shall include reasonable registration rights and shall be exercisable at any time up from the First Commencement Date until the seventh (7th) anniversary of the date of mutual execution of this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first set forth above. "Landlord" "Tenant" HAYWARD POINT EDEN I LIMITED ARADIGM CORPORATION, a California PARTNERSHIP, a Delaware limited corporation partnership By: Slough Point Eden Inc., a Delaware By: corporation, Its General Partner -------------------------------- Richard P. Thompson, President By: ------------------------------- By: ------------------------------- Its: Norman Halleen, VP Finance and ------------------------------ CFO -30- 34 EXHIBITS EXHIBIT A Location of Premises EXHIBIT B Real Property Description EXHIBIT C Construction EXHIBIT D Acknowledgment of Third Commencement Date 35 EXHIBIT A LOCATION OF PREMISES [MAP] 36 REAL PROPERTY DESCRIPTION Improved real property located in the City of Hayward, County of Alameda, State of California, more particularly described as follows: Lots 2, 3, 4, 5 and 7, Tract 4019, filed June 28, 1979, Map Book 110, Pages 97, 98 and 99, Alameda County Records. Subject to easements, restrictions and other matters of record affecting title. EXHIBIT B 37 CONSTRUCTION Landlord, at its sole cost and expense, shall undertake and diligently complete, subject to delays for causes beyond its reasonable control, construction of tenant improvements in the First Space, Second Space and Third Space in accordance with plans and specifications to be mutually approved by Landlord and Tenant, which approval shall not be unreasonably withheld or delayed; provided, however, that the parties may by mutual agreement, as contemplated below and in Section 2.4(c) of the Lease, determine instead that Tenant will contract for the design and/or construction of the tenant improvements subject to reimbursement by Landlord to the extent provided below. The contemplated tenant improvements under Section 2.4 and this Exhibit C shall also include the proposed linkage between Buildings G and E, subject to receipt of required approvals from applicable governmental authorities, and the entire direct costs (as described below) of such linkage shall be chargeable against the Tenant Improvement Allowance (as defined below) or, to the extent they exceed (in combination with the other tenant improvements) the Tenant Improvement Allowance, shall be payable by Tenant as set forth below. All such work hereunder shall be performed in a neat and workmanlike manner and shall conform to all applicable governmental codes, laws and regulations in force at the time such work is completed. Landlord and Tenant shall both use their best endeavors to develop, review and approve all working drawings, final drawings, specifications, changes (if applicable) and other matters promptly, diligently and within such time periods as may be reasonably requested by the other party or by the architects, contractors and other professionals engaged in the design and construction of the work. Landlord has agreed to provide a tenant improvement allowance of up to Seventy Dollars ($70.00) per square foot, or Two Million Eight Hundred Twenty-Seven Thousand Ninety Dollars ($2,827,090) in the aggregate for the 40,387 square feet of space in the Premises, for the tenant improvements described in the initial paragraph hereof (the "Tenant Improvement Allowance"). The total direct costs of design and construction of the tenant improvement work in the Premises under Section 2.4 and this Exhibit C, including, but not limited to, payments to contractors or subcontractors for labor, materials and profits or overhead, permit fees and charges, sales and use taxes, testing and inspection costs, architects', engineers' and other consulting and professional fees, costs of power, water and other utilities and of collection and removal of debris, and all other related costs incurred in connection with the design and construction of the tenant improvement work (collectively, "Direct Costs"), shall be chargeable against the Tenant Improvement Allowance and shall result in an obligation of Tenant to pay Additional Rent pursuant to Section 3.1(c) of the Lease. All such Direct Costs of the tenant improvements, as incurred and payable from time to time, shall be payable eighty percent (80%) by Landlord (and charged against the Tenant Improvement Allowance) and twenty percent (20%) by Tenant, until (if ever) the aggregate amounts expended by Landlord for such Direct Costs have reached the maximum Tenant Improvement Allowance. Tenant's 20% share of such Direct Costs shall be payable by Tenant, and any such Direct Costs in excess of the Tenant Improvement Allowance shall be payable solely by Tenant, each within thirty (30) days after written request by Landlord accompanied by evidence reasonably satisfactory to Tenant of the nature and amount of the expense or work for which such payment is requested; provided, however, that Tenant shall have no liability for Direct Costs or excess Direct Costs to the extent such Direct Costs are attributable to changes in the Approved Plans and Specifications (as hereinafter defined) for which Tenant's approval was required under this Exhibit C and which were nevertheless implemented without Tenant's approval. Notwithstanding any contrary provisions contained in the Lease, Landlord agrees that Tenant shall have no obligation to remove, at the expiration of the term of the lease, any improvements constructed by Landlord pursuant to this Exhibit C. The general contractor for the tenant improvements shall be any licensed and qualified general contractor selected by Tenant, subject to written approval by Landlord (which approval shall not be unreasonably withheld or delayed). The architect for the tenant improvements ("Architect") shall be any licensed and qualified architect selected by Tenant, subject to written approval by Landlord (which approval shall not be unreasonably withheld or delayed). The costs and fees of Architect with respect to the tenant improvements (but not any such fees with respect to the building EXHIBIT C (PAGE 1 OF 2) 38 shell or any common area improvements) shall be Direct Costs of the tenant improvements and, to the extent paid by Landlord, shall be chargeable against the Tenant Improvement Allowance. Landlord and Tenant shall determine by mutual agreement whether the contracts with Architect, with the general contractor for the tenant improvements and with other consultants or professionals with respect to the tenant improvements shall be entered into by Landlord or Tenant. If such contracts are entered into by Tenant, then (i) Section 2.4(c) of the Lease shall define Landlord's obligations with respect to the work performed under such contracts and (ii) to the extent Landlord is responsible under this Exhibit C for the costs incurred under such contracts, Landlord shall make payments to Tenant or to the applicable parties providing goods and services, as Landlord and Tenant may agree, on a monthly or other regular basis, subject to receipt of such invoices, lien releases, certifications and other documentation as Landlord may reasonably require. Landlord and Tenant shall jointly cause Architect to prepare initial plans and specifications for the tenant improvements in the Premises, which plans and specifications shall be mutually approved (such approval not to be unreasonably withheld or delayed) by Landlord and Tenant (the "Approved Plans and Specifications"). Landlord and Tenant shall then jointly cause Architect to produce detailed working drawings, based on the Approved Plans and Specifications, for submission to the City of Hayward for building permit approval. Any material changes from the Approved Plans and Specifications shall be subject to mutual approval (not unreasonably withheld or delayed) by Landlord and Tenant, provided, however, that any changes required from time to time in the Approved Plans and Specifications, working drawings and/or final plans and specifications as a result of applicable law or governmental requirements, or at the insistence of any other third party whose approval may be required with respect to such improvements, or as a result of unanticipated conditions encountered in the course of construction, may be implemented by Landlord after prior notice to Tenant (if Landlord is the contracting party who is responsible for construction of the applicable improvements), but shall not require Tenant's approval or consent. All material subcontracts for the tenant improvements shall be competitively bid under the joint direction of Landlord and Tenant, except as otherwise provided herein. Landlord and Tenant shall consult with one another regarding all design and cost matters relating to the tenant improvements, including (but not limited to) bidding of material subcontracts as described in the preceding sentence, and both parties shall have access on an "open book" basis to all bids, contracts and other cost-related information regarding the tenant improvements. Without limiting the generality of the foregoing, cost aspects of any changes requested by Tenant from time to time in the Approved Plans and Specifications, working drawings and/or final plans and specifications shall be subject to mutual approval by Landlord and Tenant; cost aspects of any changes required from time to time in the Approved Plans and Specifications, working drawings and/or final plans and specifications as a result of applicable law or governmental requirements, or at the insistence of any other third party whose approval may be required with respect to such improvements, or as a result of unanticipated conditions encountered in the course of construction, shall not require Tenant's approval or consent, but Tenant shall at all times have access to the details of the cost aspects of such changes (including estimates and actual expenses) for information purposes. Notwithstanding any other provisions of this paragraph, however, to the extent Tenant contracts directly with the general contractor for any of the tenant improvements, Tenant shall not be required to obtain Landlord's prior approval of or joint participation in the bidding of material subcontracts to the extent Tenant reasonably determines that such prior approval or joint participation is impractical as a result of the construction timetable and timing requirements for the work contracted for by Tenant; but Tenant shall nevertheless keep Landlord as fully informed as the circumstances reasonably permit and shall in all events provide Landlord with full "open book" access at all reasonable times, on request by Landlord, to all bids, contracts and other information relating to the tenant improvements contracted for by Tenant. EXHIBIT C (PAGE 2 OF 2) 39 ACKNOWLEDGMENT OF THIRD COMMENCEMENT DATE This Acknowledgment is executed as of _________________, 200__, by HAYWARD POINT EDEN I LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and ARADIGM CORPORATION, a California corporation ("Tenant"), pursuant to Section 2.5 of the Lease dated July 1, 2000 between Landlord and Tenant (the "Lease") covering premises located at 3930 Point Eden Way, Hayward, CA 94545 (the "Premises"). Landlord and Tenant hereby acknowledge and agree as follows: 1. The Third Commencement Date under the Lease is _______________, 200__. 2. The termination date under the Lease shall be May 1, 2014, subject to any applicable provisions of the Lease for any early termination thereof. 3. The square footage of the Premises is 40,387 square feet. 4. The final amount of the Tenant Improvement Allowance expended by Landlord for tenant improvements for the Premises is $_______________. Based on that cost, the applicable monthly Additional Rent required under Section 3.1(c) of the Lease is as follows: $_______________. [If the foregoing information is not available at the date of execution of this Acknowledgement, the necessary determinations shall be made by the parties at such time as the information becomes available in accordance with the terms of the Lease and shall be reflected in a letter agreement or other appropriate written instrument between the parties.] 5. Tenant has accepted all of the Premises and acknowledges the satisfactory completion of all improvements therein (if any) required to be made by Landlord, subject only to any applicable "punch list" or similar procedures specifically provided under the Lease. EXECUTED as of the date first set forth above. "Landlord" "Tenant" HAYWARD POINT EDEN I LIMITED ARADIGM CORPORATION, a California PARTNERSHIP, a Delaware limited corporation partnership By: Slough Point Eden Inc., a Delaware By: corporation, Its General Partner ------------------------------- Norman Halleen, VP Finance and CFO By: ------------------------------- Its: ------------------------------ EXHIBIT D EX-27.1 4 f66816ex27-1.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 44,081 9,382 1,761 0 0 56,225 24,433 7,762 73,432 14,122 0 0 0 145,325 (100,175) 73,432 0 15,219 0 41,304 0 0 (1,199) 0 0 0 0 0 0 (24,886) (1.47) (1.47)
-----END PRIVACY-ENHANCED MESSAGE-----