-----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, Kz9SEnPZFkydr+3gkiUJc82N3UNQchICQ8PmOcuH1hvY5lk0N7aWsqlc0bczzms5 HBD5JMD9jONkv9382HzDDw== 0000911216-97-000016.txt : 19970929 0000911216-97-000016.hdr.sgml : 19970929 ACCESSION NUMBER: 0000911216-97-000016 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALATIN TECHNOLOGIES INC CENTRAL INDEX KEY: 0000911216 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 954078884 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22686 FILM NUMBER: 97686371 BUSINESS ADDRESS: STREET 1: 214 CARNEGIE CENTER STREET 2: SUITE 100 CITY: PRINCETON STATE: NJ ZIP: 08540 BUSINESS PHONE: 6095201911 MAIL ADDRESS: STREET 1: 214 CARNAGIE CENTER STREET 2: SUITE 100 CITY: PRINCETON STATE: NJ ZIP: 08540 FORMER COMPANY: FORMER CONFORMED NAME: INTERFILM INC DATE OF NAME CHANGE: 19930825 10KSB 1 ANNUAL REPORT ON FORM 10-KSB - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-22686 ------------------------------------ PALATIN TECHNOLOGIES, INC. (Name of small business issuer in its charter) Delaware 95-4078884 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 214 Carnegie Center - Suite 100 Princeton, New Jersey 08540 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (609) 520-1911 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or by any amendment to this Form 10-KSB. |_| The issuer's revenues for the period ended June 30, 1997 were $722,357. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of September 23, 1997, was $16,903,608. As of September 23, 1997, 3,041,111 shares of the registrant's common stock, par value $.01 per share, were outstanding. Documents incorporated by reference: None. Transitional Small Business Disclosure Format: Yes __ No X - --------------------------------------------------------------------------------
Table of Contents PART I Page Item 1. Description of Business.......................................................................... 1 Item 2. Description of Property............................................................................ 25 Item 3. Legal Proceedings................................................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders............................................... 26 PART II Item 5. Market for Common Equity and Related Stockholder Matters.......................................... 27 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 30 Item 7. Financial Statements............................................................................... 33 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. 34 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.................................................. 34 Item 10. Executive Compensation............................................................................. 37 Item 11. Security Ownership of Certain Beneficial Owners and Management..................................... 42 Item 12. Certain Relationships and Related Transactions..................................................... 48 Item 13. Exhibits and Reports on Form 8-K................................................................... 49 Signatures ................................................................................................... 54
Unless the context otherwise requires,(i) all references to the "Company" or "Palatin" include Palatin Technologies, Inc. and its wholly-owned subsidiary, RhoMed Incorporated ("RhoMed"), (ii) all references to the Company's activities, results of operations and financial condition prior to June 25, 1996 relate to RhoMed and (iii) all references to the Company's common stock, $.01 par value (the "Common Stock") are to the Company's Common Stock after giving effect to the 1-for-10 reverse split of the Common Stock effected on July 19, 1996 and the 1-for-4 reverse split of the Common Stock effected on September 5, 1997. See Item 1 and Item 4 in this Annual Report on Form 10-KSB (this "Report"). Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: delays in product development; problems or delays with clinical trials; failure to receive or delays in receiving regulatory approval; lack of enforceability of patents and proprietary rights; lack of reimbursement; general economic and business conditions; industry capacity; industry trends; competition; material costs and availability; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and other factors referenced in this Report. When used in this Report, statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "anticipates," "plans," "intends," "expects" and similar expressions are intended to identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL The Company is a development-stage biopharmaceutical company dedicated to developing and commercializing products and technologies for diagnostic imaging, cancer therapy and ethical drug development utilizing peptide, monoclonal antibody and radiopharmaceutical technologies. The Company concentrates its activities in two technology areas, each of which the Company believes may be used to develop products with potential diagnostic and therapeutic applications. These technologies involve the Company's (i) patent-pending Metal Ion-induced Distinctive Array of Structures ("MIDAS(TM)") metallopeptide technology ("MIDAS technology") and (ii) patented and patent-pending direct radiolabeling technology. The Company believes that the MIDAS technology represents a platform technology which may enable the design and synthesis of novel peptide analogs or mimics. Further, the Company believes that its MIDAS technology may provide the Company with the flexibility to generate its own pharmaceutical products, and the ability to target and complement existing product portfolios and technological bases of Page 1 other companies. The Company intends to seek to enter into collaborative arrangements to assist in development, manufacturing and marketing of certain proposed products utilizing the MIDAS technology. The Company has entered into a license option agreement as to certain proposed products based on MIDAS technology. See "MIDAS Technology" in this Item 1. The Company is developing two proposed products incorporating its direct radiolabeling technology, (i) LeuTech(TM), an infection and inflammation imaging product, and (ii) PT-5, a radiotherapeutic peptide somatostatin analog for cancer therapy. The Company is devoting substantial efforts and resources to the development of LeuTech, which the Company believes will be its first proposed product to enter Company-sponsored clinical trials. The Company anticipates seeking one or more marketing partners for LeuTech prior to product approval. See "Direct Radiolabeling Technology" in this Item 1. The Company is at an early stage of development and has not yet completed the development of any products based on either its MIDAS technology or its direct radiolabeling technology. Accordingly, the Company has not begun to market or generate revenues from the commercialization of any such products. It will be a number of years, if ever, before the Company will recognize significant revenues from product sales or royalties. The Company's technologies and products under development will require significant time-consuming and costly research, development, pre-clinical studies, clinical testing, regulatory approval and significant additional investment prior to their commercialization, which may never occur. There can be no assurance that the Company's research and development programs will be successful, that its products will exhibit the expected biological results in humans, will prove to be safe and efficacious in clinical trials or will obtain the required regulatory approvals or that the Company or its collaborators will be successful in obtaining market acceptance of any of the Company's products. There can be no assurance that the Company will be successful in entering into strategic alliances or collaborative arrangements on commercially reasonable terms, if at all, or that such arrangements will be successful, or that the parties with which the Company will establish arrangements will perform their obligations under such arrangements. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing. The failure by the Company to address successfully such problems and delays would have a material adverse effect on the Company. In addition, no assurance can be given that proprietary rights of third parties will not preclude the Company from marketing its proposed products or that third parties will not market superior or equivalent products. MIDAS TECHNOLOGY Role and Function of Peptides. Peptides, short chains of amino acids, play important roles in regulating a variety of biological functions. Natural peptides function by conforming or bending to fit specific molecules on cell surfaces, called receptors, thereby signaling the cell to initiate a biological activity. Some important biological functions that are affected in this manner include overall growth and behavior, inflammatory responses, immune responses and wound healing. In order to effectively regulate cell signaling, a peptide must bind to its target receptor with high affinity. The affinity of a peptide for its target receptor is highly dependent on its three-dimensional shape or conformation. Many naturally occurring peptides are flexible and can take on multiple conformations, allowing them to interact with more than one type of cell receptor, and to control multiple functions within the body. However, when such peptides are used as drugs, this multiple reactivity is a disadvantage as it may lead to side effects. The ability to construct high-affinity, receptor-specific peptides offers a significant opportunity to develop potent receptor-specific drugs. Page 2 Introduction to MIDAS Technology. The Company believes that its patent-pending MIDAS technology can be used to rationally design and produce receptor-specific drugs. Using MIDAS, highly stable metallopeptide complexes are formed, in which the metal ion locks or constrains the peptide into a specific conformation. By designing MIDAS peptides to mimic the conformation required for a specific receptor, a stable, receptor-specific drug, with high affinity and enhanced biological activity, can be made. Radiopharmaceutical products, which may be diagnostic or therapeutic, may be developed using radioactive metal ions in MIDAS peptides. Non-radioactive metal ions may be used in the development of biopharmaceutical MIDAS peptides. The Company is engaged in research and development on a number of product opportunities for its MIDAS technology, including use as a thrombosis imaging agent, an infection imaging agent and an immunostimulatory agent. No prediction can be made, however, as to when or whether the areas in which there are ongoing MIDAS technology research projects will yield scientific discoveries, or whether such research projects will lead to commercial products Research Projects. Certain pre-clinical work on development of MIDAS-based products has been supported, in part, by three Phase I grants for $100,000, $93,948 and $94,970 under the Small Business Innovative Research ("SBIR") program awarded to the Company by the National Institutes of Health of the Department of Health and Human Services ("NIH"). The Company intends to apply for Phase II SBIR grants, each in an amount of up to $750,000, although there can be no assurance that any Phase II grant will be awarded. Other Potential Opportunities. The Company is evaluating a number of product opportunities for its MIDAS technology, and believes that this technology may have medical applications in a variety of areas, including immune disorders, cancers and cardiology. The Company intends to expand research and development of MIDAS technology applications primarily through strategic alliances with other entities. No assurances can be made regarding the establishment or the timing of such alliances, and the failure to establish such alliances on a timely basis could limit the Company's ability to develop MIDAS technology and could have a material adverse effect on the Company. The Company expects to devote resources to expand research and development of MIDAS technology to the extent funding is available. Option Agreement with Nihon. The Company entered into a License Option Agreement (the "Option Agreement") with Nihon Medi-Physics Ltd. ("Nihon"), a Japanese developer and manufacturer of radiopharmaceutical drugs, pursuant to which the Company received an initial payment of $1,000,000 before Japanese withholding taxes of $100,000. Pursuant to the Option Agreement (i) Nihon has an option to exclusively license certain jointly developed radiopharmaceutical diagnostic products based on the Company's MIDAS technology and (ii) Nihon can maintain its option by making certain milestone payments based on progress in product development. Nihon may exercise its right to negotiate a license agreement at any time upon notice and payment of additional monies to the Company. There can be no assurance that future payments provided for in the Option Agreement will be made, that the Company and Nihon will ever enter into a definitive license agreement, or that a definitive strategic alliance between the Company and Nihon will result in the development or commercialization of any product. In the event that Nihon gives notice of its right to negotiate a license agreement, and the parties cannot agree on terms of such license agreement, the Company may be required to repay $550,000 to Nihon. Failure to enter into a definitive license agreement, or being required to repay certain monies to Nihon, may have a material adverse effect on the Company. See Item 6. Page 3 DIRECT RADIOLABELING TECHNOLOGY The Company has developed and patented radiolabeling technologies for the direct radiolabeling of antibodies, peptides and other proteins with diagnostic and therapeutic radioisotopes. LeuTech Diagnostic Imaging Product. LeuTech, a proposed product under development that utilizes direct radiolabeling technology, is a murine (or mouse) monoclonal antibody-based product designed to be labeled with the diagnostic radioisotope technetium-99m. When labeled with technetium-99m, LeuTech is intended to be used for diagnosis of infections, occult abscesses, sites of inflammatory disease and other conditions involving high concentrations of white blood cells. The Company believes that LeuTech can be used for the rapid diagnosis of a variety of difficult to diagnose infections and occult abscesses. Occult abscesses are hidden infections that are generally characterized as being highly localized. Examples of typical occult abscesses include infections of the intra-abdominal area, such as intestinal, spleen, liver or urinary tract abscesses, as well as bone, prosthetic and other abscesses. In a typical abscess, as in most infections, large numbers of white blood cells congre gate at the site of the infection. Thus, if the location of concentrations of white blood cells is known, the site of the infection is also known. It is crucial in the diagnosis and treatment of occult abscesses that the location of the infection be determined, as location will frequently determine the type of therapy which is appropriate. The most specific procedure currently available for nuclear medicine imaging of sites of infection involves removal of blood from the patient, isolating white blood cells from the patient's blood, radiolabeling the white blood cells and injecting the radiolabeled white blood cells back into the patient. The radiolabeled white blood cells then localize at the site of the infection, and can be detected using nuclear medicine diagnostic equipment. This procedure is expensive, involves risks to patients and technicians associated with blood handling, is difficult to perform and generally takes at least twelve hours. LeuTech has been formulated as a lyophilized, or freeze-dried, kit containing the modified antibody and reagents required for the radiolabeling process. Prior to use, LeuTech will be labeled with technetium-99m by a radiopharmacy or by a hospital's nuclear medicine department. LeuTech is designed to bind, in the body, to white blood cells already present at the site of the infection or circulating in the blood stream. Therefore, LeuTech does not require handling or processing of patient blood. Preliminary clinical trials have been conducted under an Investigational New Drug Application ("IND") held in the name of an investigator, using purified antibody or kits provided by the Company. Forty patient studies have been completed at UCLA/Harbor Medical Center in Los Angeles, with images obtained in a variety of diseases, including acute and suspected appendicitis, pulmonary infections and other abdominal infections. In seven cases satisfactory images were not obtained, due primarily to labeling or product formulation failures with early kit formulations. In some cases, diagnostic images have been obtained within five minutes of administration of LeuTech, and in all cases in which a definitive diagnosis could be made, diagnostic images have been obtained within 90 minutes. An additional seventeen patient studies were completed in Germany at the University of Gottingen, using kits manufactured by a third party to the Company's specifications, with images obtained in osteomyelitis and soft tissue infections. The Company has entered into an exclusive license agreement with The Wistar Institute of Anatomy and Biology ("Wistar Institute") to use the antibody and cell line used for LeuTech for a defined field of use. Failure to meet the performance criteria for any reason or any other event of default under the license agreement leading to termination of the license agreement with Wistar Institute would have a material Page 4 adverse effect on the Company. While the Company has negotiated a long-term contractual arrangement for the manufacture of the purified antibody necessary for LeuTech, there can be no assurance that such contractor will be able to successfully manufacture purified antibody for LeuTech on a sustained basis, that such contractor will remain in the contract manufacturing business for the time required by the Company, or that the Company will be able to enter into such contractual arrangements as to other steps and components required to manufacture LeuTech. To date, the Company has only manufactured LeuTech in lots preparatory to initiating clinical trial use, and has not determined whether commercial quantities of LeuTech in conformity with these standards can be manufactured on a sustained basis at an acceptable cost. Such manufacture must be done under good manufacturing practices ("GMP") requirements prescribed by the United States Food and Drug Administration ("FDA") and other agencies. Certain steps in the manufacture of LeuTech, including contract manufacture of purified antibody, vialing and lyophilization, have been done under GMP. The Company intends to file an IND application on LeuTech to initiate clinical trials on one or more selected indications in the second half of 1997, and to complete Phase III clinical trials and file regulatory applications to market with the FDA in the second half of 1998. There can be no assurance that the Company's LeuTech development program will be successful, that the FDA will permit the Company's planned clinical trials to proceed, that LeuTech will prove to be safe and efficacious in clinical trials, that LeuTech can be manufactured in commercially required quantities on a sustained basis at an acceptable price, that LeuTech will obtain the required regulatory approvals or that the Company or its collaborators will be successful in obtaining market acceptance of LeuTech. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing of LeuTech. PT-5 Cancer Therapeutic Product. PT-5 is a rhenium-labeled somatostatin peptide analog being developed by the Company which is intended to treat cancers by regional delivery of tumor cell-targeted radiotherapy. PT-5 binds to somatostatin receptors. Somatostatin is a natural peptide hormone involved in the regulation of cell growth and differentiation, and somatostatin receptors are over-expressed on a wide variety of cancers. PT-5 is intended to target such cancers and deliver a therapeutic dose of rhenium-188, a radioisotope which emits high energy beta radiation, to the cancer. The Company has developed a reproducible, easy to use, and high efficiency direct radiolabeling method for PT-5; developed a lyophilized final product formulation; conducted biodistribution studies of PT-5 in normal animals using several different routes of administration, including intravenous and intra-cavity administration; conducted biodistribution studies of PT-5 in tumor-bearing animals; and demonstrated that PT-5 has a specific therapeutic effect in animal models of three different human tumors -- lung, prostate and breast cancers. The Company believes PT-5 may have applications for local or regional administration to any compartmentalized cancer which is somatostatin-receptor positive. The cancer must be compartmentalized in order for local or regional administration to work and must express somatostatin receptors in reasonably high levels in order to obtain the targeting benefits of PT-5. Expression of somatostatin receptors varies by type of cancer. However, until clinical trials are completed, specific clinical utility and applications, if any, cannot be determined. The Company is working with researchers at the University of Bonn in Germany to initiate clinical trials of patients with bronchial cancer metastatic to the pleural cavity. PT-5 will be administered by infusion directly into the pleural cavity. This trial is primarily designed to obtain safety and dose response Page 5 data, and secondarily to obtain evidence of efficacy, including tumor stasis or regression and improvement in cancer-associated biological markers. PT-5 requires a source of radioactive rhenium, preferably rhenium-188. This isotope can be produced by a variety of methods, including a generator system; however, clinical grade radioactive rhenium is not currently available in the United States. The Company is aware of an experimental generator system developed in the United States by Oak Ridge National Laboratory, and an additional experimental generator system available in Europe. The Company does not intend to seek to commercialize any source of radioactive rhenium, but is aware of other companies seeking to commercialize radioactive rhenium. There can be no assurance that, regardless of the status of product development by the Company, any acceptable form of radioactive rhenium will ever be commercially available in the United States or other countries at acceptable prices, if at all, in which event the Company may never be able to develop or commercialize PT-5. The Company is discussing entering into a collaborative arrangement with a third party to use a specific somatostatin analog for PT-5, and both parties are waiting to evaluate the results of preliminary clinical trials. There can be no assurance that the Company will be able to conclude a collaborative arrangement on acceptable terms, if at all. If the Company cannot conclude such arrangement, the Company will either abandon PT-5 development or seek to develop a substitute using MIDAS technology. There can be no assurance that the Company will be able to enter into an arrangement with another party on acceptable terms if at all, or will be able to develop a substitute using MIDAS technology in a reasonable period of time, or at all. There can be no assurance that the Company's PT-5 development program will be successful, that PT-5 will exhibit the expected biological results in humans, that PT-5 will prove to be safe and efficacious in clinical trials, that the Company will obtain the required regulatory approvals for PT-5, or that the Company or its collaborators will be successful in obtaining market acceptance of PT-5. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing of PT-5. RHOCHEK PRODUCT The Company had manufactured and marketed, under the trade name RhoChek, a quality control test product for measuring the immunoreactive fraction of radiolabeled antibodies specific to certain cancer antigens. Due to insufficient sales, the Company discontinued product sales of RhoChek in the fiscal year ended June 30, 1997. See Item 6. MARKETS FOR PRODUCTS The Company's proposed products and technologies are intended to be utilized in two distinct pharmaceutical markets. One market, intended to be addressed by LeuTech, PT-5 and certain proposed products resulting from the Company's MIDAS technology, is the radiopharmaceutical market. The other market, intended to be addressed by other proposed products resulting from MIDAS technology, is the larger biopharmaceutical market. The radiopharmaceutical market involves both diagnostic imaging and therapeutic applications. For imaging, trace amounts of a radioisotope bound to a radiopharmaceutical drug are injected into a patient and detected with nuclear medicine diagnostic equipment, generally a gamma camera. For therapy, radioisotopes which emit radiation lethal to cancer cells are employed. Page 6 The Company believes that proposed products resulting from its MIDAS technology can be used for a variety of biopharmaceutical applications where non-radioactive but receptor-specific drugs are desired. The Company believes the MIDAS technology may be applicable to a number of disease states, including immune disorders, cancer, and cardiac therapy. There are a limited number of receptor-specific, peptide-based drugs commercially available, but none which employ a metallopeptide. There can be no assurance that MIDAS technology will result in the development of any such drugs. RESEARCH AND DEVELOPMENT EXPENDITURES In the fiscal year ended June 30, 1997 and the ten months ended June 30, 1996 the Company spent $3,409,983 and $869,896, respectively, on research and development activities. GRANTS AND COLLABORATIVE RESEARCH The Company applies for grants with the NIH and other federally-funded agencies ("Research Grants") to develop its products and technologies. Since inception, the Company has been awarded over $2.8 million in peer-reviewed Research Grants. During the fiscal year ended June 30, 1997, the Company had four active Phase I SBIR Research Grants. Generally, the maximum amount of a Phase I SBIR Research Grant is $100,000, and the maximum amount of a Phase II SBIR Research Grant is $750,000. There can be no assurance that any additional Research Grants will be awarded. The Company has, where scientifically or technologically merited, actively solicited Cooperative Research and Development Agreements ("CRADA") with agencies of the federal government, involving collaborative development activities with the Company. The Company currently has no active CRADAs, but has completed CRADAs with Los Alamos National Laboratory, Brookhaven National Laboratory, Oak Ridge National Laboratory and Sandia National Laboratory, relating primarily to radiopharmaceutical drug development, including PT-5, and animal studies of proposed radiopharmaceutical products. COMPETITION The biopharmaceutical and radiopharmaceutical industries are highly competitive. In the biopharmaceutical industry, there are a number of companies developing peptide-based drugs, including companies exploring a number of different approaches to making conformationally-constrained short peptides for use as therapeutic drugs. In the radiopharmaceutical industry, there are several companies devoted to development and commercialization of monoclonal antibody-based products and peptide-based products. The Company is likely to encounter significant competition with respect to its proposed products currently under development. Many of the Company's competitors which are engaged in the biopharmaceutical field, and in particular the development of peptide-based products, have substantially greater financial and technological resources and marketing capabilities than the Company, and have significantly greater experience in research and development. Many of the Company's competitors which are engaged in the radiopharmaceutical field, and in particular the development of antibody- and peptide-based products, have greater financial and technological resources and marketing capabilities than the Company, and have significantly greater experience in research and development. Accordingly, the Company's competitors may succeed in developing products and underlying technologies more rapidly than the Company, and in developing products that are more effective and useful and are less costly than any that may be developed by the Company, and may also be more successful than the Company in manufacturing and marketing such products. Academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and seeking patent protection and may develop competing products or technologies on their own or through collaborative arrangements. Page 7 The Company believes that the technological attributes of LeuTech, including the ease of preparation, rapidity of imaging, apparent targeting specificity and use of technetium-99m (the most widely available radioisotope) will enable the Company to compete effectively in this market. However, the Company is aware of at least one company developing an antibody-based product which may compete with LeuTech as to certain indications, which product is marketed in certain European countries and for which regulatory approval is pending in the United States. The Company is also aware of another company developing a peptide-based product which may also compete with LeuTech as to certain indications. The Company is aware of a number of companies developing technologies relating to the use of peptides as drugs, including a variety of different approaches to making conformationally-constrained short peptides. The Company is pursuing areas of product development in which there is the potential for extensive technological innovation in relatively short periods of time. The Company's competitors may succeed in developing products that are safer or more effective than those of the Company's proposed products. Rapid technological change or developments by others may result in the Company's proposed products becoming obsolete or non-competitive. PATENTS AND PROPRIETARY INFORMATION The Company aggressively seeks patent protection for its technology in the United States and, selectively, in those foreign countries where in the Company's judgment such protection is important to the development of the Company's business. The Company's patents and pending applications are directed to radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides; and to methods for making and using the foregoing in diagnostic and therapeutic applications. The Company owns or has rights to 16 U.S. patents, eight pending U.S. patent applications, four allowed U.S. patent applications and nine counterpart patents and eight pending applications in selected foreign countries. Certain of the patents and pending applications owned by the Company have been assigned to affiliates of Aberlyn Holding Co., Inc. (collectively "Aberlyn") to secure long-term financing but the Company has retained the exclusive right to practice these patents itself and to grant licenses under these patents to third parties. The Company is obligated to make monthly payments to Aberlyn in discharge of the Company's debt obligation of $91,695 per month through May 1, 1999. On completion of scheduled payments, all rights to the patents and pending applications will be assigned to the Company. In the event of default by the Company, Aberlyn has the right to require the Company to cease using the patents, and to sell or exclusively license the patents to other parties. The patents and pending applications pertain to LeuTech and PT-5. In addition, the Company has semi-exclusive rights in a basic United States patent relating to direct radiolabeling of antibodies, and its Canadian counterpart. Two of the Company's basic U.S. patents for direct radiolabeling of antibodies and other proteins were involved in a priority-of-invention contest (interference) in the U.S. Patent and Trademark Office with a patent application owned by a third party. This proceeding has been settled, and the Company's patents have emerged from reissue proceedings in which the scope of the Company's claims has been somewhat limited. The Company believes that the current claim scope will not materially adversely affect the Company's current product development plans, and is sufficient to protect the Company's underlying inventions. Page 8 One of the Company's granted European patents (directed to selection of patient-specific antibody cocktails) is involved in an opposition proceeding at the European Patent Office. The Company has received a favorable first decision, but the opposing party has filed an appeal. The Company believes that the final outcome of this proceeding, even if adverse to the Company, will not have a material adverse effect on the Company's current product development plans. The Company's success will depend in substantial part on its ability to obtain patents, defend and enforce its patents, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and abroad. In general, the patent positions of companies relying upon biotechnology are highly uncertain in general and involve complex legal and factual questions. To date there has emerged no consistent policy regarding the breadth of claims that are properly accorded to biotechnology patents. There can thus be no assurance that patents will issue from the patent applications filed by the Company or its licensors or that the scope of any claims granted in any patent will provide meaningful proprietary protection or a competitive advantage to the Company. There can be no assurance that the validity or enforceability of patents issued or licensed to the Company will not be challenged by others or, if challenged, will be upheld by a court. In addition, there can be no assurance that competitors will not be able to circumvent any patents issued or licensed to the Company. In the United States, patent applications are maintained in secrecy until they issue as patents, and thus publications in the scientific literature lag behind actual discoveries. Scientific publications also generally appear after a patent application, if any, is filed. As a result of delayed publication, the Company cannot be certain that its scientists were the first to make inventions covered by its patents and patent applications. In the event a third party has also filed a patent application relating to an invention claimed in a Company patent application, the Company may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost for the Company, even if the eventual outcome is favorable to the Company. An adverse outcome could result in the Company losing patent protection for the subject of the interference, subject the Company to significant liabilities to third parties and require the Company to obtain licenses from third parties at undetermined cost or to cease using the technology. While no patent that would be infringed by manufacture, use or sale of the Company's proposed products has come to the attention of the Company, the Company's proposed products are still in the development stage, and neither their formulations nor their method of manufacture is finalized. Moreover, patents, the claims of which would be infringed by the Company's commercial activities, might not have yet been issued. There can thus be no assurance that the manufacture, use or sale of the Company's proposed products will not infringe patent rights of others. The Company may be unable to avoid infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. There can be no assurance that a license will be available to the Company, if at all, upon terms and conditions acceptable to the Company or that the Company will prevail in any patent litigation. Patent litigation is costly and time consuming, and there can be no assurance that the Company will have sufficient resources to pursue such litigation. If the Company does not obtain a license under any such patents, is found liable for infringement, or is not able to have them declared invalid, the Company may be liable for significant money damages, may encounter significant delays in bringing products to market, Page 9 or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents. The Company relies substantially in its product development activities on certain technologies which are neither patentable nor proprietary and are therefore potentially available to the Company's competitors. The Company also relies on certain proprietary technologies (trade secrets and know-how) which are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. If the Company's employees, scientific consultants or collaborators develop inventions or processes independently that may be applicable to the Company's product candidates, disputes may arise about ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become the Company's property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of the Company's proprietary rights. Failure to obtain or maintain patent and trade secret protection, for any reason, could have a material adverse effect on the Company. Certain of the Company's patents are directed to inventions developed within the Company or within academic institutions from which the Company earlier acquired rights to such patents with funds from United States government agencies. As a result of these arrangements, the United States government may have rights in certain inventions developed during the course of the performance of federally funded projects as required by law or agreements with the funding agency. Several bills affecting patent rights have been introduced in the United States Congress. These bills address various aspects of patent law, including publication of pending patent applications, modifications of the patent term, re-examination, subject matter and enforceability. It is not certain whether any of these bills will be enacted into law or what form new laws may take. Accordingly, the effect of legislative change on the Company's intellectual property estate is uncertain. GOVERNMENTAL REGULATION The manufacture and marketing of the Company's proposed products requires approval of the FDA and comparable agencies in foreign countries and state regulatory authorities. The FDA has established regulations and guidances which apply, among other things, to the clinical testing, manufacturing, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion and marketing of the Company's proposed products. Noncompliance with applicable requirements can result in fines, recalls or seizures of products, total or partial suspension of production, refusal of the FDA to approve marketing applications and criminal prosecution. In most cases, there is a substantial period of time between conception of a proposed product and its approval for commercial sale. Determining product formulation and manufacturing can take a number of years to complete, as can pre-clinical studies. Clinical trials and related studies can also take a number of years to complete. The period between the date of submission of an application for approval to market and the date of approval by the FDA has averaged two to four years for diagnostic imaging products, although the approval process may take longer. The length of time of the approval process is a function of a number of variables, including the quality of the submission and studies presented, the potential contribution that the proposed product will make in improving the treatment of the disease in question and Page 10 the workload at the FDA. There can be no assurance that any of the Company's proposed products will successfully proceed through the approval process or that any of the proposed products will be approved in any specific period of time. Depending upon marketing and distribution plans and arrangements for a particular product, the Company may require additional time before a proposed product can be made available for commercial sale, if at all. The steps required before pharmaceutical products can be produced and marketed usually include pre-clinical non-human studies, the filing of an IND application, clinical trials and the filing and approval of a Biologics License Application ("BLA") for products classified as "biologics" or filing and approval of a New Drug Application ("NDA") for drug products. LeuTech is subject to the requirement of a BLA, while PT-5 and proposed products based on the Company's MIDAS technology are subject to the requirement of a NDA. Pre-clinical studies are conducted in the laboratory and in animal model systems to gain preliminary information on the drug's effectiveness and to identify major safety problems. The results of these studies are submitted to the FDA as part of the IND application before approval can be obtained for the commencement of testing in humans. The clinical testing program required for a new biological or pharmaceutical product typically involves three sequential phases, but the phases may overlap. In the initial clinical evaluation, Phase I, the product is tested for safety, dosage tolerance, distribution, excretion and pharmacodynamics. Phase II involves studies in a limited patient populations to evaluate the effectiveness of the product for a particular indication, to refine optimal dosage and schedules of administration, and to identify possible side effects and risks. For diagnostic imaging agents, such as LeuTech, typically the smallest quantity of product producing satisfactory images will be employed. For therapeutic products the side effects and risks of increased doses must be balanced against increased therapeutic benefits. For radiolabeled therapeutic products, such as PT-5, the radiation dose to critical organs provides an upper limit to the dosage. When a product appears to be effective in Phase II trials, it is then evaluated in Phase III clinical trials. Phase III trials consist of additional testing for effectiveness and safety with an expanded patient group, usually at multiple test sites. Therapeutic products are often compared to standard treatments, if such treatments exist, to determine relative effectiveness in randomized trials. When Phase III studies are complete, the results of the pre-clinical and clinical studies, along with manufacturing information, are submitted to the FDA in the form of either a BLA or a NDA. Both the BLA and NDA involve considerable data collection, verification and analysis, the preparation of summaries of the production and testing processes, pre-clinical studies and clinical trials. The FDA must approve the BLA or NDA, as applicable, before the product may be marketed. The FDA may deny a BLA or NDA if applicable regulatory criteria are not satisfied, may require additional testing or information, or may require post-marketing testing, including extensive Phase IV studies, and surveillance to monitor the effects of the product in general use. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, the FDA may in some circumstances impose restrictions on the use of the drug that may limit its market potential. In addition to obtaining either BLA or NDA approval from the FDA for any of the Company's proposed products, if the proposed product is manufactured in the United States the drug manufacturing establishment must be registered with, and inspected by, the FDA. Such drug manufacturing establishments are subject to biennial inspections by the FDA, and must comply with GMP regulations enforced by the FDA. To supply products for use in the United States, foreign manufacturing establishments must comply with GMP and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in Page 11 such other countries under reciprocal agreements with the FDA. In complying with standards established by the FDA, manufacturing establishments must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. Components of LeuTech are manufactured by contract manufacturing establishments both in the United States and in foreign countries, and the Company anticipates that PT-5 will be manufactured by contract manufacturing establishments. The Company is dependent on such contract manufacturing establishments for, and will have only limited control over, the commercial manufacturing of its proposed products in compliance with FDA and other regulatory requirements. The Company has very limited experience in conducting clinical trials. Clinical trials are conducted in accordance with FDA regulations covering protection of human subjects and clinical practice protocols detailing the objectives of the study, parameters for monitoring safety and criteria for determining effectiveness. The Company will either need to rely on third parties to design and administer required clinical trials or expend resources to hire additional personnel to administer such clinical trials. There can be no assurance that the Company will be able to find appropriate third parties to design and administer clinical trials or that the Company will have the resources to hire personnel to administer clinical trials. No proposed product being evaluated by the Company has been submitted for approval or approved by the FDA or any other regulatory authority for marketing, and there can be no assurance that any such product will ever be approved for marketing or that the Company will be able to obtain the labeling claims desired for its proposed products. The Company is and will continue to be dependent upon laboratories and medical institutions conducting its pre-clinical studies and clinical trials to maintain both good laboratory and good clinical practices consistent with FDA regulations. Data obtained from pre-clinical studies and clinical trials are subject to varying interpretations which could delay, limit or prevent FDA regulatory approval. Delays or rejections may be encountered based upon changes in FDA policy for drug approval during the period of development and FDA regulatory review. Similar delays also may be encountered in foreign countries. There can be no assurance that FDA or other regulatory approval for any proposed products developed by the Company will be granted on a timely basis, or at all. Delay in obtaining or failure to obtain such regulatory approvals will have a material adverse effect on the Company. MANUFACTURING AND MARKETING To be successful, the Company's products must be manufactured in commercial quantities under GMP requirements prescribed by the FDA and at acceptable costs. The Company has not yet manufactured any pharmaceutical products in commercial quantities and currently does not have the facilities to manufacture any products in commercial quantities under GMP. In the event the Company determines to establish a manufacturing facility, it will require substantial additional funds, the hiring and retention of significant additional personnel and compliance with extensive regulations applicable to such a facility. The Company has no experience in commercial pharmaceutical manufacturing, and there can be no assurance that the Company will be able to establish such a facility successfully and, if established, that it will be able to manufacture products in commercial quantities for sale at competitive prices. If the Company determines to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of its products, the Company will be dependent on such corporate partners or other entities for, and will have only limited control over, the commercial manufacturing of its products. While the Company has entered into manufacturing arrangements as to certain portions of the manufacture of LeuTech under GMP, there can be no assurance that the contract manufacturer will perform as agreed or will remain in the contract Page 12 manufacturing business for the time required by the Company, or that the Company will be able to enter into such manufacturing arrangements as to remaining portions of the manufacture of LeuTech. There can be no assurance that the Company will be able to enter into any such manufacturing arrangements as to its other proposed products on acceptable terms, if at all. LeuTech requires purified monoclonal antibody, made from a specific parent cell line. There are, on a global basis, a limited number of contract manufacturers capable of producing purified monoclonal antibodies. The Company has entered into manufacturing arrangements with third-party contract manufacturers for GMP production and purification of the monoclonal antibody required for LeuTech and for GMP vialing and lyophilization of LeuTech. Proposed products resulting from MIDAS technology and PT-5 are synthetic peptides. The peptides are synthesized from readily available amino acids, and the production process involves well-established technology. The Company currently contracts with third-party manufacturers for the production of peptides and anticipates doing so in the future. PT-5 requires a source of radioactive rhenium in order to be commercialized. There can be no assurance that, regardless of the status of product development by the Company, any acceptable form of radioactive rhenium will ever be commercially available in the United States or other countries. See "Direct Radiolabeling Technology -- PT-5 Cancer Therapeutic Product" in this Item 1. The Company intends to package and ship its radiopharmaceutical products in the form of non-radioactive kits. Prior to patient administration, the product would be radiolabeled with the specified radioisotope, generally by a specialized radiopharmacy. The Company does not intend to sell or distribute any radioactive substance. The Company has limited experience in marketing, including distribution and sales, of pharmaceutical products, and will have to develop a sales force and/or rely on its collaborators, licensees or arrangements with others to provide for the marketing, distribution and sales of its products. If the Company determines to rely on collaborators, licensees or arrangements with others for the marketing, distribution and sales of its proposed products, the Company will be dependent on such collaborators and others for, and will have only limited control over, marketing, distribution and sales of its proposed products. Successful sales of the Company's proposed products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as governmental entities, managed care organizations and private insurance plans. Reimbursement by a third-party payor may depend on a number of factors, including the payor's determination that use of a product is safe and efficacious, neither experimental nor investigational, medically necessary, appropriate for the specific patient and cost effective. Since reimbursement approval is required from each payor individually, seeking such approvals is a time-consuming and costly process. Third-party payors routinely limit reimbursement coverage and in many instances are exerting significant pressure on medical suppliers to lower their prices. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product incorporating new technology, and there is no assurance that third-party reimbursement will be available for the Company's proposed products, or that such reimbursement, if obtained, will be adequate. Less than full reimbursement by governmental and other third-party payors for the Company's products would adversely affect the market acceptance of these products and would also have a material adverse effect on the Company. Further, health care reimbursement systems vary from country to country, and there can be Page 13 no assurance that third-party reimbursement will be made available for the Company's proposed products under any other reimbursement system. PRODUCT LIABILITY AND INSURANCE The Company's business may be affected by potential product liability risks which are inherent in the testing, manufacturing and marketing of proposed pharmaceutical products to be developed by the Company. There can be no assurance that product liability claims will not be asserted against the Company, its collaborators or licensees. The use of proposed products developed by the Company in clinical trials and the subsequent sale of such proposed products is likely to cause the Company to bear all or a portion of those risks. Such litigation claims could have a material adverse effect on the Company. The Company has liability insurance providing up to $1,000,000 coverage per occurrence and in the aggregate as to certain clinical trial risks, and will seek to obtain additional product liability insurance before the commercialization of its products. There can be no assurance, however, that insurance will be available to the Company on acceptable terms, if at all, or that such coverage once obtained would be adequate to protect the Company against future claims or that a medical malpractice or other claim would not materially and adversely affect the Company. Furthermore, there can be no assurance that any collaborators or licensees of the Company will agree to indemnify the Company, be sufficiently insured or have a net worth sufficient to satisfy any such product liability claims. In addition, products such as those proposed to be sold by the Company may be subject to recall for unforeseen reasons. Such a recall could have a material adverse effect on the Company. EMPLOYEES As of June 30, 1997, the Company employed 16 persons full time, of whom 11 were engaged in research and development activities and 5 were engaged in administration and management. Of the Company's employees, 4 hold Ph.D. degrees. The Company, from time to time, hires scientific consultants to work on certain of its research and development programs. The Company believes that it has been successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of the Company's employees is covered by a collective bargaining agreement. The Company's employees have executed confidentiality agreements. The Company considers relations with its employees to be good. The Company relies, in substantial part, and for the foreseeable future will rely, on certain independent organizations, advisors and consultants to provide certain services, including substantially all aspects of manufacturing, regulatory approval and clinical management. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to the Company on a timely basis when needed, or that the Company could find qualified replacements. The Company's advisors and consultants generally sign agreements that provide for confidentiality of the Company's proprietary information. However, there can be no assurance that the Company will be able to maintain the confidentiality of the Company's technology, the dissemination of which could have a material adverse effect on the Company. HISTORY AND MERGER General. The Company was incorporated under the laws of the State of Delaware on November 21, 1986. From November 4, 1993, when the Company, then named Interfilm, acquired Interfilm Page 14 Technologies, Inc., a New York corporation, through May 9, 1995, Interfilm was primarily engaged in the business of exploiting the rights related to its interactive motion picture process, including the production and distribution of interactive motion pictures for initial exhibition in theaters and subsequently in enhanced versions for distribution to the home market. Interfilm consummated an initial public offering on October 28, 1993, and on May 10, 1995, the Board of Directors of Interfilm decided to substantially curtail the operations of Interfilm and its subsidiaries. Interfilm conducted no business activities from May 10, 1995 until June 25, 1996. Merger with RhoMed. On June 25, 1996, a newly formed, wholly-owned subsidiary of Interfilm, Interfilm Acquisition Corporation, a New Mexico corporation, merged with and into RhoMed, a New Mexico corporation, and all of RhoMed's outstanding equity securities were ultimately exchanged for equity securities of the Company (the "Merger"). As a result of the Merger, RhoMed became a wholly-owned subsidiary of the Company, with the holders of RhoMed preferred stock and RhoMed common stock (including the holders of "RhoMed Securities" as hereafter defined) receiving an aggregate of an approximately 96% interest in the equity securities of the Company on a fully-diluted basis. Additionally, all warrants and options to purchase common stock of RhoMed outstanding immediately prior to the Merger (the "RhoMed Securities"), including without limitation, any rights underlying RhoMed's qualified and nonqualified stock option plans, were automatically converted into rights to receive, upon exercise, Common Stock, in the same manner in which shares of RhoMed common stock were converted. Since the former stockholders of RhoMed acquired, by reason of the Merger, more than a 50% controlling interest in the Company, the Merger has been treated, for accounting purposes, as a reverse acquisition. Consequently, the historical financial statements of the Company prior to June 25, 1996, are those of RhoMed. In connection with the Merger, certain pre-Merger assets and liabilities of the Company and one of its wholly-owned subsidiaries, consisting principally of certain intellectual property and litigation claims, were transferred to an unaffiliated limited liability partnership for the benefit of the Company's pre-Merger stockholders as of a record date of June 21, 1996. See Item 3. On July 19, 1996, the Company filed an amendment to its Restated Certificate of Incorporation, as amended ("Certificate of Incorporation"), which (i) effected the change of name of the Company from Interfilm, Inc. to Palatin Technologies, Inc., (ii) increased the total number of authorized shares of the Company's Common Stock from 10,000,000 to 25,000,000 and (iii) effected a 1-for-10 reverse split of the Common Stock (the "Charter Amendment"). Reverse Stock Split and Increase in Authorized Capital. On September 5, 1997, the Company filed an amendment to its Certificate of Incorporation, which (i) increased the total number of authorized shares of the Company's Common Stock from 25,000,000 to 75,000,000 and the total number of authorized shares of the Company's preferred stock from 2,000,000 to 10,000,000 and (ii) effected a 1-for-4 reverse split of the Common Stock (the "Second Charter Amendment"). As a result of the Merger, Charter Amendment and Second Charter Amendment, each share of RhoMed preferred stock was converted into approximately .1167 shares of Common Stock, and each share of RhoMed common stock was converted into approximately .0461 shares of Common Stock. Page 15 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS The following important factors, among others, could cause the Company's actual results, performance or achievements, or industry results, to differ materially from those expressed in the Company's forward-looking statements in this Report and presented elsewhere by management from time to time. Early Stage of Development; Uncertainty of Product Development; Technological Uncertainty. The Company is at an early stage of development and has not yet completed the development of any products based on either its MIDAS technology or its direct radiolabeling technology. Accordingly, the Company has not begun to market or generate revenues from the commercialization of any such products. It will be a number of years, if ever, before the Company will recognize significant revenues from product sales or royalties. The Company's technologies and products under development will require significant time-consuming and costly research, development, preclinical studies, clinical testing, regulatory approval and significant additional investment prior to their commercialization, which may never occur. There can be no assurance that the Company's research and development programs will be successful, that its products will exhibit the expected biological results in humans, that its products will prove to be safe and efficacious, that its products will obtain the required regulatory approvals, demonstrate substantial therapeutic or diagnostic benefit, be commercialized on a timely basis, experience no design or manufacturing problems, be manufactured on a large scale, or be economical to market, or that the Company or its collaborators will be successful in obtaining market acceptance of any of the Company's products or generate sufficient revenue to support research and development programs. There can be no assurance that the Company will be successful in entering into strategic alliances or collaborative arrangements on commercially reasonable terms, if at all, that such arrangements will be successful, or that the parties with which the Company will establish arrangements will perform their obligations under such arrangements. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing. The failure by the Company to successfully address such problems and delays would have a material adverse effect on the Company. In addition, no assurance can be given that proprietary rights of third parties will not preclude the Company from marketing its proposed products or that third parties will not market superior or equivalent products. See this Item 1 and Item 6. History of Operating Losses and Accumulated Deficit. The Company has incurred net operating losses since its inception (January 28, 1986) and, as of June 30, 1997, had an accumulated deficit of approximately $13.4 million, which has increased to date. The Company anticipates incurring additional losses over at least the next several years and such losses are expected to increase as the Company expands its research and development activities relating to its MIDAS technology and its direct radiolabeling technology. To achieve profitability, the Company, alone or with others, must successfully develop its technologies and products, conduct preclinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture, introduce and market such technologies and products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. See Item 6. Need for Additional Financing and Access to Capital. The Company has incurred negative cash flow from operations since its inception. The Company has expended, and will continue to expend in the future, if available, substantial funds to continue its research and development programs, including preclinical studies and clinical trials, to seek regulatory approval of its products, to develop manufacturing and marketing capabilities, and to fund the growth that is expected to occur if any of its proposed products are approved for marketing. Further, the Company has significant long-term debt that is due and payable Page 16 during the fiscal years ending June 30, 1998 and 1999. The Company expects that its existing capital resources will be adequate to make scheduled debt payments and to fund its operations through June 1998. No assurance can be given that there will be no events affecting the Company's operations that would deplete available resources significantly before such time. The Company's future capital requirements depend on many factors, including continued progress in its research and development activities, progress with preclinical studies and clinical trials, prosecuting and enforcing patent claims, technological and market developments, the ability of the Company to establish product development arrangements, the cost of manufacturing scale-up and effective marketing activities and collaborative or other arrangements. The Company will seek to obtain additional funds through public or private financings, including equity or debt financings, collaborative or other arrangements with corporate partners and others, and from other sources. No assurance can be given that additional financing will be available when needed, if at all, or on terms acceptable to the Company. If adequate additional funds are not available, the Company may be required to delay, scale back or eliminate certain of its research or development activities, its manufacturing and marketing efforts, or require the Company to license to third parties certain products or technologies that the Company would otherwise seek to commercialize itself. If adequate funds are not available, there will be a material and adverse effect on the Company. See Item 6. Patents and Proprietary Rights, No Assurance of Enforceability or Significant Competitive Advantage. In general, the patent positions of companies relying upon biotechnology are highly uncertain and involve complex legal and factual questions. To date, there has emerged no consistent policy regarding the breadth of claims that are properly accorded to biotechnology patents. There can be no assurance that patents will issue from the patent applications filed by the Company or its licensors or that the scope of any claims granted in any patent will provide meaningful proprietary protection or a competitive advantage to the Company. There can be no assurance that the validity or enforceability of patents issued or licensed to the Company will not be challenged by others or, if challenged, will be upheld by a court. In addition, there can be no assurance that competitors will not be able to circumvent any patents issued or licensed to the Company. In the United States, patent applications are maintained in secrecy until they issue as patents, and thus publications in the patent literature lag behind actual discoveries. Scientific publications also generally appear after a patent application, if any, is filed. As a result of delayed publication, the Company cannot be certain that its scientists were the first to make inventions covered by its patents and patent applications. In the event another party has also filed a patent application relating to an invention claimed in a Company patent application, the Company may be required to participate in an interference proceeding adjudicated by the United States Patent and Trademark Office to determine priority of invention. The possibility of an interference proceeding could result in substantial uncertainties and cost for the Company, even if the eventual outcome is favorable to the Company. An adverse outcome could result in the Company losing patent protection for the subject of the interference, subject the Company to significant liabilities to third parties and require the Company to obtain license rights from third parties at undetermined cost or to cease using the technology. While no valid patent that would be infringed by manufacture, use or sale of the Company's proposed products has come to the attention of the Company, the Company's proposed products are still in the development stage, and neither their formulations nor their method of manufacture is finalized. Moreover, patents the claims of which would be infringed by the Company's commercial activities may not have issued as yet. There can thus be no assurance that the manufacture, use or sale of the Company's proposed products will not infringe patent rights of others. The Company may be unable to avoid Page 17 infringement of any such patents and may have to seek a license, defend an infringement action, or challenge the validity of such patents in court. There can be no assurance that a license will be available to the Company, if at all, upon terms and conditions acceptable to the Company or that the Company will prevail in any patent litigation. Patent litigation is costly and time consuming, and there can be no assurance that the Company will have sufficient resources to pursue such litigation. If the Company does not obtain a license under any such patents, is found liable for infringement, or is not able to have them declared invalid, the Company may be liable for significant money damages, may encounter significant delays in bringing products to market, or may be precluded from participating in the manufacture, use or sale of products or methods of treatment covered by such patents. The Company relies substantially in its product development activities on certain technologies which are neither patentable nor proprietary and are therefore potentially available to the Company's competitors. The Company also relies on certain proprietary technologies (trade secrets and know-how) which are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. If the Company's employees, scientific consultants or collaborators develop inventions or processes independently that may be applicable to the Company's product candidates, disputes may arise about ownership of proprietary rights to those inventions and processes. Such inventions and processes will not necessarily become the Company's property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of the Company's proprietary rights. Failure to obtain or maintain patent and trade secret protection, for any reason, could have a material adverse effect on the Company. Certain of the Company's patents are directed to inventions developed with funds from United States government agencies or within academic institutions from which the Company earlier acquired rights to such patents. As a result of these arrangements, the United States government may have rights in certain inventions developed during the course of the performance of federally funded projects as required by law or agreements with the funding agency. Several bills affecting patent rights have been introduced in the United States Congress. These bills address various aspects of patent law, including publication of pending patent applications, modification of the patent term, re-examination, subject matter and enforceability. It is not certain whether any of these bills will be enacted into law and whether, as enacted, they would affect the scope, validity and enforceability of the Company's patents. Accordingly, the effect of legislative change on the Company's intellectual property estate is uncertain. See "Patents and Proprietary Information" in this Item 1. Uncertainty of Development of MIDAS Technology. The Company is engaged in research and development on a number of product opportunities for its MIDAS technology, including use as a thrombosis imaging agent, an infection imaging agent and an immunostimulatory agent, and believes that MIDAS technology may have medical applications in a variety of areas, including immune disorders, cancers and cardiology. The Company intends to expand research and development of MIDAS technology applications primarily through strategic alliances with other entities. No assurances can be made regarding the establishment or the timing of such alliances, and the failure to establish such alliances on a timely basis could limit the Company's ability to develop MIDAS technology and could have a material adverse effect on the Company. The Company expects to devote resources to expand research and development of Page 18 MIDAS technology to the extent funding is available. No prediction can be made, however, as to when or whether the areas in which there are ongoing MIDAS technology research projects will yield scientific discoveries, or whether such research projects will lead to commercial products. See "MIDAS Technology" in this Item 1. While the Company has entered into the Option Agreement with Nihon, pursuant to which Nihon has an option to exclusively license certain products based on the Company's MIDAS technology, there can be no assurance that future payments provided for in the Option Agreement will be made, that the Company and Nihon will ever enter into a definitive license agreement, or that a definitive strategic alliance between the Company and Nihon will result in the development or commercialization of any product. In the event that Nihon gives notice of its right to negotiate a license agreement, and the parties cannot agree on terms of such license agreement, the Company will be required to repay certain monies to Nihon. Failure to enter into a definitive license agreement, or being required to repay certain monies to Nihon, may have a material adverse effect on the Company. See Item 6. Uncertainty of Development of LeuTech. The Company has entered into an exclusive license agreement with the Wistar Institute for a defined field of use for the antibody and cell line used for LeuTech, which license agreement contains certain performance criteria. Failure to meet the performance criteria for any reason or any other event of default under the license agreement leading to termination of the exclusive license agreement with Wistar Institute would have a material adverse effect on the Company. While the Company has negotiated a long-term contractual arrangement for the manufacture of the purified antibody necessary for LeuTech, there can be no assurance that such contractor will be able to successfully manufacture purified antibody for LeuTech on a sustained basis, that such contractor will remain in the contract manufacturing business for the time required by the Company, or that the Company will be able to enter into such contractual arrangements as to other steps and components required to manufacture LeuTech. Such manufacture must be done under GMP requirements prescribed by the FDA and other governmental agencies. To date, the Company has only manufactured LeuTech in lots preparatory to initiating clinical trial use, with certain manufacturing processes having been done under GMP, and has not determined whether commercial quantities of LeuTech in conformity with these standards can be manufactured on a sustained basis at an acceptable cost. While the Company intends to file an IND on LeuTech with the FDA on one or more selected indications in the second half of 1997, and to complete Phase III clinical trials and file regulatory applications to market with the FDA in the second half of 1998, there can be no assurance that the Company's LeuTech development program will be successful, that the FDA will permit the Company's planned clinical trials to proceed, that LeuTech will prove to be safe and efficacious in clinical trials, that LeuTech can be manufactured in commercially required quantities on a sustained basis at an acceptable price, that LeuTech will obtain the required regulatory approvals or that the Company or its collaborators will be successful in obtaining market acceptance of LeuTech. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing of LeuTech. Failure to develop, obtain regulatory approval for, manufacture and market LeuTech on a timely basis would have a material adverse effect on the Company. See "Direct Labeling Technology" in this Item 1. Uncertainty of Development of PT-5. The Company is discussing entering into a collaborative arrangement with a third party to use a specific somatostatin analog for PT-5. There can be no assurance that the Company will be able to enter into a collaborative arrangement on acceptable terms, if at all. If the Page 19 Company cannot conclude such arrangement, the Company will either abandon PT-5 development or seek to develop a substitute using MIDAS technology. There can be no assurance that the Company will be able to enter into an arrangement with another party on acceptable terms if at all, or will be able to develop a substitute using MIDAS technology in a reasonable period of time, or at all. There can be no assurance that the Company's PT-5 development program will be successful, that PT-5 will exhibit the expected biological results in humans, that PT-5 will prove to be safe and efficacious in clinical trials, that the Company will obtain the required regulatory approvals for PT-5, or that the Company or its collaborators will be successful in obtaining market acceptance of PT-5. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing and marketing of PT-5. In addition, PT-5 requires a source of radioactive rhenium, preferably rhenium-188. This isotope can be produced by a variety of methods, including a generator system; however, clinical grade radioactive rhenium is not currently available in the United States. The Company is aware of an experimental generator system developed in the United States by Oak Ridge National Laboratory, and an additional experimental generator system available in Europe. The Company does not intend to seek to commercialize any source of radioactive rhenium, but is aware of other companies seeking to commercialize radioactive rhenium. There can be no assurance that, regardless of the status of product development by the Company, any acceptable form of radioactive rhenium will ever be commercially available in the United States or other countries at acceptable prices, if at all, in which event the Company may never be able to develop or commercialize PT-5. See "Direct Labeling Technology" in this Item 1. Government Regulation; No Assurance of Product Approval. Research, development, testing, clinical trials, manufacture, distribution, advertising and marketing, including distribution and sale, of pharmaceutical products are subject to extensive regulation by governmental authorities in the United States and other countries. Prior to marketing, proposed products developed by the Company must undergo an extensive regulatory approval process required by the FDA and by comparable agencies in other countries. This process, which includes preclinical studies and clinical trials of each proposed product to establish safety and effectiveness and confirmation by the FDA that good laboratory, clinical and manufacturing practices were maintained during testing and manufacturing, can take many years, requires the expenditure of substantial resources and gives larger companies with greater financial resources a competitive advantage over the Company. To date, no proposed product being evaluated by the Company has been submitted for approval or approved by the FDA or any other regulatory authority for marketing, and there can be no assurance that any such product will ever be submitted or approved for marketing or that the Company will be able to obtain the labeling claims desired for its products. The Company is and will continue to be dependent upon the laboratories and medical institutions conducting its preclinical studies and clinical trials to maintain both good laboratory and good clinical practices. Data obtained from preclinical studies and clinical trials are subject to varying interpretations which could delay, limit or prevent FDA regulatory approval. Delays or rejections may be encountered based upon changes in FDA policy for drug approval during the period of development and FDA regulatory review. Similar delays also may be encountered in foreign countries. There can be no assurance that FDA or other regulatory approval for any products developed by the Company will be granted on a timely basis, if at all. Delay in obtaining or failure to obtain such regulatory approvals will materially adversely affect the introduction and marketing of any products which may be developed by the Company as well as the Company's results of operations. Page 20 When and if approvals are granted, the Company, the approved drug, the manufacture of such drug and the facilities in which such drug is manufactured are subject to ongoing regulatory review. Subsequent discovery of previously unknown problems may result in restriction on a product's use or withdrawal of the product from the market. Adverse government regulation that might arise from future legislative or administrative action, particularly as it relates to health care reform and product pricing, cannot be predicted. See "Government Regulation" in this Item 1. No Commercial Manufacturing Capability or Experience. To be successful, the Company's products must be manufactured in commercial quantities under GMP requirements prescribed by the FDA and at acceptable costs. The Company has not yet manufactured any pharmaceutical products in commercial quantities and currently does not have the facilities to manufacture any products in commercial quantities under GMP. In the event the Company determines to establish a manufacturing facility, it will require substantial additional funds, the hiring and retention of significant additional personnel and compliance with extensive regulations applicable to such a facility. The Company has no experience in commercial pharmaceutical manufacturing, and there can be no assurance that the Company will be able to establish such a facility successfully and, if established, that it will be able to manufacture products in commercial quantities for sale at competitive prices. If the Company determines to rely on collaborators, licensees or contract manufacturers for the commercial manufacture of its products, the Company will be dependent on such corporate partners or other entities for, and will have only limited control over, the commercial manufacturing of its products. While the Company has entered into manufacturing arrangements as to certain portions of the manufacture of LeuTech under GMP, there can be no assurance that the contract manufacturer will perform as agreed or will remain in the contract manufacturing business for the time required by the Company, or that the Company will be able to enter into such manufacturing arrangements as to remaining portions of the manufacture of LeuTech. There can be no assurance that the Company will be able to enter into any such manufacturing arrangements as to its other proposed products on acceptable terms, if at all. See "Manufacturing and Marketing" in this Item 1. Limited Clinical Trial Experience. Before obtaining required regulatory approvals for the commercial sale of its proposed products, the Company must demonstrate through clinical trials that such products are safe and efficacious for use. The Company is in various stages of testing, but has not yet filed any IND applications. The initiation and completion of clinical trials is dependent upon many factors, including FDA acquiescence, the availability of qualified clinical investigators and access to suitable patient populations. Delays in initiating and completing clinical trials may result in increased trial costs and delays in FDA submissions, which could have a material adverse effect on the Company. To date, the Company has very limited experience in conducting clinical trials. The Company will either need to rely on third parties to design and conduct any required clinical trials or expend resources to hire additional personnel to administer such clinical trials. There can be no assurance that the Company will be able to find appropriate third parties to design and conduct clinical trials or that it will have the resources to hire personnel to administer clinical trials in-house. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in clinical trials, even after showing promising results in earlier studies or trials. There can be no assurance that the Company will not encounter problems in its clinical trials that will cause the Company to delay or suspend its clinical trials, that the clinical trials of its proposed products will be completed at all, that such testing will ultimately demonstrate the safety or efficacy of such proposed products or that any proposed products will receive regulatory approval on a timely basis, if at all. If any such problems occur, there would be a material adverse effect on the Company. See "Government Regulation" in this Item 1. Page 21 Limited Marketing, Distribution or Sales Capability and Experience. The Company has limited experience in marketing pharmaceutical products, including distribution and selling of pharmaceutical products, and will have to develop a sales force and/or rely on collaborators or licensees or on arrangements with others to provide for the marketing, distribution, and sales of its proposed products. There can be no assurance that the Company will be able to establish marketing, distribution and sales capabilities or make arrangements with third parties to perform such activities on acceptable terms, which may result in the lack of control by the Company over the marketing, distribution and sales of its proposed products. In addition, there can be no assurance that the Company or any third party will be successful in marketing, distributing or selling any products. Furthermore, the Company will compete with many other companies that currently have extensive and well-funded marketing, distribution and sales operations. See "Manufacturing and Marketing" in this Item 1. Competition. The biopharmaceutical and radiopharmaceutical industries are highly competitive. In the biopharmaceutical industry, there are a number of companies developing peptide-based drugs, including companies exploring a number of different approaches to making conformationally-constrained short peptides for use as therapeutic drugs. In the radiopharmaceutical industry, there are several companies devoted to development and commercialization of monoclonal antibody-based products and peptide-based products. The Company is likely to encounter significant competition with respect to its proposed products currently under development. Many of the Company's competitors which are engaged in the biopharmaceutical field, and in particular the development of peptide-based products, have substantially greater financial and technological resources and marketing capabilities than the Company, and have significantly greater experience in research and development. Many of the Company's competitors which are engaged in the radiopharmaceutical field, and in particular the development of antibody- and peptide-based products, have greater financial and technological resources and marketing capabilities than the Company, and have significantly greater experience in research and development. Accordingly, the Company's competitors may succeed in developing products and underlying technologies more rapidly than the Company, and in developing products that are more effective and useful and are less costly than any that may be developed by the Company, and may also be more successful than the Company in manufacturing and marketing such products. Academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and seeking patent protection and may develop competing products or technologies on their own or through collaborative arrangements. The Company is aware of at least one company developing an antibody-based product which may compete with LeuTech as to certain indications, which product is marketed in certain European countries and for which regulatory approval is pending in the United States. The Company is also aware of another company developing a peptide-based product which may also compete with LeuTech as to certain indications. The Company is aware of a number of companies developing technologies relating to the use of peptides as drugs, including a variety of different approaches to making conformationally-constrained short peptides. See "Competition" in this Item 1. The Company is pursuing areas of product development in which there is the potential for extensive technological innovation in relatively short periods of time. Rapid technological change or developments by others may result in the Company's proposed products becoming obsolete or non-competitive. Dependence on Third-Party Reimbursement. Successful sales of the Company's proposed products in the United States and other countries will depend on the availability of adequate reimbursement from third-party payors such as governmental entities, managed care organizations and private insurance Page 22 plans. Reimbursement by a third-party payor may depend on a number of factors, including the payor's determination that use of a product is safe and efficacious, neither experimental nor investigational, medically necessary, appropriate for the specific patient and cost effective. Since reimbursement approval is required from each payor individually, seeking such approvals is a time-consuming and costly process. Third-party payors routinely limit reimbursement coverage and in many instances are exerting significant pressure on medical suppliers to lower their prices. There is significant uncertainty concerning third-party reimbursement for the use of any pharmaceutical product incorporating new technology, and there is no assurance that third-party reimbursement will be available for the Company's proposed products, or that such reimbursement, if obtained, will be adequate. Less than full reimbursement by governmental and other third-party payors for the Company's products would adversely affect the market acceptance of these products and would also have a material adverse effect on the Company. Further, health care reimbursement systems vary from country to country, and there can be no assurance that third-party reimbursement will be made available for the Company's proposed products under any other reimbursement system. See "Manufacturing and Marketing" in this Item 1. Health Care Reform. The health care industry is undergoing fundamental change in the United States as a result of economic, political and regulatory influences. There exists a powerful trend toward managed care that is motivated by a desire to reduce costs and prices of health care. The Company anticipates that the health care industry, particularly insurance companies and other third-party payors, will continue to promote cost containment measures and alternative health care delivery systems, and political debate of these issues will most likely continue. The Company cannot predict which specific reforms will be proposed or adopted by industry or government or the precise effect that such proposals or adoption may have on the Company. There can be no assurance that health care reform initiatives will not have a material adverse effect on the Company. Conducting Business Abroad. To the extent the Company conducts business outside the United States, it may do so through licenses, joint ventures or other contractual arrangements for the development, manufacturing and marketing of its proposed products. No assurance can be given that the Company will be able to establish suitable arrangements, that the necessary foreign regulatory approvals for its proposed product will be obtained, that foreign patent coverage will be available or that the development and marketing of its proposed products through such licenses, joint ventures or other contractual arrangements will be successful. The Company might also have greater difficulty obtaining proprietary protection for its proposed products and technologies outside the United States and enforcing its rights in foreign courts. Furthermore, international operations and sales may be limited or disrupted by the imposition of governmental controls regulation of medical products, export license requirements, political instability, trade restrictions, changes in tariffs, exchange rate fluctuations and difficulties in managing international operations. Risk of Liability; Adequacy of Insurance Coverage; Risk of Product Recall. The Company's business may be affected by potential product liability risks which are inherent in the testing, manufacturing and marketing of proposed pharmaceutical products to be developed by the Company. There can be no assurance that product liability claims will not be asserted against the Company, its collaborators or licensees. The use of proposed products developed by the Company in clinical trials and the subsequent sale of such proposed products is likely to cause the Company to bear all or a portion of those risks. Such litigation claims could have a material adverse effect on the Company. The Company has liability insurance providing up to $1,000,000 coverage per occurrence and in the aggregate as to certain clinical trial risks, and will seek to obtain additional product liability insurance before the commercialization of its products. Page 23 There can be no assurance, however, that insurance will be available to the Company on acceptable terms, if at all, or that such coverage once obtained would be adequate to protect the Company against future claims or that a medical malpractice or other claim would not materially and adversely affect the Company. Furthermore, there can be no assurance that any collaborators or licensees of the Company will agree to indemnify the Company, be sufficiently insured or have a net worth sufficient to satisfy any such product liability claims. In addition, products such as those proposed to be sold by the Company may be subject to recall for unforeseen reasons. Such a recall could have a material adverse effect on the Company. See "Government Regulation" and "Product Liability and Insurance" in this Item 1. Dependence on Key Management and Qualified Personnel; Limited Personnel; Dependence on Contractors. The Company is highly dependent upon the efforts of its management. The loss of the services of one or more members of management could impede the achievement of development objectives. Due to the specialized scientific nature of the Company's business, the Company is also highly dependent upon its ability to attract and retain qualified scientific and technical personnel. There is intense competition for qualified personnel in the areas of the Company's activities and there can be no assurance that the Company can presently, or will be able to continue to, attract and retain the qualified personnel necessary for the development of its existing business and its expansion into areas and activities requiring additional expertise. In addition, the Company's intended or possible growth and expansion into areas requiring additional skill and expertise, such as marketing, including sales and distribution, will require the addition of new management personnel and the development of additional expertise by existing management personnel. The loss of, or failure to recruit, scientific, technical and marketing and managerial personnel could have a material adverse effect on the Company. The Company relies, in substantial part, and for the foreseeable future will rely, on certain independent organizations, advisors and consultants to provide certain services, including substantially all aspects of manufacturing, regulatory approval and clinical management. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to the Company on a timely basis when needed, or that the Company could find qualified replacements. The Company's advisors and consultants generally sign agreements that provide for confidentiality of the Company's proprietary information. However, there can be no assurance that the Company will be able to maintain the confidentiality of the Company's technology, the dissemination of which could have a material adverse effect on the Company. Hazardous Materials; Compliance with Environmental Regulations. The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations if the Company develops manufacturing capacity. In addition, there can be no assurance that current or future environmental laws, rules, regulations or policies will not have a material adverse effect on the Company. Certain Interlocking Relationships; Potential Conflicts of Interest. Certain of the directors of the Company are officers or directors of Paramount Capital, Inc. ("Paramount Capital") or of Paramount Capital Investments, LLC ("Paramount Capital Investments"). Paramount Capital Investments is a merchant Page 24 bank and venture capital firm specializing in biotechnology and biopharmaceutical companies. In the regular course of its business, Paramount Capital Investments identifies, evaluates and pursues investment opportunities in biomedical and pharmaceutical products, technologies and companies. Generally, Delaware corporate law requires that any transactions between the Company and any of its affiliates be on terms that, when taken as a whole, are substantially as favorable to the Company as those then reasonably obtainable from a person who is not an affiliate in an arms-length transaction. Nevertheless, neither Paramount Capital Investments nor any other person is obligated pursuant to any agreement or understanding with the Company to make any additional products or technologies available to the Company, and there can be no assurance, and purchasers of the Common Stock should not expect, that any biomedical or pharmaceutical product or technology identified by Paramount Capital Investments or any other person in the future will be made available to the Company. In addition, certain of the officers, directors, consultants and advisors to the Company may from time to time serve as officers, directors, consultants or advisors to other biopharmaceutical or biotechnology companies. There can be no assurance that such other companies will not in the future have interests in conflict with those of the Company. See Item 11 and Item 12. Risk of Loss in Lawsuit. The Company and one of its subsidiaries, Interfilm Technologies, Inc. (collectively, "IT"), are the plaintiffs in a lawsuit against Sony Corporation of America and certain of its affiliates and subsidiaries (collectively, "Sony") for breach of contract and breach of duty of good faith and fair dealing (the "IT Litigation"). In November 1996, Sony asserted two counterclaims in the IT Litigation. The complaint and counterclaims relate solely to the business activities of the Company prior to the Merger. The IT Litigation is under the control of and at the expense of an unaffiliated limited liability partnership (the "Partnership"), and is solely for the benefit of the Company's pre-Merger stockholders as of June 21, 1996. Based upon the opinion of the Company's counsel of record in the IT Litigation, the Company believes that the counterclaims are without merit. However, the Company may be liable in the event that a judgment is rendered against the Company on the counterclaims, and the assets of the Partnership may not be sufficient to provide full indemnification. See Item 3. ITEM 2. DESCRIPTION OF PROPERTY. The Company's executive offices are located at 214 Carnegie Center, Suite 100, Princeton, New Jersey, where it leases approximately 4,000 square feet under a lease which expires July 31, 2002. In March 1997, the Company entered into a ten-year lease on approximately 10,500 square feet for use as a research and development facility in Edison, New Jersey, with a lease term commencing August 1, 1997. The Company had leased approximately 14,000 square feet in Albuquerque, New Mexico, which served as the Company's research and development facility; in August 1997 the Albuquerque facility was closed and research and development activities were relocated to the Edison facility. The properties the Company leases are in good condition. ITEM 3. LEGAL PROCEEDINGS. In April 1996, prior to the Merger, IT filed a complaint initiating the IT Litigation in the Supreme Court of the State of New York, County of New York, against Sony for breach of contract and breach of duty of good faith and fair dealing, seeking contract damages of $18 million, punitive damages of $100 million and costs. The IT Litigation relates solely to the business activities of the Company prior to the Merger and, pursuant to the Merger, was included in certain assets and liabilities of the Company Page 25 transferred to the Partnership solely for the benefit of the Company's stockholders as of June 21, 1996. Accordingly, the litigation is under the control of and at the expense of the Partnership, and the Company will receive no financial benefit from the litigation, even if the litigation is successfully concluded. The assets of the Partnership, including any proceeds from the IT Litigation, whether by judgment, settlement or otherwise, are available to indemnify the Company from certain liabilities arising out of the Merger. The causes of action in the IT Litigation relate to the actions or inactions of Sony under certain agreements entered into between IT and Sony in April 1993, and as amended in November 1993 and October 1994 (collectively, the "Sony-IT Agreement"). Pursuant to the original terms of the Sony-IT Agreement, Sony was obligated, among other things, to develop, produce, market, distribute and exhibit three Cinematic Games. Subsequently, at Sony's request, the Sony-IT Agreement was amended so that Sony's commitment to produce Cinematic Games was reduced to two Cinematic Games in exchange for, among other things, an increased financial marketing commitment by Sony. The first Sony-financed Cinematic Game was initially slated for release in the first half of 1994, which release was delayed until February 1995. Among other things, IT alleges that the delay in the opening of the first Cinematic Game, which delay IT alleges was primarily a result of Sony's failure to abide by the terms of the Sony-IT Agreement, seriously harmed IT. Under the terms of the amended Sony-IT Agreement, Sony was obligated to begin principal photography of the next Sony-financed Cinematic Game by May 15, 1995. In November 1996, Sony asserted two counterclaims in the IT Litigation, generally alleging that the Company's pre-Merger executives misrepresented their qualifications and breached the Sony-IT Agreement by not recruiting sufficient exhibitors. The counterclaims relate solely to the business activities of the Company prior to the Merger. A denial of the material allegations in the counterclaims has been filed on behalf of the Company in the IT Litigation. The IT Litigation has been placed on a trial calendar, but no trial date has been set. The Partnership is obligated to indemnify the Company from certain claims, including all liabilities and reasonable expenses and costs that the Company may incur as a result of the IT Litigation, and the Company is closely monitoring the IT Litigation. The Company has incurred no out-of-pocket expenses in connection with the IT Litigation. The Company believes that the Partnership's assets consist primarily of the IT Litigation, certain intellectual property assets and cash assets of approximately $75,000, with liabilities (primarily contingent on a recovery in the IT Litigation) totaling approximately $731,500. Based upon the opinion of the Company's counsel of record in the IT Litigation, the Company believes that the counterclaims are without merit. However, the Company may be liable in the event that a judgment is rendered against the Company on the counterclaims, and the assets of the Partnership may not be sufficient to provide full indemnification. The Company is involved in various other claims and litigations arising in the normal course of business, consisting of actions commenced against the Company prior to the Merger. Management believes that the outcome of such claims and litigation will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1997. However, on August 21, 1997, and as adjourned to August 25, 1997, at a special meeting of stockholders, the following matters were adopted by the stockholders: (i) the Company's 1996 Stock Option Plan, (ii) an amendment to the Company's Certificate of Incorporation increasing the authorized shares of capital stock from 27,000,000 to 85,000,000 shares, of which 75,000,000 are Common Page 26 Stock and 10,000,000 are preferred stock, and (iii) amendments to the Certificate of Incorporation authorizing a reverse stock split, which reverse split was subsequently set by the Board of Directors of the Company at 1-for-4 (the "Reverse Split"). With respect to approval of the 1996 Stock Option Plan, there were 13,590,324 affirmative votes, 261,058 negative votes, 195,507 abstentions and 4,796,856 broker non-votes. The following table sets forth the total votes cast with respect to matters (ii) and (iii) above, as to each of which there was class voting, with two classes entitled to vote, Common Stock and Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock vote is shown as if converted into Common Stock.
SERIES A CONVERTIBLE PREFERRED STOCK COMMON STOCK ------------------------------------------------ --------------------------------------------------- Nega- Broker Nega- Broker Affirmative tive Absten- Non- Affirmative tive Absten- Non- Issue Votes Votes tions Votes Votes Votes tions Votes - ----------------------- ----------- --------- --------- ------- ----------- --------- --------- ----------- (ii) Increase authorized shares of capital stock 7,300,365 120,967 120,966 0 6,150,679 122,648 26,125 5,001,995 (iii) Authorize reverse stock split 7,421,332 20,161 100,805 0 10,950,353 114,965 30,990 205,139
The Second Charter Amendment effecting the increase in authorized shares and Reverse Split was filed on September 5, 1997. Unless the context otherwise requires, all references to the Company's activities, results of operations and financial condition have been adjusted to give retroactive effect to the Second Charter Amendment. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock has been quoted on the OTC Bulletin Board(R) (the "Bulletin Board") since October 1, 1995. Currently, the Common Stock trades under the symbol "PLTND;" prior to the Reverse Split the Common Stock traded under the symbol "PLTN." Before July 22, 1996, the Common Stock traded under the symbol "IFLM." The Common Stock began trading publicly on the Nasdaq National Market(R) ("NMS") on October 28, 1993 under the symbol "IFLM." Before October 28, 1993, there was no public market for the Common Stock. On September 30, 1995, the Common Stock was delisted from the NMS for failure to maintain certain net tangible assets requirements. The Company has applied to have the Common Stock quoted on the Nasdaq SmallCap Market(sm). There can be no assurance that the Company will be able to meet the listing requirements of the Nasdaq SmallCap Market, or if listed, maintain the criteria for continued listing on the Nasdaq SmallCap Market. The following table gives the range of high and low bid information on the Bulletin Board for the Common Stock for each quarter since the Merger, as obtained from The Nasdaq Stock Market, Inc. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Page 27 PERIOD HIGH BID PRICE LOW BID PRICE - ------------------------------------- -------------- ------------- June 26 - June 30, 1996 (1) $ 20 $ 16 July 1 - September 30, 1996 (1) 55 7 October 1 - December 31, 1996 (1) 11 1/4 5 3/8 January 1 - March 31, 1997 (1) 9 1/4 6 3/8 April 1 - June 30, 1997 (1) 7 5 July 1, 1997 - September 23, 1997 (1) 5 4/5 8 - ------------------------ (1) The prices in the table have been adjusted to give retroactive effect to the 1-for-10 reverse split of the outstanding Common Stock which became effective on July 19, 1996 and the Reverse Split of the outstanding Common Stock which became effective on September 5, 1997. While the Merger was effective June 26, 1996, no RhoMed equity securities were exchanged for Common Stock until July 19, 1996, and accordingly prices on and prior to July 19, 1996 may not accurately reflect the effects of the Merger. Holders. On September 23, 1997, the approximate number of holders of record of Common Stock was 189. Dividend Policy. The Company has never declared or paid any cash dividends on the Common Stock. The Company currently intends to retain earnings, if any, for use in its business and therefore does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. The Company may not pay a dividend or make any distribution to holders of any capital stock of the Company, including Common Stock, unless and until the Company first pays a special dividend or distribution of $100 per share to the holders of Series A Convertible Preferred Stock, and unless holders of two-thirds of the Series A Convertible Preferred Stock approve the dividend. Recent Sales of Unregistered Securities. During the period covered by this Report, except as previously included on a quarterly report on Form 10-QSB, the Company sold the following securities without registering the securities under the Securities Act of 1933, as amended (the "Securities Act"), all in non-underwritten transactions: (i) Series A Convertible Preferred Stock. The Company sold restricted shares of Series A Convertible Preferred Stock to a total of 211 accredited investors in a private placement for which Paramount Capital served as placement agent (the "Series A Offering") and claimed exemption under Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The Company offered and sold the securities solely to accredited investors (as defined in Regulation D) and made no general solicitation. The certificates representing Series A Convertible Preferred Stock bear a restrictive legend. Each purchaser represented to the Company that the purchaser was purchasing the Series A Convertible Preferred Stock for the purchaser's own account for investment and not with a view toward resale or distribution to others. Page 28
Number Offering Cash Date of sale of shares price commissions(1) - ----------------------------- ---------------- -------------------- ------------------------ February 21, 1997 30,630 $3,063,000 $398,190 April 3, 1997 76,225 $7,622,500 $990,925 May 9, 1997 30,925 $3,092,500 $402,025 --------- ------------ ----------- TOTALS: 137,780 $13,778,000 $1,791,140
------------------------------------- (1) Includes commission of 9% and a non-accountable expense allowance of 4%. Does not include the Preferred Stock Placement Warrant, described below. Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder thereof, into approximately 20.2 shares of Common Stock, calculated by dividing the stated value of each share of Series A Convertible Preferred Stock ($100.00) by the conversion price of $4.96. The Series A Convertible Preferred Stock has a reset mechanism which provides that the conversion price is subject to adjustment on May 9, 1998 (the "Reset Date"), if the average closing bid price of the Common Stock for the thirty (30) consecutive trading days immediately preceding the Reset Date (the "Reset Trading Price") is less than 130% of the then applicable conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the then applicable conversion price will be reduced to the greater of (i) the Reset Trading Price divided by 1.3 and (ii) 50% of the then applicable conversion price. The conversion price is also subject to adjustment, under certain circumstances, upon the sale or issuance of Common Stock for consideration per share less than either (i) the conversion price in effect on the date of sale or issuance, or (ii) the market price of the Common Stock as of the date of the sale or issuance. Upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of Common Stock outstanding the conversion price is subject to adjustment. The Series A Preferred Stock may be mandatorily converted by the Company if, commencing May 9, 1998, the closing bid price of the Common Stock has exceeded 200% of the then applicable conversion price for at least twenty (20) trading days in any thirty (30) consecutive trading day period ending three (3) days prior to the date of conversion. (ii) Preferred Stock Placement Warrant. The Company issued a Preferred Stock Placement Warrant to purchase an aggregate of 13,778 shares of Series A Convertible Preferred Stock to Paramount Capital and/or its designees, as part of Paramount Capital's compensation in connection with the Series A Offering described above, for a nominal cash price of $13.78. The Preferred Stock Placement Warrant is exercisable for a period of five (5) years commencing in November 1997, at a price of $110 per share of Series A Convertible Preferred Stock (110% of the offering price of Series A Convertible Preferred Stock in the Series A Offering), and includes a cashless exercise provision. The Company claimed exemption under Section 4(2) of the Securities Act, issued the warrant to Paramount Capital and/or its designees as compensation and made no general solicitation. The Preferred Stock Placement Warrant bears a restrictive legend generally restricting transfer. (iii) Common Stock issued on exercise of employee stock options. On April 11, 1997, the Company sold 17,969 restricted shares of Common Stock to Edward J. Quilty (the Company's Chairman of the Board and Chief Executive Officer) upon partial exercise of an option granted to Mr. Quilty pursuant to his employment agreement. The Company claimed exemption under Section 4(2) of the Securities Act, as a Page 29 transaction not involving any public offering. The stock subject to the option is offered only to Mr. Quilty, at approximately $.217 per share. The option is not transferable during Mr. Quilty's lifetime and the Common Stock issued on exercise of the option is restricted. The certificates representing the Common Stock issued on exercise of the option bear restrictive legends. The Company sold the Common Stock directly to Mr. Quilty with no discount or commission. (iv) Common Stock issued to pay interest obligation. On April 30, 1997, the Company sold 63,910 restricted shares of Common Stock to Bioquest Venture Leasing Partnership L.P., the designee of Aberlyn, a creditor of the Company, as payment in full of $303,171 of accrued interest which the Company owed Aberlyn under a financing arrangement. The Company claimed exemption under Section 4(2) of the Securities Act, for a transaction not involving any public offering. This was a one-time transaction negotiated at arm's length between the Company and its largest creditor. The Common Stock issued as payment of interest is restricted and the certificate representing the Common Stock bears a restrictive legend. Aberlyn represented to the Company that Aberlyn and its designee were accredited investors (as defined in Regulation D) and that Aberlyn or its designee was acquiring the stock for its own account and not with a view to or for sale in connection with any distribution of the Common Stock in violation of the Securities Act. The Company sold the Common Stock directly to Aberlyn's designee with no commission. Registration Statement. Pursuant to the terms of the Series A Offering, the Company filed a registration statement with the Securities and Exchange Commission on Form SB-2 on August 13, 1997, relating to 2,777,822 shares of Common Stock issuable on conversion of the Series A Convertible Preferred Stock and 277,782 shares of Common Stock issuable on conversion of the Series A Convertible Preferred Stock obtainable upon exercise of the Preferred Stock Placement Warrant. This registration statement also includes 63,910 shares of Common Stock issued to Bioquest Venture Leasing Partnership L.P. to pay an interest obligation and approximately 447,026 shares of Common Stock issued or issuable upon exercise of certain outstanding warrants. See Item 12 and Notes to Consolidated Financial Statements. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto filed as part of this Report. RESULTS OF OPERATIONS YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996 Grants and contracts - During the year ended June 30, 1997, the Company had four active Phase I SBIR Research Grants, totaling $394,970, under the SBIR program with the NIH. Grant and contract revenue from these grants was $350,173 during the year ended June 30, 1997, compared to no revenue from grants and contracts during the year ended June 30, 1996. License fees and royalties - In December 1996, the Company entered into the Option Agreement with Nihon, pursuant to which the Company received, in January 1997, an initial payment of $1,000,000 before Japanese withholding taxes of $100,000 (the "Initial Payment"). The Company has accounted for the Initial Payment by recognizing license fee revenue of $350,000 and deferred license fee revenue of Page 30 $550,000. The deferred license fee revenue will be recognized as revenue when a license agreement is consummated. In the event that the parties cannot agree on terms of a license agreement, then the Company could be required to repay $550,000 of the Initial Payment to Nihon. There were no revenues from license fees or royalties during the year ended June 30, 1996. Sales - During the year ended June 30, 1997, the Company discontinued sales of its RhoChek product due to insufficient sales. Total revenues from sales during the year ended June 30, 1997, were $22,184, compared to $27,517 for the year ended June 30, 1996. Research and development expenses - Research and development expenses increased to $3,409,983 for the year ended June 30, 1997 from $953,730 for the year ended June 30, 1996. The increase is attributable to expansion in the scale of the Company's research and development operations, which expansion followed completion of an equity offering immediately prior to the Merger. During the year ended June 30, 1997, the Company increased the manufacturing development scale-up expenses for LeuTech by approximately $779,000, incurred approximately $200,000 in increased regulatory consulting related to LeuTech, incurred an increase in license fees paid of $170,000, incurred laboratory relocation expenses of $142,000, and had its first full year with two executive vice presidents with responsibilities for research and development at a salary expense of approximately $300,000. The Company expects research and development expenses to continue to increase in future years as the Company expands manufacturing development efforts and initiates clinical trials on LeuTech and significantly expands its efforts to develop the MIDAS technology, including the hiring of scientists and the acquisition of equipment and supplies. General and administrative expenses - General and administrative expenses increased to $2,533,883 for the year ended June 30, 1997 from $1,633,598 for the year ended June 30, 1996. The increase is attributable to a full year of expenses in the year ended June 30, 1997 related primarily to the hiring of certain key executives, the leasing of executive offices in New Jersey and increased travel, legal and consulting expenses. General and administrative expenses were also affected by amortization, totaling approximately $395,000, of the value of options and warrants issued to consultants and the value of options granted at exercise prices below the then current market price of the Company's Common Stock. In addition, the Company has been actively searching for certain products and technologies to license or acquire, and incurred costs in evaluating these products and technologies during the year ended June 30, 1997 amounting to approximately $187,000, which has been included in general and administrative expenses. General and administrative expenses are expected to remain consistent with the current levels for the 1998 fiscal year. Interest income - Interest income increased to $296,009 for the year ended June 30, 1997 from $10,515 for the year ended June 30, 1996. The interest income is primarily the result of interest on the net proceeds from the Company pre-Merger equity offering and the Series A Offering. Interest expense - Interest expense decreased to $374,664 for the year ended June 30, 1997 from $494,814 for the year ended June 30, 1996. The decrease is mainly due to the repayment by the Company of certain pre-Merger notes, the principal amount of which was $1,000,000, in August and September of 1996. Interest expense is expected to remain at current levels for the 1998 fiscal year. Net loss - Net loss increased to $5,300,164 for the year ended June 30, 1997 from $4,247,664 for the year ended June 30, 1996. Page 31 TEN MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO TEN MONTH PERIOD ENDED JUNE 30, 1995. License fees and royalties - License fees and royalties were zero for the ten months ended June 30, 1996, compared to $64,296 for the prior ten month period. During the ten months ended June 30, 1996, there were no royalties on product sales or new license agreements. Sales - Sales of RhoChek, the sole product sold by the Company, decreased to $24,457 in the ten months ended June 30, 1996, from $30,546 in the prior ten month period. Research and development expenses - Research and development expenses increased by $391,983 to $869,896 for the ten months ended June 30, 1996 from $477,913 in the ten months ended June 30, 1995. The majority of the increase is attributable to development of LeuTech, including increased consulting and manufacturing scale-up expenses. General and administrative expenses - General and administrative expenses increased to $1,366,343 in the ten months ended June 30, 1996 from $598,560 for the ten months ended June 30, 1995. The majority of the increase is due to the hiring of a Chairman of the Board and Chief Executive Officer and of a Chief Financial Officer, the leasing of general and administrative offices in New Jersey, and increased travel and consulting expenses. Other expenses - Other expenses increased to $1,142,963 for the ten months ended June 30, 1996 from $305,615 for the ten months ended June 30, 1995. The increase is attributable primarily to increased interest expense, commission and fees paid in connection with the Company's pre-Merger debt offerings of $168,970 and costs and fees associated with the Merger of $525,000. Net loss - Net loss increased to $3,897,879 in the ten months ended June 30, 1996, compared to $1,287,246 in the prior ten month period. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has incurred net operating losses and, as of June 30, 1997, had an accumulated deficit of $13,433,102. The Company has financed its net operating losses through June 30, 1997 by a series of debt and equity financings. At June 30, 1997, the Company had cash and cash equivalents of $12,806,717. For the year ended June 30, 1997, the net increase in cash amounted to $6,015,417. Net cash used for operating activities was $4,126,684, net cash used for investing activities was $279,705, and net cash provided by financing activities was $10,421,806. On December 2, 1996, the Company commenced the Series A Offering at a price of $100,000 per unit, each unit consisting of 1,000 shares of Series A Convertible Preferred Stock. The final closing on the Series A Offering was effective as of May 9, 1997, with the Company having sold an aggregate total of 137.78 units, representing 137,780 shares of Series A Convertible Preferred Stock, for net proceeds to the Company of approximately $11,637,000, after deducting commission and other expenses of the Series A Offering. Pursuant to the Option Agreement, Nihon can maintain its option to license certain products based on the MIDAS technology provided Nihon makes certain milestone payments based on progress in product development. Nihon may exercise its right to negotiate a license agreement at any time upon notice and payment of additional monies to the Company. In the event that the parties cannot agree on terms of a license agreement, then the Company could be required to repay $550,000 to Nihon. There can be no Page 32 assurance that the Company and Nihon will ever enter into a definitive license agreement, that additional payments provided for in the Option Agreement will be made, or that the strategic alliance between the Company and Nihon will result in the development or commercialization of any product. Pursuant to certain license agreements relating to LeuTech, the Company is obligated to make minimum payments of $100,000 per year in the fiscal years ending June 30, 1998 and 1999, and $125,000 in the fiscal year ending June 30, 2000. Pursuant to the terms of certain notes payable to stockholders, the principal of which aggregates $80,000, repayment of principal and interest is required in the second quarter of the fiscal year ending June 30, 1998. Commencing June 1997, the Company's monthly payments on long-term financing provided by Aberlyn increased to $91,695, representing payment of current interest and principal. The final monthly payment is scheduled to be made in May 1999. In March 1997, the Company entered into a ten-year lease on research and development facilities in Edison, New Jersey, with the lease term commencing August 1, 1997. Minimum future lease payments escalate from approximately $116,000 per year to $200,000 per year after the fifth year of the lease term. The lease will expire in fiscal year 2007. The Company anticipates that the cost of tenant improvements, net of the landlord's contribution, and acquisition of laboratory equipment will amount to approximately $1,600,000. Effective August 1, 1997, the Company entered into a five-year lease on administrative offices in Princeton, New Jersey. Minimum future lease payments are approximately $97,000 per year. The Company believes that it has sufficient cash and cash equivalents to fund the Company's projected debt obligations and fund projected operations for fiscal year 1998. The Company expects to continue actively searching for certain products and technologies to license or acquire in the future. If the Company is successful in identifying a product or technology for acquisition, substantial funds may be required for such acquisition and subsequent development or commercialization. To date, the Company has not completed an acquisition and there can be no assurance that any acquisition will be consummated in the future. The Company anticipates incurring additional losses over at least the next several years, and such losses are expected to increase as the Company expands its research and development activities relating to its MIDAS technology and its direct radiolabeling technology. To achieve profitability, the Company, alone or with others, must successfully develop its technologies and proposed products, conduct pre-clinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture and market such technologies and proposed products. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. ITEM 7. FINANCIAL STATEMENTS. The Company's consolidated financial statements appear following Item 13 of this Report. Page 33 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As of July 9, 1996, in connection with the Merger, Deloitte & Touche LLP, the Company's independent accountant which was engaged as the principal accountant to audit the Company's financial statements, was dismissed. The Company, after consultation with Arthur Andersen LLP, engaged Arthur Andersen LLP as of July 9, 1996 as the principal accountant to audit the Company's financial statements. Arthur Andersen LLP served as RhoMed's independent accountant prior to the Merger. RhoMed, prior to the Merger, consulted Arthur Andersen LLP regarding the application of accounting principles to the proposed Merger. The primary issue that was the subject of such consultations was the characterization of the proposed Merger for accounting purposes. RhoMed was orally advised by Arthur Andersen LLP that the Merger would be treated as a recapitalization of RhoMed with RhoMed as the acquirer (reverse acquisition), and that the proposed Merger would not constitute a business combination. The Company's former accountant, Deloitte & Touche LLP, was not consulted by the Company regarding such issue. The Company's decision to change accountants was recommended and approved by the Company's Board of Directors subsequent to the Merger based upon the Company's need for one independent accountant to be responsible for the financial statements of the Company following the Merger. During Interfilm's fiscal years ended December 31, 1995 and 1994, there were no disagreements between the Company and Deloitte & Touche LLP, the Company's former independent accountant, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Further, during Interfilm's fiscal years ended December 31, 1995 and 1994, respectively, Deloitte & Touche LLP's opinion with respect to the Company's financial statements was qualified as to the Company's ability to continue as a going concern. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name and positions of the executive officers and directors of the Company: Name Age Position with the Company - ----------------------- ----- ---------------------------------------- Edward J. Quilty (1) 46 Chairman of the Board, President, Chief Executive Officer and Director Carl Spana, Ph.D. 35 Executive Vice President, Chief Technology Officer and Director Charles Putnam 45 Executive Vice President John J. McDonough 33 Vice President and Chief Financial Officer Page 34 Name Age Position with the Company - ----------------------- ----- --------------------------------- Michael S. Weiss (2) 31 Director James T. O'Brien (2) 58 Director John K.A. Prendergast, Ph.D. (1) 43 Director - ------------------------------------ (1) Member of the Compensation Committee. Mr. Quilty, as President of the Company, is a member ex officio of the Compensation Committee. (2) Member of the Audit Committee. EDWARD J. QUILTY has been Chairman of the Board, President, Chief Executive Officer and a director of the Company since June 25, 1996, the effective date of the Merger, and has been Chief Executive Officer and a director of RhoMed since November 1995. From July 1994 through November 1995, Mr. Quilty was President, Chief Executive Officer and a director of MedChem Products, Inc. ("MedChem"), a publicly traded medical device company, which in September 1995 was merged into C.R. Bard, Inc. From March 1992 through July 1994, Mr. Quilty served as President and Chief Executive Officer of Life Medical Sciences, Inc. ("Life Medical"), a publicly traded biotechnology company. From January 1987 through October 1991, Mr. Quilty served as Executive Vice President of McGaw Inc., a publicly traded pharmaceutical company. Mr. Quilty is also Chairman of the Board and a director of Derma Sciences, Inc., a publicly traded medical device company. Mr. Quilty received his M.B.A. from Ohio University, and a B.S. from Southwest Missouri State University. CARL SPANA, Ph.D., has been a director of the Company since June 25, 1996, the effective date of the Merger, and has been a director of RhoMed since July 1995. Since June 1996, Dr. Spana has served as Executive Vice President and Chief Technology Officer of the Company and RhoMed. From June 1993 to June 1996, Dr. Spana was Vice President of Paramount Capital Investments, a biotechnology and biopharmaceutical merchant banking firm, and of The Castle Group Ltd. ("Castle Group"), a medical venture capital firm. At Paramount Capital Investments and at Castle Group, Dr. Spana was responsible for discovering, evaluating, and commercializing biotechnologies. Through his work at Paramount Capital Investments and Castle Group, Dr. Spana co-founded and acquired several private biotechnology firms. From July 1991 to June 1993, Dr. Spana was a Research Associate at Bristol-Myers Squibb, a publicly traded pharmaceutical company, where he was involved in scientific research in the field of immunology. Dr. Spana is a director of and was Interim President of AVAX Technologies, Inc. ("AVAX"), a publicly traded medical technology company. Dr. Spana received his Ph.D. in Molecular Biology from The Johns Hopkins University and a B.S. in Biochemistry from Rutgers University. CHARLES PUTNAM has been Executive Vice President of the Company since June 25, 1996, the effective date of the Merger, and is responsible for operations, product development and regulatory and clinical affairs. From July 1994 to May 1996, Mr. Putnam was Executive Vice President, Research and Development, of MedChem. At MedChem, Mr. Putnam was responsible for product development, regulatory affairs, clinical research and quality control. From March 1993 to July 1994, Mr. Putnam was Vice President of Operations and Research and Development of Life Medical, where he was responsible Page 35 for all aspects of manufacturing, product development and regulatory affairs for the company's commercial product line. From March 1983 to March 1993, Mr. Putnam was employed by American Cyanamid Corporation in a variety of positions, including Director of Device Development. JOHN J. McDONOUGH has been Vice President and Chief Financial Officer of the Company since June 25, 1996, the effective date of the Merger, and has been Vice President and Chief Financial Officer of RhoMed since December, 1995. From January 1992 through December 1995, Mr. McDonough was employed by MedChem in various positions, his final position being Vice President and Chief Financial Officer. Previously, Mr. McDonough was a manager with KPMG Peat Marwick. Mr. McDonough received his B.S. in Accountancy from Bentley College and is a candidate for an M.B.A. from Harvard Business School due to graduate in June 1998. MICHAEL S. WEISS has been a director of the Company since June 25, 1996, the effective date of the Merger, and has been a director of RhoMed since July 1995. Since November 1993, Mr. Weiss has been Associate General Counsel and then General Counsel of Paramount Capital Investments and Senior Managing Director of Paramount Capital. Prior to that Mr. Weiss was an attorney with Cravath, Swaine & Moore. Mr. Weiss also serves on the Board of Directors of Pacific Pharmaceuticals, Inc., AVAX, as Secretary of Atlantic Pharmaceuticals, Inc. ("Atlantic Pharmaceuticals"), and as Vice Chairman of the Board and on the Board of Directors of Genta Incorporated and as Chairman of the Board and on the Board of Directors of Procept Inc., all publicly traded medical technology companies. Additionally, Mr. Weiss is a member of the board of directors of several privately held biopharmaceutical companies. Mr. Weiss received his J.D. from Columbia University School of Law and a B.S. in Finance from The State University of New York at Albany. JAMES T. O'BRIEN has been a director of the Company since August 1, 1996. Since November 1991, Mr. O'Brien has been Chairman of the Board of Access Corporation, a provider of employment software and information. Since July 1996, Mr. O'Brien has been President and Chief Executive Officer of O'Brien Marketing and Communications, an advertising and communications company. From 1989 to 1991 Mr. O'Brien was President and Chief Operating Officer of Elan Corporation, PLC, a publicly traded pharmaceutical company. From 1986 to 1989, Mr. O'Brien was President and Chief Executive Officer of O'Brien Pharmaceuticals, Inc. Prior to this, Mr. O'Brien held various management positions with Revlon Health Care Group, including President of USV Laboratories and the Armour Pharmaceutical Company; Lederle Laboratories; and Sandoz Pharmaceuticals, Inc. Mr. O'Brien is a director of Carrington Laboratories, Inc., a publicly traded pharmaceutical and medical devices company, and Theratech, Inc., a publicly traded pharmaceutical and drug delivery company. JOHN K.A. PRENDERGAST, Ph.D. has been a director of the Company since August 28, 1996. Dr. Prendergast has served as a Managing Director of Paramount Capital Investments and as a Managing Director of Castle Group since October 1991. Dr. Prendergast is a co-founder and director of Avigen, Inc. ("Avigen"), a medical technology company, and, from December 1992 to March 1996, served as a Vice President and the Treasurer of Avigen, Inc. Dr. Prendergast is a co-founder and director of Xenometrix, Inc., AVAX, and Atlantic Pharmaceuticals, all publicly traded medical technology companies. Dr. Prendergast received M.Sc. and Ph.D. degrees from the University of New South Wales, Sydney, Australia and a C.S.S. in Administration and Management from Harvard University. There are no family relationships between directors or executive officers. Page 36 All directors hold office until the next annual meeting of stockholders of the Company and until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors. Certain of the officers and directors of the Company currently do, and may from time to time in the future, serve as officers or directors of other biopharmaceutical or biotechnical companies. There can be no assurance that such other companies will not in the future have interests in conflict with those of the Company. See "Important Factors Regarding Forward-Looking Statements -- Certain Interlocking Relationships; Potential Conflicts of Interest" in Item 1. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Edward J. Quilty failed to timely report a transaction on Form 4 for the month of April 1997 and John K.A. Prendergast failed to timely report his initial ownership on Form 3 for the month of August 1996. Mr. Quilty and Mr. Prendergast each subsequently reported the required information on Forms 5 for the fiscal year ended June 30, 1997. The Aries Trust failed to timely report its initial ownership on Form 3 for the month of July 1996, but subsequently reported the required information on a Form 5 for the fiscal year ended June 30, 1997. The Company knows of no other failure to file a required form. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth compensation paid to the Company's Chief Executive Officer and the other named executive officers for the last three fiscal years. See note (1) to the following table, concerning the change in fiscal year end. With respect to the persons and periods covered in the following table, the Company made no restricted stock awards and had no long-term incentive plan payouts. Page 37
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation ------------------------------------------------------- ------------------------------------ Awards Other ------------------- Annual Securities All other Compen- Underlying Compen- Name and Salary Bonus sation Options/ sation Principal Position Year(1) ($) ($) ($) SARs (#)(2) ($) - ------------------ ------- ------ ----- ------- ----------- --------- Edward J. Quilty, 1997 $301,064 -- -- 240,074(4) -- Chief Executive 1996 $184,794 -- -- 178,073 -- Officer(3) 1995 N/A N/A N/A N/A -- Carl Spana, Ph.D., 1997 $150,000 -- -- 41,766 -- Executive Vice 1996 $3,462 -- -- 74,196 $25,000(6) President(5) 1995 N/A N/A N/A N/A N/A Charles L. Putnam, 1997 $150,000 -- -- 41,766 -- Executive Vice 1996 $9,539 -- -- 74,196 -- President(7) 1995 N/A N/A N/A N/A N/A
- -------------------------------- (1) The Company's fiscal year ends on June 30. Due to a change in the Company's fiscal year end, unless otherwise specified herein fiscal year 1996 covers the ten-month transition period from September 1, 1995 to June 30, 1996. Fiscal year 1995 ended August 31, 1995 (RhoMed's former fiscal year end). All references to compensation before June 25, 1996 (the Merger date) relate to compensation paid or issued by RhoMed. (2) The security underlying all options is Common Stock. All amounts of Common Stock in the table have been adjusted to reflect the Reverse Split. (3) Mr. Quilty became an employee and Chief Executive Officer of RhoMed on November 16, 1995 and became Chief Executive Officer of the Company on June 25, 1996. (4) Includes an anti-dilution option to purchase 70,257 shares of Common Stock at $.20 per share granted on September 27, 1996, pursuant to the terms of Mr. Quilty's employment agreement with the Company. See "Employment Agreements" below. The September 27, 1996 option replaced a canceled option to purchase the same number of shares at $5.42 per share, originally granted by RhoMed on June 21, 1996 and included in the 1996 total. The $5.42 per share price of the June Page 38 21, 1996 option was not in accordance with the terms of Mr. Quilty's employment agreement, so the Board of Directors replaced the June 21, 1996 option with the correctly priced September 27, 1996 option. Excluding that replacement option, the options granted during fiscal 1997 were to purchase a total of 169,817 shares. (5) Dr. Spana became an employee of RhoMed on June 15, 1996 and an Executive Vice President of the Company on June 25, 1996. Before becoming an officer of the Company, he was a consultant to RhoMed. (6) Consists of consulting fees paid by RhoMed. (7) Mr. Putnam became an employee of RhoMed on June 3, 1996 and an Executive Vice President of the Company on June 25, 1996. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth the options granted to the named executive officers during the fiscal year ended June 30, 1997. The Company granted no stock appreciation rights ("SARs").
Market Price Number of % of Total as Reported Securities Options/SARs Exercise on Bulletin Underlying Granted to or Base Board on Name Options/SARs Employees Price Date of Expiration Granted (#) in Fiscal Year ($/Sh) Grant Date ------------ -------------- -------- ------------ ---------- Edward J. Quilty 70,257(1) 17.77% $0.20(1) $10.50 none 30,000(2) 7.59% $7.50 $7.50 12-12-06 82,542(3) 20.88% $0.20(3) $6.00 none 57,275(4) 14.49% $4.96(6) $6.00 6-2-07 Carl Spana, Ph.D. 15,000(2) 3.79% $8.00 $8.00 1-3-07 26,766(5) 6.77% $4.96(6) $6.00 6-2-07 Charles L. Putnam 15,000(2) 3.79% $8.00 $8.00 1-3-07 26,766(5) 6.77% $4.96(6) $6.00 6-2-07
- -------------------------------- (1) Anti-dilution option granted pursuant to the Company's employment agreement with Mr. Quilty. During the employment term, the option vests in 29 equal monthly installments on the 16th of each month. See "Employment Agreements" in this Item 10. (2) Granted under the 1996 Stock Option Plan and immediately exercisable. Page 39 (3) Anti-dilution option granted pursuant to the Company's employment agreement with Mr. Quilty. During the employment term, the option vests in 18 equal monthly installments on the 16th of each month following the date of grant. See "Employment Agreements" in this Item 10. (4) Vests in 17 equal monthly installments on the 16th of each month after July 1, 1997. (5) Vests in three equal installments, on July 1, 1997; July 1, 1998; and June 21, 1999. (6) Non-plan option. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth each option exercise by a named executive officer during the fiscal year ended June 30, 1997. Only Edward J. Quilty exercised any options. The Company has no outstanding SARs. Fiscal year-end values are based on a last reported sale price for the Common Stock, as reported on the Bulletin Board on June 30, 1997, of $6.125 per share.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Shares Options/SARs at Options/SARs Acquired Value FY-End (#) at FY-End ($) on Exercise Realized Exercisable/ Exercisable/ Name (#) ($) (1) Unexercisable Unexercisable - ------------------- ----------- --------- -------------- ------------------- Edward J. Quilty 47,918 $310,065 72,642/227,331 $252,504/$1,073,451 Carl Spana, Ph.D. 0 -- 64,465/51,499 $33,884/$48,125 Charles L. Putnam 0 -- 39,732/76,231 $16,942/$65,066
- -------------------------------- (1) Value realized is the closing market price of the stock on the date of exercise less the option price, multiplied by the number of shares acquired on exercise. COMPENSATION OF DIRECTORS Pursuant to the 1996 Stock Option Plan each director of the Company who is not an employee of the Company or of a parent or subsidiary of the Company (a "Non-Employee Director") will be granted, at the first meeting of the Board of Directors following each annual meeting of the stockholders of the Company, an option to purchase 2,500 shares of Common Stock at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, which options are to vest as to 25% per of the option granted during each year, starting one year after the date of grant (a "Non-Employee Director's Formula Option"). Any Non-Employee Director who is elected to the Board of Directors after August 28, 1996 and before the annual stockholders' meeting in any year will also be granted a Non-Employee Director's Formula Option to purchase a pro-rata portion of 2,500 shares equal to the portion of a year (measured in full calendar months) remaining until the next scheduled annual stockholders' meeting. All Non-Employee Directors serving on the date the Board of Directors adopted the 1996 Stock Page 40 Option Plan (Richard J. Murphy, who resigned as a director effective August 26, 1997, James T. O'Brien, John K.A. Prendergast and Michael S. Weiss) were granted initial Non-Employee Director's Formula Options to purchase 5,000 shares of Common Stock at an exercise price of $5.44 per share with the same exercise price and vesting conditions as regular Non-Employee Director's Formula Options. Non-Employee Directors are paid $12,000 per year, plus expenses, for services as a director. In lieu of the $12,000 per year, each Non-Employee Director may, and Mr. O'Brien and Mr. Weiss have, elected to receive a non-incentive stock option pursuant to the 1996 Stock Option Plan to purchase that number of shares which would be purchasable, at the then fair market value, by a sum equal to twice the then accrued compensation. Such options will be granted at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, will be immediately exercisable and will expire ten (10) years from the date of grant. The Board of Directors previously agreed that in lieu of $4,000 which was due to each of the Non-Employee Directors as of December 1996, such directors could elect to receive a non-incentive stock option pursuant to the 1996 Stock Option Plan to purchase 1,066 shares of Common Stock at an exercise price of $7.50 per share, which was the fair market value per share on the date of grant. Mr. Murphy, Mr. O'Brien and Mr. Weiss were each granted such options, which are immediately exercisable and expire ten (10) years from the date of grant. Employee directors are not separately compensated for services as a director, but are reimbursed for expenses incurred in performing their duties as directors, including attending all meetings of the Board of Directors and any committees thereof. Service as a director is a condition of Edward J. Quilty's employment agreement, but such service is not separately compensated. See "Employment Agreements" in this Item 10. In July 1996, the Company paid $36,000 to Buck A. Rhodes, Ph.D., a former director of the Company and RhoMed, as severance compensation for resigning from the board of RhoMed effective June 30, 1996. The resignation and severance pay were pursuant to the terms of a consulting agreement dated as of March 7, 1996, between RhoMed and Dr. Rhodes. EMPLOYMENT AGREEMENTS Executive officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board of Directors. Each officer shall hold his position until his successor is appointed and qualified. Mr. Quilty, Dr. Spana and Mr. Putnam each hold their offices pursuant to employment agreements. Subsequent to the Merger, the Company adopted, with amendments as required to reflect the Merger, an employment agreement entered into on November 16, 1995 between RhoMed and Edward J. Quilty. Pursuant to this agreement, Mr. Quilty is serving as President and Chief Executive Officer of the Company and RhoMed. The initial term of the employment agreement was one year and it is automatically renewed for successive twelve-month periods unless either party gives written notice to the contrary, or unless the agreement is otherwise terminated. Mr. Quilty's minimum base salary is $300,000 per year; his current salary is $321,000 per year. The Company has agreed to reimburse Mr. Quilty for premiums and other payments to maintain a $1,000,000 term life insurance policy issued in 1992 for the benefit of Mr. Quilty and his designees. Mr. Quilty may also participate in any benefit plans available to other senior executives of the Company, and in any directors' and officers' liability insurance which the Company maintains. Pursuant to the employment agreement, RhoMed issued to Mr. Quilty an option to purchase common stock equal to a 10% fully diluted equity interest in RhoMed as of November 16, 1995, at a price of $0.01 per share, to vest in 36 equal increments monthly during the term of the employment agreement. By operation of the Merger, that option became an option for 107,816 shares of Common Stock at an Page 41 exercise price of $0.22 per share (rounded to the nearest cent). To date, Mr. Quilty has exercised that option as to 47,918 shares. The agreement also provides for anti-dilution protections which, among other things, require the Company to issue additional options with the same exercise price as the original option, so that Mr. Quilty shall, at all times, have options in the aggregate to purchase the number of shares of Common Stock (together with Common Stock purchased on the exercise of such options) equal to not less than 3.75% of the Company's outstanding Common Stock on a fully diluted basis. Pursuant to the anti-dilution protections, the Company has issued to Mr. Quilty additional anti-dilution options to purchase an aggregate of 152,799 shares of Common Stock, which options vest in equal monthly increments so as to become fully vested 36 months after the commencement of the employment agreement. For a period of five (5) years after the first anniversary of the Company's initial post-Merger public offering, Mr. Quilty has piggy-back registration rights as to all Common Stock which he owns. If the Company terminates the employment agreement for "cause," or if Mr. Quilty terminates the agreement without "good reason," then the Company's payment obligation is limited to amounts earned through the termination date, and the option will be exercisable only to the extent vested. If Mr. Quilty elects to terminate the employment agreement following a post-Merger change in control of the Company, then the Company's payment obligation is limited to amounts earned through the termination date, but the option will immediately become exercisable in full. If the Company terminates the employment agreement without cause, or in the event of Mr. Quilty's death or disability, or if Mr. Quilty terminates the employment agreement with good reason, then in addition to amounts earned through the termination date, the Company must pay Mr. Quilty one year of his then current base salary. "Cause," as defined in the employment agreement, consists of fraud, felony conviction, refusal to carry out instructions of the Board of Directors, or governmental disqualification (all as defined in the employment agreement). "Good reason," as defined in the employment agreement, consists of breach by the Company of its obligations under the employment agreement. The employment agreement also includes non-competition, confidentiality and indemnification covenants. Carl Spana, Ph.D., and Charles Putnam have each entered into employment agreements with the Company dated September 27, 1996, pursuant to which each is serving as an Executive Vice President of the Company for a three-year period commencing June 21, 1996. Effective June 21, 1997, the base salary for each is $160,500 per year. Each is entitled to participate in all bonus and benefit programs that the Company establishes, to the extent his position, tenure, salary, age, health and other qualifications make him eligible to participate. Each agreement allows either the Company or the employee to terminate the agreement on thirty (30) days' notice, and contains other provisions for termination by the Company for "cause," or by the employee for "good reason" after a "change in control" (all as these terms are defined in the respective agreements). Early termination may, in some circumstances, result in accelerated vesting of stock options and/or severance pay for a nine-month period at the rate of base salary, cash bonus and benefits then in effect. Each agreement contains non-competition and confidentiality covenants. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Set forth below is information, as of September 17, 1997, concerning the stock ownership and voting power of all persons (or groups of persons) known by the Company to be the beneficial owner of more than five percent (5%) of the Common Stock or Series A Convertible Preferred Stock, each director of the Company, each of the executive officers included in the Summary Compensation Table and all directors and executive officers of the Company as a group. Page 42
Amount and Nature Percent of Title of Name and Address of Beneficial Percent of Voting Class of Beneficial Owner Ownership (1)(2) Class Power(2) - -------- ------------------------------- ----------------- ---------- ---------- Common Edward J. Quilty 187,421(3) 5.9% * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common Carl Spana, Ph.D. 85,059(4) 2.7% * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common Charles L. Putnam 48,654(5) 1.6% * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common Michael S. Weiss 26,828(6) * * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common James T. O'Brien 2,316(7) * * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common John K.A. Prendergast, Ph.D. 12,923(8) * * Stock c/o Palatin Technologies, Inc. 214 Carnegie Center, Suite 100 Princeton, NJ 08540 Common Lindsay A. Rosenwald, M.D. 1,283,056(9) 35.2% 15.2% Stock 787 Seventh Avenue New York, NY 10019 Common RAQ, LLC 358,245(10) 11.8% 6.2% Stock 787 Seventh Avenue New York, NY 10019 Common Paramount Capital, Inc. 277,782(11) 8.4% * Stock 787 Seventh Avenue New York, NY 10019
Page 43
Amount and Nature Percent of Title of Name and Address of Beneficial Percent of Voting Class of Beneficial Owner Ownership (1)(2) Class Power(2) - -------- ------------------------------- ----------------- ---------- ---------- Common Paramount Capital Asset Management, Inc. 580,535(12) 17.6% 9.1% Stock 787 Seventh Avenue New York, NY 10019 Common The Aries Trust 397,197(13) 12.4% 6.3% Stock c/o MeesPierson (Cayman) Limited P.O. Box 2003 British American Centre, Phase 3 Dr. Roy's Drive George Town, Grand Cayman Common Aries Domestic Fund, L.P. 183,338(14) 5.9% 2.8% Stock 787 Seventh Avenue New York, NY 10019 Common Essex Woodlands Health Ventures, L.P. 302,419(15) 9.0% 5.2% Stock Fund III 2170 Buckthorne, Suite 170 The Woodlands, TX 77380 Series A Lindsay A. Rosenwald, M.D. 23,778(16) 15.7% 3.5% Preferred 787 Seventh Avenue Stock New York, NY 10019 Series A Paramount Capital, Inc. 13,778(17) 9.1% * Preferred 787 Seventh Avenue Stock New York, NY 10019 Series A Paramount Capital Asset Management, Inc. 10,000(18) 7.3% 3.5% Preferred 787 Seventh Avenue Stock New York, NY 10019 Series A Essex Woodlands Health Ventures, L.P. 15,000 10.9% 5.2% Preferred Fund III Stock 2170 Buckthorne, Suite 170 The Woodlands, TX 77380 All directors and executive officers as a 370,815(19) 11.1% 1.4% group (seven (7) persons)
- ------------------ *Less than one percent. (1) With respect to Common Stock, this column includes shares of Common Stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days following Page 44 September 17, 1997, and shares of Common Stock issuable upon conversion of Series A Convertible Preferred Stock. No director or officer owns any Series A Convertible Preferred Stock. Beneficial ownership includes direct or indirect voting or investment power. All shares listed in the table are beneficially owned and sole voting and investment power is held by the persons named, except as otherwise noted. (2) The Common Stock has one vote for each share and the Series A Convertible Preferred Stock has approximately 80.6 votes for each share, subject to adjustment upon the occurrence of certain events. Voting power is calculated on the basis of the aggregate of Common Stock and Series A Convertible Preferred Stock outstanding as of September 17, 1997. On September 17, 1997, there were 3,041,111 shares of Common Stock outstanding and 137,780 shares of Series A Convertible Preferred Stock outstanding, entitled to a maximum of 2,777,739 votes in the aggregate. In the case of Series A Convertible Preferred Stock voting separately as a class, voting power is equal to the percent of the class owned. (3) Includes (i) 23,959 shares of Common Stock issuable upon exercise of options granted pursuant to RhoMed's 1995 Employee Incentive Stock Option Plan, of which options with respect to 17,969 shares of Common Stock are currently exercisable and options with respect to 5,990 shares of Common Stock will become exercisable within 60 days following September 17, 1997; (ii) 30,000 shares of Common Stock issuable upon exercise of options granted pursuant to the 1996 Stock Option Plan; (iii) 68,699 shares of Common Stock issuable upon exercise of anti-dilution options granted by the Company, of which options with respect to 54,681 shares of Common Stock are currently exercisable and options with respect to 14,018 shares of Common Stock will become exercisable within 60 days following September 17, 1997; and (iv) 16,845 shares of Common Stock issuable upon exercise of non-plan options, of which options with respect to 10,107 shares of Common Stock are currently exercisable and options with respect to 6,738 shares of Common Stock will become exercisable within 60 days following September 17, 1997. Does not include 160,469 shares of Common Stock issuable upon exercise of options not exercisable within 60 days following September 17, 1997. (4) Includes (i) 49,464 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to RhoMed's 1995 Employee Incentive and Non-Qualified Stock Option Plans; (ii) 15,000 shares of Common Stock issuable upon exercise of options granted pursuant to the 1996 Stock Option Plan; and (iii) 8,922 shares of Common Stock issuable upon exercise of non-plan options. Does not include 42,576 shares of Common Stock issuable upon exercise of options not exercisable within 60 days following September 17, 1997. (5) Includes (i) 24,732 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to RhoMed's 1995 Employee Incentive and Non-Qualified Stock Option Plans; (ii) 15,000 shares of Common Stock issuable upon exercise of options granted pursuant to the 1996 Stock Option Plan; and (iii) 8,922 shares of Common Stock issuable upon exercise of non-plan options. Does not include 67,308 shares of Common Stock issuable upon exercise of options not exercisable within 60 days following September 17, 1997. (6) Includes (i) 11,587 shares of Common Stock issuable upon exercise of currently exercisable warrants; and (ii) 2,316 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to the 1996 Stock Option Plan. Does not include 3,750 shares of Page 45 Common Stock issuable upon exercise of options granted pursuant to the 1996 Stock Option Plan not exercisable within 60 days following September 17, 1997. (7) Represents 2,316 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to the 1996 Stock Option Plan. Does not include 3,750 shares of Common Stock issuable upon exercise of options granted pursuant to the Option Plan not exercisable within 60 days following September 17, 1997. (8) Includes 1,250 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to the 1996 Stock Option Plan. Does not include 3,750 shares of Common Stock issuable upon exercise of options granted pursuant to the Option Plan not exercisable within 60 days following September 17, 1997. (9) Includes (i) 66,494 shares of Common Stock issuable upon exercise of currently exercisable warrants held by Dr. Rosenwald; (ii) 358,245 shares of Common Stock owned by RAQ, LLC, of which Dr. Rosenwald is President; (iii) 232,734 shares of Common Stock outstanding and 131,048 shares of Common Stock issuable upon conversion of 6,500 shares of Series A Convertible Preferred Stock, owned by The Aries Trust, a Cayman Islands trust ("The Aries Trust"); (iv) 93,189 shares of Common Stock outstanding and 70,564 shares of Common Stock issuable upon conversion of 3,500 shares of Series A Convertible Preferred Stock, owned by Aries Domestic Fund, L.P. ("Aries Domestic Fund") (v) 19,585 shares of Common Stock issuable upon exercise of currently exercisable warrants held by Aries Domestic Fund; (vi) 33,415 shares of Common Stock issuable upon exercise of currently exercisable warrants held by The Aries Trust; and (vii) 277,782 shares of Common Stock issuable upon conversion of 13,778 shares of Series A Convertible Preferred Stock issuable upon exercise of warrants held by Paramount Capital, exercisable within 60 days following September 17, 1997. Dr. Rosenwald shares voting and investment power as to the foregoing shares. Dr. Rosenwald is the President of Paramount Capital and is the President, Chairman of the Board and sole shareholder of Paramount Capital Asset Management, Inc., which is the general partner of Aries Domestic Fund and the investment manager of The Aries Trust. Paramount Capital Asset Management, Inc. and Dr. Rosenwald disclaim beneficial ownership of the securities held by Aries Domestic Fund and The Aries Trust, except to the extent of their pecuniary interest therein, if any. Does not include (i) any shares of Common Stock owned by employees of Paramount Capital or Paramount Capital Investments of which Dr. Rosenwald is the Chairman of the Board and President, or (ii) warrants to purchase 6,250 shares of Common Stock which are issuable to Paramount Capital or its designees pursuant to a financial advisory services agreement. (10) RAQ, LLC shares voting and investment power as to these shares. All of the shares of Common Stock owned by RAQ, LLC are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D., as explained in note (9) above. (11) Represents 277,782 shares of Common Stock issuable upon conversion of 13,778 shares of Series A Convertible Preferred Stock issuable upon exercise of placement agent warrants exercisable within 60 days following September 17, 1997. All of the shares purchasable by Paramount Capital are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D., as explained in note (9) above. (12) Includes (i) 232,734 shares of Common Stock outstanding and 131,048 shares of Common Stock issuable upon conversion of 6,500 shares of Series A Convertible Preferred Stock, owned by The Page 46 Aries Trust; (ii) 93,189 shares of Common Stock outstanding and 70,564 shares of Common Stock issuable upon conversion of 3,500 shares of Series A Convertible Preferred Stock, owned by Aries Domestic Fund; (iii) 19,585 shares of Common Stock issuable upon exercise of currently exercisable warrants held by Aries Domestic Fund; and (iv) 33,415 shares of Common Stock issuable upon exercise of currently exercisable warrants held by The Aries Trust. Dr. Rosenwald and Paramount Capital Asset Management, Inc. share voting and investment power as to the foregoing shares. Paramount Capital Asset Management, Inc. and Dr. Rosenwald disclaim beneficial ownership of the securities held by Aries Domestic Fund and The Aries Trust, except to the extent of their pecuniary interest therein, if any. All of the shares owned or purchasable by Paramount Capital Asset Management, Inc. are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D., as explained in note (9) above. (13) Includes (i) 131,048 shares of Common Stock issuable upon conversion of 6,500 shares of Series A Convertible Preferred Stock; and (ii) 33,415 shares of Common Stock issuable upon exercise of currently exercisable warrants. The Aries Trust shares voting and investment power as to the foregoing shares. All of the shares owned or purchasable by The Aries Trust are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D. and of Paramount Capital Asset Management, Inc., as explained in notes (9) and (12) above. (14) Includes (i) 70,564 shares of Common Stock issuable upon conversion of 3,500 shares of Series A Convertible Preferred Stock; and (ii) 19,585 shares of Common Stock issuable upon exercise of currently exercisable warrants. Aries Domestic Fund shares voting and investment power as to the foregoing shares. All of the shares owned or purchasable by Aries Domestic Fund are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D. and of Paramount Capital Asset Management, Inc., as explained in notes (9) and (12) above. (15) Represents shares of Common Stock issuable on conversion of 15,000 shares of Series A Convertible Preferred Stock. (16) Includes (i) 6,500 shares of Series A Convertible Preferred Stock owned by The Aries Trust; (ii) 3,500 shares of Series A Convertible Preferred Stock owned by Aries Domestic Fund; and 13,778 shares of Series A Convertible Preferred Stock issuable upon exercise of placement agent warrants held by Paramount Capital, exercisable within 60 days following September 17, 1997. Dr. Rosenwald shares voting and investment power as to the foregoing shares. See note (9) above. (17) Represents shares of Series A Convertible Preferred Stock issuable upon exercise of placement agent warrants exercisable within 60 days following September 17, 1997. All of the shares purchasable by Paramount Capital are also included in the beneficial ownership of Lindsay A. Rosenwald, M.D., as explained in note (9) above. (18) Includes (i) 6,500 shares of Series A Convertible Preferred Stock owned by The Aries Trust; and (ii) 3,500 shares of Series A Convertible Preferred Stock owned by Aries Domestic Fund. Paramount Capital Asset Management, Inc. shares voting and investment power as to the foregoing shares. See note (12) above. (19) Includes 286,626 shares of Common Stock issuable on exercise of options and warrants, of which 259,880 are currently exercisable and 26,746 will become exercisable within 60 days following September 17, 1997. Does not include 304,446 shares of Common Stock issuable upon exercise of options not exercisable within 60 days following September 17, 1997. Page 47 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 1996 the Company engaged Paramount Capital to act as exclusive placement agent for the Series A Offering. Mr. Weiss and Dr. Prendergast, directors of the Company, recused themselves from voting on the matter, and the Series A Offering was approved by a vote of the disinterested directors. Mr. Weiss is Senior Managing Director of Paramount Capital and Paramount Capital Investments, an affiliate of Paramount Capital, and Dr. Prendergast is Managing Director of Paramount Capital Investments. As placement agent, Paramount Capital received a 9% commission, amounting to $1,240,020, and a 4% non-accountable expense allowance, amounting to $551,120, on the gross proceeds of the Series A Offering, for an aggregate total of $1,791,140, and Preferred Stock Placement Warrants to purchase 13,778 shares of Series A Convertible Preferred Stock, at an exercise price of $110 per share. The Company also agreed to indemnify Paramount Capital against certain liabilities, including liabilities arising under the Securities Act, in connection with the Series A Offering. Pursuant to the placement agency agreement for the Series A Offering, the Company entered into an introduction agreement with Paramount Capital (the "Introduction Agreement"), under which Paramount Capital acts as the Company's non-exclusive financial advisor for a minimum period of eighteen (18) months commencing January 1, 1997, and will receive (i) out-of-pocket expenses incurred in connection with services performed under the Introduction Agreement, (ii) a retainer of $72,000 and (iii) percentage or lump sum success fees in the event that Paramount Capital assists the Company in connection with certain financing and strategic transactions. The Introduction Agreement replaced a similar agreement in effect from September 1, 1996 through December 31, 1996, pursuant to which Paramount Capital received a retainer of $5,000 per month and a warrant to purchase 6,250 shares of Common Stock at $9.00 per share. Prior to the Merger, Paramount Capital served as placement agent for an offering of shares of RhoMed common stock (the "RhoMed Common Stock Offering") authorized by RhoMed's board of directors on March 4, 1996; the RhoMed Class B Offering authorized by RhoMed's board of directors on November 27, 1995; and the RhoMed Class A Offering authorized by RhoMed's board of directors on July 28, 1995. In the RhoMed Class A Offering, the RhoMed Class B Offering and the RhoMed Common Stock Offering, RhoMed paid Paramount Capital commissions and fees of $90,000, $110,500 and $1,254,000, respectively, and issued warrants to designees of Paramount Capital to purchase RhoMed common stock, which as a result of the Merger were converted into warrants to purchase 20,737 shares of Common Stock at $0.22 per share; 1,958 shares of Common Stock at $6.51 per share; and 177,796 shares of Common Stock at $6.51 per share, respectively. Effective April 1995, RhoMed entered into a letter of intent with Castle Group under which (i) Castle Group agreed to arrange for a line of credit of up to $300,000 to finance ongoing operations of RhoMed; (ii) Castle Group agreed to arrange for future financings for RhoMed; and (iii) RhoMed agreed to sell to Castle Group or its designees, for nominal consideration, 4,000,000 shares of RhoMed Series A Preferred Stock. This resulted, at the time of the investment, in Castle Group and affiliates of Castle Group obtaining majority ownership and control of RhoMed. Castle Group is owned by Lindsay A. Rosenwald, M.D., and is under common control with Paramount Capital. Pursuant to the letter of intent, RhoMed borrowed the maximum amount, and paid off the line of credit in full in September 1995. The average interest rate for the line of credit was 10.90% and the total interest paid was $8,005. On July 24, 1995, Michael S. Weiss and Carl Spana, Ph.D., were appointed to the board of directors of RhoMed. Dr. Spana was an employee of Castle Group at the time of his appointment to RhoMed's board Page 48 of directors. The RhoMed Class A Offering was ratified by disinterested stockholders of RhoMed on August 15, 1995; the RhoMed Class B Offering was approved by disinterested directors with Mr. Weiss and Dr. Spana abstaining; and the placement agent for the RhoMed Common Stock Offering was selected by an offering committee of RhoMed's board of directors, consisting of disinterested directors. As a result of the RhoMed offerings described above, Dr. Rosenwald, Mr. Weiss, and Dr. Spana received equity securities of the Company in the following amounts: Dr. Rosenwald received warrants to purchase 15,079 shares of Common Stock at $0.22 per share and warrants to purchase 51,416 shares of Common Stock at $6.51 per share; RAQ, LLC, a company controlled by Dr. Rosenwald, received 414,267 shares of Common Stock; Mr. Weiss received 12,925 shares of Common Stock, warrants to purchase 1,464 shares of Common Stock at $0.22 per share and warrants to purchase 10,123 shares of Common Stock at $6.51 per share; and Dr. Spana received 11,673 shares of Common Stock. Dr. Rosenwald is the President, Chairman of the Board and sole stockholder of Paramount Capital Asset Management, Inc., the general partner of Aries Domestic Fund and investment manager of The Aries Trust (together, the "Aries Entities"). The Aries Entities taken together purchased the following equity securities: 10,000 shares of Series A Convertible Preferred Stock, convertible into 201,612 shares of Common Stock, 322,673 shares of Common Stock, warrants to purchase 4,608 shares of Common Stock at $2.71 per share, and warrants to purchase 13,824 shares of Common Stock at $.22 per share. Following the RhoMed Class A, Class B and Common Stock Offerings, Paramount Capital assigned to the Aries Entities those portions of Paramount Capital's placement agent warrants attributable to the investments of the Aries Entities, consisting of warrants to purchase 2,073 shares of Common Stock at $.22 per share and 32,497 shares of Common Stock at $6.51 per share. Mr. Quilty, Dr. Spana, Mr. Putnam and Non-Employee Directors have been granted options to purchase Common Stock. See Items 10 and 11. Buck A. Rhodes, Ph.D. was a director of RhoMed from inception until June 30, 1996, was President of RhoMed from inception until March 7, 1996, and was a director of the Company from June 25, 1996 through June 30, 1996. Under a consulting agreement dated March 7, 1996 between Dr. Rhodes and RhoMed, Dr. Rhodes was paid $51,023 in accrued salary and $36,000 as severance compensation for resigning from the board of RhoMed, and is being paid $6,833 per month from April 1996 through March 1998 for consulting services. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS The following exhibits are filed with this Report, or incorporated by reference as noted: 2.1 Agreement and Plan of Reorganization dated as of April 12, 1996 by and between Interfilm, Inc., Interfilm Acquisition Corp. and RhoMed Incorporated. (a) 2.2 Waiver and Consent dated as of June 24, 1996, between Interfilm, Inc., Interfilm Acquisition Corp. and RhoMed Incorporated. (b) 3.1 Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on November 3, 1993. (c) Page 49 3.2 Amendment to the Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on July 19, 1996. (d) 3.3 Bylaws of the Company. (e) 3.4 Amended Certificate of Designation of Series A Convertible Preferred Stock of the Company, filed on June 24, 1996. (f) 3.5 Amended Certificate of Designation of Series B Preferred Stock of the Company, filed on June 24, 1996. (g) 3.6 Certificate of Designation of Series A Convertible Preferred Stock of the Company, filed on February 21, 1997. (e) 3.7 Amendment to the Restated Certificate of Incorporation of the Company, filed on September 5, 1997.** 4.1 Specimen Certificate for Common Stock. (h) 4.2 Patent Assignment and License Agreement dated as of July 15, 1993, between RhoMed Incorporated and Aberlyn Capital Management Limited Partnership. (b) 4.3 Master Lease Agreement dated November 16, 1994, between RhoMed Incorporated and Aberlyn Capital Management Limited Partnership. (b) 4.4 Letter Agreement, dated as of April 28, 1995, between Aberlyn Capital Management Limited Partnership and RhoMed Incorporated. (b) 4.5 Stock Purchase and Modification Agreement, dated as of June 24, 1996, between Aberlyn Capital Management Limited Partnership, Aberlyn Holding Company, Inc. and RhoMed Incorporated. (b) 4.6 Specimen Certificate for Series A Convertible Preferred Stock. (e) 10.01 Lease between Charles C. and Ellen C. France Revocable Trust and RhoMed Incorporated dated December 18, 1992. (b) 10.02 Amendment, dated November 1, 1993, to Lease between Charles C. and Ellen C. France Revocable Trust and RhoMed Incorporated. (b) 10.03 Second Amendment, dated July 5, 1996, to Lease between Charles C. and Ellen C. France Revocable Trust and RhoMed Incorporated. (b) 10.04 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. (b)* 10.05 RhoMed Incorporated 1995 Nonqualified Stock Option Plan. (b)* 10.06 1996 Stock Option Plan of the Company. (e)* 10.07 Employment Agreement dated as of November 16, 1995, between RhoMed Incorporated and Edward J. Quilty. (b)* 10.08 Employment Agreement dated as of September 27, 1996, between Palatin Technologies, Inc. and Carl Spana. (b)* Page 50 10.09 Employment Agreement dated as of September 27, 1996, between Palatin Technologies, Inc. and Charles Putnam. (b)* 10.10 Class C Warrant for the Purchase of shares of Common Stock issued to William I. Franzblau June 24, 1996. (b) 10.11 License Agreement between Rougier Bio-Tech Limited and RhoMed Incorporated dated May 1, 1992. (b) 10.12 License Agreement between Sterling Winthrop Inc. and RhoMed Incorporated dated November 2, 1992. (b) 10.13 Assignment and Assumption dated January 21, 1994, between Sterling Winthrop, Inc. and Burroughs Wellcome Co. (b) 10.14 Option Agreement between RhoMed Incorporated and The Wistar Institute of Anatomy and Biology dated August 22, 1996. (b) 10.15 Consulting Agreement dated as of March 7, 1995, between RhoMed Incorporated and Buck A. Rhodes. (b) 10.16 Form of Class A Warrant. (b) 10.17 Form of Placement Agent Warrant for the Class A Offering. (b) 10.18 Form of Unit Purchase Agreement for the Class A Offering, including registration rights referred to in the Form of Class A Warrant and Form of Placement Agent Warrant for the Class A Offering. (b) 10.19 Form of Class B Warrant. (b) 10.20 Form of Placement Agent Warrant for the Class B Offering. (b) 10.21 Form of Unit Purchase Agreement for the Class B Offering, including registration rights referred to in the Form of Class B Warrant and Form of Placement Agent Warrant for the Class B Offering. (b) 10.22 Form of Placement Agent Warrant for the RhoMed Common Stock Offering. (b) 10.23 Form of Common Stock Purchase Agreement for the RhoMed Common Stock Offering, including registration rights referred to in the Form of Placement Agent Warrant for the RhoMed Common Stock Offering. (b) 10.24 Lease between Adelante Development Center, Inc. and Palatin Technologies, Inc. dated October 10, 1996. (f) 10.25 License Option Agreement dated as of December 18, 1996, between Palatin Technologies, Inc. and Nihon Medi-Physics Co. Ltd. (j) 10.26 Lease between Carnegie 214 Associates Limited Partnership and Palatin Technologies, Inc. dated May 6, 1997.** 10.27 Lease between WHC-Six Real Estate, L.P. and Palatin Technologies, Inc. dated March 13, 1997.** Page 51 10.28 Amendment to Employment Agreement dated as of November 16, 1995, between RhoMed Incorporated and Edward J. Quilty.* ** 16.1 Letter dated July 19, 1996 from Deloitte & Touche LLP. (k) 21.1 Current list of subsidiaries of the Company. (b) 27 Financial Data Schedule.** 99.1 Certificate of Limited Partnership of "The Interfilm Stockholders Limited Partnership," as filed with the Delaware Secretary of State on June 17, 1996. (b) 99.2 Agreement of Limited Partnership of The Interfilm Stockholders Limited Partnership, dated June 11, 1996. (b) 99.3 The Interfilm Stockholders Trust, established by Interfilm, Inc. and Interfilm Technologies, Inc. on June 11, 1996. (b) 99.4 General Bill of Sale, Assignment and Assumption Agreement among, on the one hand, Interfilm, Inc. and Interfilm Technologies, Inc. and on the other hand, The Interfilm Stockholders Limited Partnership, dated June 25, 1996. (b) NOTES TO EXHIBITS * A management contract or compensatory plan or arrangement. ** Filed as an exhibit to this Report. (a) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K dated June 25, 1996, filed with the Commission on July 10, 1996. (b) Incorporated by reference and previously filed as an exhibit to the Company's Form 10-KSB Annual Report for the period ended June 30, 1996, filed with the Commission on September 27, 1996. (c) Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated July 19, 1996, filed with the Commission on August 9, 1996. (d) Incorporated by reference to Exhibit 3.2 of the Company's Form 8-K dated July 19, 1996, filed with the Commission on August 9, 1996. (e) Incorporated by reference and previously filed as an exhibit to the Company's Form 10-QSB/A Amendment No. 2 for the quarter ended March 31, 1997, filed with the Commission on July 17, 1997. (f) Incorporated by reference to Exhibit 3.3 of the Company's Form 8-K dated July 19, 1996, filed with the Commission on August 9, 1996. (g) Incorporated by reference to Exhibit 3.4 of the Company's Form 8-K dated July 19, 1996, filed with the Commission on August 9, 1996. (h) Incorporated by Reference to Exhibit 4.1 of the Company's Form 8-K dated July 19, 1996, filed with the Commission on August 9, 1996. Page 52 (i) Incorporated by reference to Exhibit 10.24 of the Company's Form 10-QSB for the quarter ended September 30, 1996, filed with the Commission on November 13, 1996. (j) Incorporated by reference to Exhibit 10.25 of the Company's Form 10-QSB/A Amendment No. 2 for the quarter ended December 31, 1996, filed with the Commission on September 12, 1997. (k) Incorporated by reference to Exhibit 16.1 of the Company's Form 8-K/A dated June 25, 1996, filed with the Commission on July 23, 1996. b) REPORTS ON FORM 8-K One report on Form 8-K was filed by the Company during the three months ended June 30, 1997. The report was filed on April 18, 1997, with a date of April 8, 1997, and reported on Item 5, Other Events, relating to an announcement of an interim closing on the Company's Series A Offering. Page 53 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PALATIN TECHNOLOGIES, INC. Date: September 26, 1997 By: /s/ Edward J. Quilty -------------------------- Edward J. Quilty Chairman of the Board, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Titles Date --------- ------ ---- /s/ Edward J. Quilty Chairman of the Board, September 26, 1997 - -------------------------- President and Chief Executive Officer (principal executive officer) /s/ Carl Spana Executive Vice President September 26, 1997 - -------------------------- and Director Carl Spana /s/ John J. McDonough Vice President and Chief September 26, 1997 - ------------------------- Financial Officer John J. McDonough (principal financial and accounting officer) /s/ Michael S. Weiss Director September 26, 1997 - ------------------------- Michael S. Weiss /s/ James T. O'Brien Director September 26, 1997 - ------------------------- James T. O'Brien /s/ John K.A. Prendergast Director September 26, 1997 - ------------------------- John K.A. Prendergast Page 54 TABLE OF CONTENTS FINANCIAL STATEMENTS The following financial statements of the Company are filed as part of this Report: Report of Independent Public Accountants, Arthur Andersen LLP................F-1 Consolidated Balance Sheets..................................................F-2 Consolidated Statements of Operations........................................F-3 Consolidated Statements of Stockholders' Equity (Deficit)....................F-4 Consolidated Statements of Cash Flows........................................F-6 Notes to Consolidated Financial Statements...................................F-8 Page 55 Report of Independent Public Accountants ---------------------------------------- To the Stockholders and Board of Directors of Palatin Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. (a Delaware corporation in the development stage) and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended June 30, 1997, the ten months ended June 30, 1996, the year ended August 31, 1995 and the period from inception (January 28, 1986) to June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the periods indicated above, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, PA August 20, 1997 F-1 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Balance Sheets
JUNE 30, 1997 JUNE 30, 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents, including restricted cash of $201,211 at June 30, 1997 ............................................................................ $ 12,806,717 $ 6,791,300 Accounts receivable ............................................................................ 84,562 4,574 Prepaid expenses and other ..................................................................... 174,996 66,430 ------------ ------------- Total current assets ....................................................................... 13,066,275 6,862,304 Property and equipment, net ...................................................................... 922,096 96,354 Intangibles, net of accumulated amortization of $103,743 and $91,336, respectively .......................................................................... 74,494 82,547 ------------ ------------- $ 14,062,865 $ 7,041,205 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................................... $ 316,273 $ 214,424 Accrued expenses ............................................................................... 1,472,905 769,260 Current portion of long-term financing ......................................................... 869,549 311,695 Notes payable .................................................................................. 80,000 - Senior bridge notes, including note to related party of $110,000 as of June 30, 1996 .......................................................................... - 1,100,000 ------------- ------------- Total current liabilities .................................................................. 2,738,727 2,395,379 Notes payable .................................................................................... - 80,000 Deferred license revenue ......................................................................... 550,000 - Long-term financing .............................................................................. 939,590 1,727,619 ------------- ------------- 4,228,317 4,202,998 ------------- ------------- Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 and 2,000,000 shares authorized and 137,780 and no shares issued as of June 30, 1997 and 1996, respectively ......................................................... 1,378 - Common stock, $.01 par value, 75,000,000 and 25,000,000 shares authorized and 3,020,373 and 2,884,694 shares issued as of June 30, 1997 and 1996, respectively ......................................................... 30,204 28,847 Additional paid-in capital ..................................................................... 23,740,864 10,890,935 Warrants ....................................................................................... 573,537 - Common stock earned but not issued ............................................................. - 53,030 Treasury stock, no and 308 shares at cost, respectively ........................................ - (1,667) Deferred compensation .......................................................................... (1,078,333) - Deficit accumulated during development stage ................................................... (13,433,102) (8,132,938) ------------- ------------- 9,834,548 2,838,207 ------------- ------------- $ 14,062,865 $ 7,041,205 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-2 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Operations
Inception (January 28, 1986) Year Ten Months Year through Ended Ended Ended June 30, 1997 June 30, 1997 June 30, 1996 August 31, 1995 ----------------- ------------- ------------- --------------- REVENUES: Grants and contracts ..................................... $ 3,210,685 $ 350,173 $ - $ - License fees and royalties ............................... 684,296 350,000 - 64,296 Product .................................................. 318,917 22,184 24,457 33,606 ------------- ------------ ------------- ------------- Total revenues ...................................... 4,213,898 722,357 24,457 97,902 ------------- ------------ ------------- ------------- OPERATING EXPENSES: Research and development ................................. 7,806,391 3,409,983 869,896 619,354 General and administrative ............................... 7,552,844 2,533,883 1,366,343 776,291 Restructuring charge ..................................... 284,000 - 284,000 - Net intangibles write down ............................... 259,334 - 259,334 - ------------- ------------ ------------- ------------- Total operating expenses ............................ 15,902,569 5,943,866 2,779,573 1,395,645 ------------- ------------ ------------- ------------- OTHER INCOME (EXPENSES): Interest income .......................................... 367,389 296,009 10,515 2,744 Interest expense ......................................... (1,417,850) (374,664) (459,308) (343,865) Placement agent commissions and fees on debt offering ............................... (168,970) - (168,970) - Merger costs ............................................. (525,000) - (525,000) - ------------- ------------ ------------- ------------- Total other (expenses) .............................. (1,744,431) (78,655) (1,142,763) (341,121) ------------- ------------ ------------- ------------- NET LOSS ...................................................... (13,433,102) (5,300,164) (3,897,879) (1,638,864) PREFERRED STOCK DIVIDEND ...................................... (2,888,935) (2,888,935) - - ------------- ------------ ------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ...................................... $(16,322,037) $(8,189,099) $ (3,897,879) $ (1,638,864) ============= ============ ============= ============= Weighted average number of common shares outstanding ....................................... 559,609 2,924,073 585,356 309,548 ============= ============= ============= ============= Net loss per common share ..................................... $ (29.17) $ (2.80) $ (6.66) $ (5.29) ============= ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock ------------------------------------------------------------ Shares Amount Subscriptions Receivable ----------- ------------ ---------------- ------------ Balance at inception ........................................ - $ - $ - $ - Preferred stock subscriptions ............................ 4,000 (4,000) Issuance of shares from inception ........................ - - - - Net loss from inception .................................. - - - - ----------- ------------ ---------------- ------------ Balance, August 31, 1995 .................................... - - 4,000 (4,000) Preferred stock subscriptions ............................ - - (4,000) 4,000 Issuance of preferred shares ............................. 4,000,000 4,000 - - Issuance of common shares on $10,395,400 private placement ......................... - - - - Shares earned but not issued ............................. - - - - Issuance of common shares ................................ - - - - Net loss ................................................. - - - - ----------- ------------ ---------------- ----------- Balance, June 25, 1996 ...................................... 4,000,000 4,000 - - Conversion to Palatin Technologies, Inc. .................. (4,000,000) (4,000) - - ----------- ------------ ---------------- ----------- Adjusted balance, June 25, 1996 ............................. - - - - Shares outstanding of Palatin Technologies, Inc. ...................................... - - - - Issuance of common shares ................................. - - - - Purchase of treasury stock ................................ - - - - ----------- ------------ ---------------- ----------- Balance, June 30, 1996 ...................................... - - - - Issuance of preferred shares, net of expenses ............ 137,780 1,378 - - Shares earned but not issued ............................. - - - - Issuance of common shares ................................ - - - - Retirement of treasury stock ............................. - - - - Issuance of stock options below fair market value ........................................... - - - - Amortization of deferred compensation .................... - - - - Net loss ................................................. - - - - ---------- ------------ ---------------- ----------- Balance, June 30, 1997 ...................................... 137,780 $ 1,378 $ - $ - =========== ============ ================ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) - Continued -
Common Stock ------------------------------------------------------------------- Paid-in Additional Earned but Capital from Shares Amount Paid-in Capital not Issued Warrants ------------ ------------- ------------- ---------- ------------ Balance at inception ..................... - $ - $ - $ - $ - Preferred stock subscriptions ......... - - - - - Issuance of shares from inception ..... 6,922,069 1,177,786 - 110,833 100,000 Net loss from inception ............... - - - - - ----------- ------------- ------------- ---------- ---------- Balance, August 31, 1995 ................. 6,922,069 1,177,786 - 110,833 100,000 Preferred stock subscriptions ......... - - - - - Issuance of preferred shares .......... - - - - - Issuance of common shares on $10,395,400 private placement ...... 41,581,600 9,139,303 - - - Shares earned but not issued .......... - - - 266,743 - Issuance of common shares ............. 1,054,548 458,977 - (324,546) (100,000) Net loss .............................. - - - - - ----------- ------------- ------------- ---------- ---------- Balance, June 25, 1996 ................... 49,558,217 10,776,066 - 53,030 - Conversion to Palatin Technologies, Inc. (46,807,465) (10,748,558) 10,752,558 - - ----------- ------------- ------------- ---------- ---------- Adjusted balance, June 25, 1996 .......... 2,750,752 27,508 10,752,558 53,030 - Shares outstanding of Palatin Technologies, Inc. ................... 108,188 1,082 (1,082) - - Issuance of common shares .............. 25,754 257 139,459 - - Purchase of treasury stock ............. - - - - - ----------- ------------- ------------- ---------- ---------- Balance, June 30, 1996 ................... 2,884,694 28,847 10,890,935 53,030 - Issuance of preferred shares, net of expenses ......................... - - 11,062,116 - 573,537 Shares earned but not issued .......... - - - 250,141 - Issuance of common shares ............. 135,987 1,360 316,761 (303,171) - Retirement of treasury stock .......... (308) (3) (1,664) - - Issuance of stock options below fair market value ........................ - - 1,472,716 - - Amortization of deferred compensation . - - - - - Net loss .............................. - - - - - ----------- ------------- ------------- ---------- ---------- Balance, June 30, 1997 ................... 3,020,373 $ 30,204 $ 23,740,864 $ - $ 573,537 =========== ============= ============= ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Stockholders' Equity (Deficit) - Continued -
Deficit Accumulated Unamortized During Treasury Deferred Development Stock Compensation Stage Total ----------- --------------- ------------- ------------ Balance at inception ..................... $ - $ - $ - $ - Preferred stock subscriptions ......... - - - - Issuance of shares from inception ..... - - - 1,388,619 Net loss from inception ............... - - (4,235,059) (4,235,059) ---------- ------------ ------------- ------------- Balance, August 31, 1995 ................. - - (4,235,059) (2,846,440) Preferred stock subscriptions ......... - - - - Issuance of preferred shares .......... - - - 4,000 Issuance of common shares on $10,395,400 private placement ...... - - - 9,139,303 Shares earned but not issued .......... - - - 266,743 Issuance of common shares ............. - - - 34,431 Net loss .............................. - - (3,897,879) (3,897,879) ---------- ------------ ------------- ------------- Balance, June 25, 1996 ................... - - (8,132,938) 2,700,158 Conversion to Palatin Technologies, Inc. - - - - ---------- ------------ ------------- ------------- Adjusted balance, June 25, 1996 .......... - - (8,132,938) 2,700,158 Shares outstanding of Palatin Technologies, Inc. ................... - - - - Issuance of common shares .............. - - - 139,716 Purchase of treasury stock ............. (1,667) - - (1,667) ---------- ------------ ------------- ------------- Balance, June 30, 1996 ................... (1,667) - (8,132,938) 2,838,207 Issuance of preferred shares, net of expenses ......................... - - - 11,637,031 Shares earned but not issued .......... - - - 250,141 Issuance of common shares ............. - - - 14,950 Retirement of treasury stock .......... 1,667 - - - Issuance of stock options below fair market value ........................ - (1,472,716) - - Amortization of deferred compensation . - 394,383 - 394,383 Net loss .............................. - - (5,300,164) (5,300,164) ---------- ------------ ------------- ------------- Balance, June 30, 1997 ................... $ - $(1,078,333) $(13,433,102) $ 9,834,548 ========== ============ ============== =============
PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows
Inception (January 28, 1986) Year Ten Months Year through Ended Ended Ended June 30, 1997 June 30, 1997 June 30, 1996 August 31, 1995 ---------------- ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................... $(13,433,102) $ (5,300,164) $ (3,897,879) $ (1,638,864) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization ...................... 374,494 65,920 68,005 85,947 Interest expense on note payable ................... 72,691 19,304 6,667 8,000 Accrued interest on long-term financing ............ 796,038 - 293,380 320,709 Accrued interest on short-term financing ........... 7,936 (100,000) 100,000 7,936 Intangibles and equipment write down ............... 278,318 - 278,318 - Equity and notes payable issued for expenses ....... 546,188 250,141 174,147 10,350 Settlement with consultant ......................... (28,731) - - - Deferred revenue ................................... 550,000 550,000 - - Amortization of deferred compensation .............. 394,383 394,383 - - Changes in certain operating assets and liabilities: Accounts receivable .............................. (84,562) (79,988) 1,052 2,557 Prepaid expenses and other ....................... (174,996) (108,566) (46,678) (5,206) Intangibles ...................................... (431,690) (4,353) (44,314) (66,152) Accounts payable ................................. 315,373 101,849 (91,433) 164,744 Accrued expenses ................................. 863,350 84,790 449,244 50,512 ------------- ------------- ------------- ------------- Net cash used for operating activities ....... (9,954,310) (4,126,684) (2,709,491) (1,059,467) ------------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .................... (614,934) (279,705) (26,577) (4,294) ------------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable, related party ............. 302,000 - - 302,000 Payments on notes payable, related party ............... (309,936) - (23,286) (286,650) Proceeds from senior bridge notes payable .............. 1,850,000 - 850,000 1,000,000 Payments on senior bridge notes ........................ (1,850,000) (1,000,000) (850,000) - Proceeds from notes payable and long-term financing .................................. 1,951,327 - - 292,063 Payments on notes payable and long-term financing .................................. (420,236) (230,175) (65,000) (92,384) Proceeds from paid-in capital from common stock warrants ....................................... 100,000 - - 100,000 Proceeds from common stock, stock option issuances, net ....................................... 10,117,442 14,950 9,143,303 345 Proceeds from preferred stock, net ..................... 11,637,031 11,637,031 Purchase of treasury stock ............................. (1,667) - (1,667) - ------------- ------------- ------------- ------------- Net cash provided by financing activities .... 23,375,961 10,421,806 9,053,350 1,315,374 ------------- ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 12,806,717 6,015,417 6,317,282 251,613 CASH AND CASH EQUIVALENTS, beginning of period ........................................... - 6,791,300 474,018 222,405 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of period ................. $ 12,806,717 $ 12,806,717 $ 6,791,300 $ 474,018 ============= ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Consolidated Statements of Cash Flows
Inception (January 28, 1986) Year Ten Months Year through Ended Ended Ended June 30, 1997 June 30, 1997 June 30, 1996 August 31, 1995 ----------------- -------------- ------------- --------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest ................................. $ 229,522 $ 151,999 $ 49,494 $ 28,029 ============== ============= ============= ============== NON-CASH TRANSACTION: Settlement of accounts payable with equipment ........................................... $ 900 $ - $ - $ - ============== ============= ============= ============== NON-CASH STOCK ACTIVITY: Conversion of loans from employees to common stock ........................................ $ 74,187 $ - $ - $ - ============== ============= ============= ============== Conversion of note payable to common stock.............. $ 16,000 $ - $ $ - ============== ============= ============= ============== Common stock issued for equipment ...................... $ 2,327 $ - $ - $ - ============== ============= ============= ============== Common stock issued for expenses (included above) .................................... $ 679,715 $ 394,383 $ 174,147 $ 10,350 ============== ============= ============== ============== Common stock issued for accrued salaries and bonuses ......................................... $ 16,548 $ $ - $ 9,858 ============== ============= ============== ============== Interest paid in common stock .......................... $ 679,097 $ 303,171 $ 266,743 $ 109,183 ============== ============= ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 PALATIN TECHNOLOGIES, INC. (A Development Stage Enterprise) Notes to Consolidated Financial Statements (1) ORGANIZATION ACTIVITIES: Nature of Business -- Palatin Technologies, Inc. ("Palatin" or the "Company") and its wholly-owned subsidiary, RhoMed Incorporated ("RhoMed"), is a development stage enterprise dedicated to developing and commercializing products and technologies for diagnostic imaging, cancer therapy and ethical drug development utilizing peptide, monoclonal antibody and radiopharmaceutical technologies. On June 25, 1996, RhoMed merged into Palatin in a transaction accounted for as a reverse merger, with RhoMed deemed as the acquiror for account purposes (see Corporate History). As a result, the historical financial statements presented are those of RhoMed. Business Risk -- Since its inception, the Company has devoted substantially all of its efforts and resources to the research and development of its technologies. The Company has experienced operating losses in each year since its inception and, as of June 30, 1997, the Company had a deficit accumulated during the development stage of $13,433,102. The Company expects to incur additional operating losses over the next several years and expects cumulative losses to increase as research and development and clinical testing efforts continue and expand. The ultimate completion of the Company's development projects is contingent upon a number of factors, including the successful completion of technology and product development, obtaining required regulatory approvals and additional financing and, ultimately, achieving profitable operations. Corporate History -- Palatin, formerly Interfilm, Inc., was incorporated under the laws of the State of Delaware on November 21, 1986. From November 4, 1993 until May 10, 1995, the date on which the Board of Directors substantially curtailed the operations of the Company, the Company had been primarily engaged in the business of exploiting rights related to its interactive motion picture process, including the production and distribution of interactive motion pictures for initial exhibition in theaters and subsequently in enhanced versions for distribution to the home market. On June 25, 1996, a newly formed, wholly-owned subsidiary of the Company, Interfilm Acquisition Corporation ("InSub"), a New Mexico corporation, merged with and into RhoMed, a New Mexico corporation, with all outstanding shares of RhoMed equity securities ultimately being exchanged for the Company's common stock (the "Merger"). As a result of the Merger, RhoMed became a wholly-owned subsidiary of the Company, with the holders of RhoMed preferred stock and RhoMed common stock (including the holders of "RhoMed Securities" as hereafter defined) receiving an aggregate of approximately 96% interest in the equity securities of the Company on a fully-diluted basis. Additionally, all warrants and options to purchase common stock of RhoMed outstanding immediately prior to the Merger (the "RhoMed Securities"), including without limitation, any rights underlying RhoMed's qualified or non-qualified stock option plans, were automatically converted into rights upon exercise to receive the Company's common stock in the same manner in which the shares of RhoMed common stock were converted. Since the former stockholders of RhoMed retained more than a 50% controlling interest in the surviving company (Palatin), the Merger was accounted for as a reverse merger. The business of RhoMed, conducted by Palatin since June 25, 1996, represents the on-going business of Palatin. Certain assets and liabilities of the Company and a subsidiary existing prior to the Merger, consisting principally of certain intellectual property and litigation claims against Sony Corporation of America and related entities, were transferred to an unaffiliated limited liability partnership for the benefit of the Company's stockholders of record as of June 21, 1996 (pre-Merger stockholders). The historical F-8 financial statements prior to June 25, 1996, are those of RhoMed, except that the stock transactions have been presented in the notes on an as if converted basis. References to the Company's activities, results of operations and financial condition prior to June 25, 1996 are to RhoMed unless otherwise specified. The merger costs of $525,000 have been charged to operations for the ten months ended June 30, 1996, and accrued expenses include $32,000 of this amount as of June 30, 1997. Charter Amendment -- On September 5, 1997, an amendment to the Restated Certificate of Incorporation of the Company (the "Amendment") was filed, which (i) increased the total number of authorized shares of common stock (the "Common Stock") from 25,000,000 to 75,000,000, (ii) increased the total number of authorized shares of preferred stock from 2,000,000 to 10,000,000 and (iii) effected a 1-for-4 reverse split of Common Stock. The consolidated financial statements have been retroactively restated to reflect the Amendment. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation -- The consolidated financial statements include the accounts of Palatin and its wholly owned subsidiary, RhoMed. The remaining subsidiaries of Palatin - Interfilm Technologies, Inc., Ediflex Digital Systems, Inc. and Production Equipment Leasing Corp. LP - are inactive. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year -- Effective June 30, 1996, Palatin and RhoMed each changed its fiscal year end to June 30. The fiscal year ends of Palatin and RhoMed prior to the Merger were December 31 and August 31, respectively. Cash and Cash Equivalents -- For purposes of presenting cash flows, the Company considers cash and cash equivalents as amounts on hand, on deposit in financial institutions and highly liquid investments purchased with an original maturity of three months or less. Fixed Assets -- Fixed assets consist of equipment, office furniture and leasehold improvements. Fixed assets are stated at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of 5 years for equipment, 7 years for office furniture and over the term of the lease for leasehold improvements. Maintenance and repairs are expensed as incurred while expenditures that extend the useful life of an asset are capitalized. Intangible Assets -- Intangible assets consist of patents and deferred financing costs. Patents represent the costs capitalized to successfully obtain a patent registration. Internal costs to obtain and develop the patents have been expensed. Patents are included as intangible assets in the accompanying consolidated financial statements and are stated at cost, net of accumulated amortization. Amortization is recognized using the straight-line method over the estimated patent lives ranging up to 17 years. Unsuccessful patent costs and patents with no demonstrated future value are expensed when so determined by management. Impairment of Long-Lived Assets -- The Company complies with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine F-9 recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. Impairment is measured at fair value. Revenue Recognition -- The Company recognizes revenue on grants and contracts at the time such related expenses are incurred in compliance with contractual terms, license fees and royalties ratably over the term of the license or royalty agreement, and sales upon shipment. Research and Development Costs -- The costs of research and development activities are expensed as incurred. Stock Options and Warrants -- Warrants and the majority of common stock options have been issued at exercise prices greater than, or equal to, their fair market value at the date granted. Accordingly, no value has been assigned to these instruments. However, certain stock options were issued under non-plan option agreements and a non-qualified stock option plan at an exercise price below market value. The difference between the exercise price and the market value of these securities has been recorded as deferred compensation and is being expensed over the vesting period of the option. Income Taxes -- The Company and its subsidiaries intend to file consolidated federal and combined state income tax returns. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires, among other things, the use of the liability method in computing deferred income taxes. The Company provides for deferred income taxes relating to timing differences in the recognition of income and expense items (primarily relating to depreciation, amortization and certain leases) for financial and tax reporting purposes. Such amounts are measured using current tax laws and regulations in accordance with the provisions of SFAS 109. In accordance with SFAS 109, the Company has recorded valuation allowances against the realization of its deferred tax assets. The valuation allowance is based on management's estimates and analysis, which includes tax laws which may limit the Company's ability to utilize its tax loss carryforwards. Net Loss per Common Share -- Net loss per common share is calculated based upon the weighted average number of shares of Common Stock, on an as if converted basis, outstanding during each period. All options and warrants were excluded in the calculation of weighted average shares outstanding since their inclusion would have had an anti-dilutive effect. Reclassifications -- Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Fair Value of Financial Instruments -- Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. F-10 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: the carrying amount reported on the balance sheet approximates the fair value for cash, short-term borrowings and current maturities of long-term debt; and the fair value for the Company's fixed rate long-term debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. Based on the above, the amount reported on the balance sheet approximates the fair value. (3) RELATED PARTY TRANSACTIONS: During the fiscal year ended August 31, 1995, the Company encountered serious liquidity and working capital deficiencies. As a result, effective April 1995, the Company entered into a letter of intent with The Castle Group Ltd. ("Castle"), a company controlled by Lindsay A. Rosenwald, M.D. ("Dr. Rosenwald"), under which Castle agreed to arrange for a line of credit of up to $300,000 to finance ongoing operations; agreed to arrange for future financings; and the Company agreed to sell to Castle or its designees, for $4,000 consideration paid, 4,000,000 shares of preferred stock which converted into 466,952 shares of Common Stock. At the time the letter of intent was entered into with Castle, the Company was insolvent and its equity had nominal value; accordingly, the sale of preferred stock to Castle or its designees was recorded at the nominal $4,000 consideration paid. The issuance of the preferred stock to designees of Castle was consummated on October 25, 1995 and resulted in Dr. Rosenwald and his designees obtaining majority ownership and control of the Company on that date. On July 28, 1995, the Board of Directors approved an offering of senior bridge notes and warrants (the "Class A Offering"), for which Paramount Capital, Inc. ("Paramount"), of which Dr. Rosenwald is the Chairman, served as placement agent. Two of the then three members of the Board of Directors of RhoMed were employees of entities controlled by Dr. Rosenwald. The transaction and selection of the placement agent was ratified by disinterested stockholders on August 15, 1995. Paramount received (i) a cash commission equal to 6% of the gross proceeds from the sale of the units or $60,000, (ii) a non-accountable expense allowance equal to 3% of gross proceeds or $30,000 and (iii) placement agent's warrants, on the same terms as the warrants, equal to 15% of the Common Stock underlying the warrants issued in the Class A Offering. Additionally, investment funds managed by a company of which Dr. Rosenwald is president purchased senior bridge notes with a face value of $100,000 and warrants to purchase 13,824 shares of Common Stock at $.22 per share. On November 27, 1995, the Company's Board of Directors approved an offering of senior bridge notes and warrants (the "Class B Offering"), for which Paramount served as placement agent, which was approved by the two disinterested directors. Paramount received (i) a cash commission equal to 9% of the gross proceeds from the sale of the units or $76,500, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $34,000 and (iii) placement agent's warrants at an exercise price of $6.52 per share but otherwise on the same terms as the warrants, equal to 5% of the Common Stock underlying the warrants issued in the Class B Offering. Additionally, investment funds managed by a company of which Dr. Rosenwald is president purchased senior bridge notes with a face value of $100,000 and warrants to purchase 4,608 shares of Common Stock at $2.72 per share. On March 4, 1996, the Board of Directors approved an offering of common stock (the "Common Stock Offering") and authorized an offering committee of the Board of Directors, consisting of the two disinterested directors, to determine the placement agent for the Common Stock Offering. The selection of Paramount as placement agent was approved by the disinterested directors, who concluded that alternative means of financings were not available to the Company on terms more favorable than the Common Stock Offering. The price per share of common stock in the Common Stock Offering of $5.44 F-11 was determined through negotiations between the Company and Paramount. On May 14, 1996, the disinterested directors approved an increase in the Common Stock Offering. Paramount received (i) a cash commission equal to 9% of the gross proceeds from the sale of the units or $868,000, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $386,000 and (iii) placement agent's warrants, equal to 10% of the common stock issued in the Common Stock Offering, at an exercise price of $6.52 per common stock share, which are freely exercisable, terminate ten years from the date of issuance and have certain registration rights. Additionally investment funds managed by a company of which Dr. Rosenwald is president purchased 322,674 shares of Common Stock at $5.44 per share. On December 2, 1996, the Board of Directors approved an offering of Series A Preferred Convertible Stock (the "Series A Preferred Offering"), which was approved by the four disinterested directors. The selection of Paramount as placement agent was approved by the disinterested directors, who concluded that alternative means of financings were not available to the Company on terms more favorable than the Series A Preferred Offering. The Series A Preferred Convertible Stock is currently convertible into Common Stock at a price per share of Common Stock of $4.96, which represented a 15% discount to the average closing bid price of the Company's Common Stock for the twenty (20) consecutive trading days immediately preceding the final closing. The 15% discount on conversion of the Series A Preferred Convertible Stock to Common Stock was determined through negotiations between the Company and the placement agent. The 15% discount has been reflected in the Company's consolidated statement of operations as a dividend to the Series A Preferred Convertible Stock of $2,888,935. Paramount received (i) a cash commission equal to 9% of the gross proceeds from the sale of the units or $1,240,020, (ii) a non-accountable expense allowance equal to 4% of gross proceeds or $551,120 and (iii) placement agent's warrants, equal to 10% of the Series A Preferred Convertible Stock issued in the Series A Preferred Offering at an exercise price of $110.00 per share of Series A Preferred Convertible Stock, which are freely exercisable commencing in November, 1997, terminate ten years from the date of issuance and have certain registration rights. The Company has valued those warrants at $573,537. In the Series A Preferred Offering, investment funds managed by a company of which Dr. Rosenwald is president purchased 10,000 shares of Series A Preferred Convertible Stock at $100 per share. Management of the Company believes that the terms of the transactions and the agreements described above are on terms at least as favorable as those which it could otherwise have obtained from unrelated parties. (4) PROPERTY AND EQUIPMENT: Property and equipment consists of the following: June 30, June 30, 1997 1996 ------------ ------------ Office equipment $ 263,827 $ 202,960 Laboratory equipment 145,310 76,929 Leasehold improvements 750,008 - ------------ ------------ 1,159,145 279,889 Less: Accumulated depreciation 237,049 183,535 ------------ ------------ $ 922,096 $ 96,354 ============ ============ F-12 (5) INTANGIBLES: The Company owns or has rights to sixteen U.S. patents, eight pending U.S. patent applications, four allowed U.S. patent applications and nine counterpart patents and eight pending applications in selected foreign countries. For the ten month period ended June 30, 1996, $259,334 of previously capitalized patent costs relating to patents that were not being utilized for products in active development were written- off to expense. The write-off was based upon an evaluation by the new President and Chief Executive Officer and the management team of products in development and determination of the likelihood of product development and commercialization. Historical costs in each patent were used to determine the total write-off to expense. The Company has assigned its interest in several patents to secure long-term financing. (6) LONG-TERM FINANCING: The Company has a long-term financing agreement with Aberlyn Holding Co., Inc., and its affiliates (collectively "Aberlyn"). Aberlyn has, in a series of transactions, loaned to the Company approximately $1,800,000, secured by certain of the Company's patents, intellectual property and equipment. Certain fees and costs related to the borrowings have been deferred as intangible assets and are being amortized over the remaining terms of the arrangement using the effective interest method. The Company is obligated to make monthly principal and interest payments of $91,695 from June 1, 1997 through May 1, 1999. Payments of $20,000 per month through May 1, 1997 were applied to principal only; with interest accruing during this period at an annual effective rate of 15% and payable in the Company's Common Stock. On June 24, 1996, the Company issued an equivalent of 42,858 shares of Common Stock in payment of accrued interest of $324,546 through April 30, 1996. In addition, certain warrants held by Aberlyn were terminated. On May 15, 1997 the Company issued 63,910 shares of Common Stock in payment of accrued interest of $303,171 through April 30, 1997 at an immaterial discount of approximately $1.00 per share under the then fair market value of the Common Stock. Scheduled principal payments on the long-term financing at June 30, 1997, are as follows: Fiscal Year ----------- 1998 $869,549 1999 939,590 ----------- $ 1,809,139 (7) SENIOR BRIDGE NOTES: Class A Offering -- On July 28, 1995, the Company initiated the Class A Offering of 40 units, with each unit consisting of a $25,000 face amount senior bridge note and a warrant to purchase 3,456 shares of Common Stock at an exercise price of $.22 per share. All units were purchased, with net proceeds to the Company of approximately $907,000 after payment of the placement agent's commissions and expenses ($90,000) and offering expenses (approximately $3,000). The nominal exercise price for the warrants reflected the seriously troubled financial condition of the Company on the date of the transaction, and accordingly, no value was assigned to the warrants upon issuance. The senior bridge notes sold in the Class A Offering accrued interest at 1% per month, and were payable, with interest, one year from the date of issuance. In August and September of 1996, the Class A Offering notes with accrued interest were repaid F-13 in full. The warrants are exercisable at any time, terminate ten years from the date of issuance, and have certain registration rights. Class B Offering -- On November 27, 1995, the Company initiated the Class B Offering of up to 7.5 units at $100,000 per unit, subsequently increased to 8.5 units, with each unit consisting of a $100,000 face amount senior bridge note and a warrant to purchase an equivalent of 4,608 shares of common stock at an exercise price of $2.72. Net proceeds to the Company were $739,500 after payment of the placement agent's commissions and expenses ($110,500). Due to the seriously troubled financial condition of the Company on the date of the transaction, no value was assigned to the warrants upon issuance. The senior bridge notes sold in the Class B Offering accrued interest at 1% per month, and were payable, with interest 12 months from the date of issuance, unless accelerated under certain circumstances. On June 28, 1996, the Class B Offering notes with accrued interest were paid in full. The warrants are exercisable at any time, terminate five years from the date of issuance, have certain registration rights, and contain a call provision. (8) NOTES PAYABLE Notes payable consist of four ten year notes totaling $80,000. These notes were issued as part of a combined stock and debt offering during the fiscal year ended August 31, 1992. Each note is a promissory note in the face amount of $20,000, bearing interest at 10% per year, accruing annually. Principal and interest on the notes is due and payable by December 31, 1997. (9) COMMITMENTS AND CONTINGENCIES: Leases -- The Company leases two facilities in New Jersey under noncancellable operating leases. Future minimum lease payments under those two leases are as follows: Fiscal Year ----------- 1998 $ 212,000 1999 216,000 2000 223,000 2001 253,000 2002 255,330 2003 and therafter 1,022,388 Restructuring Charge -- In conjunction with the Company's decision to consolidate and relocate its research and development facilities and executive offices from New Mexico to New Jersey, the Company established a restructuring charge of $284,000. The restructuring charge represents severance costs of $115,000 and facility closing expenses of $169,000. Five research and development and three administrative employees were severed as part of the relocation. Facility closing expenses consist primarily of costs related to lease termination and fixed asset disposals. Included in accrued expenses at June 30, 1997, is $144,316 of remaining restructuring charges. Employment Agreements -- On November 27, 1996, the Board of Directors of the Company ratified an employment agreement (the "Employment Agreement") with Edward J. Quilty ("Mr. Quilty") to serve as President and Chief Executive Officer, originally entered into with RhoMed prior to the Merger. Pursuant to the Employment Agreement, RhoMed agreed to grant Mr. Quilty an option to acquire such number of shares of common stock as equal a 10% fully diluted equity interest in the Company at an exercise price of $.22 per share, which option vests in 36 equal increments on each of the first 36 monthly F-14 anniversaries of the commencement of Mr. Quilty's employment with the Company, and may be accelerated or terminated in part on the happening of certain events (the "Initial Option"). The Employment Agreement further provides for anti-dilution options, pursuant to which Mr. Quilty will be issued options to acquire the number of shares that, when aggregated with the shares issuable pursuant to the Initial Option, equal not less than 3.75% of the shares of common stock of the Company. The Employment Agreement is for an initial period of one year, with automatic one year extensions, and provides that, on certain termination events, the portion of the options that would otherwise have terminated without vesting, vest and are exercisable upon termination, and also provides for specified termination pay. On September 27, 1996, the Board of Directors ratified two employment agreements with two of the officers of the Company. The agreements expire in June 1999 and provide for current annual salaries of $160,500. The agreements include specified termination pay and accelerated vesting of stock options under certain termination events. Consulting Agreements -- The Company is obligated under two consulting agreements to make payments totaling $76,500 in fiscal 1998. License Agreements -- The Company has two license agreements which require minium yearly payments. Future minium payments under the license agreements are as follows: 1998 - $100,000, 1999 - $100,000, 2000- $125,000, 2001 - $50,000 and 2002 - $50,000. Construction -- The Company is currently constructing a research and development facility in Edison, New Jersey. The Company is committed to a construction contract for approximately $666,000 as of June 30, 1997. The remaining services under such contract are expected to be completed in fiscal 1998. Legal Proceedings -- The Company is subject to various claims and litigation in the ordinary course of its business. Management believes that the outcome of such legal proceedings will not have a material adverse effect on the Company's financial position or future results of operation. (10) STOCKHOLDERS' EQUITY (DEFICIT): The Company's Authorized Shares -- The Amendment, effective September 5, 1997, increased the number of shares of authorized Common Stock to 75,000,000, increased the number of shares of authorized preferred stock to 10,000,000, and effected a 1-for-4 reverse split of the Common Stock. The consolidated financial statements have been retroactively restated to reflect the Amendment. Preferred Stock Transactions -- On December 2, 1996, the Company commenced the Series A Preferred Offering of units at a price of $100,000 per unit, each unit consisting of 1,000 shares of Series A Convertible Preferred Stock. The final closing on the Series A Preferred Offering was effective as of May 9, 1997, with the Company having sold an aggregate total of 137.78 units, representing 137,780 shares of Series A Convertible Preferred Stock, for net proceeds to the Company of approximately $11,637,000, after deducting commission and other expenses of the Series A Preferred Offering. Optional Conversion. Each share of Series A Convertible Preferred Stock is convertible at any time, at the option of the holder, into the number of shares of Common Stock equal to $100 divided by the "Conversion Price". The current Conversion Price is $4.96, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 20.2 shares of Common Stock. The Conversion Price is subject to adjustment. Mandatory Conversion. Commencing May 9, 1998, the Company may, at its option, cause the conversion of the Series A Convertible Preferred Stock, in whole or in part, on a pro rata basis, into F-15 Common Stock at the conversion rate in effect at that time, if the closing bid price of the Common Stock has exceeded 200% of the then applicable Conversion Price for at least twenty (20) trading days in any thirty (30) consecutive trading day period ending three (3) days prior to the date of conversion. Adjustments to the Conversion Price. The Conversion Price is subject to adjustment, under certain circumstances, upon the sale or issuance of Common Stock for consideration per share less than either (i) the Conversion Price in effect on the date of such sale or issuance, or (ii) the market price of the Common Stock as of the date of such sale or issuance. The Conversion Price is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of Common Stock outstanding. Conversion Price Reset Event. The Conversion Price is subject to adjustment on May 9, 1998 (the "Reset Date") if the average closing bid price of the Common Stock for the thirty (30) consecutive trading days immediately preceding the Reset Date (the "Reset Trading Price") is less than 130% of the then applicable Conversion Price (a "Reset Event"). Upon a Reset Event, the Conversion Price will be reduced to greater of (i) the Reset Trading Price divided by 1.3 or (ii) 50% of the Conversion Price in effect before the Reset Event. Common Stock Transactions -- On March 4, 1996, the Company initiated the Common Stock Offering of units at $100,000 per unit, with each unit consisting of 18,433 shares of Common Stock at a purchase price of $5.44 per share. The Common Stock Offering was terminated on June 24, 1996, with 96.454 units having been sold, realizing net proceeds of approximately $8,391,000, and resulting in the issuance of 1,777,961 shares of Common Stock. On June 24, 1996, and pursuant to the Merger, certain stockholders of Interfilm prior to the Merger and third parties purchased 138,249 shares of Common Stock at a purchase price of $5.44 per share, with net proceeds of approximately $748,000. In addition, and pursuant to the Merger, warrants to purchase 69,124 shares of Common Stock at an exercise price of $8.68 were issued to certain stockholders of Interfilm prior to the Merger and third parties. These warrants are exercisable at any time, terminate four years from the date of issuance, have certain registration rights, contain a call provision and are subject to adjustment in certain circumstances. In the ten months ended June 30, 1996, the Company issued 31,492 shares of Common Stock in exchange for services and recorded compensation expense for the fair market value of the shares. The Company commenced a private offering of preferred stock in fiscal 1994, and a private offering of units consisting of common stock and common stock warrants in fiscal 1995, both of which were terminated without having raised the minimum required for closing. Stock issuance costs incurred in connection with both offerings were expensed to operations in the fiscal year in which such costs were incurred. In February 1993, the Company sold 26,912 shares of Common Stock for net proceeds of approximately $577,000. In September 1992, the Company sold 12,288 shares of Common Stock for net proceeds of approximately $191,000. In December 1991, the Company issued a private offering memorandum for the sale of units consisting of 1,211 shares of Common Stock and a $20,000 note (see Note 8). Four units were sold for $25,000 per unit. F-16 All pre-Merger common stock issuances were for RhoMed common stock, subsequently converted into the Company's Common Stock as a result of the Merger, and were at issuance prices representing market value of the RhoMed common stock on the date of issuance. Outstanding Stock Purchase Warrants -- At June 30, 1997, the Company had the following warrants outstanding, all of which are currently exercisable except 2,777 warrants included in "Other Warrants."
Common Exercise Price Latest Warrant Stock Shares per Share Termination Date - -------------------------- -------------- --------------- ---------------- Class A Offering 114,055 $ .22 9/13/05 Class A Placement Agent 20,737 .22 9/13/05 Class B Offering 39,170 2.72 2/15/01 Class B Placement Agent 1,958 6.52 2/15/06 Common Stock Offering PlacementAgent 177,796 6.52 6/25/06 Merger Warrants 69,124 8.68 6/24/00 Series A Preferred Offering Placement Agent 277,782 5.46 11/9/02 Other Warrants 13,965 $9.00 - $282.00 12/12/06 ----------- --------------- -------- Total 714,587 $ .22 - $282.00 6/25/06 =========== =============== ========
The Class B Offering and Merger Warrants contain provisions providing for termination of the warrant if not exercised following notice of specified per share trading prices. Stock Option Plans -- The Company has one stock option plan currently in effect under which future grants may be issued, the 1996 Stock Option Plan, approved by the Company's stockholders on August 25, 1997, for which 625,000 shares of Common Stock are reserved. Prior to the Merger, the Company had adopted a 1993 Equity Incentive Plan, pursuant to which options for 6,687 Common Stock shares, giving effect to the Merger and Amendment, were granted and outstanding at June 30, 1997. No new shares can be issued under this Plan. Pursuant to the Merger, options which had been granted under RhoMed's four stock option plans constituted RhoMed Securities which were automatically converted into rights upon exercise to receive Common Stock in the same manner in which the shares of RhoMed common stock were converted. In October 1995, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Effective July 1, 1996, the Company has elected to adopt the disclosures of this pronouncement. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under SFAS 123, the Company's net loss and net loss attributable to common stockholders per share for the ten months ended June 30, 1996 would have been $4,060,901 and $7.58, respectively, while net loss and net loss attributable to common stockholders per share for the year ended June 30, 1997 was $5,695,856 and $2.94, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to September 1, 1995, the resulting pro forma compensation cost, and thus pro forma net loss, may not be representative of that to be expected in future years. The weighted average fair market value at the date of grant for options granted during 1996 and 1997 is estimated as $3.44 and $2.98 per F-17 share, respectively, using the Black-Scholes option-pricing model. The assumptions used in the Black-Scholes model are as follows: dividend yield of 0%, expected volatility of 60%, weighted average risk-free interest rate of 6.37% in 1996 and 6.60% in 1997, and an expected option life of 7 years. The status of the plans, including predecessor and replacement plans under which options remain outstanding, giving effect to the Merger, the Amendment and stockholder approval of the Company's 1996 Stock Option Plan, during the three years ended June 30, 1997, was as follows:
Incentive Stock Options Nonqualified Stock Options ------------------------------------------ --------------------------------------- Weighted Weighted Number average Number average of Price price per of Price price per shares per share share shares per share share ---------- ----------------- ---------- -------- -------------- --------- Balance at inception - $ - $ - - $ - $ - Granted 33,536 7.59 - 21.70 57,583 6.51 - 21.70 Terminated (3,248) 21.70 (115) 21.70 ---------- ----------------- ---------- -------------- Outstanding, August 31, 1995 30,288 7.59 - 21.70 16.72 57,468 6.51 - 21.70 11.69 Granted 350,287 .22 - 5.42 79,176 .22 - 5.42 Interfilm, Inc. pre-Merger options 6,687 306.00 - 360.00 - - Terminated (8,928) 5.42 - 21.70 (2,626) 21.70 ---------- ----------------- --------- -------------- Outstanding, June 30, 1996 378,334 .22 - 360.00 10.76 134,018 .22 - 21.70 8.21 Granted 84,044 7.50 - 8.00 100,905 5.44 - 8.00 Terminated (54,958) 5.42 (19,907) 5.42 Exercised (47,918) .22 - - ---------- ------------------ ---------- -------------- Outstanding, June 30, 1997 359,502 .22 - 360.00 12.26 215,016 .22 - 21.70 8.07 Exercisable, June 30, 1997 148,392 $ .22 - $360.00 $23.14 146,028 $.22 - $21.70 $9.12 ========== =============== ====== ======== ============= =====
In addition, during the year ended June 30, 1997, the Company granted anti-dilution options to Mr. Quilty pursuant to his Employment Agreement to purchase 152,799 shares of Common Stock at $.20 per share, which were exercisable as to 33,656 shares as of June 30, 1997, and granted non-plan options to three executive officers to purchase an aggregate of 110,807 shares of Common Stock at $4.96 per share, none of which were exercisable as of June 30, 1997. There were no other outstanding non-plan options. (11) GRANTS AND CONTRACTS: The Company applies for and has received grants and contracts under the Small Business Innovative Research ("SBIR") program and other federally funded grant and contract programs. Since inception, approximately $2,876,173 of the Company's revenues have been derived from federally or state funded grants and contracts. Under federal grants and contracts, there are no royalties or other forms of repayment; however, in certain limited circumstances the government can acquire rights to technology which is not being commercially exploited. Most contract costs, including indirect costs, are subject to audit and adjustment by negotiation with government representatives. (12) LICENSING FEES AND ROYALTIES: In December 1996, the Company entered into an Option Agreement with Nihon Medi-Physics ("Nihon"), pursuant to which the Company received, in January 1997, an initial payment of $1,000,000 before Japanese withholding taxes of $100,000 (the "Initial Payment"). The Company has accounted for the Initial Payment by recognizing license fee revenue of $350,000 and deferred license fee revenue of F-18 $550,000. The deferred license fee revenue will be recognized as revenue when a license agreement is consummated. In the event that the parties can not agree on terms of a license agreement, the Company could be required to repay $550,000 of the initial payment back to Nihon. The agreement includes additional payments to the Company upon the attainment of certain milestones. (13) INCOME TAXES: The Company has had no income tax expense or benefit since inception because of operating losses. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statements and tax reporting basis of assets and liabilities, given the provisions of the tax laws. A valuation allowance for the net deferred tax assets has been recorded at June 30, 1997, based on the weight of evidence that the deferred tax assets exceed the likely reversal of deferred tax liabilities and likely taxable income. The Tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. As a result of the change in majority ownership relating to the Castle preferred stock transaction, the Common Stock Offering, the Merger, and the Series A Preferred Stock Offering, the Company most likely will not be able to fully realize the benefit of its net operating loss carryforwards. (14) COMPARISON WITH THE YEAR ENDED JUNE 30, 1996: As noted above, the Company changed its fiscal year end to June 30. Therefore, the following June 30, 1997 and 1996, selected financial information is presented for comparative purposes only (unaudited): Year Ended June 30, ------------------------------------- 1997 1996 ------------- ------------- Revenues $ 722,357 $ 27,517 Research and development expenses 3,409,983 953,730 General and administrative expenses 2,533,883 1,633,598 Other income (expenses) (78,655) (1,687,853) ------------- ------------- Net loss $ (5,300,164) $ (4,247,664) ============= ============= Weighted average number of common shares outstanding 2,924,073 540,216 ============= ============= Net loss per common share $ (1.81) $ (7.86) ============= ============= F-19 EX-3.7 2 AMENDMENT TO CERTIFICATE OF INCORPORATION CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF PALATIN TECHNOLOGIES, INC. ----------------------------------------------------- Under Section 242 of the General Corporation Law of the State of Delaware ----------------------------------------------------- The undersigned officer of Palatin Technologies, Inc., a Delaware corporation (the "Corporation"), in order to amend the Restated Certificate of Incorporation of the Corporation, pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Restated Certificate of Incorporation of the Corporation is hereby amended by striking out Section 1 of Article IV thereof in its entirety and by substituting in lieu of said Section 1 the following new Section 1: Section 1. AUTHORIZED CAPITAL STOCK. The Corporation shall be authorized to issue two classes of shares of capital stock to be designated, respectively, "Preferred Stock" and "Common Stock." The total number of shares of capital stock which the Corporation shall have the authority to issue is 85,000,000, comprised of 75,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par value $.01 per share. 2. The Restated Certificate of Incorporation of the Corporation is hereby amended by including a new Section 4 of Article IV thereof as follows: SECTION 4. Upon the date the Certificate of Amendment, including this Section 4, is filed with the Secretary of State of the State of Delaware (the "Effective Date"), each four shares of issued and outstanding shares of Common Stock of this Corporation shall be automatically combined into one share of Common Stock of this Corporation (the "Reverse Stock Split"). In lieu of the issuance of any Page 1 fractional shares that would otherwise result from the Reverse Stock Split, the Corporation shall pay the cash value of fractions of a share determined by the average closing price of the Common Stock for the five (5) trading days immediately preceding the Effective Date multiplied by the fractional interest. Following the Effective Date, certificates representing the shares of Common Stock to be outstanding thereafter shall be exchanged for certificates now outstanding pursuant to procedures adopted by the Corporation's Board of Directors and communicated to those who are to receive new certificates. 3. The foregoing amendments to the Corporation's Restated Certificate of Incorporation were duly authorized and adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. 4. This Certificate of Amendment shall become effective at 11:59 p.m., EDT, on September 5, 1997. IN WITNESS WHEREOF, the undersigned has signed this Certificate of Amendment and does hereby affirm, under penalty of perjury, that the statements contained herein are true and correct, this 5th day of September, 1997. Palatin Technologies, Inc. /s/ John J. McDonough ----------------------------- Name: John J. McDonough Title: Vice President Page 2 EX-10.26 3 LEASE ON 214 CARNEGIE CENTER LEASE AND LEASE AGREEMENT Between CARNEGIE 214 ASSOCIATES LIMITED PARTNERSHIP The Landlord And PALATIN TECHNOLOGIES, INC. The Tenant For Leased Premises In 214 Carnegie Center Princeton, New Jersey MAY 6, 1997 Prepared by: Gary O. Turndorf 101 Carnegie Center Suite 101 Princeton, NJ 08540 (609) 452-1444 TABLE OF CONTENTS
Article Page ------- ---- 1. Definitions 1 2. Lease of the Leased Premises 1 3. Rent 1 4. Term 2 5. Preparation of the Leased Premises 3 6. Options 3 7. Use and Occupancy 4 8. Utilities, Services, Maintenance and Repairs 6 9. Allocation of the Expense of Utilities, Services, Maintenance, Repairs and Taxes 7 10. Computation and Payment of Allocated Expenses of Utilities, Services, Maintenance, 8 Repairs, Taxes and Capital Expenditures 11. Leasehold Improvements, Fixtures and Trade Fixtures 13 12. Alterations, Improvements and Other Modifications by the Tenant 14 13. Landlord's Rights of Entry and Access 15 14. Liabilities and Insurance Obligations 16 15. Casualty Damage to Building or Leased Premises 18 16. Condemnation 19 17. Assignment or Subletting by Tenant 20 18. Signs, Displays and Advertising 22 19. Quiet Enjoyment 23 20. Relocation 23 21. Surrender 23 22. Events of Default 24 23. Rights and Remedies 25 24. Termination of the Term 28 25. Mortgage and Underlying Lease Priority 29 26. Transfer by Landlord 29
-ii- 27. Indemnification 30 28. Parties' Liability 31 29. Security Deposit 33 30. Representations 33 31. Reservation in Favor of Tenant 34 32. Tenant's Certificates and Mortgagee Notice Requirements 34 33. Waiver of Jury Trial and Arbitration 36 34. Severability 36 35. Notices 36 36. Captions 36 37. Counterparts 36 38. Applicable Law 37 39. Exclusive Benefit 37 40. Successors 37 41. Amendments 37 42. Waiver 37 43. Course of Performance 37
TABLE OF EXHIBITS Exhibit Leased Premises Floor Space Diagram A Property Description B Work Letter C Building Rules and Regulations D Definitions and Index of Definitions E Form of Estoppel Certificate F -iii- LEASE AND LEASE AGREEMENT, dated May 6, 1997, between CARNEGIE 214 ASSOCIATES LIMITED PARTNERSHIP, a New Jersey limited partnership, with offices at Suite 101, 101 Carnegie Center, Princeton, New Jersey 08540 (the "Landlord"), and PALATIN TECHNOLOGIES, INC., a Delaware corporation, with an office at 214 Carnegie Center, Princeton, NJ 08540 (the "Tenant"). Subject to all the terms and conditions set forth below, the Landlord and the Tenant hereby agree as follows: 1. Definitions. Certain terms and phrases used in this Agreement (generally those whose first letters are capitalized) are defined in Exhibit E attached hereto and, as used in this Agreement, they shall have the respective meanings assigned or referred to in that exhibit. 2. Lease of the Leased Premises. 2.1. The Landlord shall, and hereby does, lease to the Tenant, and the Tenant shall, and hereby does, accept and lease from the Landlord, the Leased Premises during the Term. The Leased Premises consist of 3,970 square feet of gross rentable floor space on the first floor of 214 Carnegie Center, as more fully described in the definition of Leased Premises set forth in Exhibit E attached hereto. 2.2. The Landlord shall, and hereby does, grant to the Tenant, and the Tenant shall, and hereby does, accept from the Landlord, the non-exclusive right to use the Common Facilities during the Term for itself, its employees, other agents and Guests in common with the Landlord, any tenants of Other Leased Premises, any of their respective employees, other agents and guests and such other persons as the Landlord may, in the Landlord's sole discretion, determine from time to time. 3. Rent. 3.1. The Tenant shall punctually pay the Rent for the Leased Premises for the Term to the Landlord in the amounts and at the times set forth below, without bill or other demand and without any offset, deduction or, except as may be otherwise specifically set forth in this Agreement, abatement whatsoever. 3.2. The Basic Rent for the Leased Premises during the Initial Term shall be at the rate per year set forth below: Years Annual Rate Monthly Rate ----- ------ ---- ------- ---- 1 through 5 $97,265.04 $8,105.42 The annual rate of Basic Rent for the Leased Premises during any Renewal Term shall be calculated as set forth in subsection 6.3 of this Agreement for the respective Renewal Term. 3.3. The Tenant shall punctually pay the applicable Basic Rent in equal monthly installments in advance on the first day of each month during the Term, with the exception of Basic Rent for the first full calendar month of the Initial Term and for any period of less than a full calendar -1- month at the beginning of the Term. The Tenant shall pay the Basic Rent for the first full calendar month of the Initial Term upon execution and delivery of this Agreement. The Tenant shall punctually pay the Basic Rent for a period of less than a full calendar month at the beginning of the Term on the Commencement Date. 3.4. The Basic Rent and the Additional Rent for any period of less than a full calendar month shall be prorated. In the event that any installment of Basic Rent cannot be calculated by the time payment is due, such portion as is then known or calculable shall be then due and payable; and the balance shall be due upon the Landlord's giving notice to the Tenant of the amount of the balance due. 3.5. The Additional Rent for the Leased Premises during the Term shall be promptly paid by the Tenant in the respective amounts and at the respective times set forth in this Agreement. 3.6. That portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due shall incur a late charge equal to the sum of: (i) five percent of that portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due and (ii) interest on that portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due at the Base Rate(s) in effect from time to time plus two additional percentage points from the day such portion is first due through the day of receipt thereof by the Landlord. Any such late charge due from the Tenant shall be due immediately. 4. Term. 4.1. The Initial Term shall commence on the Commencement Date and shall continue for five years from the beginning of the Initial Year, unless sooner terminated in accordance with section 24 of this Agreement. The Term shall commence on the Commencement Date and shall continue until the later of the conclusion of the Initial Term or the conclusion of any Renewal Term, unless sooner terminated in accordance with section 24 of this Agreement. 4.2. Unless one or more of the conditions contemplated by subsection 4.3 of this Agreement occurs, the Commencement Date shall be the later of: 4.2.1. the Target Date; or 4.2.2. the date the Landlord can deliver actual and exclusive possession of the Leased Premises to the Tenant in accordance with the provisions of Article 5 of this Agreement. 4.3. In the event one or more of the conditions contemplated by this subsection 4.3 of the Agreement occurs, notwithstanding anything to the contrary set forth in subsection 4.2 of this Agreement, the Commencement Date shall be the earliest date the Tenant takes possession of, occupies or moves any furniture, furnishings, equipment (with the exception of equipment required for telecommunications hook-ups), supplies or other possessions into, the Leased Premises or any portion thereof earlier than the date otherwise determined in accordance with subsection 4.2 of this Agreement. -2- 4.4. Once it is ascertained in accordance with subsections 4.2 and 4.3 of this Agreement, the Landlord shall give prompt notice of the Commencement Date to the Tenant; and if the Tenant does not object thereto by notice given to the Landlord within 10 days of the Landlord's notice, the date set forth in the Landlord's notice shall thereafter be conclusively presumed to be the Commencement Date. 5. Preparation of the Leased Premises. The Landlord shall deliver actual and exclusive possession of the Leased Premises to the Tenant in an "AS-IS" condition, free of rubbish and debris. 6. Options. 6.1. If, prior to the respective date of exercise thereof, (a)(i) no Event of Default shall have occurred or (ii) if an Event of Default shall have occurred, the Tenant shall have previously cured it in full and the Landlord shall have waived it and (b) there shall not have been a History of Recurring Events of Default, the Tenant shall have one option, exercisable exclusively at the time and in the manner set forth below in subsection 6.2 of this Agreement, to extend the Term for one additional period of five years' duration. If the option is properly exercised, the period to which it relates shall commence upon the end of the Expiring Term. The option is an "Option to Renew." 6.2. In the event the Tenant is interested in exercising the Option to Renew, the Tenant shall give timely notice of the Tenant's interest to the Landlord no earlier than nine, and no later than eight, months prior to the end of the Expiring Term. Within four weeks of the giving of such notice, the Landlord shall give notice to the Tenant of the Market Rental Rate in effect eight months prior to end of the Expiring Term. In the event the Tenant desires to exercise the Option to Renew, the Tenant shall do so exclusively by giving timely notice thereof to the Landlord no earlier than seven, and no later than six, months prior to the end of the Expiring Term, and indicating in that notice whether or not the Market Rental Rate in effect eight months prior to the end of the Expiring Term is acceptable. In the event the Tenant fails timely to notify the Landlord of its interest in exercising the Option to Renew or timely to exercise the Option to Renew, that Option to Renew shall thereupon expire. 6.3. The Basic Rent for the Leased Premises during the Renewal Term shall be the Market Rental Rate, as set forth in the Landlord's notice to the Tenant of the Market Rental Rate, unless the Tenant, in the Tenant's notice contemplated by the third sentence of subsection 6.2 of this Agreement affirmatively indicates that the Market Rental Rate for the Renewal Term is not acceptable, in which case the Basic Rent for the Leased Premises during the Renewal Term shall be the greater of: 6.3.1. that amount which is the product of the annual rate of Basic Rent in effect during the last 12 months of the Expiring Term multiplied by the sum of the following two amounts: (a) one and (b) the amount obtained by multiplying five-hundredths (.05) by the number of full calendar months in the Expiring Term and dividing the result by 12; or -3- 6.3.2. that amount which bears the same ratio to the annual rate of Basic Rent in effect during the Expiring Term as the Index for the ninth month before the end of the Expiring Term bears to the Index for the ninth month before the first full calendar month at the beginning of the Expiring Term. 6.4. In the event the Tenant assigns this Agreement or sublets, or licenses the use or occupancy of, the Leased Premises or any portions thereof in accordance with section 17 of this Agreement or otherwise, or attempts to do so: 6.4.1. any Option to Renew which the Tenant has theretofore properly exercised with respect to a Renewal Term that has not yet actually commenced shall be rescinded, if the Landlord so elects by notice to the Tenant, to the same extent as if it had not been exercised at all; and 6.4.2. any Option to Renew or any other type of option or optional right exercisable by the Tenant not theretofore timely and otherwise properly exercised by the Tenant shall thereupon expire. 7. Use and Occupancy. 7.1. The Tenant shall continuously occupy and use the Leased Premises during the Term exclusively as an office for its business of administering the off-site manufacture and sale of its medical supplies. 7.2. In connection with the Tenant's use and occupancy of the Leased Premises and use of the Common Facilities, the Tenant shall observe, and the Tenant shall cause the Tenant's employees, other agents and Guests to observe, each of the following: 7.2.1. the Tenant shall not do, or permit or suffer the doing of, anything which might have the effect of creating not insignificantly increased risk of, or damage from, fire, explosion or other casualty; 7.2.2. the Tenant shall not do, or permit or suffer the doing of, anything which would have the effect of (a) increasing any premium for any liability, property, casualty or excess coverage insurance policy otherwise payable by the Landlord or any tenant of Other Leased Premises or (b) making any such types or amounts of insurance coverage unavailable or less available to the Landlord or any tenant of Other Leased Premises; 7.2.3. to the extent they are not inconsistent with this Agreement, the Tenant and the Tenant's employees, other agents and Guests shall comply with the Building Rules and Regulations attached hereto as Exhibit D, and with any changes made therein by the Landlord if, with respect to any such changes, the Landlord shall have given notice of the particular changes to the Tenant and such changes shall not materially adversely affect the conduct of the Tenant's business in the Leased Premises; 7.2.4. the Tenant and the Tenant's employees, other agents and Guests shall not create, permit or continue any Nuisance in or around the Carnegie Center Complex, the Leased Premises, the Other Leased Premises, the Building, the Common Facilities and the Property; -4- 7.2.5. The Tenant and the Tenant's employees, other agents and Guests shall not permit the Leased Premises to be regularly occupied by more than one individual per 200 square feet of usable floor space of the Leased Premises; 7.2.6. the Tenant and the Tenant's employees, other agents and Guests shall comply with all Federal, state and local statutes, ordinances, rules, regulations and orders as they pertain to the Tenant's use and occupancy of the Leased Premises, to the conduct of the Tenant's business and to the use of the Common Facilities, except that this subsection shall not require the Tenant to make any structural changes that may be required thereby that are generally applicable to the Building as a whole; 7.2.7. the Tenant and the Tenant's employees, other agents and Guests shall comply with the requirements of the Board of Fire Underwriters (or successor organization) and of any insurance carriers providing liability, property, casualty or excess insurance coverage regarding the Property, the Building, the Common Facilities or any portions thereof, any other improvements on the Property and the Carnegie Center Complex, except that this subsection shall not require the Tenant to make any structural changes that may be required thereby that are generally applicable to the Building as a whole; 7.2.8. the Tenant and the Tenant's employees, other agents and Guests shall not bring or discharge any substance (solid liquid or gaseous), or conduct any activity, in or on the Carnegie Center Complex, the Property, the Building, the Common Facilities or the Leased Premises that shall have been identified by the scientific community or by any Federal, state or local statute (including, without limiting the generality of the foregoing, the Spill Compensation and Control Act (58 N.J.S.A. sec.23.11 et seq.) and the Industrial Site Recovery Act (13 N.J.S.A. sec.1 K-6 et seq.), as they may be amended), ordinance, rule, regulation or order as toxic or hazardous to health or to the environment; 7.2.9. the Tenant and the Tenant's employees, other agents and Guests shall not draw electricity in the Leased Premises in excess of the rated capacity of the electrical conductors and safety devices including, without limiting the generality of the foregoing, circuit breakers and fuses, by which electricity is distributed to and throughout the Leased Premises and, without the prior written consent of the Landlord in each instance, shall not connect any fixtures, appliances or equipment to the electrical distribution system serving the Building and the Leased Premises other than typical professional office equipment such as minicomputers, microcomputers, typewriters, copiers, telephone systems, coffee machines and table top microwave ovens, none of which, considered individually and in the aggregate, overall and per fused or circuit breaker protected circuit, shall exceed the above limits; 7.2.10. on a timely basis the Tenant shall pay directly and promptly to the respective taxing authorities any taxes (other than Taxes) charged, assessed or levied exclusively on the Leased Premises or arising exclusively from the Tenant's use and occupancy of the Leased Premises; and 7.2.11. the Tenant shall not initiate any appeal or contest of any assessment or collection of Taxes for any period without, in each instance, the prior written consent of the Landlord -5- which, without being deemed unreasonable, the Landlord may withhold if the Building was not 90% occupied by paying tenants throughout that period or if the Tenant is not joined by tenants of Other Leased Premises that leased throughout that period, and that are then leasing, at least 80% of all Other Leased Premises, determined by their gross rentable floor space. 7.3. Tenant agrees to prepare, furnish and enforce a traffic management plan (the "Traffic Plan") that the Landlord can submit in connection with site plan approval or other governmental requirements. The Traffic Plan shall include, but not be limited to, such matters as staggered work schedules and van pooling. Landlord agrees that the Regular Business Hours shall be extended, if necessary, to take into account any staggered work schedule required under the Traffic Plan. 8. Utilities, Services, Maintenance and Repairs. 8.1. The Landlord shall provide or arrange for the provision of: 8.1.1. such maintenance and repair of the Building (except the Leased Premises and Other Leased Premises); the Common Facilities; and the heating, ventilation and air conditioning systems, any plumbing systems and the electrical systems in the Building, the Common Facilities, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area; 8.1.2. such garbage removal from the Building and the Common Facilities and such janitorial services for the Building, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area; 8.1.3. water to the Building and, if the appropriate plumbing has been installed therein, the Leased Premises and Other Leased Premises; 8.1.4. sewage disposal for the Building; 8.1.5. passenger elevator service for the Building; 8.1.6. snow clearance from, and sweeping of, Parking Facilities and driveways which are part of the Property; and 8.1.7. the maintenance of landscaping which is part of the Property. 8.2. The Landlord shall provide or arrange for the provision of: 8.2.1. such maintenance and repair of the Leased Premises, except for refinishing walls and wall treatments, base, ceilings, floor treatments and doors in general from time to time or for gouges, spots, marks, damage or defacement caused by anyone other than the Landlord, its employees and other agents, and except for the Tenant's furniture, furnishings, equipment and other property; 8.2.2. such maintenance and repair of the Other Leased Premises, except for refinishing walls and wall treatments, base, ceilings, floor treatments and doors in general from time to time or for gouges, spots, marks, damage or defacement caused by anyone other than the -6- Landlord, its employees and other agents, and except for the respective tenants' furniture, furnishings, equipment and other property; 8.2.3. the electricity required for the operation of the Building, the Property and the Common Facilities during Regular Business Hours and, on a reduced service basis, during other than Regular Business Hours, and, at all times, the electricity required for the Leased Premises and Other Leased Premises; 8.2.4. such heat, ventilation and air conditioning for the Building, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area for the comfortable use of the Building during Regular Business Hours; and 8.2.5. heated water to the Building (except the Leased Premises and Other Leased Premises, unless the appropriate plumbing, fixtures and hot water heating units have been installed therein). 8.3. Except as specifically set forth in subsections 8.1 and 8.2.1 of this Agreement, the Tenant shall maintain and repair the Leased Premises and keep the Leased Premises in as good condition and repair, reasonable wear and use excepted, as the Leased Premises are upon the completion of any improvements contemplated by section 5 of this Agreement. 9. Allocation of the Expense of Utilities, Services, Maintenance, Repairs and Taxes. 9.1. All Tenant Electric Charges shall be borne by the Tenant. 9.2. Between the Commencement Date and the end of the No Pass Through Period, the Tenant's Share of all Operational Expenses and Taxes incurred during such period shall be borne by the Landlord. 9.3. Between the day after the end of the No Pass Through Period and the end of the Term, the Tenant's Share of Operational Expenses and Taxes incurred during each annual or shorter period ending on (a) December 31 of each year and (b) the end of the Term shall be borne as follows: 9.3.1. the Tenant's Share of: Operational Expenses and Taxes incurred during each such period of 12 months (or shorter period), up to the amounts of Base Year Operational Expenses and Base Year Taxes, respectively (or proportional amount thereof for periods shorter than 12 months), shall be borne by the Landlord; and 9.3.2. the Tenant's Share of: the amounts by which Operational Expenses and Taxes incurred during each such period of 12 months (or shorter period) exceed Base Year Operational Expenses and Base Year Taxes, respectively (or proportional amount thereof for periods shorter than 12 months) shall be allocated to, and borne by, the Tenant as more specifically set forth in section 10 of this Agreement. -7- 10. Computation and Payment of Allocated Expenses of Utilities, Services, Maintenance, Repairs, Taxes and Capital Expenditures. 10.1. The Tenant shall promptly pay the following additional amounts to the Landlord at the respective times set forth below: 10.1.1. commencing with the first day after the end of the No Pass Through Period, and on the first day of each month thereafter during the Term, one-twelfth of the Tenant's Share of the amount by which Taxes for the then current calendar year exceeds Base Year Taxes, computed in accordance with subsection 10.5 of this Agreement. When Landlord knows of facts which cause a revision of the estimate, it may serve a revised estimate and, for the balance of the current calendar year, the estimated payments shall be made accordingly; 10.1.2. within 20 days of the Landlord's giving notice to the Tenant after the close of each calendar year closing during the Term, commencing with the first calendar year closing after the close of the No Pass Through Period, and after the end of the Term, the Tenant's Share of the difference between the Landlord's previously projected amount of Taxes for such period and the actual amount of Taxes for such period, in either case in excess of Base Year Taxes, computed in accordance with subsection 10.6 of this Agreement (unless such difference is a negative amount, in which case the Landlord shall credit such difference against any amounts next due from the Tenant under subsections 10.1.1 and 10.5 of this Agreement); 10.1.3. commencing with the first day after the end of the No Pass Through Period, and on the first day of each month thereafter during the Term, one-twelfth of the Tenant's Share of the amount by which Operational Expenses for the then current calendar year exceed Base Year Operational Expenses, computed in accordance with subsection 10.7 of this Agreement. When Landlord knows of facts which cause a revision of the estimate, it may serve a revised estimate and, for the balance of the current calendar year, the estimated payments shall be made accordingly; 10.1.4. within 20 days of the Landlord's giving notice to the Tenant after the close of each calendar year closing during the Term, commencing with the first calendar year closing after the close of the No Pass Through Period, and after the end of the Term, the Tenant's Share of the difference between the Landlord's previously projected amount of Operational Expenses for such period and the actual amount of Operational Expenses for such period, in either case in excess of Base Year Operational Expenses, computed in accordance with subsection 10.8 of this Agreement (unless such difference is a negative amount, in which case the Landlord shall credit such difference against any amounts next due from the Tenant under subsections 10.1.5 and 10.7 of this Agreement); 10.1.5. commencing with the first day of the first month after the Landlord gives any notice contemplated by subsection 10.9 of this Agreement to the Tenant and continuing on the first day of each month thereafter until the earlier of (a) the end of the Term or (b) the last month of the useful life set forth in the respective notice, one-twelfth of the -8- Tenant's Share of any Annual Amortized Capital Expenditure, computed in accordance with subsection 10.9 of this Agreement; 10.1.6. on the first day of each month during the Term, the monthly Tenant Electric Charges, computed in accordance with subsection 10.10 of this Agreement; and 10.1.7. promptly as and when billed therefor by the Landlord, the amount of any expense which would otherwise fall within the definition of Operational Expenses, but which is specifically paid or incurred by the Landlord for operation and maintenance of the Building, the Common Facilities or the Property outside Regular Business Hours at the specific request of the Tenant or the amount of any expenditure incurred for maintenance or repair of damage to the Building, the Common Facilities, the Property, the Leased Premises or the Other Leased Premises caused directly or indirectly, in whole or in part, by the active or passive negligence or intentional act of the Tenant or any of its employees, other agents or Guests. 10.2. "Operational Expenses" means all expenses paid or incurred by the Landlord in connection with the Property, the Building, the Common Facilities and any other improvements on the Property and their operation and maintenance (other than Taxes (which are separately allocated to the Tenant in accordance with subsections 10.1.1 and 10.1.2 of this Agreement), Capital Expenditures (which are separately allocated to the Tenant in accordance with subsection 10.1.5 of this Agreement) and those expenses contemplated by subsections 10.1.6 and 10.1.7 of this Agreement)) including, without limiting the generality of the foregoing: 10.2.1. Utilities Expenses; 10.2.2. the expense of providing the services, maintenance and repairs contemplated by subsections 8.1, 8.2.1 and 8.2.2 of this Agreement, whether furnished by the Land lord's employees or by independent contractors or other agents; 10.2.3. wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or union agree ment (or, if the employees or any of them are not represented by a union, then payments for benefits comparable to those generally required by union agreement in first class office buildings in the immediate area which are unionized) made to or on behalf of any employees of Landlord performing services rendered in connection with the operation and maintenance of the Building, the Common Facilities and the Property, including, without limiting the generality of the foregoing, elevator opera tors, elevator starters, window cleaners, porters, janitors, maids, miscellaneous handymen, watchmen, persons engaged in patrolling and protecting the Building, the Common Facilities and the Property, carpenters, engineers, firemen, mechanics, electricians, plumbers, other tradesmen, other persons engaged in the operation and maintenance of the Building, Common Facilities and Property, Building superinten dent and assistants, Building manager, and clerical and administrative personnel; 10.2.4. the uniforms of all employees and the cleaning, pressing and repair thereof; -9- 10.2.5. premiums and other charges incurred by Landlord with respect to all insurance relating to the Building, the Common Facilities and the Property and the operation and maintenance thereof, including, without limitation: property and casualty, fire and extended coverage insurance, including windstorm, flood, hail, explosion, other casualty, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability insurance; elevator, boiler and machinery insurance; excess liability coverage insurance; use and occupancy insurance; workers' compensation and health, accident, disability and group life insurance for all employees; and casualty rent insurance; 10.2.6. sales and excise taxes and the like upon any Operational Expenses and Capital Expenditures; 10.2.7. management fees of any independent managing agent for the Property, the Building or the Common Facilities; and if there shall be no independent managing agent, or if the managing agent shall be a person affiliated with the Landlord, the management fees that would customarily be charged for the management of the Property, the Building and the Common Facilities by an independent, first class managing agent in the immediate area; 10.2.8. the cost of replacements for tools, supplies and equipment used in the operation, service, maintenance, improvement, inspection, repair and alteration of the Building, the Common Facilities and the Property; 10.2.9. the cost of repainting or otherwise redecorating any part of the Building or the Common Facilities; 10.2.10. decorations for the lobbies and other Common Facilities in the Building; 10.2.11. the cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building, the Property and the Common Facilities; 10.2.12. an allocable share of service, replacement, repair, maintenance and other charges assessed from time to time by the Carnegie Center Owner's Association II to the Building; and 10.2.13. any and all other expenditures of the Landlord in connection with the operation, alteration, repair or maintenance of the Property, the Common Facilities or the Building as a first-class office building and facilities in the immediate area which are properly treated as an expense fully deductible as incurred in accordance with generally applied real estate accounting practice. 10.3. "Capital Expenditures" means the following expenditures incurred or paid by the Landlord in connection with the Property, the Building, the Common Facilities and any other improvements on the Property: 10.3.1. all costs and expenses incurred by the Landlord in connection with retro-fitting the entire Building or the Common Facilities, or any portion thereof, to comply with any change in Federal, state or local statute, rule, regulation, order or requirement which change takes effect after the original completion of the Building; -10- 10.3.2. all costs and expenses incurred by the Landlord to replace and improve the Property, the Building or the Common Facilities or portions thereof for the purpose of contin ued operation of the Property, the Building and the Common Facilities as a first class office complex in the immediate area; and 10.3.3. all costs and expenses incurred by the Landlord in connection with the installation of any energy, labor or other cost saving device or system on the Property or in the Building or the Common Facilities. 10.4. Neither "Operational Expenses" nor "Capital Expenditures" shall include any of the following: 10.4.1. principal or interest on any mortgage indebtedness on the Property, the Building or any portion thereof; 10.4.2. any capital expenditure, or amortized portion thereof, other than those included in the definition of Capital Expenditures set forth in subsection 10.3 above; 10.4.3. expenditures for any leasehold improvement which is made in connection with the preparation of any portion of the Building for occupancy by a new tenant or which is not made generally to or for the benefit of the Leased Premises and all Other Leased Premises or generally to the Building or the Common Facilities; 10.4.4. to the extent the Landlord actually receives proceeds of property and casualty insur ance policies on the Building, other improvements on the Property or the Common Facilities, expenditures for repairs or replacements occasioned by fire or other casualty to the Building or the Common Facilities; 10.4.5. expenditures for repairs, replacements or rebuilding occasioned by any of the events contemplated by section 16 of this Agreement; 10.4.6. expenditures for costs, including advertising and leasing commissions, incurred in connection with efforts to lease portions of the Building and to procure new tenants for the Building; 10.4.7. expenditures for the salaries and benefits of the executive officers, if any, of the Landlord; and 10.4.8. depreciation (as that term is used in the accounting sense in the context of generally applied real estate accounting practice) of the Building, the Common Facilities and any other improvement on the Property. 10.5. As soon as practicable after the close of the No Pass Through Period and December 31 of each year thereafter, any portion of which is during the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.5.1. Taxes billed, or if a bill has not then been received for the entire period, the Land lord's projection of Taxes to be billed, for the then current calendar year; 10.5.2. the amount of Base Year Taxes; 10.5.3. the amount, if any, by which item 10.5.1 above exceeds item 10.5.2 above; and 10.5.4. the Tenant's Share of item 10.5.3 above. -11- 10.6. As soon as practicable after December 31 of each year during the Term and after the end of the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.6.1. the actual amount of Taxes for the preceding calendar year in excess of Base Year Taxes (or proportional amount thereof for shorter periods during the Term); 10.6.2. the Landlord's previously projected amount of Taxes for the preceding calendar year in excess of Base Year Taxes (or proportional amount thereof for shorter periods during the Term); 10.6.3. the difference obtained by subtracting item 10.6.2 above from item 10.6.1 above; and 10.6.4. the Tenant's Share of item 10.6.3 above. 10.7. As soon as practicable after the close of the No Pass Through Period and December 31 of each year thereafter, any portion of which is during the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.7.1. the Landlord's projection of annual Operational Expenses for the current period (if any portion thereof is during the Term); 10.7.2. the amount of the Base Year Operational Expenses; 10.7.3. the amount, if any, by which item 10.7.1 above exceeds item 10.7.2 above; and 10.7.4. the Tenant's Share of item 10.7.3 above. 10.8. As soon as practicable after December 31 of each year during the Term and after the end of the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.8.1. the actual amount of Operational Expenses for the preceding calendar year in excess of Base Year Operational Expenses (or proportional amount thereof for shorter periods during the Term); 10.8.2. the Landlord's previously projected amount of Operational Expenses for the preced ing calendar year in excess of Base Year Operational Expenses (or proportional amount thereof for shorter periods during the Term); 10.8.3. the difference obtained by subtracting item 10.8.2 above from item 10.8.1 above; and 10.8.4. the Tenant's Share of item 10.8.3 above. 10.9. As soon as practicable after incurring any Capital Expenditure, the Landlord shall furnish the Tenant with a notice setting forth: 10.9.1. a description of the Capital Expenditure and the subject thereof; 10.9.2. the date the subject of the respective Capital Expenditure was first placed into service and the period of useful life selected by the Landlord in connection with the determi nation of the Annual Amortized Capital Expenditure; 10.9.3. the amount of the Annual Amortized Capital Expenditure; and 10.9.4. the Tenant's Share of item 10.9.3 above. -12- 10.10. As soon as practicable after the Commencement Date and from time to time thereafter, the Landlord shall furnish the Tenant with a notice setting forth its estimate of Tenant Electric Charges per month. Unless the Tenant desires to question the Landlord's then most recent estimate of Tenant Electric Charges exclusively in the manner set forth below, the Landlord's then most recent estimate shall be binding and shall continue in effect until any question raised by the Tenant is otherwise resolved in accordance with this subsection 10.10 of the Agreement. If the Tenant desires to question the Landlord's estimate of Tenant Electric Charges, the Tenant shall give notice to the Landlord of its desire. Upon receipt of the Tenant's notice, the Landlord shall obtain, at the Tenant's expense, a reputable, independent electrical engineer's formal written estimate and computation of the Tenant Electric Charges. The engineer's estimate and computation of Tenant Electric Charges shall thereupon control for a 12 month period com mencing with the date as of which it is given effect as to Tenant Electric Charges, and until the Landlord furnishes the Tenant with a subsequent notice setting forth its estimate of Tenant Electric Charges per month, except to the extent that the Landlord may increase them in proportion to increases in Utilities Expenses during the same period. 10.11. Within 30 days after the Landlord gives any notice enumerated in subsections 10.5 through 10.10 of this Agreement, the Tenant or the Tenant's authorized agent, upon one week's prior notice to the Landlord, may inspect the Landlord's books and records, as they pertain to the particular expense in question, at the Landlord's office regarding the subject of any such notice to verify the amount(s) and calculation(s) thereof. After payment of the Tenant's Share in accordance with the provisions of section 10 of this Agreement, no further audit shall be conducted except with respect to items which may have been questioned within the 30 day period. Tenant agrees that no audit will be conducted by an auditor engaged, in whole or in part, on a contingent fee basis. If an audit is conducted, the Landlord shall have the right to verify that the provisions of this prohibition have been satisfied. 10.12. The mere enumeration of an item within the definitions of Operational Expenses and Capital Expenditures in subsections 10.2 and 10.3 of this Agreement, respectively, shall not be deemed to create an obligation on the part of the Landlord to provide such item unless the Landlord is affirmatively required to provide such item elsewhere in this Agreement. 11. Leasehold Improvements, Fixtures and Trade Fixtures. All leasehold improvements to the Leased Premises, fixtures installed in the Leased Premises and the blinds and floor treatments or coverings shall be the property of the Landlord, regardless of when, by which party or at which party's cost the item is installed. Movable furniture, furnishings, trade fixtures and equipment of the Tenant which are in the Leased Premises shall be the property of the Tenant, except as may otherwise be set forth in section 23 of this Agreement. 12. Alterations, Improvements and Other Modifications by the Tenant. 12.1. The Tenant shall not make any alterations, improvements or other modifications to the Leased Premises which effect structural changes in the Building or any portion thereof, change the functional utility or rental value of the Leased Premises or, except as may be contemplated by section 5 of this Agreement prior to the Commencement Date, affect the mechanical, electrical, plumbing or other systems installed in the Building or the Leased Premises. -13- 12.2. The Tenant shall not make any other alterations, improvements or modifications to the Leased Premises, the Building or the Property or make any boring in the ceiling, walls or floor of the Leased Premises or the Building unless the Tenant shall have first: 12.2.1. furnished to the Landlord detailed, New Jersey architect-certified construction drawings, construction specifications and, if they pertain in any way to the heating, ventilation and air conditioning or other systems of the Building, related engineering design work and specifications regarding, the proposed alterations, improvements or other modifications; 12.2.2. not received a notice from the Landlord objecting thereto in any respect within 30 days of the furnishing thereof (which shall not be deemed the Landlord's affirmative consent for any purpose); 12.2.3. obtained any necessary or appropriate building permits or other approvals from the Municipality and, if such permits or other approvals are conditional, satisfied all conditions to the satisfaction of the Municipality; and 12.2.4. met, and continued to meet, all the following conditions with regard to any contractors selected by the Tenant and any subcontractors, including materialmen, in turn selected by any of them: 12.2.4.1. the Tenant shall have sole responsibility for payment of, and shall pay, such contractors; 12.2.4.2. the Tenant shall have sole responsibility for coordinating, and shall coordinate, the work to be supplied or performed by such contractors, both among themselves and with any contractors selected by the Landlord; 12.2.4.3. the Tenant shall not permit or suffer the filing of any mechanic's notice of intention or other lien or prospective lien by any such contractor or subcontractor with respect to the Property, the Common Facilities, the Building or any other improvements on the Property; and if any of the foregoing should be filed by any such contractor or subcontractor,the Tenant shall forthwith obtain and file the complete discharge and release thereof or provide such payment bond(s) from a reputable, financially sound institutional surety as will, in the opinions of the Landlord, the holders of any mortgage indebtedness on, or other interest in, the Property, the Building, the Common Facilities or any other improvements on the Property, or any portions thereof, and their respective title insurers, be adequate to assure the complete discharge and release thereof; 12.2.4.4. prior to any such contractor's entering upon the Property, the Building or the Leased Premises or commencing work the Tenant shall have deliv ered to the Landlord (a) all the Tenant's certificates of insurance set forth in section 14 of this Agreement, conforming in all respects to the require ments of section 14 of this Agreement, except that the effective dates of all such insurance policies shall be prior to any such contractor's entering -14- upon the Property, the Building or the Leased Premises or commencing work (if any work is scheduled to begin before the Commencement Date) and (b) similar certificates of insurance from each of the Tenant's con tractors providing for coverage in equivalent amounts, together with their respective certificates of workers' compensation insurance, employer's liability insurance and products-completed operations insurance, the latter providing coverage in at least the amount required for the Tenant's comprehensive general public liability and excess insurance; 12.2.4.5. each such contractor shall be a party to collective bargaining agreements with those unions that are certified as the collective bargaining agents of all bargaining units of such contractor, of which all such contractor's workpersons shall be members in good standing; 12.2.4.6. each such contractor shall perform its work in a good and workpersonlike manner and shall not interfere with or hinder the Landlord or any other contractor in any manner; 12.2.4.7. there shall be no labor dispute of any nature whatsoever involving any such contractor or any workpersons of such contractor or the unions of which they are members with anyone; and if such a labor dispute exists or comes into existence the Tenant shall forthwith, at the Tenant's sole cost and expense, remove all such contractors and their workpersons from the Building, the Common Facilities and the Property; and 12.2.4.8. the Tenant shall have the sole responsibility for the security of the Leased Premises and all contractors' materials, equipment and work, regardless of whether their work is in progress or completed. 12.3. After the Commencement Date, the Tenant shall not apply any wall covering (except latex based flat paint) or other treatment to the walls of the Leased Premises without the prior written consent of the Landlord. 13. Landlord's Rights of Entry and Access. The Landlord and its authorized agents shall have the following rights of entry and access to the Leased Premises: 13.1. In case of any emergency or threatened emergency, at any time for any purpose which the Landlord reasonably believes under such circumstances will serve to prevent, eliminate or reduce the emergency, or the threat thereof, or damage or threatened damage to persons and property. 13.2 Upon at least one day's prior verbal advice to the Tenant, at any time for the purpose of erecting or constructing improvements, modifications, alterations and other changes to the Building or any portion thereof, including, without limiting the generality of the foregoing, the Leased Premises, the Common Facilities or the Property or for the purpose of repairing, maintaining or cleaning them, whether for the benefit of the Landlord, the Building, all tenants of Other Leased Premises in the Building, or one or more tenants of Other Leased Premises, the Carnegie Center Complex or others. In connection with any such improvements, modifications, alterations, other -15- changes, repairs, maintenance or cleaning, the Landlord may close off such portions of the Property, the Building and the Common Facilities and interrupt such services as may be necessary to accomplish such work, without liability to the Tenant therefor and without such closing or interruption being deemed an eviction or constructive eviction or requiring an abatement of Rent. However, in accomplishing any such work, the Landlord shall endeavor not to materially interfere with the Tenant's use and enjoyment of the Leased Premises or the conduct of the Tenant's business and to minimize interference, inconvenience and annoyance to the Tenant. 13.3. At all reasonable hours for the purpose of operating, inspecting or examining the Building, including the Leased Premises, or the Property. 13.4. At any time after the Tenant has vacated the Leased Premises, for the purpose of preparing the Leased Premises for another tenant or prospective tenant. 13.5. If practicable by appointment with the Tenant, at all reasonable hours for the purpose of showing the Building to prospective purchasers, mortgagees and prospective mortgagees and prospective ground lessees and lessors. 13.6. If practicable by appointment with the Tenant, at all reasonable hours during the last six months of the Term for the purpose of showing the Leased Premises to prospective tenants thereof. 13.7. The mere enumeration of any right of the Landlord within this section 13 of the Agreement shall not be deemed to create an obligation on the part of the Landlord to exercise any such right unless the Landlord is affirmatively required to exercise such right elsewhere in this Agreement. 14. Liabilities and Insurance Obligations. 14.1. The Tenant shall, at the Tenant's own expense, purchase before the Commencement Date, and maintain in full force and effect throughout the Term and any other period during which the Tenant may have possession of the Leased Premises, the following types of insurance coverage from financially sound and reputable insurers, licensed by the State of New Jersey to provide such insurance and acceptable to the Landlord, in the minimum amounts set forth below, each of which insurance policies shall be for the benefit of, and shall name the Landlord, the Landlord's managing agent and mortgagees and ground lessors known to the Tenant, if any, of the Building, the Common Facilities, the Property or any interest therein, their successors and assigns as additional persons insured, and none of which insurance policies shall contain a "co-insurance" clause: 14.1.1. commercial general liability insurance (including "broad form and contractual liabil ity" coverage) and excess ("umbrella") insurance which, without limiting the general ity of the foregoing, considered together shall insure against such risks as bodily injury, death and property damage, with a combined single limit of not less than $3,000,000.00 for each occurrence; and 14.1.2. "all-risks" property insurance covering the Leased Premises in an amount sufficient, as determined by the Landlord from time to time, to cover the replacement costs for all Tenant's alterations, improvements, fixtures and personal property located in or on the Leased Premises. -16- 14.2. With respect to risks: 14.2.1. as to which this Agreement requires either party to maintain insurance, or 14.2.2. as to which either party is effectively insured and for which risks the other party may be liable, the party required to maintain such insurance and the party effectively insured shall use its best efforts to obtain a clause, if available from the respective insurer, in each such insurance policy expressly waiving any right of recovery, by reason of subrogation to such party's rights or otherwise, the respective insurer might otherwise have or obtain against the other party, so long as such a clause can be obtained in the respective insurance policy without additional premium cost. If such a clause can be obtained in the respective insurance policy, but only at additional premium cost, such party shall, by notice to the other party, promptly advise the other party of such fact and the amount of the additional premium cost. If the other party desires the inclusion of such a clause in the notifying party's respective insurance policy, the other party shall, within 10 days of receipt of the notifying party's notice, by notice advise the notifying party of its desire and enclose therewith its check in the full amount of the additional premium cost; otherwise the notifying party need not obtain such a clause in the respective insurance. 14.3. Each party hereby waives any right of recovery against the other party for any and all damages for property losses and property damages which are actually insured by either party, but only to the extent: 14.3.1. that the waiver set forth in this subsection 14.3 does not cause or result in any cancellation of, or diminution in, the insurance coverage otherwise available under any applicable insurance policy; 14.3.2. of the proceeds of any applicable insurance policy (without adjustment for any deductible amount set forth therein) actually received by such party for such respec tive loss or damages; and 14.3.3. the substance of the clause contemplated by subsection 14.2 of this Agreement is actually and effectively set forth in the respective insurance policy. The waiver set forth in this subsection 14.3 of the Agreement shall not apply with respect to liability insurance policies (as opposed to property and casualty insurance policies). 14.4. The Tenant hereby waives any right of recovery it might otherwise have against the Landlord for losses and damages caused actively or passively, in whole or in part, by any of the risks the Tenant is required to insure against in accordance with subsections 14.1.1 or 14.1.2 of this Agreement, unless such waiver would cause or result in a cancellation of, or diminution in, the coverage of the Tenant's policies of insurance against such risks. 14.5. The Landlord shall have no liability whatsoever to the Tenant or the Tenant's employees, other agents or Guests or anyone else for any death, bodily injury, property loss or other damages suffered by any of them or any of their property which is not caused directly, exclusively and entirely by the active gross negligence or intentional misconduct of the Landlord without the intervention or contribution of any other cause or contributing factor whatsoever. -17- 14.6. Each policy of insurance required under subsection 14.1 of this Agreement shall include provisions to the effect that: 14.6.1. no act or omission of the Tenant, its employees, other agents or Guests shall result in a loss of insurance coverage otherwise available under such policy to any person required to be named as an additional insured in accordance with subsection 14.1 of this Agreement; and 14.6.2. the insurance coverage afforded by such policy shall not be diminished, cancelled, permitted to expire or otherwise terminated for any reason except upon 30 days' prior written notice from the insurer to every person required to be named as an additional insured in accordance with subsection 14.1 of this Agreement. 14.7. With respect to each type of insurance coverage referred to in subsection 14.1 of this Agree ment, prior to the Commencement Date the Tenant shall cause its insurer(s) to deliver to the Landlord the certificate(s) of the insurer(s) setting forth the name and address of the insurer, the name and address of each additional insured, the type of coverage provided, the limits of the coverage, any deductible amounts, the effective dates of coverage and that each policy under which coverage is provided affirmatively includes provisions to the effect set forth in subsec tion 14.6 of this Agreement. In the event any of such certificates indicates a coverage termina tion date earlier than the end of the Term or the end of any other period during which the Tenant may have possession of the Leased Premises, no later than 10 days before any such coverage termination date, the Tenant shall deliver to the Landlord respective, equivalent, new certificate(s) of the insurer(s). 15. Casualty Damage to Building or Leased Premises. 15.1. In the event of any damage to the Building or any portion thereof by fire or other casualty, with the result that the Leased Premises are rendered unusable, in whole or in part, then, unless the Building is destroyed or so damaged that the Landlord does not intend to rebuild the same, the Landlord shall, within 30 business days of the casualty, determine the period of time required to restore the Building and the Leased Premises (but not including the improvements constructed or installed prior to the Term or during the Term in excess of the original allowance for the same). 15.1.1. If, in Landlord's opinion, the restoration described above will take more than 180 days then Landlord may elect to cancel this Agreement effective as of the date of casualty. Notice of the Landlord's election shall be served upon the Tenant within the 30 business day period described above. 15.1.2. If, in Landlord's opinion, the restoration described above will take 180 days or less, then Landlord shall not cancel this Agreement and must restore the Building and the Leased Premises as aforesaid. In either of such events, the Landlord shall cause restoration to proceed diligently and expediently to the extent the Landlord has received proceeds of any property, casualty or liability insurance on the damaged portions (or would have received such proceeds had it obtained such coverage). 15.2. Rent shall abate from the date of the casualty until: -18- 15.2.1. such time as the Leased Premises are again fully usable and be reduced during such period by the amount which bears the same proportion to the Rent otherwise payable during such period as the gross rentable floor space of the Leased Premises which are rendered unusable bears to the gross rentable floor space of the Leased Premises. The restoration of the improvements constructed or installed prior to the Term or during the Term in excess of the original allowance for the same shall be the Tenant's responsibility. Tenant shall make reasonable, good faith efforts to integrate the restoration which is its responsiblity with the work which is being performed by Landlord. To the extent that is not feasible, Tenant shall be allowed an additional, reasonable interval to complete its work, not to exceed sixty days and Rent shall abate during the interval required for such restoration. The Landlord shall cooperate with Tenant to integrate the restoration of such improvements during the reconstruction period; or 15.2.2. this Agreement is canceled pursuant to the provisions of subsections 15.1. 15.3. If, in the Landlord's opinion, the restoration described above will take more than 180 days and the Landlord makes the election to cancel set forth in subsection 15.1 above then Landlord, in such event, may proceed with restoration (or non-restoration) in any manner it chooses, without any liability to Tenant. 15.4. The Tenant shall promptly advise the Landlord by the quickest means of communication of the occurrence of any casualty damage to the Building or the Leased Premises of which the Tenant becomes aware. 16. Condemnation. If the Leased Premises, or any portion thereof, or the Building or the Common Facilities, or any substantial portion of any of the foregoing, shall be acquired for any public or quasi-public use or purpose by statute, right of eminent domain or private sale in lieu thereof, with the result the Tenant can not use and occupy the Leased Premises for the purpose set forth in subsection 7.1 of this Agreement, the Tenant hereby waives any claim against the Landlord, the condemning authority or other person acquiring same for any thing of value, tangible or intangible, including, without limiting the generality of the foregoing, the putative value of any leasehold interest or loss of the use of same, except for any right the Tenant might have to make a claim, independent of, and without reference to or having any effect on, any award or claim of the Landlord, against the condemning authority or other acquiring party regarding the value of the Tenant's installed trade fixtures and other installed equip ment which are not removable from the Leased Premises or for ordinary and necessary moving expenses occasioned thereby. 17. Assignment or Subletting by Tenant. 17.1. Except as may be specifically set forth in this section 17 of the Agreement, the Tenant shall not: 17.1.1. assign, or purport to assign, this Agreement or any of the Tenant's rights hereunder; 17.1.2. sublet, or purport to sublet, the Leased Premises or any portion thereof; 17.1.3. license, or purport to license, the use or occupancy of the Leased Premises or any portion thereof; -19- 17.1.4. otherwise transfer, or attempt to transfer any interest including, without limiting the generality of the foregoing, a mortgage, pledge or security interest, in this Agreement, the Leased Premises or the right to the use and occupancy of the Leased Premises; or 17.1.5. indirectly accomplish, or permit or suffer the accomplishment of, any of the foregoing by merger or consolidation with another entity, by acquisition or disposition of assets or liabilities outside the ordinary course of the Tenant's business or by acquisition or disposition, by the Tenant's equity owners or subordinated creditors, of any of their respective interests in the Tenant. 17.2. The Tenant shall not assign this Agreement or any of the Tenant's rights hereunder or sublet the Leased Premises or any portion thereof without first giving three months' prior notice to the Landlord of its desire to assign or sublet and requesting the Landlord's consent and without first receiving the Landlord's prior written consent. The Tenant's notice to the Landlord shall include: 17.2.1. the full name, address and telephone number of the proposed assignee or sublessee; 17.2.2. a description of the type(s) of business in which the proposed assignee or sublessee is engaged and proposes to engage; 17.2.3. a description of the precise use to which the proposed assignee or sublessee intends to put the Leased Premises or portion thereof; 17.2.4. the proposed assignee's or subtenant's most recent quarterly and annual financial statements prepared in accordance with generally accepted accounting principles and any other evidence of financial position and responsibility that the Tenant or proposed assignee or sublessee may desire to submit; 17.2.5. by diagram and measurement of the actual square feet of floor space, the precise portion of the Leased Premises proposed to be subject to the assignment of this Agreement or to be sublet; 17.2.6. a complete, accurate and detailed description of the terms of the proposed assignment or sublease including, without limiting the generality of the foregoing, all consider ation paid or given, or proposed to be paid or to be given, by the proposed assignee, sublessee or other person to the Tenant and the respective times of payment or delivery; and 17.2.7. any other information reasonably requested by the Landlord. 17.3. By the expiration of the notice period contemplated by subsection 17.2 of this Agreement, the Landlord, in its sole discretion, shall take one of the following actions by notice to the Tenant: 17.3.1. grant consent on the terms and conditions set forth in subsection 17.4 of this Agree ment and such other reasonable terms and conditions set forth in the Landlord's notice; 17.3.2. refuse to grant consent for any of the reasons set forth in subsection 17.5 of this Agreement or for any other reasonable reason set forth in the Landlord's notice; or -20- 17.3.3. elect to terminate the Term as of (a) the end of the third full month after the Tenant has given notice of the Tenant's desire to assign or sublet or (b) the proposed effective date of the proposed assignment or sublease. 17.4. The Landlord's consent to the Tenant's proposed assignment or sublease, if granted under subsection 17.3.1 of this Agreement, shall be subject to all the following terms and conditions (and to any other terms and conditions permitted by that subsection): 17.4.1. any proposed assignee or sublessee shall, by document executed and delivered forthwith to the Landlord, agree to assume and be bound by all the obligations of the Tenant set forth in this Agreement; 17.4.2. the Tenant shall remain liable under this Agreement, jointly and severally with any proposed assignee or sublessee, for the timely performance of all obligations of the Tenant set forth in this Agreement; 17.4.3. the Tenant shall forthwith deliver to the Landlord manually executed copies of all documents regarding the proposed assignment or sublease and a written, accurate and complete description, manually executed both by the Tenant and the proposed assignee or sublessee, of any other agreement, arrangement or understanding between them regarding the same; 17.4.4. with respect to any consideration or other thing of value received or to be received by the Tenant in connection with any such assignment or sublease (other than those payable in equal monthly installments each month during the proposed term of any such assignment or sublease), the Tenant shall pay to the Landlord one-half of any such amount and one-half of the fair market value of any other thing of value within 10 days of receipt of same; and 17.4.5. with respect to any amount payable to the Tenant in equal monthly installments each month during the proposed term of any such assignment or sublease in connection with such assignment or sublease, which amount is in excess of the amount which bears the same ratio to the monthly installment of Rent due from the Tenant as the usable floor space of the Leased Premises subject to the assignment or sublease bears to the usable floor space of the entire Leased Premises, the Tenant shall pay one-half of such excess to the Landlord together with the Tenant's monthly installment of Rent. 17.5. The Landlord's refusal to grant consent under subsection 17.3.2 of this Agreement shall not be deemed an unreasonable withholding of consent if based upon any of the following reasons (or any other reason permitted by that subsection): 17.5.1. the Landlord desires to take one of the other actions enumerated in subsection 17.3 of this Agreement; 17.5.2. there is already another assignee, sublessee or licensee of all or a portion of the Leased Premises; 17.5.3. the proposed sublease is for a term of less than one year; 17.5.4. the proposed sublease is for a term which would expire after the Term; -21- 17.5.5. less than one year remains in the Term as of the proposed effective date of the proposed assignment or sublease; 17.5.6. the general reputation, financial position or ability or type of business of, or the anticipated use of the Leased Premises by, the proposed assignee or proposed subles see is unsatisfactory to the Landlord or is inconsistent with those of tenants of Other Leased Premises or of the Carnegie Center Complex or inconsistent with any commit ment made by the Landlord to any such other tenant; 17.5.7. the proposed consideration to be paid to the Tenant during any period of 12 months is less than the amount of the Market Rental Rate divided by the gross rentable floor space of the Leased Premises and multiplied by that portion of the gross rentable floor space of the Leased Premises proposed to be subject to the proposed assignment or sublease; or 17.5.8. the gross rentable floor space of the portion of the Leased Premises proposed to be sublet is less than one-third of the gross rentable floor space of the Leased Premises. 18. Signs, Displays and Advertising. 18.1. The Tenant shall have one sign identifying the Landlord's assigned number for the Leased Premises at the principal entrance to the Leased Premises. The Tenant may identify itself in or on each of: the sign at the principal entrance to the Leased Premises, the Building directory and the directory, if any, on the floor of the Building on which the Leased Premises is located. All such signs, and the method and materials used in mounting and dismounting them, shall be in accordance with the Landlord's specifications. All such signs shall be provided and mounted by the Landlord at the Landlord's expense, except that the Tenant shall bear any expense of identifying itself on the sign at the principal entrance to the Leased Premises. 18.2. No other sign, advertisement, fixture or display shall be used by the Tenant on the Property or in the Building or the Common Facilities. Any signs other than those specifically permitted under subsection 18.1 of this Agreement shall be removed promptly by the Tenant or by the Landlord at the Tenant's expense. 19. Quiet Enjoyment. The Landlord is the owner of the Building, the Property and those Common Facilities located on the Property. The Landlord has the right and authority to enter into and execute and deliver this Agreement with the Tenant. So long as an Event of Default shall not have occurred, the Tenant shall and may peaceably and quietly have, hold and enjoy the Leased Premises during the Term in accordance with this Agreement. 20. Relocation. At any time and from time to time during the Term, on at least 30 days' prior notice to the Tenant, but subject to the provisions of subsection 26.4 of this agreement, the Landlord shall have the right to move the Tenant out of the Leased Premises and into premises having at least equal floor space located in the Building or in any other comparable building located in the Carnegie Center Complex for the duration of the Term, subject to the express written consent of State Mutual Life Assurance Company of America, as long as it is the holder of the first mortgage on the Property. In the event the Landlord -22- exercises this right of relocation, the Landlord shall decorate the new premises similarly to the Leased Premises and remove, relocate and reinstall the Tenant's furniture, trade fixtures, furnishings and equipment, all at the sole cost and expense of the Landlord. When the substitute new premises are ready, the Tenant shall surrender the Leased Premises. Following any such relocation, this Agreement shall continue in full force and effect except for the description of the Leased Premises, the Building and the Property which, upon completion of such relocation, shall be deemed amended to describe the substitute new premises, building and property, respectively, to which the Tenant shall have been relocated in accordance with this section 20 of the Agreement. 21. Surrender. Upon termination of the Term, or at any other time at which the Landlord, by virtue of any provision of this Agreement or otherwise has the right to re-enter and re-take possession of the Leased Premises, the Tenant shall surrender possession of the Leased Premises; remove from the Leased Premises all property owned by the Tenant or anyone else other than the Landlord; remove from the Leased Premises any alterations, improvements or other modifications to the Leased Premises that the Landlord may request by notice; make any repairs required by such removal; clean the Leased Premises; leave the Leased Premises in as good order and condition as it was upon the completion of any improvements contemplated by section 5 of this Agreement, ordinary wear and use excepted; return all copies of all keys and passes to the Leased Premises, the Common Facilities and the Building to the Landlord; and receive the Landlord's written acceptance of the Tenant's surrender. The Landlord shall not be deemed to have accepted the Tenant's surrender of the Leased Premises unless and until the Landlord shall have executed and delivered the Landlord's written acceptance of surrender to the Tenant, which shall not be unreasonably withheld or delayed. 22. Events of Default. The occurrence of any of the following events shall constitute an Event of Default under this Agree ment: 22.1. the Tenant's failure to pay any installment of Basic Rent or any amount of Additional Rent when it is first due; 22.2. the Tenant's failure to perform any of its obligations under this Agreement if such failure has caused, or may cause, loss or damage that can not promptly be cured by subsequent act of the Tenant; 22.3. the Tenant's failure to complete performance of any of the Tenant's obligations under this Agreement (other than those contemplated by subsections 22.1 and 22.2 of this Agreement) within 10 days after the Landlord shall have given notice to the Tenant specifying which of the Tenant's obligations has not been performed and in what respects, unless completion of performance within such period of 10 days is not possible using diligence and expedience, then within a reasonable time of the Landlord's notice so long as the Tenant shall have commenced substantial performance within the first three days of such period of 10 days and shall have continued to provide substantial performance, diligently and expediently, through to completion of performance; -23- 22.4. the discovery that any representation made by the Tenant in this Agreement shall have been inaccurate or incomplete in any material respect either on the date it was made or the date as of which it was made; 22.5. the sale, transfer or other disposition of any interest of the Tenant in the Leased Premises by way of execution or other legal process; 22.6. with the exception of those of the following events to which section 365 of the Bankruptcy Code shall apply in the context of an office lease (in which case subsection 22.7 of this Agreement shall apply): 22.6.1. the Tenant's becoming a "debtor," as that term is defined in section 101 of the Bankruptcy Code; 22.6.2. any time when either the value of the Tenant's liabilities exceed the value of the Tenant's assets or the Tenant is unable to pay its obligations as and when they respectively become due in the ordinary course of business; 22.6.3. the appointment of a receiver or trustee of the Tenant's property or affairs; or 22.6.4. the Tenant's making an assignment for the benefit of, or an arrangement with or among, creditors or filing a petition in insolvency or for reorganization or for the appointment of a receiver; 22.7. in the event of the occurrence of any of the events enumerated in subsection 22.6 of this Agreement to which section 365 of the Bankruptcy Code shall apply in the context of an office lease, the earlier of the bankruptcy trustee's rejection or deemed rejection (as those terms are used in section 365 of the Bankruptcy Code) of this Agreement; or 22.8. the Tenant's abandoning the Leased Premises before expiration of the Term without the prior written consent of the Landlord. 23. Rights and Remedies. 23.1. Upon the occurrence of an Event of Default the Landlord shall have all the following rights and remedies: 23.1.1. to elect to terminate the Term by giving notice of such election, and the effective date thereof, to the Tenant and to receive Termination Damages; 23.1.2. to elect to re-enter and re-take possession of the Leased Premises, without thereby terminating the Term, by giving notice of such election, and the effective date thereof, to the Tenant and to receive Re-Leasing Damages; 23.1.3. if the Tenant remains in possession of the Leased Premises after the Tenant's obliga tion to surrender the Leased Premises shall have arisen, to remove the Tenant and the Tenant's and any others' possessions from the Leased Premises by any of the follow ing means without any liability to the Tenant therefor, any such liability to the Tenant therefor which might otherwise arise being hereby waived by the Tenant: legal proceedings (summary or otherwise), writ of dispossession and any other means and to receive Holdover Damages and, except in the circumstances contemplated by section 20 of this Agreement, to receive all expenses incurred in removing the Tenant -24- and the Tenant's and any others' possessions from the Leased Premises, and of storing such possessions if the Landlord so elects; 23.1.4. to be awarded specific performance, temporary restraints and preliminary and permanent injunctive relief regarding Events of Default where the Landlord's rights and remedies at law may be inadequate, without the necessity of proving actual damages or the inadequacy of the rights and remedies at law; 23.1.5. to receive all expenses incurred in securing, preserving, maintaining and operating the Leased Premises during any period of vacancy, in making repairs to the Leased Premises, in preparing the Leased Premises for re-leasing and in re-leasing the Leased Premises including, without limiting the generality of the foregoing, any brokerage commissions; 23.1.6. to receive all legal expenses, including without limiting the generality of the forego ing, attorneys' fees incurred in connection with pursuing any of the Landlord's rights and remedies, including indemnification rights and remedies; 23.1.7. if the Landlord, in its sole discretion, elects to perform any obligation of the Tenant under this Agreement (other than the obligation to pay Rent) which the Tenant has not timely performed, to receive all expenses incurred in so doing; 23.1.8. to elect to pursue any legal or equitable right and remedy available to the Landlord under this Agreement or otherwise; and 23.1.9. to elect any combination, or any sequential combination of any of the rights and remedies set forth in subsection 23.1 of this Agreement. 23.2. In the event the Landlord elects the right and remedy set forth in subsection 23.1.1 of this Agreement, Termination Damages shall be equal to the amount which, at the time of actual payment thereof to the Landlord, is the sum of: 23.2.1. all accrued but unpaid Rent; 23.2.2. the present value (calculated using the most recently available (at the time of calcula tion) published weekly average yield on United States Treasury securities having maturities comparable to the balance of the then remaining Term) of the sum of all payments of Rent remaining due (at the time of calculation) until the date the Term would have expired (had there been no election to terminate it earlier) less the present value (similarly calculated) of all payments of rent to be received through the end of the Term (had there been no election to terminate it earlier) from a lessee, if any, of the Leased Premises at the time of calculation (and it shall be assumed for purposes of such calculations that (i) the amount of future Additional Rent due per year under this Agreement will be equal to the average Additional Rent per month due during the 12 full calendar months immediately preceding the date of any such calculation, increas ing annually at a rate of eight percent compounded, (ii) if any calculation is made before the first anniversary of the end of the No Pass Through Period, the average Additional Rent due for any month after the end of the No Pass Through Period will be equal to nine percent of the sum of the Base Year Operational Expenses, Base Year Taxes and Tenant Electric Charges (considered on an annual basis), (iii) if any -25- calculation is made before the beginning of the Base Year, the sum of Base Year Taxes and Base Year Operational Expenses shall be assumed to be $6.50 per gross rentable square foot and (iv) if any calculation is made before the end of the Base Year, Base Year Taxes and Base Year Operational Expenses may be extrapolated based on the year to date experience of the Landlord); 23.2.3. the Landlord's reasonably estimated cost of demolishing any leasehold improvements to the Leased Premises; and 23.2.4. that amount, which as of the occurrence of the Event of Default, bears the same ratio to the costs, if any, incurred by the Landlord (and not paid by the Tenant) in building out the Leased Premises in accordance with section 5 of this Agreement as the number of months remaining in the Term (immediately before the occurrence of the Event of Default) bears to the number of months in the entire Term (immediately before the occurrence of the Event of Default). 23.3. In the event the Landlord elects the right and remedy set forth in subsection 23.1.2 of this Agreement, Re-Leasing Damages shall be equal to the Rent less any rent actually and timely received by the Landlord from any lessee of the Leased Premises or any portion thereof, payable at the respective times that Rent is payable under the Agreement plus the cost, if any, to the Landlord of building out or otherwise preparing the Leased Premises for, and leasing the Leased Premises to, any such lessee. 23.4. In the event the Landlord elects the right and remedy set forth in subsection 23.1.3 of this Agreement, Holdover Damages shall mean damages at the rate per month or part thereof equal to the greater of: (a) one and one-half times one-twelfth of the then Market Rental Rate plus all Additional Rent as set forth in this Agreement or (b) double the average amount of all payments of Rent due under this Agreement during each of the last 12 full calendar months prior to the Landlord's so electing or, in the event the Term shall have terminated by expiration under subsection 24.1.1 of this Agreement, the last full 12 calendar months of the Term, in either case payable in full on the first day of each holdover month or part thereof. 23.5. In connection with any summary proceeding to dispossess and remove the Tenant from the Leased Premises under subsection 23.1.3 of this Agreement, the Tenant hereby waives: 23.5.1. any notices for delivery of possession thereof, of termination, of demand for removal therefrom, of the cause therefor, to cease, to quit and all other notices that might otherwise be required pursuant to 2 A N.J.S.A. sec. 18-53 et seq.; 23.5.2. any right the Tenant might otherwise have to cause a termination of the action or proceeding by paying to the Landlord or into court or otherwise any Rent in arrears; 23.5.3. any right the Tenant might otherwise have to a period of waiting between issuance of any warrant in execution of any judgment for possession obtained by the Landlord and the execution thereof; 23.5.4. any right the Tenant might otherwise have to transfer or remove such proceeding from the court (or the particular division or part of the court) or other forum in which it shall have been instituted by the Landlord to another court, division or part; -26- 23.5.5. any right the Tenant might otherwise have to redeem the Tenant's former leasehold interest between the entry of any judgment and the execution of any warrant issued in connection therewith by paying to the Landlord or into Court or otherwise any Rent in arrears; and 23.5.6. any right the Tenant might otherwise have to appeal any judgment awarding posses sion of the Leased Premises to the Landlord. 23.6. The enumeration of rights and remedies in this section 23 of the Agreement is not intended to be exhaustive or exclusive of any rights and remedies which might otherwise be available to the Landlord, or to force an election of one or more rights and remedies to the exclusion of others, concurrently, consecutively or sequentially. On the contrary, each right and remedy enumerated in this section 23 of the Agreement is intended to be cumulative with each other right and remedy enumerated in this section 23 of the Agreement and with each other right and remedy that might otherwise be available to the Landlord; and the selection of one or more of such rights and remedies at any time shall not be deemed to prevent resort to one or more others of such rights and remedies at the same time or a subsequent time, even with regard to the same occurrence sought to be remedied. 23.7. It is expressly understood and agreed that the Landlord shall have no duty to mitigate damages. In the event the Landlord elects the right and remedy set forth in subsection 23.1.2 of this Agreement, Re-Leasing Damages shall be equal to the Rent less any rent actually and timely received by the Landlord from any lessee of the Leased Premises or any portion thereof, payable at the respective times that Rent is payable under the Agreement plus the cost, if any, to the Landlord of building out or otherwise preparing the Leased Premises for, and leasing the Leased Premises to, any such lessee. The Landlord may relet some or all of the Leased Premises but shall have no duty to do so. The Tenant shall retain its rights to sublet or assign the Leased Premises, or portions thereof, pursuant to Article 17 hereof except to the extent that the Landlord shall have already relet the same which shall abrogate the Tenant's rights, pro tanto. 24. Termination of the Term. 24.1. The Term shall terminate upon the earliest of the following events to occur: 24.1.1. expiration of the Term; 24.1.2. in connection with a transaction contemplated by section 16 of this Agreement, the later of (a) the vesting of the acquiring party's right to possession or (b) the Tenant's vacating the Leased Premises; 24.1.3. under the circumstances contemplated by subsection 15.1 of this Agreement, upon the Tenant's giving prompt notice of the failure of the Landlord to give, on a timely basis, the notice contemplated by subsection 15.1.2 of this Agreement and that the Tenant desires termination of the Term (which termination shall be effective as of the date of the subject casualty with respect to those portions of the Leased Premises rendered untenantable and as of the date of the Tenant's giving notice with respect to those portions of the Leased Premises which were not rendered untenantable); 24.1.4. under the circumstances contemplated by subsection 15.1 of this Agreement, upon the expiration of 45 additional days (without the Landlord's completion of restoration in -27- the interim) after the Tenant shall have given prompt notice that the Landlord has not restored the Leased Premises on a timely basis and that the Tenant desires termination of the Term (which termination shall be effective as of the date of the subject casualty with respect to those portions of the Leased Premises rendered untenantable and as of the date of the Tenant's giving notice with respect to those portions of the Leased Premises which were not rendered untenantable); 24.1.5. the effective date of any election by the Landlord under subsection 17.3.3 of this Agreement in response to the Tenant's notice of the Tenant's desire to assign this Agreement or to sublet all or a portion of the Leased Premises; or 24.1.6. the effective date of any election by the Landlord to terminate the Term under subsection 23.1.1 of this Agreement. 24.2. No termination of the Term shall have the effect of releasing the Tenant from any obligation or liability theretofore or thereby incurred and, until the Tenant shall have surrendered the Leased Premises in accordance with section 21 of this Agreement, from any obligation or liability thereafter incurred. 25. Mortgage and Underlying Lease Priority. This Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are, and shall always be, subordinate to any mortgage (other than a mortgage created by the Tenant or a sale, transfer or other disposition by the Tenant in the nature of a security interest in violation of subsections 17.1.4 and 22.5, respectively, of this Agreement) already or afterwards placed on the Property, the Common Facilities, the Building or any estate or interest therein including, without limiting the generality of the foregoing, any new mortgage or any mortgage extension, renewal, modification, consolidation, replacement, supplement or substitution. This Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are, and shall always be, subordinate to any ground lease already or afterwards made with regard to the Property, the Common Facilities, the Building or any estate or interest therein including, without limiting the generality of the foregoing, any new ground lease or any ground lease extension, renewal, modification, consolidation, replacement, supplement or substitution. The provisions of this section 25 of the Agreement shall be self-effecting; and no further instrument shall be necessary to effect any such subordination. Nevertheless, the Tenant hereby consents that any mortgagee or mortgagee's successor in interest may, at any time and from time to time, by notice to the Tenant, subordinate its mortgage to the estate and interest created by this Agreement; and upon the giving of such notice, the subject mortgage shall be deemed subordinate to the estate and interest created by this Agreement regardless of the respective times of execution or delivery of either or of recording the subject mortgage. 26. Transfer by Landlord. 26.1. The Landlord shall have the right at any time and from time to time to sell, transfer, lease or otherwise dispose of the Carnegie Center Complex, the Property, the Common Facilities or the Building or any of the Landlord's interests therein, or to assign this Agreement or any of the Landlord's rights thereunder. 26.2. Upon giving notice of the occurrence of any transaction contemplated by subsection 26.1 of this Agreement, the Landlord shall thereby be relieved of any obligation that might otherwise exist -28- under this Agreement with respect to periods subsequent to the effective date of any such transaction. If, in connection with any transaction contemplated by subsection 26.1 of this Agreement the Landlord transfers, or makes allowance for, any Security Deposit of the Tenant and gives notice of that fact to the Tenant, the Landlord shall thereby be relieved of any further obligation to the Tenant with regard to any such Security Deposit; and the Tenant shall look solely to the transferee with respect to any such Security Deposit. 26.3. In the event of the occurrence of any transaction contemplated by subsection 26.1 of this Agreement the Tenant, upon written request therefor from the transferee, shall attorn to and become the tenant of such transferee upon the terms and conditions set forth in this Agreement. 26.4. Notwithstanding anything to the contrary that may be set forth in subsections 26.1, 26.2 and 26.3 of this Agreement, in the event any mortgage contemplated by section 25 of this Agree ment is enforced by the respective mortgagee pursuant to remedies provided in the mortgage or otherwise provided by law or equity and any person succeeds to the interest of the Landlord as a result of, or in connection with, any such enforcement, the Tenant shall, upon the request of such successor in interest, automatically attorn to and become the Tenant of such successor in interest without any change in the terms or provisions of this Agreement, except that such successor in interest shall not be (a) liable for any act or omission of the Landlord; or (b) liable for the return of the Security Deposit unless actually received by such motgagee or such successor in interest; or (c) subject to any counterclaims, credits, rights to deduct from rent, offsets or defenses which the Tenant might have against the Landlord; or (d) bound by any payment of Rent or Additional Rent to the Landlord in advance for more than each current month; or (e) bound by any agreement, amendment, modification, renewal or extension (other than pursuant to the exercise by the Tenant of an option therefor contained in this Agree ment), termination, surrender, release, waiver, consent, or approval, or the exercise by the Landlord of any option or right (including without limitation the right to relocate the Tenant contained in Section 20 of this Agreement), any of which actions is taken or done with respect to this Agreement without first obtaining the prior written consent thereto by such mortgagee; or (f) bound by any payment of any consideration or compensation of any kind to the Landlord which may relate in any way to any of the actions referred to in the immedi ately preceding clause (e) or any payment of any damages or other amounts to the Landlord relating in any way to any breach or default by the Tenant under this agreement. Upon the request of such successor in interest, the Tenant shall execute, acknowledge and deliver any instrument(s) confirming any and all of the matters referred to in this Subsection 26.4. -29- 26.5. If this Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are ever subject and subordinate to any ground lease contemplated by section 25 of this Agreement: 26.5.1. upon the expiration or earlier termination of the term of any such ground lease before the termination of the Term under this Agreement, the Tenant shall attorn to, and become the Tenant of, the lessor under any such ground lease and recognize such lessor as the Landlord under this Agreement for the balance of the Term; and 26.5.2. such expiration or earlier termination of the term of any such ground lease shall have no effect on the Term under this Agreement. 27. Indemnification. 27.1. The Tenant shall, and hereby does, indemnify the Landlord against any and all liabilities, obligations, damages, penalties, claims, costs, charges and expenses including, without limiting the generality of the foregoing, expenses of investigation, defense and enforcement thereof or of the obligation set forth in this section 27 of the Agreement including, without limiting the generality of the foregoing, attorneys' fees, imposed on or incurred by the Landlord in connec tion with any of the following matters which occurs during the Term: 27.1.1. any matter, cause or thing arising out of the use, occupancy, control or management of the Leased Premises or any portion thereof which is not caused directly, exclusively and entirely by the Landlord's active gross negligence or intentional act without the intervention of any other cause or contributing factor whatsoever; 27.1.2. any negligence or intentional act on the part of the Tenant or any of its employees, other agents or Guests; 27.1.3. any accident, injury or damage to any person or property occurring in or about the Leased Premises which is not caused directly, exclusively and entirely by the Land lord's active gross negligence or intentional act without the intervention of any other cause or contributing factor whatsoever; 27.1.4. any representation made by the Tenant in this Agreement shall have been inaccurate or incomplete in any material respect either on the date it was made or the date as of which it was made; 27.1.5. the imposition of any mechanic's, materialman's or other lien on the Property, the Common Facilities, the Building, the Leased Premises or any portion of any of the foregoing, or the filing of any notice of intention to obtain any such lien, in connection with any alteration, improvement or other modification of the Leased Premises made or authorized by the Tenant (which indemnification obligation shall be deemed to include the Tenant's obligations set forth in subsection 12.2.4.3 of this Agreement); or 27.1.6. any failure on the part of the Tenant to perform or comply with any obligation of the Tenant set forth in this Agreement. 27.2. Payment of indemnification claims by the Tenant to the Landlord shall be due upon the Landlord's giving notice thereof to the Tenant. -30- 27.3. The Landlord shall promptly give notice of any claim asserted, or action or proceeding commenced, against it as to which it intends to claim indemnification from the Tenant and, upon notice from the Tenant so requesting, shall forward to the Tenant copies of all claim or litigation documents received by it. Upon receipt of such notice the Tenant may, by notice to the Landlord, participate therein and, to the extent it may desire, assume the defense thereof through independent counsel selected by the Tenant and reasonably satisfactory to the Landlord. The Landlord shall not be bound by any compromise or settlement of any such claim, action or proceeding without its prior written consent. 28. Parties' Liability. 28.1. None of the following occurrences shall constitute a breach of this Agreement by the Landlord, a termination of the Term, an active or constructive eviction or an occurrence requiring an abatement of Rent: 28.1.1. the inability of the Landlord to provide any utility or service to be provided by the Landlord, as described in section 8 of this Agreement which is due to causes beyond the Landlord's control, or to necessary or advisable improvements, maintenance, repairs or emergency, so long as the Landlord uses reasonable efforts and diligence under the circumstances to restore the interrupted service or utility; 28.1.2. any improvement, modification, alteration or other change made to the Carnegie Center Complex, the Property, the Building or the Common Facilities by the Landlord consistently with the Landlord's obligations set forth in subsection 13.2 of this Agreement; and 28.1.3. any change in any Federal, state or local law or ordinance. 28.2. Except for the commencement, duration or termination of the Term (other than under the circumstances contemplated by subsection 15.1 of this Agreement), the Tenant's obligation to make timely payments of Rent, the Tenant's obligation to maintain certain insurance coverage in effect, the Tenant's failure to perform any of its other obligations under this Agreement if such failure has caused loss or damage that can not promptly be cured by subsequent act of the Tenant and the period within which any Option to Renew or any other type of option or optional right exercisable by the Tenant must be exercised, any period of time during which the Landlord or the Tenant is prevented from performing any of its respective obligations under this Agreement because of fire, any other casualty or catastrophe, strikes, lockouts, civil commo tion, acts of God or the public enemy, governmental prohibitions or preemptions, embargoes or inability to obtain labor or material due to shortage, governmental regulation or prohibition, shall be added to the time when such performance is otherwise required under this Agreement. 28.3. In the event the Landlord is an individual, partnership, joint venture, association or a participant in a joint tenancy or tenancy in common, the Landlord, the partners, venturers, members and joint owners shall not have any personal liability or obligation under or in connection with this Agreement or the Tenant's use and occupancy of the Leased Premises; but recourse shall be limited exclusively to the Landlord's interest in the Building. 28.4. If, at any time during the Term, the payment or collection of any Rent otherwise due under this Agreement shall be limited, frozen or otherwise subjected to a moratorium by applicable law, -31- and such limitation, freeze or other moratorium shall subsequently be lifted, whether before or after the termination of the Term, such aggregate amount of Rent as shall not have been paid or collected during the Term on account of any such limitation, freeze or other moratorium, shall thereupon be due and payable at once. There shall be added to the maximum period of any otherwise applicable statute of limitation the entire period during which any such limitation, freeze or other moratorium shall have been in effect. 28.5. If this Agreement is executed by more than one person as Tenant, their liability under this Agreement and in connection with the use and occupancy of the Leased Premises shall be joint and several. 28.6. In the event any rate of interest, or other charge in the nature of interest, calculated as set forth in this Agreement would lead to the imposition of a rate of interest in excess of the maximum rate permitted by applicable usury law, only the maximum rate permitted shall be charged and collected. 28.7. The rule of construction that any ambiguities that may be contained in any contract shall be construed against the party drafting the contract shall be inapplicable in construing this Agreement. 29. Security Deposit. The Tenant shall pay to the Landlord upon execution and delivery of this Agreement the sum of $12,158.13 as a security deposit to be held by the Landlord as security for the Tenant's performance of all the Tenant's obligations under this Agreement. The Landlord may commingle the Security Deposit with its general funds. Any interest earned on the Security Deposit shall belong to the Landlord. The Tenant shall not encumber the Security Deposit. The Landlord, in its sole discretion, may apply the Security Deposit to cure any Event of Default under this Agreement. If any such application is made, upon notice by the Landlord to the Tenant, the Tenant shall promptly replace the amount so applied. If there has been no Event of Default, within 30 days after termination of the Term the Landlord shall return the entire balance of the Security Deposit to the Tenant. The Tenant will not look to any foreclosing mortgagee of the Property, the Building, the Common Facilities or any interest therein for such return of the balance of the Security Deposit, unless the mortgagee has expressly assumed the Landlord's obligations under this Agreement or has actually received the balance of the Security Deposit. 30. Representations. The Tenant hereby represents and warrants that: 30.1. its Standard Industrial Classification (SIC) code is 3970 and it will promptly give notice of any change therein during the Term to the Landlord; 30.2. no broker or other agent has shown the Leased Premises or the Building to the Tenant, or brought either to the Tenant's attention, except Princeton Realty Advisors, whose entire commission therefor is set forth in a separate document and which commission the Tenant understands will be paid by the Landlord directly to the person named; 30.3. the execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Agreement by the Tenant have been duly and -32- validly authorized by its general partners, to the extent required by their partnership agreement and applicable law, if the Tenant is a partnership or, if the Tenant is a corporation, by its board of directors and, if necessary, by its stockholders at meetings duly called and held on proper notice for that purpose at which there were respective quorums present and voting throughout; and no other approval, partnership, corporate, governmental or otherwise, is required to authorize any of the foregoing or to give effect to the Tenant's execution and delivery of this Agreement; and 30.4. the execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Agreement by the Tenant will not result in a breach or violation of, or constitute a default under, the provisions of any statute, charter, certificate of incorporation or bylaws or partnership agreement of the Tenant or any affiliate of the Tenant, as presently in effect, or any indenture, mortgage, lease, deed of trust, other agreement, instrument, franchise, permit, license, decree, order, notice, judgment, rule or order to or of which the Tenant or any affiliate of the Tenant is a party, a subject or a recipient or by which the Tenant, any affiliate of the Tenant or any of their respective properties and other assets is bound. 31. Reservation in Favor of Tenant. Neither the Landlord's forwarding a copy of this document to any prospective tenant nor any other act on the part of the Landlord prior to execution and delivery of this Agreement by the Landlord shall give rise to any implication that any prospective tenant has a reservation, an option to lease or an outstand ing offer to lease any premises. 32. Tenant's Certificates and Mortgagee Notice Requirements. 32.1. Promptly upon request of the Landlord at any time or from time to time, but in no event more than five days after the Landlord's respective request, the Tenant shall execute, acknowledge and deliver to the Landlord or its designee an estoppel or other certificate, satisfactory in form and substance to the Landlord and any of its mortgagees, ground lessors or lessees or trans ferees or prospective mortgagees, ground lessors or lessees or transferees, with respect to any of or all the following matters, which certificate shall be in the form attached hereto as Exhibit G if so requested by State Mutual Life Assurance Company of America while it remains a mortgagee of the Property, the Building or any interest therein: 32.1.1. whether this Agreement is then in full force and effect; 32.1.2. whether this Agreement has not been amended, modified, superseded, canceled, repudiated or revoked; 32.1.3. whether the Landlord has satisfactorily completed all construction work, if any, required of the Landlord or contractors selected and retained by the Landlord in connection with readying the Leased Premises for occupancy by the Tenant in accordance with section 5 of this Agreement; 32.1.4. whether the Tenant is then in actual possession of the Leased Premises; 32.1.5. whether the Tenant then has no defenses or counterclaims under this Agreement or otherwise against the Landlord or with respect to the Leased Premises; -33- 32.1.6. whether Landlord is not then in breach of this Agreement in any respect; 32.1.7. whether the Tenant then has no knowledge of any assignment of this Agreement, the pledging or granting of any security interest in this Agreement or in Rent due and to become due under this Agreement; 32.1.8. whether Rent is not then accruing under this Agreement in accordance with its terms; 32.1.9. whether any Rent is not then in arrears; 32.1.10. whether Rent due or to become due under this Agreement has not been prepaid by more than one month; 32.1.11. if the response to any of the foregoing matters is in the negative, a specification of all the precise reasons that necessitated the negative response in each instance; and 32.1.12. any other matter reasonably requested by the Landlord or any of its mortgagees, ground lessors or lessees or transferees or prospective mortgagees, ground lessors or lessees or transferees, including, without limiting the generality of the foregoing, such information as the Landlord may request for purposes of assuring compliance with the Industrial Site Recovery Act (13 N.J.S.A. sec. 1K-6 et seq.), as it may be amended, and any other applicable Federal, state or local statute, ordinance, rule, regulation or order concerned with environmental matters. 32.2. If, in connection with the Landlord's or a prospective transferee's obtaining financing or refinancing of the Carnegie Center Complex, the Property, the Building, the Common Facili ties, any portion thereof or any interest therein, the Landlord or a prospective lender shall so request, the Tenant shall furnish to the requesting party within 15 days of the request: 32.2.1. its written consent to any requested modifications of this Agreement provided that, in each such instance, the requested modification does not increase the Rent otherwise due or, in the reasonable judgment of the Tenant, otherwise materially increase the obligations of the Tenant under this Agreement or materially adversely affect the Tenant's leasehold interest created hereby or the Tenant's use and enjoyment of the Leased Premises (except in the circumstances contemplated by section 16 of this Agreement); and 32.2.2. summary financial information regarding its financial position as of the close of its most recently completed fiscal year and its most recently completed interim fiscal period and regarding its results of operations for the periods then ended and compara ble year earlier periods, certified by Tenant's chief financial officer to be a complete, accurate and fair presentation of the summary financial information purporting to be set forth therein. 32.3. If the Landlord or any of its mortgagees gives notice to the Tenant of any of their respective names and addresses from time to time, the Tenant shall give notice to each such mortgagee of any notice of breach or default previously or afterwards given by the Tenant to the Landlord under this Agreement and provide in such notice that if the Landlord has not cured such breach or default within any permissible cure period then such mortgagee shall have the greater of (a) an additional period of 30 days or (b) if such default cannot practically be cured by such -34- mortgagee within such period, such additional period as is reasonable under the circumstances, within which such mortgagee may cure such default. Upon request of the Landlord at any time or from time to time, the Tenant shall execute, acknowledge and deliver to the Landlord or its designee an acknowledgment of receipt of any such notice, an acknowledgment of receipt of any notice of assignment of this Agreement or rights hereunder by the Landlord to any of its mortgagees and the Tenant's agreement to the foregoing effect on the respective forms, if any, furnished by the Landlord or the respective mortgagees. 32.4. Approximately (i) 90 days prior to the termination of the Term and (ii) 30 days prior to any relocation of the Tenant from the Leased Premises (as constituted on the Commencement Date), the Tenant shall obtain from the New Jersey Department of Environmental Protection, and deliver to the Landlord, the Department's unconditional certificate of non-applicability or approval of the Tenant's negative declaration or clean-up plan, together with copies of all documents furnished to the Department in connection with obtaining such certificate or approval. 33. Waiver of Jury Trial and Arbitration. The parties hereby waive any right they might otherwise have to a trial by jury in connection with any dispute arising out of or in connection with this Agreement or the use and occupancy of the Leased Premises; and they hereby consent to arbitration of any such dispute in Princeton, New Jersey, in accordance with the rules for commercial arbitration of the American Arbitration Association or successor organization, except that the Landlord, in its sole discretion, may, with respect to any dispute involving either (i) the Landlord's right to re-enter and re-take possession of the Leased Premises or (ii) the determination of money damages following the occurrence of an Event of Default under this Agreement, elect to pursue any of or all its rights in any court of competent jurisdiction. Judgment upon any arbitration award may be entered in any court of competent jurisdiction. 34. Severability. In the event that any provision of this Agreement, or the application of any provision in any instance, shall be conclusively determined by a court of competent jurisdiction to be illegal, invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of the balance of this Agreement. -35- 5. Notices. All notices contemplated by, permitted or required by this Agreement shall be in writing. All notices required by this Agreement shall be personally delivered or forwarded by certified mail--return receipt requested, addressed to the intended party at its address first set forth above (adding, in the case of notices to the Landlord after the Commencement Date, "Attention: Lease Administration") or, in the case of notices to the Tenant during the Term or any other period during which the Tenant shall be in possession of the Leased Premises, at the Leased Premises. Either party may from time to time change the address prescribed in this Agreement for notices to it by notice to the other. All notices required under this Agreement shall be deemed given upon their deposit, properly addressed and postage prepaid, in a postal depository or upon personal delivery to the intended party, regardless of whether delivery shall be refused. 36. Captions. Captions have been inserted at the beginning of each section of this Agreement for convenience of reference only and such captions shall not affect the construction or interpretation of any such section of this Agreement. 37. Counterparts. This Agreement may be executed in more than one counterpart, each of which shall constitute an original of this Agreement but all of which, taken together, shall constitute one and the same Agree ment. 38. Applicable Law. This Agreement and the obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of New Jersey. 39. Exclusive Benefit. Except as may be otherwise specifically set forth in this Agreement, this Agreement is made exclu sively for the benefit of the parties hereto and their permitted assignees and no one else shall be entitled to any right, remedy or claim by reason of any provision of this Agreement. 40. Successors. This Agreement shall be binding upon the parties hereto and their respective successors and assigns. 41. Amendments. This Agreement contains the entire agreement of the parties hereto, subsumes all prior discussions and negotiations and, except as may otherwise be specifically set forth in this Agreement, this Agreement may not be amended or otherwise modified except by a writing signed by all the parties to this Agreement. 42. Waiver. Except as may otherwise be specifically set forth in this Agreement, the failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any -36- term, covenant, representation or warranty set forth in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such condition or breach, or as a waiver of any other condition or of the breach of any other term, covenant, representation or warranty set forth in this Agreement. The Landlord's accep tance of, or endorsement on, any partial payment of Rent or any late payment of Rent from the Tenant shall not operate as a waiver of the Landlord's right to the balance of the Rent due on a timely basis regardless of any writing to the contrary on, or accompanying, the Tenant's partial payment or the Landlord's putative acquiescence therein. 43. Course of Performance. No course of dealing or performance by the parties, or any of them, shall be admissible for the purpose of obtaining an interpretation or construction of this Agreement at variance with the express language of the Agreement itself. -37- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LANDLORD: CARNEGIE 214 ASSOCIATES LIMITED PARTNERSHIP By : 214 Capital Corp. By: /s/ Alan B. Landis ------------------------- Alan B. Landis, President TENANT: PALATIN TECHNOLOGIES, INC. By: /s/ Edward J. Quilty ------------------------- Edward J. Quilty Chairman and CEO -38- EXHIBIT A LEASED PREMISES FLOOR SPACE DIAGRAM [GROUND FLOOR PLAN DIAGRAM] -39- EXHIBIT B DESCRIPTION OF LOT 76, BLOCK S-9 WEST WINDSOR TOWNSHIP MERCER COUNTY, NEW JERSEY All that certain lot, parcel, or tract of land situate and lying in the Township of West Windsor, County of Mercer and State of New Jersey and being more particularly bounded and described as follows: BEGINNING at a point, said point being distant the following five courses (designated A through E) from the intersection of the southerly line of Roszel Road (60' R.O.W.) and the westerly line of Lot 61, Block S-9 as shown on a Major Subdivision Map entitled "Preliminary-Final Major Subdivision, Lot 7, Block S-9 situated in West Windsor Township, Mercer County, New Jersey," prepared by Lynch, Carmody, Giuliano & Karol, P.A., filed in the Mercer County Clerk's Office on February 18, 1983, as Map No. 2513, and running thence: (A) South 44 13' 07" East, a distance of 324.42 feet to a point; thence (B) South 58 57' 14" West, a distance of 716.08 feet to a point; thence (C) South 16 48' 22" West, a distance of 198.72 feet to a point; thence (D) South 49 39' 04" West, a distance of 583.64 feet to a point; thence (E) South 42 48' 22" West, a distance of 10.00 feet to the aforementioned point of BEGINNING, and running thence from the point of BEGINNING: 1. Along a curve to the right, said curve having a radius of 250.00 feet and an arc length of 196.35 feet, to a point of tangency; thence 2. South 87 48' 22" West, a distance of 340.00 feet to a point; thence 3. North 02 11' 38" West, a distance of 394.25 feet to a point of curvature; thence 4. Along a curve to the left, said curve having a radius of 200.00 feet and an arc length of 157.08 feet, to a point of tangency; thence 5. North 47 11' 38" West, a distance of 295.16 feet to a point; thence 6. North 42 48' 22" East, a distance of 615.00 feet to a point; thence 7. South 47 11' 38" East, a distance of 279.19 feet to a point; thence 8. South 02 11' 38" East, a distance of 756.83 feet to a point; thence 9. South 47 11' 38" East, a distance of 214.65 feet to the point and place of BEGINNING. The above described parcel of land is intended to be the same as shown on a map entitled "Preliminary-Final Major Subdivision, Lots 7 & 20, Block S-9, situated in West Windsor Township, Mercer County, New Jersey," prepared by Lynch, Carmody, Giuliano & Karol, P.A., dated October 8, 1984, and revised to December 10, 1985, and filed in the Mercer County Clerk's office on October 30, 1985 as Map No. 2730. The above description is in accordance with a survey prepared by Fellows Read & Associates, Inc. dated January 9, 1986, revised to January 30, 1986. -40- EXHIBIT C WORK LETTER The Building's structure is a three-story office building of Construction Type 2C with a steel frame, a metal deck floor system, a granite and concrete exterior facade and insulated glass. The floors will sustain a live load of 100 pounds per square foot of usable floor space plus an allowance of 20 pounds per square foot for partitions and has a typical bay size of 30 feet by 30 feet. Among other Common Facilities, the Building contains two men's and two women's bathrooms on each floor, two drinking fountains on each floor and two hydraulic elevators with a capacity of 2,500 pounds each and has Parking Facilities with approximately 500 lined parking spaces. As used in this Work Letter, "building standard" shall mean the type and grade of material, equipment or device designated by the Landlord as standard for leased premises in the Building. Any work performed in the Building shall conform to such standard. -41- EXHIBIT D BUILDING RULES AND REGULATIONS The following are the Building Rules and Regulations adopted in accordance with subsection 7.2.3 of the Agreement of which this exhibit is a part; and the Tenant and the Tenant's employees, other agents and Guests shall comply with these Building Rules and Regulations: 1. The sidewalks, driveways, entrances, passages, courts, lobby, esplanade areas, plazas, elevators, vestibules, stairways, corridors, halls and other Common Facilities shall not be obstructed or encum bered or used for any purpose other than ingress and egress to and from the Leased Premises. The Tenant shall not permit or suffer any of its employees, other agents or Guests to congregate in any of the said areas. No door mat of any kind whatsoever shall be placed or left in any public hall or outside any entry door of the Leased Premises. 2. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, drapes, blinds, shades or screens shall be attached to, hung in or used in connection with any window or door of the Leased Premises without the prior written consent of Landlord. If such consent is given, such curtains, drapes, blinds, shades or screens shall be of a quality, type, design and color, and attached in the manner, approved by Landlord. 3. Except as otherwise specifically provided in subsection 18.1 of the Agreement, no sign, insignia, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed so as to be visible from outside the Leased Premises or the Building. In the event of the violation of the foregoing by the Tenant, the Landlord may remove same without any liability and may charge the expense incurred in such removal to the Tenant. 4. The sashes, doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed and no bottles, parcels or other articles shall be placed on the window sills. 5. No showcase or other articles shall be placed in front of or affixed to any part of the Building or the Common Facilities. 6. The lavatories, water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed and constructed, and no sweepings, rubbish, rags, acids or other substances shall be thrown or deposited therein. All damages resulting from any misuse thereof shall be repaired at the expense of the Tenant that permitted or suffered the violation hereof by the Tenant, the Tenant's employees, other agents or Guests. 7. The Tenant shall not mark, paint, drill into or in any way deface any part of the Leased Premises, the Building, the Common Facilities or the Property. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of the Landlord, and as the Landlord may direct. Linoleum and other resilient floor coverings shall be laid so that the same shall not come in direct contact with the floor of the Leased Premises; and if linoleum or other resilient floor coverings are desired, an interlining of builder's deadening felt shall be first affixed to the floor by a paste or -42- other material that is, and will remain, soluble in water. The use of cement or other adhesive material that either is not, or will not remain, soluble in water is prohibited. 8. No bicycles, vehicles, animals, reptiles, fish or birds of any kind shall be brought into or kept in or about the Leased Premises. 9. No noise including, without limiting the generality of the foregoing, music or the playing of musical instruments, recordings, radio or television which, in the reasonable judgment of Landlord, might disturb tenants of Other Leased Premises shall be made or permitted by the Tenant. Nothing shall be done or permitted in the Leased Premises by the Tenant which would impair or interfere with the use or enjoyment of Other Leased Premises by any tenant thereof. Nothing shall be thrown out of the doors, windows or skylights or down the passageways of the Building. 10. The Tenant shall not manufacture any commodity, or prepare or dispense any foods or beverages, tobacco, flowers or other commodities or articles without the prior written consent of the Landlord. 11. Duplicates of keys and passes distributed to the Tenant by the Landlord shall not be made. The Tenant shall provide appropriate security for keys. Nothing shall be done to render any lock inoperable by the Building Grand Master Key. No lock shall be installed without the Landlord's prior written consent; and any lock so installed shall be operable by the Building Grand Master Key. Upon termination of the Term, all keys, passes and duplicates provided by the Landlord to the Tenant, or otherwise procured by the Tenant, shall be returned to the Landlord. Any failure to comply with the foregoing which requires changes in locks, new or additional keys, passes or duplicates or other services of a locksmith shall be paid by the Tenant. 12. All deliveries and removals, and the carrying in or out of any safes, freight, furniture, packages, boxes, crates or any other object or matter of any description shall take place during such hours, in such manner and in such elevators and passageways as the Landlord may determine from time to time. The Landlord reserves the right to inspect all objects and matter being brought into the Building or the Common Facilities and to exclude from the Building and the Common Facilities all objects and matter that violates any of these Building Rules and Regulations or that are contraband. The Landlord may (but shall not be obligated to) require any person leaving the Building or the Common Facilities with any package or object or matter from the Leased Premises to establish his authority from the Tenant to do so. The establishment and enforcement of such a requirement shall not impose any responsibility on the Landlord for the protection of the Tenant against the removal of property from the Leased Premises. The Landlord shall not be liable to the Tenant for damages or loss arising from the admis sion, exclusion or ejection of any person to or from the Leased Premises or the Building or the Common Facilities under this rule. 13. The Tenant shall not place any object in any portion of the Building that is in excess of the safe carrying or designed load capacity of the structure. 14. The Landlord shall have the right to prohibit any advertising or display of any identifying sign by the Tenant which in the Landlord's judgment tends to impair the reputation of the Building or its desirability; and, on written notice from the Landlord, the Tenant shall refrain from or discontinue such advertising or display of such identifying sign. -43- 15. The Landlord reserves the right to exclude from the Building and the Common Facilities during hours other than Regular Business Hours all persons who do not present a pass thereto signed by both the Landlord and the Tenant. All persons entering or leaving the Building or the Common Facilities during hours other than Regular Business may be required to sign a register. The Landlord will furnish passes to persons for whom the Tenant requests same in writing. The establishment and enforcement of such a requirement shall not impose any responsibility on the Landlord for the protection of the Tenant against unauthorized entry of persons. 16. The Tenant, before closing and leaving the Leased Premises at any time shall see that all lights and appliances generating heat (other than the heating system) are turned off. All entrance doors to the Leased Premises shall be left locked by the Tenant when the Leased Premises are not in use. At any time when the Building or the Common Facilities are locked during hours other than Regular Business Hours, the Building and the Common Facilities locks shall not be defeated by any means, such as by leaving a door ajar. 17. No person shall go upon the roof of the Building without the prior written consent of the Landlord. 18. Any requirements of the Tenant may be attended to only upon application at the office of the Building. The Landlord and its agents shall not perform any work or do any work or do anything outside of the Landlord's obligations under the Agreement except upon special instructions from the Landlord on terms acceptable to the Landlord and the Tenant. 19. Canvassing, soliciting and peddling in the Building and the Common Facilities are prohibited and the Tenant shall cooperate to prevent same. 20. There shall not be used in any space, or in the public halls or other Common Facilities of the Building, in connection with the moving or delivery or receipt of safes, freight, furniture, packages, boxes, crates, paper, office material, or any other matter or thing, any hand trucks or dollies except those equipped with rubber tires, side guards and such other safeguards as the Landlord shall require. No hand trucks shall be used in passenger elevators, and no passenger elevators shall be used for the moving, delivery or receipt of the aforementioned articles. In connection with moving in or out any furniture, furnishings, equipment, heavy articles and heavy packages, the Tenant shall take such precautions as may be necessary to prevent excessive wear and tear in the Building's Common Facilities and the Leased Premises including, without limiting the generality of the foregoing, floor and wall treatments. 21. The Tenant shall not cause or permit any odors of cooking or other processes or any unusual or objectional odors to emanate from the Leased Premises which might constitute a Nuisance. No cooking shall be done in the Leased Premises other than as specifically permitted in the Agreement. 22. The Landlord reserves the right not to enforce any Building Rule or Regulation against any tenants of Other Leased Premises. The Landlord reserves the right to rescind, amend or waive any Building Rule and Regulation when, in the Landlord's reasonable judgment, it appears necessary or desirable for the reputation, safety, care or appearance of the Building or the preservation of good order therein or the operation of the Building or the comfort of tenants or others in the Building. No rescission, amendment or waiver of any Building Rule and Regulation in favor of one tenant shall operate as a rescission, amendment or waiver in favor of any other tenant. -44- EXHIBIT E DEFINITIONS AND INDEX OF DEFINITIONS In accordance with section 1 of the Agreement of which this exhibit is a part, throughout the Agree ment the following terms and phrases shall have the meanings set forth or referred to below: 1. "Additional Rent" means all amounts, other than Basic Rent and any Security Deposit, required to be paid by the Tenant to the Landlord in accordance with this Agreement. 2. "Agreement" means this Lease and Lease Agreement (including exhibits), as it may have been amended. 3. "Annual Amortized Capital Expenditure" means the payment amount determined as an annuity in arrears using the cost incurred by the Landlord for any Capital Expenditure as the present value, the number of years of its useful life (not exceeding 10 years) selected by the Landlord in accordance with generally applied real estate accounting practice as the number of periods and the Base Rate in effect when the respective improvement is first placed into service plus two additional percentage points as the annual rate of interest. 4. "Base Rate" means the prime commercial lending rate per year as announced from time to time by The Chase Manhattan Bank (National Association) at its principal office in New York City. 5. "Base Year" means the full calendar year 1997 with respect to Operational Expenses and Taxes. 6. "Base Year Operational Expenses" means actual Operational Expenses incurred by the Landlord during the Base Year. 7. "Base Year Taxes" means the product of the final assessed value, as the same may subsequently be adjusted in any appeal of the tax assessor's valuation, of the Property, the Building and any other improvements on the Property in the Base Year and the Municipality's lowest tax rate for office buildings and the property on which they stand in effect during the Base Year. 8. "Basic Rent" is defined in subsection 3.2 of this Agreement. 9. "Building" means the office building erected on the Property which is commonly known as 214 Carnegie Center, Princeton, New Jersey 08540, as it may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term. As the Building is presently constructed it consists of 149,043 gross rentable square feet of floor space. 10. "Capital Expenditure" is defined in subsection 10.3 of this Agreement. 11. "Commencement Date" is defined in section 4 of this Agreement. 12. "Common Facilities" means the areas, facilities and improvements provided by the Landlord in the Building (except the Leased Premises and the Other Leased Premises)and on the Property, including, without limiting the generality of the foregoing, the Parking Facilities and driveways on the Property, for non-exclusive use by the Tenant in accordance with subsection 2.2 of this Agreement, as they may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term, and subject to rights which may be granted to the major tenant to utilize the lobby as a common reception area. -45- 13. "Common Walls" means those walls which separate the Leased Premises from Other Leased Premises. 14. "Electric Charges" means all the supplying utility's charges for, or in connection with, furnishing electricity including charges determined by actual usage, any seasonal adjustments, demand charges, energy charges, energy adjustment charges and any other charges, howsoever denominated, of the supplying utility, including sales and excise taxes and the like. 15. "Event of Default" is defined in section 22 of this Agreement. 16. "Expiring Term" means, when used in the context of any Option to Renew, the Term as it is then scheduled to expire (immediately prior to exercise of the next available Option to Renew). 17. The Tenant's "Guests" shall mean the Tenant's licensees, invitees and all others in, on or about the Leased Premises, the Building, the Common Facilities or the Property, either at the Tenant's express or implied request or invitation or for the purpose of soliciting or visiting the Tenant. 18. A "History of Recurring Events of Default" means the occurrence of three or more Events of Default (whether or not cured by the Tenant) in any period of 12 months. 19. "Holdover Damages" is defined in subsection 23.4 of this Agreement. 20. The "Index" means the "all items" index figure for the New York Northeastern New Jersey average of the Consumer Price Index for all urban wage earners and clerical workers which uses a base period of 1982-84=100, published by the United States Department of Labor, so long as it continues to be published. If the Index is not published for a period of three consecutive months, or if its base period is changed, the term "Index" shall mean that index, as nearly equivalent in purpose, function and coverage as practicable to the original Index, which the Landlord shall have designated by notice to the Tenant. 21. "Initial Term" means the period so designated in subsection 4.1 of this Agreement. 22. "Initial Year" means the first 12 full calendar months of the Initial Term. 23. "Landlord" means the person so designated at the beginning of this Agreement and those successors to the Landlord's interest in the Property and/or the Landlord's rights and obligations under this Agreement contemplated by section 26 of this Agreement. 24. "Leased Premises" means that portion of the interior of the Building (as viewed from the interior of the Leased Premises) bounded by the interior sides of the unfinished floor and the finished ceiling on the first floor (as the floors have been designated by the Landlord) of the Building, the centers of all Common Walls and the exterior sides of all walls other than Common Walls, the outline of which floor space is designated on the diagram set forth in Exhibit A attached hereto, which portion contains 3,336 square feet of usable floor space and 3,970 square feet of gross rentable floor space; and references within this Agreement to the gross rentable floor space and the usable floor space, respectively, of the Leased Premises shall mean the respective quantities herein specified. -46- 25. "Legal Holidays" means New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 26. "Market Rental Rate" means, at the time of reference, the gross rentable floor space of the Leased Premises multiplied by the greater of: (a) that annual rate of Basic Rent per square foot of gross rentable floor space which is then being quoted by the Landlord for comparable Other Leased Premises (or would then be quoted if comparable Other Leased Premises were then available) or (b) that annual rate of Basic Rent per square foot of gross rentable floor space in effect during the Expiring Term. 27. "Municipality" means the Township of West Windsor in Mercer County, New Jersey, or any successor municipality with jurisdiction over the Property. 28. "No Pass Through Period" means, in the context of Operational Expenses and Taxes, the period beginning on the Commencement Date and ending on December 31, 1997. 29. "Nuisance" means any condition or occurrence which unreasonably or materially interferes with the authorized use and enjoyment of the Other Leased Premises and the Common Facilities by any tenant of Other Leased Premises or by any person authorized to use any Other Leased Premises or Common Facilities or with the authorized use of any other areas, buildings or other improvements in the Carnegie Center Complex. 30. "Operational Expenses" is defined in subsection 10.2 of this Agreement. 31. "Option to Renew" is defined in subsection 6.1 of this Agreement. 32. "Other Leased Premises" means all premises within the Building, with the exception of the Leased Premises, that are, or are available to be, leased to tenants or prospective tenants, respectively. 33. "Parking Facilities" means the parking area adjacent to the Building, containing the approxi mate number of lined parking spaces set forth in the Work Letter, which parking area is provided as Common Facilities 34. "Person" includes an individual, a corporation, a partnership, a trust, an estate, an unincorpo rated group of persons and any group of persons. 35. "Property" means the parcel of land, as it may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term, on which the Building is (or is about to be) erected. As the Property is presently constituted, it is more particularly described in Exhibit B attached hereto. 36. "Regular Business Hours" means 8:00 A.M. to 6:00 P.M., Monday through Friday, except on Legal Holidays. 37. "Re-Leasing Damages" is defined in subsection 23.3. 38. "Renewal Term" means, at the time of reference, any portion of the Term, other than the Initial Term, as to which the Tenant has properly exercised an Option to Renew which Option to Renew has not been rescinded in accordance with subsection 6.4.1 of this Agreement. -47- 39. "Rent" means Basic Rent and Additional Rent. 40. "Security Deposit" is designated in section 29 of this Agreement. 41. "Target Date" means, upon execution and delivery of this Agreement, the then estimated Commencement Date which is hereby established to be August 1, 1997. 42. "Taxes" means, in any calendar year, the aggregate amount of real property taxes, assess- ments and sewer rents, rates and charges, state and local taxes, transit taxes and every other govern mental charge, whether general or special, ordinary or extraordinary (except corporate franchise taxes and taxes imposed on, or computed as a function of, net income or net profits from all sources and except taxes charged, assessed or levied exclusively on the Leased Premises or arising exclusively from the Tenant's occupancy of the Leased Premises) charged, assessed or levied by any taxing authority with respect to the Property, the Building, the Common Facilities and any other improvements on the Property and an allocable portion of Taxes with respect to other portions of the Carnegie Center Complex, less any refunds or rebates (net of expenses incurred in obtaining any such refunds or rebates) of Taxes actually received by the Landlord during such calendar year with respect to any period during the Term for the benefit of the Tenant, tenants of Other Leased Premises and the Landlord. If during the Term there shall be a change in the means or methods of taxing real property generally in effect at the beginning of the Term and another type of tax or method of taxation should be substituted in whole or in part for, or in lieu of, Taxes, the amounts calculated under such other types of tax or by such other methods of taxation shall also be deemed to be Taxes. Until such time as the actual amount of Taxes for any calendar year becomes known, the amount thereof shall be the Landlord's estimate of Taxes for that calendar year. 43. "Tenant" means the person so designated at the beginning of this Agreement. 44. "Tenant Electric Charges" means (a) during Regular Business Hours, Electric Charges attributable to the Tenant's use of electricity in the Leased Premises for purposes other than heating, ventilation and air conditioning provided to the Leased Premises by the Landlord in accordance with subsection 8.2.4 of this Agreement and (b) during other than Regular Business Hours, a charge at the rate of $75.00 per hour or partial hour of use plus Electric Charges attributable to the Tenant's use of electricity in the Leased Premises for all purposes including, without limiting the generality of the foregoing, heating, ventilation and air conditioning. 45. "Tenant's Share" of any amount means 2.664%. 46. "Term" means the Initial Term plus, at the time of reference, any Renewal Term. 47. "Termination Damages" is defined in subsection 23.2 of this Agreement. 48. "Traffic Plan" is defined in subsection 7.3 of this Agreement."Utilities Expenses" means Electric Charges (other than Tenant Electric Charges) and all charges for any other fuel that may be used in providing electricity and services powered by electricity that the Landlord provides in accordance with section 8 of this Agreement to the Building, the Leased Premises, Other Leased Premises, the Common Facilities and the Property, including sales and excise taxes and the like. -48- 49. "Utilities Expenses" means Electric Charges (other than Tenant Electric Charges) and all charges for any other fuel that may be used in providing electricity and services powered by electricity that the Landlord provides in accordance with section 8 of this Agreement to the Building, the Leased Premises, Other Leased Premises, the Common Facilities and the Property, including sales and excise taxes and the like. 50. "Work Letter" means Exhibit C attached hereto which generally describes the type of construc tion of the Building and, unless the Tenant Plan does not require any such respective improve ment, those improvements the Landlord will provide or install in the Leased Premises without installation charge to the Tenant in connection with the preparation of the Leased Premises contemplated by section 5 of this Agreement. -49- EXHIBIT F STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA FORM OF ESTOPPEL CERTIFICATE STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA 440 Lincoln Street Worcester, MA 01605 Gentlemen: This instrument is being furnished to State Mutual Life Assurance Company of America ("Lender") by ------------------- ("Tenant"), which is the tenant under a lease (the "Lease") dated --------------- from CARNEGIE 214 ASSOCIATES LIMITED PARTNERSHIP ("Landlord"), pertaining to and covering a portion, as such portion is specifically described in the Lease (the "Demised Premises"), of that real estate commonly designated as 214 Carnegie Center, Princeton, Mercer County, New Jersey (the "Property" or "Building"), such real estate being more specifically described in Exhibit "A" attached hereto. As an inducement to Lender to make a loan (the "Loan") as permanent financing for the Property, with the intention of having Lender rely thereon, and for other good and valuable consideration, Tenant hereby warrants and represents to Lender and agrees with Lender as follows: (a) That the Lease has not been amended or modified, except as follows: and is in ------------------------- full force and effect as originally executed or as so amended, whichever is appropriate, and that neither Landlord nor the Tenant is in default in any respect under any terms of the Lease; (b) The commencement date of the term of the Lease was ------------, and the term of the Lease will expire on ------------- , unless extended or sooner terminated as provided in the Lease; (c) That Tenant is in possession of the Demised Premises and that Landlord has complied fully and completely with all of Landlord's covenants, warranties and other undertakings and obligations under the Lease to this date, including, without limitation, those with respect to (i) the construction, character, condition and location of the Demised Premises; (ii) improvements, tenant's spaces and the common areas situated on the Property; (iii) other tenancies, occupancies, stores or businesses on the Property; (iv) any property adjacent to the Property; (v) parking and access; and (vi) the provision of maintenance and services under the Lease, with the result that Tenant is fully obligated to pay, and is paying, the rent and other charges due thereunder, and is fully obligated to perform, and is performing, all of the other obligations of Tenant under the Lease without current claim or counterclaim, offset, defense or otherwise; (d) That Tenant has not and will not make any prepayment of rental under the Lease for more than one (1) month in advance of the due date thereof, and that there are currently no offsets, defenses, counterclaims or credits against the rentals due thereunder; (e) That Tenant has not received notice and has no knowledge of any assignment, hypothecation or pledge of the rents or of Landlord's interest under the Lease other than ----------------. (f) That Tenant understands and acknowledges that (i)Landlord shall execute a conditional assignment of the Lease in favor of Lender; (ii) notwithstanding said assignment, all rental payments under the Lease shall be paid as heretofore stated and in accordance with the terms of the Lease until and unless Tenant is notified to the contrary in writing by Lender; (iii) under the conditions of said assignment and after the date thereof, it is expressly agreed that, unless the written consent of Lender be first obtained, no rents are to be collected more than one month in advance of the due date thereof, and no alterations, modification, amendments, terminations, waivers, consents, approvals or other actions whatsoever are to be made or become effective with respect to the Lease except as permitted under the terms of said conditional assignment; and (iv) the interest of the Landlord in the Lease shall be assigned to Lender solely as additional security for said Loan and Lender assumes no duty, liability or obligation under the Lease, either by virtue of said assignment, the exercise of remedies thereunder, or by any subsequent receipt or collection of rents thereunder or any other sums due under the terms of the Lease; -50- (g) That Lender shall not be (i) liable for any action or omission of any person or party who may be Landlord under the Lease prior to your acquisition of title to the Property by foreclosure or otherwise; (ii) subject to any offsets or defenses which Tenant may have against any such prior Landlord; or (iii) liable for the return of any security deposit unless Lender actually receives such deposit; (h) That Tenant has not subordinated by separate written instrument its interest under the Lease to any mortgage, deed of trust or other lien on title to the Property. (i) That Tenant has paid in full for all labor and materials and other services in connection with Tenant's construction work and Tenant's other work in the Demised Premises, so that no lien by reason thereof may attach against the Landlord's interest in the Demised Premises or the Property of which they are a part and that Tenant, to the extent required by the terms of the Lease, has been fully reimbursed by Landlord for all improvements made by Tenant to the Demised Premises. (j) In consideration of the premises and other good and valuable consideration to the Tenant by Lender, the receipt and sufficiency of which are hereby acknowledged, Tenant further agrees with Lender as follows: In the event of any default by Landlord under the Lease, Tenant shall promptly send to Lender at the address hereinabove set forth a copy of any notice of such default sent to Landlord, in the same manner as such notice to Landlord is sent, and in such event and prior to the exercise by Tenant of any of its rights or remedies under the Lease or otherwise with respect to such default, Lender shall be permitted to cure such default within the period of time during which Landlord would be permitted to cure such default as set forth in the Lease. (k) Tenant agrees that, with respect to any successor to Landlord's interest in the Property, to look solely to such successor's interest in the Property for recovery of any judgment from such successor to Landlord; it being specifically agreed that no successor to Landlord's interest in the Property shall ever be personally liable for any such judgment. (l) This Certificate shall inure to the benefit of Lender, its successors and assigns, and shall be binding upon Tenant and Tenant's heirs, legal representatives, successors and assigns. This Certificate shall not be deemed to alter or modify any of the terms, conditions, covenants or obligations of the Lease, except to the extent, if any specifically set forth herein. EXECUTED this ________ day of ____________________, 19__. ATTEST: ______________________________ BY:___________________________ -51- EX-10.27 4 LEASE WITH WHC-SIX REAL ESTATE, L.P. LEASE AGREEMENT BETWEEN WHC-SIX REAL ESTATE, L.P., A DELAWARE LIMITED PARTNERSHIP, AS LANDLORD, AND PALATIN TECHNOLOGIES, INC., A DELAWARE CORPORATION, AS TENANT DATED MARCH 13, 1997 TABLE OF CONTENTS Article Caption Page 1 Lease Grant. . . . . . . . . . . . . . . . . . . . . . . .1 2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .2 (a) Basic Rent. . . . . . . . . . . . . . . . . . . . . . .2 (b) Payment . . . . . . . . . . . . . . . . . . . . . . . .2 (c) Operating Expenses. . . . . . . . . . . . . . . . . . .3 4 Delinquent Payment; Handling Charges . . . . . . . . . . .5 5 Security Deposit . . . . . . . . . . . . . . . . . . . . .5 6 Landlord's Obligations . . . . . . . . . . . . . . . . . .6 (a) Services. . . . . . . . . . . . . . . . . . . . . . . .6 (b) Excess Utility Use. . . . . . . . . . . . . . . . . . .7 (c) Restoration of Services; Abatement. . . . . . . . . . .7 7 Improvements; Alterations; Repairs; Maintenance. . . . . .8 (a) Improvements; Alterations . . . . . . . . . . . . . . .8 (b) Repairs; Maintenance. . . . . . . . . . . . . . . . . 8 (c) Performance of Work . . . . . . . . . . . . . . . . . .9 (d) Mechanic's Liens. . . . . . . . . . . . . . . . . . . .9 8 Use. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 9 Assignment and Subletting. . . . . . . . . . . . . . . . 10 (a) Transfers; Consent. . . . . . . . . . . . . . . . . . 10 (b) Cancellation. . . . . . . . . . . . . . . . . . . . . 11 (c) Additional Compensation . . . . . . . . . . . . . . . 11 10 Insurance; Waivers; Subrogation; Indemnity . . . . . . . 11 (a) Insurance . . . . . . . . . . . . . . . . . . . . . . 11 (b) Waiver of Negligence; No Subrogation. . . . . . . . . 12 (c) Indemnity . . . . . . . . . . . . . . . . . . . . . . 12 11 Subordination Attornment; Notice to Landlord's Mortgagee. . . . . . . . . . . . . . . . . . . . . . . . 12 (a) Subordination . . . . . . . . . . . . . . . . . . . . 12 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (c) Attornment. . . . . . . . . . . . . . . . . . . . . . 13 (d) Notice to Landlord's Mortgagee. . . . . . . . . . . . 13 12 Rules and Regulations. . . . . . . . . . . . . . . . . . 13 13 Condemnation . . . . . . . . . . . . . . . . . . . . . . 13 (a) Total Taking. . . . . . . . . . . . . . . . . . . . . 13 (b) Partial Taking - Tenant's Rights. . . . . . . . . . . 13 (c) Partial Taking - Landlord's Rights. . . . . . . . . . 14 (d) Award . . . . . . . . . . . . . . . . . . . . . . . . 14 14 Fire or Other Casualty . . . . . . . . . . . . . . . . . 14 (a) Repair Estimate . . . . . . . . . . . . . . . . . . . 14 (b) Landlord's and Tenant's Rights. . . . . . . . . . . . 15 (c) Landlord's Rights . . . . . . . . . . . . . . . . . . 15 (d) Repair Obligation . . . . . . . . . . . . . . . . . . 15 15 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 15 16 Events of Default. . . . . . . . . . . . . . . . . . . . 15 17 Remedies . . . . . . . . . . . . . . . . . . . . . . . . 16 18 Payment by Tenant; Non-Waiver. . . . . . . . . . . . . . 17 (a) Payment by Tenant . . . . . . . . . . . . . . . . . . 17 (b) No Waiver . . . . . . . . . . . . . . . . . . . . . . 17 19 Landlord's Lien. . . . . . . . . . . . . . . . . . . . . 17 20 Surrender of Premises. . . . . . . . . . . . . . . . . . 17 21 Holding Over . . . . . . . . . . . . . . . . . . . . . . 18 22 Certain Rights Reserved by Landlord. . . . . . . . . . . 18 23 Intentionally Omitted. . . . . . . . . . . . . . . . . . 19 24 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . 19 (a) Landlord's Transfer . . . . . . . . . . . . . . . . . 19 (b) Landlord's Liability. . . . . . . . . . . . . . . . . 19 (c) Force Majeure . . . . . . . . . . . . . . . . . . . . 19 (d) Brokerage . . . . . . . . . . . . . . . . . . . . . . 19 (e) Estoppel Certificates . . . . . . . . . . . . . . . . 19 (f) Notices . . . . . . . . . . . . . . . . . . . . . . . 20 (g) Separability. . . . . . . . . . . . . . . . . . . . . 20 (h) Amendments; and Binding Effect. . . . . . . . . . . . 20 (i) Quiet Enjoyment . . . . . . . . . . . . . . . . . . . 20 (j) No Merger . . . . . . . . . . . . . . . . . . . . . . 20 (k) No Offer. . . . . . . . . . . . . . . . . . . . . . . 20 (l) Entire Agreement. . . . . . . . . . . . . . . . . . . 21 (m) Waiver of Jury Trial. . . . . . . . . . . . . . . . . 21 (n) Governing Law . . . . . . . . . . . . . . . . . . . . 21 (o) Joint and Several Liability . . . . . . . . . . . . . 21 (p) Financial Reports . . . . . . . . . . . . . . . . . . 21 (q) Landlord's Fees . . . . . . . . . . . . . . . . . . . 21 (r) Intentionally Omitted . . . . . . . . . . . . . . . . 21 (s) Confidentiality . . . . . . . . . . . . . . . . . . . 21 (t) List of Exhibits. . . . . . . . . . . . . . . . . . . 22 25 Other Provisions . . . . . . . . . . . . . . . . . . . . 22 26 Environmental Laws . . . . . . . . . . . . . . . . . . . 22 27 Signs. . . . . . . . . . . . . . . . . . . . . . . . . . 25 LIST OF DEFINED TERMS Defined Term Page Additional Rent. . . . . . . . . . . . . . . . . . . . . . . . .3 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . .110 AS-IS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .G-1 Balance of Suite 500 . . . . . . . . . . . . . . . . . . . . . .1 Basic Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . .143 Commencement Date. . . . . . . . . . . . . . . . . . . . . . . .1 Construction Allowance . . . . . . . . . . . . . . . . . . . .C-2 Damage Notice. . . . . . . . . . . . . . . . . . . . . . . . . 14 Determination Notice . . . . . . . . . . . . . . . . . . . . .F-1 Event of Default . . . . . . . . . . . . . . . . . . . . . . . 15 Exercise Date. . . . . . . . . . . . . . . . . . . . . . . . .F-1 Initial Portion of Premises. . . . . . . . . . . . . . . . . . .1 Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Landlord's Mortgagee . . . . . . . . . . . . . . . . . . . . . 12 Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . .5 Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Market Value Rent. . . . . . . . . . . . . . . . . . . . . . .F-1 Offer Notice . . . . . . . . . . . . . . . . . . . . . . . . .G-1 Offer Space. . . . . . . . . . . . . . . . . . . . . . . . . .G-1 Operating Costs. . . . . . . . . . . . . . . . . . . . . . . . .3 Operating Costs and Tax Statement. . . . . . . . . . . . . . . .5 Parking Area . . . . . . . . . . . . . . . . . . . . . . . . .D-1 Permitted Use. . . . . . . . . . . . . . . . . . . . . . . . . .8 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Renewal Option(s). . . . . . . . . . . . . . . . . . . . . . .F-1 Renewal Term(s). . . . . . . . . . . . . . . . . . . . . . . .F-1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Security Deposit . . . . . . . . . . . . . . . . . . . . . . . .5 Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Tenant Delay Date. . . . . . . . . . . . . . . . . . . . . . .C-3 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . .C-1 Working Drawings . . . . . . . . . . . . . . . . . . . . . . .C-1 LEASE THIS LEASE AGREEMENT (this "Lease") is dated March 13, 1997, between WHC-SIX REAL ESTATE L.P., a Delaware limited partnership ("Landlord"), and PALATIN TECHNOLOGIES, INC., a Delaware corporation, (Tenant"). 1. Lease Grant. Subject to the terms of this Lease, Landlord initially leases to Tenant, and Tenant initially leases from Landlord Suite No. 500 (the "Premises") in the office building (the "Building") located at 125 May Street, Edison, New Jersey. Landlord and Tenant acknowledge that initially Tenant shall be occupying only a 9,000 square foot portion ("Initial Portion of Premises") of the Premises, notwithstanding that certain Tenant improvements shall be constructed by Tenant for the 1,538 square foot balance of Suite 500 ("Balance of Suite 500") simultaneously with the construction of Tenant improvements for the Initial Portion of Premises. The land on which the Building is located and the Premises are described on Exhibits A. The term "Building" includes the related land, driveways, parking facilities, and similar improvements, but for purposes of Operating Expenses (Operating Cost and Taxes) shall be deemed to mean the two (2) Buildings within the office complex and the related land (described on Exhibit A), driveways, parking facilities, and similar improvements. 2. Term. (a) The term of this Lease shall be ten (10) years commencing the earlier of (i) ninety-seven (97) days following the date that the existing tenant in the Premises vacates the Premises or (ii) the date a temporary or permanent certificate of occupancy is issued for the Initial Portion of Premises, (the "Commencement Date") and expiring at 5:00 p.m., ten (10) years following the Commencement Date (the "Term", which definition shall, upon Tenant's timely and other proper exercise of the Renewal Option(s) (as hereinafter defined), also include all renewals of the initial Term). If the Commencement Date is not the first day of a calendar month, then the Term shall be extended for the number of days between the Commencement Date and the first day of the following month. Notwithstanding the foregoing, the ninety-seven (97) day period shall be extended by the number of days in excess of five (5) business days, if any, that Landlord takes to respond to Tenant's request for approval of the working drawings submitted to Landlord by Tenant in accordance with Exhibit C (i.e., if Landlord takes 8 days [of which the first 5 days are business days] to respond to Tenant, the 97 day period is extended by 3 days). (b) Once the Commencement Date is ascertained, Landlord and Tenant shall each execute a notice of the Commencement Date, and thenceforth the date set forth in the notice shall be conclusively presumed to be the Commencement Date. (c) In the event the existing tenant in the Premises has not vacated the Premises prior to June 15, 1997, Tenant can terminate this Lease upon written notice to Landlord prior to June 20, 1997, whereupon any Rent paid to Landlord (including, but not limited to, the Security Deposit) shall be returned to Tenant and neither party shall have any further rights or obligations towards the other. (d) Landlord shall not be in default hereunder nor liable for damages for any delay to, or extension of, the Commencement Date. 3. Rent (a) (i) Basic Rent. "Basic Rent" (herein so called) shall be the following amounts for the following periods of time, subject to the increase in Basic Rent as determined in subparagraph 3(a)(ii), which shall in no event affect the rent schedule from and after the twenty-fifth (25th) month: Time Period Anual Rent Monthly Basic Rent - ---------------- ----------- ------------------ Months 1-12 $115,690.00 $ 9,640.83 13-24 118,766.00 9,897.17 25-36 126,456.00 10,538.00 37-60 158,070.00 13,172.50 61-120 200,222.00 16,685.17 (ii) As of the earlier of (a) two (2) years following the Commencement Date or (b) the date Tenant utilizes or occupies the Balance of Suite 500 in its regular course of business ("Total Occupancy Date") and up to the commencement of the 25th month of the Term (pro rated for any partial month), the Basic Rent for the Premises shall be increased from and after the Total Occupancy Date to the rate of $126,456.00 per annum, payable in consecutive monthly payments of $10,538.00. (b) Payment. Tenant shall timely pay to Landlord Basic Rent and all additional sums to be paid by Tenant to Landlord under this Lease (collectively, the "Rent") without deduction or set off (except as may be otherwise specifically set forth in this Lease), at Landlord's notice address provided for in this Lease or as otherwise specified by Landlord. Basic Rent, adjusted as herein provided, shall be payable monthly in advance, and shall be accompanied by all applicable state and local sales or use taxes, if any. The monthly installment for the first month of Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable on the first day of each month of the Term beginning on the first day of the second full calendar month of the Term. The monthly Basic Rent for any partial month at the beginning or expiration of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month. 2 (c) Operating Expenses. (1) Tenant shall pay an amount ("Additional Rent") equal to its proportionate share of Operating Costs. Landlord may collect such amount annually in arrears in a lump sum, which shall be due within 30 days after Landlord furnishes to Tenant the Operating Costs and Tax Statement (defined below). Alternatively, Landlord may make a good faith estimate of the Additional Rent to be due by Tenant for any calendar year or part thereof by thirty (30) days prior notice to Tenant during the Term, and Tenant shall pay to Landlord, on the Commencement Date and on the first day of each calendar month thereafter, an amount equal to the estimated Additional Rent for such calendar year or part thereof divided by the number of months therein. From time to time, Landlord may estimate and re-estimate in good faith the Additional Rent to be due by Tenant and deliver a copy of the estimate or re-estimate to Tenant. Thereafter, the monthly installments of Additional Rent payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of the Additional Rent as estimated by Landlord. Any amounts paid based on such an estimate shall be subject to adjustment as herein provided when actual Operating Costs are available for each calendar year. (2) The term "Operating Costs" shall mean all expenses and disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, and maintenance of the Building, determined in accordance with sound accounting principles consistently applied, including, but not limited to, the following costs: (A) wages and salaries (including management fees) of all employees engaged in the operation, maintenance, and security of the Building, including taxes, insurance and benefits relating thereto; (B) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the Building; (C) costs for improvements made to the Building which, although capital in nature, are expected to reduce the normal operating costs of the Building, as well as capital improvements made in order to comply with any law hereafter promulgated by any governmental authority, as amortized over the useful economic life of such improvements as determined by Landlord in its reasonable discretion; (D) cost of all utilities, except the cost of utilities reimbursable to Landlord by the Building's tenants other than pursuant to a provision similar to this Section 3.(c; (E) insurance expenses; (F) repairs, replacements, and general maintenance of the Building; and (G) service or maintenance contracts with independent contractors for the operation, maintenance, repair, replacement, or security of the Building (including, without limitation, alarm service, window cleaning, and elevator maintenance). The following shall not be deemed Operating Costs: (i) capital improvements made to the Building, other than capital improvements described in Section 3(c)(2)(C) and except for items which are generally considered maintenance 3 and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; (ii) repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or other third parties; (iii) interest, amortization or other payments on loans to Landlord; (iv) depreciation; (v) leasing commissions; (vi) legal expenses for services, other than those that benefit the Building tenants generally (e.g., tax disputes); (vii) renovating or otherwise improving space for occupants of the Building or vacant space in the Building; (viii) Taxes (defined below), (ix) federal income taxes imposed on or measured by the income of Landlord from the operation of the Building; (x) expenditures for repairs, replacements or rebuilding occasioned by fire or other casualty to the Building; (xi) expenditures for repairs, replacements or rebuilding occasioned by any of the events contemplated by Section 13 of this Lease; (xii) expenditures for costs, including advertising and promotional expenses, incurred in connection with efforts to lease portions of the Building and to procure new tenants for the Building; (xiii) expenditures for the salaries, benefits and other compensation of the employees and other personnel of the Landlord or any managing agent who are not contemplated by subsection 3(c)(2)(A); (xiv) expenditures to an affiliate of the Landlord to the extent any such expenditure exceeds the amount that would have been payable in the absence of such affiliate relationship; (xv) expenditures for installing, operating and maintaining any special facility in or on the Building such as an observatory, broadcasting facility, cafeteria or dining facility or athletic, recreational or luncheon club if the respective facility shall not be available to the Tenant or any of its employees; (xvi) expenditures for what would otherwise be an Operating Cost which are reimbursed under any construction contractors' or manufacturers' or vendors' warranties or which are otherwise reimbursed to the Landlord; and (xvii) Operating Costs to the extent that the sum of (a) the Tenant's proportionate share of Operating Costs and (b) the proportionate shares of Operating Costs of tenants of other leased premises in the Building exceeds 100% of Operating Costs. (3) Tenant shall also pay a proportionate share of the Taxes for each year and partial year falling within the Term, which shall be determined by multiplying the aggregate Taxes by a fraction, the numerator of which is the number of rentable square feet in the Premises and the denominator of which is the number of rentable square feet in the Building. Tenant shall pay its proportionate share of Taxes in the same manner as provided above for Additional Rent with regard to Operating Costs. "Taxes" shall mean taxes, assessments, and governmental charges whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments 4 attributable to the Building (or its operation), excluding, however, penalties and interest thereon and federal and state taxes on income (if the present method of taxation changes so that in lieu of the whole or any part of any Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Building, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "Taxes" for purposes hereof); (4) By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Operating Costs for the previous year and of the Taxes for the previous year (the "Operating Costs and Tax Statement"). If the Operating Costs and Tax Statement reveals that Tenant paid more for Operating Costs than the actual amount for the year for which such statement was prepared, or more than its actual share of Taxes for such year, then Landlord shall promptly credit or reimburse Tenant for such excess; likewise, if Tenant paid less than the actual Additional Rent or share of Taxes due, then Tenant shall promptly pay Landlord such deficiency. (5) Initially, for the purposes of calculating pro-rata Operating Costs and Taxes in this Section 3, the parties stipulate that the area of the Premises is 9,000 rentable square feet and the area of the Building is 105,382 rentable square feet. As of the Total Occupancy Date, the area of the Premises shall be deemed to be 10,538 rentable square feet. 4. Delinquent Payment; Handling Charges. All past due payments required of Tenant hereunder shall bear interest from the date due until paid at the Wall Street Journal, Eastern Edition, published prime rate plus 2%; alternatively, Landlord may charge Tenant a fee equal to 5% of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant's delinquency. In no event, however, shall the charges permitted under this Section 4 or elsewhere in this Lease, to the extent they are considered to be interest under law, exceed the maximum lawful rate of interest. 5. Security Deposit. Upon execution of this Lease, in lieu of a security deposit in immediately available funds, Tenant shall deposit with the Landlord a one hundred eighty-five thousand dollars and 00/100 ($185,000.00) irrevocable unconditional standby letter of credit ("Letter of Credit") in the form attached hereto as Exhibit H (subject to the right of the issuer to make non-substantive changes thereto) as a security deposit ("Security Deposit") for the full and faithful performance of Tenant's obligations in this Lease in favor of Landlord as beneficiary drawn on a financial institution acceptable to Landlord and with such other terms and conditions reasonably acceptable to Landlord requiring the issuer to pay the sum of One Hundred Eighty-Five Thousand and 00/100 ($185,000.00) Dollars (or such reduced amount limited as hereinafter permitted) to Landlord upon presentation to the issuer of the letter of credit and a letter on Landlord's letterhead stating that an Event of Default by Tenant has occurred under this Lease and such other customary and reasonable requirements of the issuer but without requiring further evidence of default. The Letter of Credit shall be for a minimum of one (1) year 5 maturity and renewed on an annual basis (except as hereinafter permitted to be reduced and/or terminated) during the Term, as the same may be extended and, provided an Event of Default by Tenant has not occurred under this Lease, Tenant may reduce the amount of the Letter of Credit by $74,000.00 at the expiration of twenty-four (24) months from the Commencement Date and by additional amounts of $37,000.00 at the expiration of thirty-six (36), forty-eight (48) and sixty (60) months from the Commencement Date, such that no Security Deposit shall remain from and after the expiration of the fifth (5th) lease year. Failure to renew the Letter of Credit (unless expressly permitted to the contrary herein) at least thirty (30) days prior to the expiration of any lease year shall be deemed a material Event of Default under this Lease entitling Landlord to draw upon the Letter of Credit and retain the amount so drawn as a Security Deposit. In the event of any dispute between Landlord and Tenant with respect to an Event of Default and the Letter of Credit is drawn upon, the funds so received shall be held by Landlord in a segregated interest-bearing account (interest to follow the principal) pending resolution of the dispute. The Security Deposit is not an advance payment of Rent or a measure or limit of Landlord's damages upon an Event of Default (defined in Section 16). Landlord may, from time to time and without prejudice to any other remedy, use all or a part of the Security Deposit to perform any obligation Tenant fails to perform hereunder. The portion of the Letter of Credit proceeds received by Landlord and not utilized to cure a default shall be deemed a Cash Security Deposit. Following any such application of the Security Deposit, Tenant shall deposit with Landlord in cash on demand the amount so applied in order to restore the Security Deposit to its original amount. Provided that Tenant has performed all of its obligations hereunder, Landlord shall, within the earlier of (i) the expiration of the fifth (5th) lease year, or (ii) 30 days after the Term ends, return to Tenant the portion of the Security Deposit which was not applied to satisfy Tenant's obligations. The Security Deposit, letter of credit proceeds or other cash payment may be commingled with other funds, and no interest (other than in the event of a dispute as provided in this Article) shall be paid thereon. If Landlord transfers its interest in the Premises and the transferee assumes Landlord's obligations under this Lease in writing, then Landlord shall assign any cash portion of the Security Deposit to the transferee and Tenant shall issue a substitute Letter of Credit to the transferee simultaneously with the cancellation of the existing Letter of Credit with all transfer costs associated therewith being borne by Tenant and Landlord thereafter shall have no further liability for the return of the Security Deposit. A copy of the assumption agreement shall be provided to Tenant in writing. 6. Landlord's Obligations (a) Services. Landlord shall furnish to Tenant (1) water at those points of supply provided for general use of tenants of the Building; (2) heated and refrigerated air conditioning as appropriate, at such temperatures and in such amounts as are standard for comparable buildings in the vicinity of the Building; (3) electrical current at all times for equipment that does not require more than 220 volts and whose electrical energy consumption does not exceed normal combined office and laboratory usage; (4) a dumpster located at the Building for office garbage and trash and a hauling service to empty same; (5) sewage disposal for the Building; (6) snow and ice clearance from, and sweeping of, the Parking Area and access roads and walks relating to the Building; (7) such maintenance and repair of the Building and its electrical, 6 plumbing, HVAC, safety and other mechanical systems and other improvements at the Building as is customarily provided for comparable office and laboratory buildings within a 10-mile radius from the Building; and (8) all those items which are contemplated as Operating Costs under section 3(c)(2) of this Lease. Landlord shall maintain the common areas of the Building in reasonably good order and condition, except for damage caused by Tenant, or its employees, agents or invitees. Tenant shall pay, as Additional Rent, the total electricity, water and gas charges for the Premises at the supplying utility's rates therefor as determined pursuant to separate submeters for the Premises. Tenant shall pay for all light bulbs (including exit sign light bulbs) and ballasts in the Premises. (b) Excess Utility Use. Landlord shall not be required to furnish electrical current for equipment that requires more than 220 volts or other equipment whose electrical energy consumption exceeds normal office and laboratory usage. If Tenant's requirements for or consumption of electricity exceed the electricity to be provided by Landlord as described in Section 6(a), Landlord shall, at Tenant's expense, make reasonable efforts to supply such service through the then-existing feeders and risers serving the Building and the Premises, and Tenant shall pay to Landlord the cost of such service within ten days after Landlord has delivered to Tenant an invoice therefor. Landlord may determine the amount of such additional consumption and potential consumption by any verifiable method, including installation of a separate meter in the Premises installed, maintained, and read by Landlord, at Tenant's expense. Tenant shall not install any electrical equipment requiring special wiring or requiring voltage in excess of 220 volts or otherwise exceeding Building capacity unless approved in advance by Landlord. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Premises. Notwithstanding any provisions in this Lease to the contrary, any risers or wiring required to meet Tenant's excess electrical requirements shall, upon Tenant's written request, be installed by Landlord, at Tenant's cost, if, in Landlord's judgment, the same are necessary and shall not cause permanent damage to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations, repairs, or expenses, or interfere with or disturb other tenants of the Building. If Tenant uses machines or equipment in the Premises which materially adversely affects the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord, after consulting with Tenant for the purpose of cooperation to develop a reasonable solution, may install supplemental air conditioning units or other supplemental equipment in the Premises designed to remedy the adverse effect or overload, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within ten days after Landlord has delivered to Tenant an invoice therefor. Tenant acknowledges that, currently, current for 110 volts is supplied to the Premises and that all costs associated in supplying the 220 volts required by Tenant shall be borne by Tenant. (c) Restoration of Services; Abatement. Landlord shall use reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, 7 entitle Tenant to any abatement of Tenant's obligations hereunder. If, however, Tenant is prevented from using the Premises for more than 15 consecutive business days because of the unavailability of any such services referred to in Section 6(a)(1)-(7) or Tenant is denied access to the Building as a result of acts within Landlord's control for more than fifteen (15) consecutive business days, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Rent for each consecutive day (after such 15-day period) that Tenant is so prevented from using the Premises. In no event, however, shall the abatement apply to Section 6(a)(8) items. 7. Improvements; Alterations; Repairs; Maintenance. (a) Improvements; Alterations. Improvements to the Premises shall be installed at Tenant's expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord. No alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld, delayed or conditioned; however, Landlord may withhold its consent to any alteration or addition that would adversely affect the Building's structure or adversely affect its HVAC, plumbing, electrical, or mechanical systems. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type on or about the Premises without the prior written consent of Landlord, which shall not be unreasonably withheld, delayed or conditioned; however, Landlord may withhold its consent to any such painting or installation which would affect the appearance of the exterior of the Building or of any common areas of the Building. All alterations, additions, or improvements made in or upon the Premises shall, at Landlord's option, either be removed by Tenant prior to the end of the Term (and Tenant shall repair all damage caused thereby), or shall remain on the Premises at the end of the Term without compensation to Tenant. Whenever Tenant applies to Landlord for consent to a proposed alteration, addition or improvement that includes items in the nature of fixtures to real property, in connection with any consent that Landlord might give, Landlord shall advise Tenant by notice whether Landlord will require Tenant to remove or to leave behind such items upon expiration of the Term. All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all applicable laws; Landlord's approval of the plans and specifications therefor shall not be a representation by Landlord that such alterations, additions, or improvements comply with any law. (b) Repairs; Maintenance. Tenant shall maintain the Premises in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Subject to the provisions of Section 14, Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by Tenant, Tenant's transferees, or their respective agents, contractors, or invitees. If Tenant fails to make such repairs or replacements within 30 days after the occurrence of such damage, then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage. The cost of all repair or replacement work performed by Landlord under this 8 Section 7 shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. (c) Performance of Work. All work described in this Section 7 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord. Tenant shall cause all of its contractors and subcontractors to procure and maintain insurance coverage naming Landlord as an additional insured against such risks, in such amounts, and with such companies as Landlord may reasonably require. All such work shall be performed in accordance with all legal requirements and in a good and workmanlike manner so as not to damage the Premises, the Building, or the components thereof. (d) Construction Liens. Tenant shall not permit any construction liens to be filed against the Premises or the Building for any work performed, materials furnished, or obligation incurred by or at the request of Tenant by a contractor under contract to Tenant or its subcontractors or suppliers of materials to the contractor or subcontractor. If such a lien is filed pursuant to work contracted by Tenant, then Tenant shall, within ten days after Landlord has delivered notice of the filing thereof to Tenant, either pay the amount of the lien or diligently contest such lien and deliver to Landlord or to the Clerk of the Court with jurisdiction a bond or other security reasonably satisfactory to Landlord or in compliance with the requirements of the construction lien law in order to have such construction lien released or bonded. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. (e) To the extent Exhibit C of this Lease may be inconsistent with any requirement of this Section 7 of the Lease regarding the Work contemplated by Exhibit C, the provisions of Exhibit C shall control. 8. Use. Tenant shall continuously occupy and use the Premises only for general office and laboratory use (the " Permitted Use") and shall comply with all laws, orders, rules, and regulations relating to the use, condition, access to, and occupancy of the Premises (including, but not limited to, the storage, handling and experimentation of animals). Tenant acknowledges that the research on animals shall be limited to rodents and that there shall be (a) no breeding of animals, nor (b) housing of animals in excess of twenty-four (24) hours at the Premises. Tenant shall not permit the Premises, or any part thereof to be used in any manner which would in any way discharge objectionable fumes, vapors or odors into the Building's air conditioning system or flues or vents not designated to receive them. The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any hazardous materials or substances, which hazardous materials or substances are not lawfully utilized in connection with Tenant's Permitted Use. If, because of Tenant's acts, the rate of insurance on the Building or its contents increases, then such acts shall be an Event of Default, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of Landlord's other rights. Tenant shall conduct 9 its business and control its agents, employees, and invitees in such a manner as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building. 9. Assignment and Subletting (a) Transfers; Consent. Tenant shall not, without the prior written consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law (except an assignment to an Affiliate (as hereinafter defined) of Tenant), (2) if Tenant is an entity other than a corporation whose stock is publicly traded, permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises (except to an Affiliate of Tenant), (5) grant any license, concession, or other right of occupancy of any portion of the Premises (except to an Affiliate of Tenant), or (6) permit the use of the Premises by any parties other than Tenant or an Affiliate of Tenant (any of the events listed in Section 9.(a)(1) through 9.(a)(6) being a "Transfer"). If Tenant requests Landlord's consent to a Transfer, then Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee's credit worthiness and character. Landlord shall not unreasonably withhold, delay or condition its consent to any assignment or subletting of the Premises, provided that the proposed transferee (A) is credit worthy, (B) has a good reputation in the business community, and (C) is not another occupant of the Building if the Landlord then has space available in the Building that meets the other occupant's requirements for additional space; otherwise, Landlord may withhold its consent in its sole discretion by notice to Tenant. Concurrently with Tenant's notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $500.00 to defray Landlord's expenses in reviewing such request, and Tenant shall also reimburse Landlord immediately upon request for its reasonable attorneys' fees, if any, incurred in connection with considering and/or performing any legal services regarding any request for consent to a Transfer. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes the Tenant's obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer. Landlord's consent to a Transfer shall not release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. If an Event of Default contemplated by Subsection 16(a) of this Lease occurs while the Premises or any part thereof are subject to a 10 Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so. (b) Cancellation. Landlord may by notice to Tenant, within 30 days after submission of Tenant's written request for Landlord's consent to an assignment or subletting, cancel this Lease (unless Tenant withdraws its request to Landlord in writing and within two (2) business days of its receipt of Landlord's notice) as to the portion of the Premises proposed to be sublet or assigned as of the date the proposed Transfer is to be effective. If Landlord cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) in compliance with all applicable building, fire and use codes without liability to Tenant. (c) Additional Compensation. Tenant shall pay to Landlord, immediately upon receipt thereof, fifty percent (50%) of the excess of (1) all compensation received by Tenant for a Transfer less the costs reasonably incurred by Tenant with unaffiliated third parties in connection with such Transfer (i.e., brokerage commissions, tenant finish work, and the like) over (2) the Rent allocable to the portion of the Premises covered thereby. (d) The term "Affiliate" shall mean any person or entity, directly or indirectly, controlling, controlled by, or under common control with Tenant. 10. Insurance; Waivers; Subrogation; Indemnity (a) Insurance. Tenant shall maintain throughout the Term the following insurance policies: (1) comprehensive general liability insurance in amounts of not less than a combined single limit of $2,000,000 or such other amounts as Landlord may from time to time reasonably require as is customary for buildings of similar size, use and nature, insuring Tenant, Landlord, Landlord's agents and their respective affiliates against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises, (2) insurance covering the full value of Tenant's property and improvements, and other property (including property of others) in the Premises, (3) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder, and (4) worker's compensation insurance, containing a waiver of subrogation endorsement acceptable to Landlord. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies, reasonably 11 satisfactory to Landlord. The term "affiliate" shall mean any person or entity, directly or indirectly, controlling, controlled by, or under common control with the party in question. (b) Waiver of Negligence; No Subrogation. Landlord and Tenant each waives any claim it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property (a " Loss"), to the extent the same is insured against under any insurance policy that covers the Building, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, or, in the case of Tenant's waiver, is required to be insured against under the terms hereof, regardless of whether the negligence of the other party caused such loss; however, Landlord's waiver shall not include any deductible amounts on insurance policies carried by Landlord not to exceed $10,000 on any policy. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. (c) Indemnity. Subject to Section 10.(b), Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages, and expenses (including attorneys' fees) arising from (i) any Loss arising from any occurrence on the Premises or (ii) Tenant's failure to perform its obligations under this Lease. This indemnity provision shall exclude the acts and/or omissions of Landlord, its agents, employees and contractors, and shall survive termination or expiration of this Lease. If any proceeding is filed for which indemnity is required hereunder, Tenant agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel satisfactory to the indemnified party. 11. Subordination Attornment; Notice to Landlord's Mortgagee (a) Subordination. Provided the Subordination, Non-Disturbance and Attornment Agreements and recognition agreements are delivered to Tenant for execution in the forms as required in this subparagraph, within five (5) business days of receipt of same, Tenant agrees to execute, acknowledge and deliver same to Landlord and/or any other party directed by Landlord for execution by all required parties and upon receipt by Tenant of a fully executed duplicate original of said document(s), this Lease shall be subordinate to the deed of trust, mortgage, or other security instrument, or any ground lease, master lease, or primary lease, referred to in the applicable Subordination, Non-Disturbance and Attornment Agreement and/or recognition agreement so executed and delivered (the mortgagee under any such mortgage or the lessor under any such lease is referred to herein as a "Landlord's Mortgagee"). With respect to the existing mortgagee, Tenant shall execute and deliver the Subordination, Non-Disturbance and Attornment Agreement and Estoppel Certificate annexed hereto as Exhibit E. Landlord agrees to obtain for the benefit of Tenant a Subordination, Non-Disturbance and Attornment Agreement from future mortgagees, on forms substantially as set forth in Exhibit E (which form must provide the same benefits to all parties as provided for in Exhibit E) which Tenant agrees to execute. Landlord shall obtain 12 recognition agreements for the benefit of Tenant, which Tenant agrees to execute, with respect to any ground lease, master lease or primary lease on forms reasonably acceptable to Landlord, Tenant and the applicable lessor which Tenant agrees to execute. Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its mortgage, ground lease, or other interest in the Premises by so notifying Tenant in writing. (b) In the event that Landlord submits to Tenant a Subordination, Non-Disturbance and Attornment Agreement and/or recognition agreement, as applicable, complying with the provisions of subparagraph (a) and Tenant fails to execute, acknowledge and deliver same within five (5) business days of receipt thereof, then subject to mortgagee's election rights provided in the last sentence of subparagraph (a), this Lease shall be subordinate to the deed of trust, mortgage, or other security instrument, or any ground lease, master lease, or primary lease referred to in the Subordination, Non-Disturbance and Attornment Agreement and/or recognition agreement delivered to Tenant without further action on the part of any party. (c) Attornment. Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such party may reasonably request. (d) Notice to Landlord's Mortgagee. Tenant shall not seek to enforce any remedy it may have for any default on the part of the Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee a reasonable opportunity to perform Landlord's obligations hereunder. 12. Rules and Regulations. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit B. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, provided that such changes are applicable to all tenants of the Building and will not unreasonably interfere with Tenant's use of the Premises and are not inconsistent with the other provisions of this Lease. Tenant shall be responsible for the compliance with such rules and regulations by its employees, agents, and invitees. 13. Condemnation. (a) Total Taking. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "Taking"), this Lease shall terminate as of the date of the Taking. 13 (b) Partial Taking - Tenant's Rights. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking for a period of more than 90 days, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 30 days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking. (c) Partial Taking - Landlord's Rights. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds received for a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 13.(b). (d) Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the land on which the Building is situated, the Building, and other improvements taken, and Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have. 14. Fire or Other Casualty (a) Repair Estimate. If the Premises or the Building are damaged by fire or other casualty (a "Casualty"), Landlord shall, within 45 days after such Casualty, deliver to Tenant a good faith estimate (the "Damage Notice") of the time needed to repair the damage caused by such Casualty. (b) Landlord's and Tenant's Rights. If a 50% or greater portion of the Premises or a material portion of the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 120 days after the Casualty or in the event Landlord commences repairs as hereinafter set forth and does not substantially complete same within 180 days from the Casualty, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. If Tenant does not so timely terminate this Lease, then (subject to Sections 14.(c) and (d)) Landlord shall repair the Building or the Premises, as the case may be, as provided below, and Rent for the portion of the Premises rendered untenantable by the damage shall be abated from the date of damage until the earlier of (i) four (4) months from the date of the shell of the Premises being completed by Landlord and electric brought to the Premises by Landlord; or (ii) the date a 14 Certificate of Occupancy is issued with respect to the Premises after Landlord's and Tenant's repairs have been completed (or the repair is completed and Tenant is permitted to occupy the Premises if no Certificate of Occupancy is required). (c) Landlord's Rights. If a Casualty damages a material portion of the Building, and Landlord makes a good faith determination that restoring the Premises would be uneconomical, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant, and Basic Rent and Additional Rent shall be abated as of the date of the Casualty. (d) Repair Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Building and the shell of the Premises and shall proceed with reasonable diligence to restore the Building and shell of the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any of the furniture, equipment, fixtures, and other improvements which may have been placed by, or at the request of, Tenant (it being acknowledged by Tenant that it shall insure and replace all improvements in the Premises other than the shell of the Premises) or other occupants in the Building or the Premises, and Landlord's obligation to repair or restore the Building or shell of the Premises shall be limited to the extent of the insurance proceeds notwithstanding the application of any portion of the proceeds by a lender towards Landlord's indebtedness to the lender. As used herein, the term "shell of the Premises" shall mean sheetrocked exterior walls and a hung ceiling with respect to the Premises. 15. Taxes. Tenant shall be liable for any personal property taxes levied or assessed against personal property, furniture, or trade fixtures (not in the nature of fixtures to real property) placed by Tenant in the Premises. If any personal property taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, upon demand, the part of such personal property taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such personal property taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with law and if the non-payment thereof does not pose a threat of loss or seizure of the Building or interest of Landlord therein. 16. Events of Default. Each of the following occurrences shall be an "Event of Default": 15 (a) Tenant's failure to pay Rent within five days after Landlord has delivered notice to Tenant that the same is due; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Landlord has given Tenant written notice under this Section 16.(a) on more than two (2) occasions during the twelve (12) month interval immediately preceding such failure by Tenant; (b) Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof; and (c) The filing of a petition by or against Tenant (the term "Tenant" shall include, for the purpose of this Section 16.(c), any guarantor of the Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; or (4) for the reorganization or modification of Tenant's capital structure; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof. 17. Remedies. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any of the following actions: (a) Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 18.(a), and (3) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to its present value using a discount rate of four (4%) per annum. (b) Terminate Tenant's right to possess the Premises without terminating this Lease by giving written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession, (2) all amounts due from time to time under Section 18.(a), and (3) all Rent and other net sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period, after deducting all costs incurred by Landlord in reletting the Premises. Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building. Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Rent due hereunder. Reentry by Landlord in the Premises shall not affect Tenant's obligations hereunder for 16 the unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity of Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 17.(b). If Landlord elects to proceed under this Section 17.(b), it may at any time elect to terminate this Lease under Section 17.(a); or (c) Additionally, without notice, if permitted by law, Landlord may alter locks or other security devices at the Premises to deprive Tenant of access thereto, and Landlord shall not be required to provide a new key or right of access to Tenant. Any and all remedies set forth in this Lease: (i) shall be in addition to any and all other remedies Landlord may have at law or in equity; (ii) shall be cumulative; and (iii) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. Notwithstanding the foregoing, Landlord shall only recover its damages allowed hereunder once. 18. Payment by Tenant; Non-Waiver (a) Payment by Tenant. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into condition acceptable to a new tenant, (4) reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the Event of Default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of New Jersey shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease. (b) No Waiver. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due. 19. Landlord's Lien. Landlord hereby waives any statutory landlord's lien in and to Tenant's equipment, inventory, furniture and fixtures. 17 20. Surrender of Premises. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, broom-clean, reasonable wear and tear (and condemnation and Casualty damage not caused by Tenant, as to which Sections 13 and 14 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Tenant shall remove all unattached trade fixtures, furniture, and personal property placed in the Premises by Tenant, and shall remove such alterations, additions, improvements, trade fixtures, personal property, equipment, and furniture as required in subparagraph 7(a). Tenant shall repair all damage caused by such removal and cap any fixtures and/or wiring that are affected in the process of removing the foregoing. All items not so removed shall be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord upon ten (10) days notice to Tenant and without any obligation to account for such items. The provisions of this Section 20 shall survive the end of the Term. 21. Holding Over. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at will and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, in addition to the other Rent, a daily Basic Rent equal to the greater of (A) 150% of the daily Basic Rent payable during the last month of the Term, or (B) 125% of the prevailing basic rental rate in the Building for similar space. 22. Certain Rights Reserved by Landlord. Provided that the exercise of such rights does not unreasonably interfere with Tenant's occupancy of the Premises, Landlord shall have the following rights: (a) To decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof; to enter upon the Premises and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities; to change the name of the Building; and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, stairs, restrooms, or other public parts of the Building, if any; (b) To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to the Building; and closing the Building after normal business hours and on Sundays and holidays, subject, however, to Tenant's right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time; and (c) To enter the Premises at reasonable hours to show the Premises to prospective purchasers, lenders, or, during the last 12 months of the Term, tenants. 18 (d) Provided Tenant is not in default under this Lease, in connection with any entry into the Premises for any purpose or in connection with any physical work in or about the Building in the vicinity of the Premises which might interfere with Tenant's use and enjoyment of the Premises, other than in an emergency, Landlord shall: (i) attempt to schedule any such physical work by appointment with Tenant at least a week after verbally advising Tenant of a mutually satisfactory time; (ii) use reasonable efforts to minimize any interference with Tenant's use and enjoyment of the Premises for its regular business operations; (iii) in connection with showing the Premises to others on shorter advice, not seek to enter into laboratory portions of the Premises without the explicit permission of Tenant in each instance, but be satisfied with viewing the laboratory areas from the office areas through doors which will have windows installed in them for the purpose of viewing the laboratory areas from the office areas; and (iv) not enter the laboratory areas if the consequence of doing so would be to invalidate any pre-clinical or clinical trials in which Tenant is then engaged and Tenant notifies Landlord of same prior to the intended entry. 23. Intentionally Omitted. 24. Miscellaneous. (a) Landlord Transfer. Landlord may transfer any portion of the Building and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder, provided that the assignee assumes Landlord's obligations hereunder in writing. (b) Landlord's Liability. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be recoverable only from the interest of Landlord in the Building, and Landlord shall not be personally liable for any deficiency. This Section shall not limit any remedies which Tenant may have for Landlord's defaults which do not involve the personal liability of Landlord. (c) Force Majeure. Other than for Tenant's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party. (d) Brokerage. Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Newmark Partners, Inc. and Grubb & Ellis Company, whose commission shall be paid by Landlord. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commission or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. 19 (e) Estoppel Certificates. From time to time, Tenant shall furnish to any party designated by Landlord, within ten days after Landlord has made a request therefor, a certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease, to the extent the same are accurate, as Landlord may reasonably request. (f) Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified next to their signature block, (2) hand delivered to the intended address, or (3) sent by prepaid telegram, cable, facsimile transmission, or telex followed by a confirmatory overnight (i.e., Federal Express or equivalent) letter with copies as indicated on the signature block. All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision. (g) Separability. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (h) Amendments; and Binding Effect. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by either party unless such waiver is in writing signed by the putatively waiving party, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of either party to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof. (i) Quiet Enjoyment. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, subject to the terms and conditions of this Lease. (j) No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any 20 interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate. (k) No Offer. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant. (l) Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. (m) Waiver of Jury Trial. To the maximum extent permitted by law, Landlord and Tenant each waive right to trial by jury in any litigation arising out of or with respect to this Lease. (n) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State in which the Premises are located. (o) Joint and Several Liability. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. (p) Financial Reports. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant's internally prepared financial statements. Tenant will discuss its financial statements with Landlord. Landlord will not disclose any aspect of Tenant's financial statements that Tenant designates to Landlord as confidential except (a) to Landlord's lenders or prospective purchasers of the project, (b) in litigation between Landlord and Tenant, and (c) if required by court order. (q) Landlord's Fees. Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord for Landlord's reasonable costs incurred in reviewing the proposed action or consent, including without limitation reasonable attorneys', engineers' or architects' fees, within 10 days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. (r) Intentionally Omitted. 21 (s) Confidentiality. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for the Landlord's benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord's prior written consent. The consent by the Landlord to any disclosures shall not be deemed to be a waiver on the part of the Landlord of any prohibition against any future disclosure. (t) List of Exhibits. All exhibits and attachments attached hereto are incorporated herein by this reference. Exhibit A -Legal Description and Outline of Premises Exhibit B -Building Rules and Regulations Exhibit C -Work Letter Exhibit D -Parking Exhibit E -Subordination, Non-Disturbance and Attornment Agreement/ Tenant Estoppel Certificate Exhibit F -Renewal Option Exhibit G -Right of First Offer Exhibit H -Letter of Credit (u) The execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Lease by the Landlord have been duly and validly authorized by all its general partners; and no other approval or consent, whether partnership, governmental or otherwise, is required to authorize or to give effect to the Landlord's execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Lease. 25. Other Provisions. LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. 26. Environmental Laws. (a) Tenant, at its own cost and expense, agrees to comply with all applicable environmental laws, rules and regulations of the Federal, State, County and Municipal governments and of all other governmental authorities having or claiming jurisdiction over the Premises or appurtenances thereto, or any part thereof, which are applicable to the Premises and/or the conduct of business thereon (except that Tenant shall not be responsible for any occurrence or condition that arises prior to the Commencement Date), including but not limited to the Environmental Cleanup Responsibility Act of 1983 as amended by the Industrial Site Recovery Act (N.J.S.A. 13:1K-6 et seq) ("ISRA"). Further, Tenant agrees to make submissions to and provide any information 22 required by all governmental authorities requesting same pursuant to Tenant's obligations under this Paragraph 26. Tenant represents to Landlord that Tenant's Standard Industrial Classification (SIC) Number is 2835. (b) Tenant hereby agrees to execute such documents as Landlord reasonably deems necessary and to make such applications as Landlord reasonably requires to assure compliance with ISRA. Tenant shall bear all costs and expenses incurred by Landlord associated with any required ISRA compliance resulting from Tenant's use of the Premises including but not limited to state agency fees, engineering fees, clean-up costs, filing fees and suretyship expenses. As used in this Lease, ISRA compliance shall include, but not be limited to, applications for determinations of nonapplicability by the appropriate governmental authority. The foregoing undertaking shall survive the termination or sooner expiration of the Lease and surrender of the Premises and shall also survive sale, or lease or assignment of the Premises by Landlord. Tenant shall immediately provide Landlord with copies of all correspondence, reports, notices, orders, findings, declarations and other materials pertinent to Tenant's compliance and the New Jersey Department of Environmental Protection's ("NJDEP") requirements under ISRA as they are issued or received by the Tenant. (c) Tenant shall not generate, store, manufacture, refine, transport, treat, dispose of, or otherwise permit to be present on or about the Premises, any Hazardous Substances unless the same are in full compliance with all applicable environmental laws, rules and regulations. As used herein, Hazardous Substances shall be defined as any "hazardous chemical," "hazardous substance" or similar term as defined in the Comprehensive Environmental Responsibility Compensation and Liability Act, as amended (42 U.S.C. 9601, et seq.), the New Jersey Environmental Cleanup Responsibility Act, as amended by the Industrial Site Recovery Act, (N.J.S.A. 13:1K-6 et seq.), the New Jersey Spill Compensation and Control Act, as amended, (N.J.S.A. 58:10-23.11b, et seq.) , any rules or regulations promulgated thereunder, or in any other present or future applicable federal, state or local law, rule or regulation dealing with environmental protection. (d) In the event Tenant receives any notice that a spill or discharge of any Hazardous Substance has occurred on or about the Premises, Building and/or Land or into the sewer and/or waste treatment system operated by Landlord from any person or entity, including NJDEP and the United States Environmental Protection Agency ("EPA"), then Tenant shall provide immediate written notice of same to Landlord, detailing all relevant facts and circumstances. (e) Tenant agrees to indemnify, defend and hold harmless the Landlord and each mortgagee of the Building from and against any and all liabilities, damages, claims, losses, judgments, causes of action, costs and expenses (including the reasonable fees and expenses of counsel) which may be incurred by the Landlord or any such mortgagee or threatened against the Landlord or such mortgagee, relating to or arising out of the presence, disposal, escape, migration, leakage, spillage, discharge, emission, release, threatened release, handling, or transportation of Hazardous Substances in, on, at, under, from, in the vicinity of, or affecting or related to the Premises 23 or any part of the land and Building arising out of the acts or omissions of Tenant, its employees, contractors, agents, invitees and/or licensees and any breach by Tenant of this Article, which indemnification shall survive the expiration or sooner termination of this Lease. In no event shall Tenant's remedial action involve engineering or institutional controls, including without limitation capping, deed notice, declaration of restriction or other institutional control notice pursuant to P.L. 1993, c.139, and notwithstanding NJDEP's requirements, Tenant's remedial action shall meet the most stringent NJDEP remediation standards for soil, surface water and groundwater. Promptly upon completion of all required investigatory and remedial activities, Tenant shall restore the affected areas of the land and Buildings from any damage or condition caused by the work, including without limitation closing, pursuant to law any wells installed at the Building. (f) Environmental Report. Landlord has provided to Tenant a copy of a Phase I Environmental Site Assessment Update (SSCI Job No. 30238NJ) ("Report") with respect to the land upon which the Building is constructed, dated June 6, 1996, prepared by SSCI Environmental and Consulting Services ("Consultant"). Tenant agrees not to release the Report, or a copy of it, or any part of it, or disclose any of the information contained in the Report to any third party (other than Tenant's counsel) without the express prior written consent of Landlord. Such consent shall not be unreasonably withheld as long as the proposed party to whom the report is given executes a letter agreement containing covenants similar to this Section 26(f). Tenant releases Landlord for any inaccuracies, omissions or errors contained in the Report. Tenant agrees that it will not rely on the Report and it will make whatever independent investigation it feels is necessary to investigate the environmental and other conditions of the land. Tenant agrees that Landlord has no duty to provide it with the Report, to correct any inaccuracies, error or omissions in the Report, to supplement the Report with any additional information, or to provide Tenant with any information concerning the environmental conditions of the land. Tenant agrees that Landlord considers the Report to be confidential proprietary information and Tenant agrees to maintain the confidentiality and security of the Report information in accordance with the highest standards of confidentiality and security associated with the protection of "trade secrets". Landlord hereby expressly disclaims responsibility for the investigation of the land by Tenant and further disclaims any responsibility for the contents of the Report. Tenant's obligations pursuant to this Section 26(f) shall survive the expiration or termination of this Lease. 24 27. Signs. Tenant shall be entitled to be listed on the building directory and in a sign in front of the Premises comparable to signs provided to other tenants in the Building. IN WITNESS WHEREOF, and in consideration of the mutual entry into this Lease and for other good and valuable consideration, and intending to be legally bound, each party hereto has caused this Lease Agreement to be duly executed as of the day and year first above written. TENANT: PALATIN TECHNOLOGIES, INC., a Delaware Corporation By: /s/ Edward J. Quilty ---------------------------- Notice Address: with a copy to: ------------------------------ -------------------------------- Palatin Technologies, Inc. Richard McCarthy, Esq. 214 Carnegie Center, Suite 100 212 Carnegie Center, Suite 206 Princeton, New Jersey 08540 Princeton, New Jersey 08543-8497 Attn: Chief Financial Officer Telephone No.: 609-452-7877 Telephone No.: 609-520-1911 Telecopy No.: 609-520-8731 Telecopy No.: 609-452-0880 LANDLORD: WHC-SIX REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership, By: WHC-SIX Gen-Par, Inc., a Delaware corporation, its general partner By: /s/ Wm. David Lawson ---------------------------- Wm. David Lawson, Assistant Vice President Notice Address: with a copy to: - --------------------------------------- --------------------------------- WHC-Six Real Estate Limited Partnership WHC-Six Real Estate Limited c/o Newmark Partners, Inc. Partnership 1084 Route 22 West c/o Archon Group, L.P. Mountainside, NJ 07092 600 E. Las Colinas Boulevard, Attn: Property Manager Suite 1900 Telephone No.: 908-233-1717 Irving, Texas 75039 Telecopy No.: 908-233-7337 Attn: Asset Manager Telephone No.: 972-831-2200 Telecopy No.: 962-831-2276 with a further copy to: - ----------------------- Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C. 103 Eisenhower Parkway Roseland, New Jersey 07068 Attn: Jeffrey D. Singer, Esq. Telephone No.: 201-228-9600 Telecopy No.: 201-228-6081 EXHIBIT A [DIAGRAM OF FIRST FLOOR PLAN AND PROPERTY DESCRIPTION] EXHIBIT B BUILDING RULES AND REGULATIONS The following rules and regulations shall apply to the Premises, the Building, and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas shall not be obstructed by tenants or used by any tenant for purposes other than ingress and egress to and from their respective leased premises and for going from one to another part of the Building. 2. Plumbing, fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or deposited therein. Damage resulting to any such fixtures or appliances from misuse by a tenant or its agents, employees or invitees, shall be paid by such tenant. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows or doors or other part of the Building without the prior written consent of Landlord. No nails, hooks or screws shall be driven or inserted in any part of the Building except by Building maintenance personnel. No curtains or other window treatments shall be placed between the glass and the Building standard window treatments. 4. Landlord shall provide and maintain an alphabetical directory for all tenants in the Building directory. 5. Landlord shall provide all door locks in each tenant's leased premises, at the cost of such tenant, and no tenant shall place any additional door locks in its leased premises without Landlord's prior written consent. Landlord shall furnish to each tenant a reasonable number of keys to such tenant's leased premises, at such tenant's cost, and no tenant shall make a duplicate thereof. 6. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by tenants of any bulky material, merchandise or materials which require use of elevators or stairways, or movement through the Building entrances shall be conducted under Landlord's supervision at such times and in such a manner as Landlord may reasonably require. Each tenant assumes all risks of and shall be liable for all damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord if damaged or injured as a result of acts in connection with carrying out this service for such tenant. 7. Landlord may prescribe weight limitations and determine the locations for safes and other heavy equipment or items, which shall in all cases be placed in the Building so as to distribute weight in a manner acceptable to Landlord which may include the use of such supporting devices as Landlord may require. All damages to the Building caused by the installation or removal of any property of a tenant, or done by a tenant's property while in the Building, shall be repaired at the expense of such tenant. 8. Corridor doors, when not in use, shall be kept closed. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No portion of any tenant's leased premises shall at any time be used or occupied as sleeping or lodging quarters. 9. Tenant shall cooperate with Landlord's employees in keeping its leased premises neat and clean. 10. Intentionally omitted. 11. Tenant shall not make or permit any vibration or improper, objectionable or unpleasant noises or odors in the Building or otherwise interfere in any way with other tenants or persons having business with them. 12. No machinery of any kind (other than laboratory and normal office equipment) shall be operated by any tenant on its leased area without Landlord's prior written consent, nor shall any tenant use or keep in the Building any flammable or explosive fluid or substance, unless required in Tenant's business operations and then not in violation of applicable law. 13. Landlord will not be responsible for lost or stolen personal property, money or jewelry from tenant's leased premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not. 14. No vending or dispensing machines of any kind may be maintained in any leased premises without the prior written permission of Landlord. 15. Tenant shall not conduct any prohibited activity on or about the Premises or Building which will draw pickets, demonstrators, or the like. 16. All vehicles are to be currently licensed, in good operating condition, parked for business purposes having to do with Tenant's business operated in the Premises, parked within designated parking spaces, one vehicle to each space. No vehicle shall be parked as a "billboard" vehicle in the parking lot. Any vehicle parked improperly may be towed away. The Tenant, Tenant's agents, employees, vendors and customers who do not operate or park their vehicles as required shall subject the vehicle to being towed at the expense of the owner or driver. The Landlord may place a "boot" on the vehicle to immobilize it and may levy a charge of $50.00 to remove the "boot". The Tenant shall indemnify, hold and save harmless the Landlord of any liability arising from the towing or booting of any vehicles belonging to the Tenant, Tenant's agents, vendors, employees and customers. EXHIBIT C WORK LETTER 1. The Landlord shall make the Premises available to the Tenant for the purpose of build-out on the day immediately after the date the existing tenant in the Premises vacates the Premises. 2. As soon as practicable, Tenant shall provide to Landlord for its approval final working drawings, prepared by an architect that has been approved by Landlord (which approval shall not unreasonably be withheld, delayed or conditioned), of all improvements that Tenant proposes to install or have installed in the Premises. Such working drawings shall include the partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the electrical, mechanical and plumbing systems of the Building, and detailed plans and specifications for the construction of the improvements called for under this Exhibit in accordance with all applicable governmental laws, codes, rules and regulations. Further, if any of Tenant's proposed construction work will affect the Building's HVAC, electrical, mechanical, or plumbing systems, then the working drawings pertaining thereto must be approved by the Building's engineer of record. Landlord's approval of such working drawings shall not be unreasonably withheld, delayed or conditioned, provided that (a) they comply with all laws, rules, and regulations, and (b) such working drawings are sufficiently detailed to allow construction of the improvements in a good and workmanlike manner. As used herein, "Working Drawings" shall mean the final working drawings approved by Landlord, as amended from time to time by any approved changes thereto, and "Work" shall mean all improvements to be constructed in accordance with and as indicated on the Working Drawings. Landlord's approval of the Working Drawings shall not be a representation or warranty of Landlord that such drawings are adequate for any use or comply with any law, but shall merely be the consent of Landlord thereto. Landlord shall endorse the Working Drawings to indicate its review and approval thereof. All changes in the Work must receive the prior written approval of Landlord, and in the event of any such approved change Tenant shall, upon completion of the Work, furnish Landlord with an accurate, reproducible "as-built" plan of the improvements as constructed. 3. The Work shall be performed by the Tenant's contractors at Tenant's expense, subject to the Construction Allowance (and, if applicable, the Additional Construction Allowance) hereinafter set forth. All of the Tenant's contractors and their subcontractors shall be required to procure and maintain insurance against such risks, in such amounts and with such companies as Landlord may reasonably require. Certificates of such insurance, with paid receipts therefor, must be received by Landlord before the Work is commenced. The Work shall be performed in a good and workmanlike manner free of defects, shall conform with the Working Drawings, and shall be performed in such a manner and at such times as and not to materially interfere with or delay Landlord's other contractors, if any, the operation of the Building, and the occupancy thereof by other tenants. All contractors shall contact Landlord on behalf of themselves and their respective subcontractors and schedule time periods during which they may use Building facilities in connection with the Work; and the Landlord shall cooperate in such scheduling so as not to delay or hinder the Work 4. (a) Landlord shall provide to Tenant a construction allowance ("Construction Allowance") equal to $40.00 per rentable square foot of the Premises at the times and in the manner set forth below. (b) Landlord shall make the Construction Allowance due with respect to the 9,000 square foot portion of the Premises available to Tenant, either by paying Tenant or its contractors, after Tenant shall have documented that it has been billed and expended $540,000.00 for the build-out. Tenant shall forward documented invoices to Landlord not more frequently than monthly and payment shall be made as expeditiously as practicable upon Landlord's receipt of an invoice and lien waivers from any contractors, subcontractors and suppliers of the Work. (c) Landlord shall make the Construction Allowance due with respect to the Balance of Suite 500 available to Tenant, either by paying Tenant or its contractors, when (i) Tenant builds out the Balance of Suite 500 to completion, and (ii) the Total Occupancy Date shall have occurred. Tenant shall forward documented invoices to Landlord not more frequently than monthly and payment shall be made as expeditiously as practicable upon Landlord's receipt of an invoice and lien waivers from any contractors, subcontractors and suppliers of the Work. 5. Landlord shall provide to Tenant an additional construction allowance ("Additional Construction Allowance") equal to 100% of all the rent and other premiums actually received (including but not limited to retroactive holdover rent and premiums), without Landlord having any obligation to commence a lawsuit therefor, from the existing tenant in the Premises as it pertains to Suite 500 (as opposed to the entire space occupied by the existing tenant) paid or attributable to the period from and after April 1, 1997 (and any retroactive period prior thereto) with respect to the Premises, up to a maximum of $35,000.00, for the limited purpose of reimbursing Tenant for incremental verified costs incurred by the Tenant in its discretion for the purpose of accelerating construction of the build-out contemplated to begin after the existing tenant in the Premises vacates the Premises, including overtime labor expense, expediting charges and similar costs incurred for the purpose of accelerating construction. Tenant shall forward documented invoices to Landlord not more frequently than monthly and payment of the Additional Construction Allowance shall be made as expeditiously as practicable upon Landlord's receipt of invoices and lien waivers from any contractors, subcontractors and suppliers of the Work setting forth such costs in the aggregate amount of such costs. 6. If the existing Tenant in the Premises shall not have vacated the Premises by the close of business on April 15, 1997, the Landlord shall promptly commence summary dispossession proceedings by filing the summons and complaint with the Clerk of the Court on the next business day and pursue such proceedings diligently and expeditiously, with the goal of evicting the existing tenant in the Premises from the Premises at the earliest possible date after April 15, 1997. EXHIBIT D PARKING Tenant may use 40 non-designated parking spaces in the parking area associated with the Building (the "Parking Area") during the initial Term subject to such terms, conditions and regulations as are from time to time applicable to patrons of the Parking Area. EXHIBIT E SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT is made and entered into as of the _________ day of _________________, 1997 by and between GENERAL ELECTRIC CAPITAL REALTY GROUP, a New York corporation ("Mortgagee"), and PALATIN TECHNOLOGIES, INC., a Delaware Corporation ("Lessee"). R E C I T A L S: A. Mortgagee has provided an acquisition and development loan ("Loan") to WHC-SIX Real Estate Limited Partnership, Owner/Lessor ("Borrower"), for the purpose of financing Borrower's acquisition and development of the Edison Corporate Center in Edison, New Jersey and described in Exhibit A attached hereto and incorporated herein by reference (said real property and improvements being herein called the "Project"), such Loan being secured by a First Mortgage and Security Agreement dated July 29, 1994 and recorded in Mortgage Book 4772, Page 295 seq., in the Clerk's Office of Middlesex County, (the "Mortgage"), constituting a lien or encumbrance on the Project; and B. Lessee is the holder of a Leasehold estate in and to Suite 500 of 125 May Street, Edison, New Jersey, of the Project, consisting of 10,538 square feet of space (the "Demised Premises"), under that lease dated March 13, 1997 (the "Lease") executed by Borrower, as Landlord (Borrower being sometimes hereinafter called "Lessor"), and Lessee, as Tenant; and C. Lessee and Mortgagee desire to confirm their understandings with respect to the Lease and Mortgage. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, Lessee and Mortgagee agree and covenant as follows: 1. Non-Disturbance. Mortgagee agrees that it will not disturb the possession of Lessee under the Lease upon any judicial or non- judicial foreclosure of the Mortgage or upon acquiring title to the Project by deed-in-lieu of foreclosure, or otherwise, if the Lease is in full force and effect and Lessee is not then in default under the Lease, and that Mortgagee will accept the attornment of Lessee thereafter so long as Lessee is not in default under the Lease. 2. Attornment. If the interests of Lessor in and to the Demised Premises are owned by Mortgagee by reason of any deed-in- lieu of foreclosure, judicial foreclosure, sale pursuant to any power of sale or other proceedings brought by it or by any other manner, including, but not limited to, Mortgagee's exercise of its rights under any assignment of leases and rents, and Mortgagee succeeds to the interest of Lessor under the Lease; Lessee shall be bound to Mortgagee under all of the terms, covenants and conditions of the Lease for the balance of the term thereof remaining and any extension thereto duly exercised by Lessee with the same force and effect as if Mortgagee were the Lessor under the Lease, and Lessee does hereby attorn to Mortgagee, as its lessor, said attornment to be effective and self-operative, without the execution of any further instruments on the part of any of the parties hereto, immediately upon Mortgagee's succeeding to the interest of Lessor under the Lease; provided, however, that Lessee shall be under no obligation to pay rent to Mortgagee until Lessee receives written notice from Mortgagee that Mortgagee has succeeded to the interest of the Lessor under the Lease or otherwise has the right to receive such rents. The respective rights and obligations of Lessee and Mortgagee upon such attornment, to the extent of the then remaining balance of the term of the Lease, shall be and are the same as now set forth therein, it being the intention of the parties hereto for this purpose to incorporate the Lease in this Agreement by reference, with the same force and effect as if set forth in full herein. 3. Mortgagee's Obligations. If Mortgagee shall succeed to the interest of Lessor under the Lease, Mortgagee, subject to the last sentence of this Paragraph 3, shall be bound to Lessee under all of the terms, covenants and conditions of the Lease, provided, however, that Mortgagee shall not be: (a) Liable for any act or omission of any prior lessor (including Lessor) but not withstanding such lack of liability, upon Mortgagee (i) succeeding to the interest' of Lessor under the Lease, and (ii) receiving written notice of the act or omission from Lessee, Mortgagee shall commence to cure any act or omission of any prior lessor (including Lessor); or (b) Subject to the offsets or defenses which Lessee might have against any prior lessor (including Lessor) but not withstanding such lack of liability, upon Mortgagee (i) succeeding to the interest of Lessor under the Lease, and (ii) receiving written notice of the act or omission from Lessee, Mortgagee shall commence to cure any act or omission of any prior lessor (including Lessor); or, 2 (c) Bound by any rent or additional rent or advance rent which Lessee might have paid in advance in excess of one month's rent to any prior lessor (including Lessor), and all such rent shall remain due and owing, notwithstanding such advance payment; or (d) Bound by any security or advance rental deposit made by Lessee which is not delivered or paid over to Mortgagee and with respect to which Lessee shall look solely to Lessor for refund or reimbursement; or (e) Bound by any termination, amendment or modification of the Lease made without its consent and written approval. Neither General Electric Capital Corporation nor any other party who from time to time shall be included in the definition of Mortgagee hereunder, shall have any liability or responsibility under or pursuant to the terms of this Agreement after it ceases to own an interest in the Project with respect to acts and omissions of its successor in interest that occur after the effective date of such cessation. Nothing in this Agreement shall be construed to require Mortgagee to see to the Application of the proceeds of the Loan, and Lessee's agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing the Loan. Lessee acknowledges that Mortgagee is obligated only to Borrower to make the Loan only upon the terms and subject to the conditions set forth in the Loan Agreement between Mortgagee and Borrower pertaining to the Loan. Lessee further acknowledges and agrees that neither Mortgagee nor any purchaser of the Project at foreclosure sale or any grantee of the Project named in a deed-in- lieu of foreclosure nor any heir, legal representative, successor, or assignee of Mortgagee or any such purchaser or grantee, has or shall have any personal liability for the obligations of Lessor under the Lease; provided, however, that the Lessee may exercise any other right or remedy provided thereby or by law in the event of any failure by Lessor to perform any such material obligation. 4. Subordination. The Lease and all rights of Lessee thereunder are subject and subordinate to the Mortgage and to any deeds of trust, mortgages, ground leases or other instruments of security which do now or may hereafter cover the Project or any interest of Lessor therein (collectively, the "Prior Encumbrances") and to any and all advances made on the security thereof and to any and all increases, renewals, modifications, consolidations, replacements and extensions of the Mortgage or of any of the Prior Encumbrances. This provision is acknowledged by Lessee to be self- operative and no further instrument shall be required to 3 effect such subordination of the Lease. Lessee shall, however, upon demand at any time or times execute, acknowledge and deliver to Mortgagee any and all instruments and certificates that in Mortgagee's judgment may be necessary or proper to confirm or evidence such subordination provided none of such certificates contains any provision that purports to increase Lessee's obligations or diminish Lessee's rights (including rights of rent abatement as specifically stated under the Lease) and provided such certificates are reasonably satisfactory in form and substance to Lessee. If Lessee shall fail or neglect to execute, acknowledge and deliver any such instrument or certificate, Mortgagee may, in addition to any other remedies Mortgagee may have, as agent and attorney-in-fact of Lessee, execute, acknowledge and deliver the same and Lessee hereby irrevocably appoints Mortgagee as Lessee's agent and attorney-in-fact for such purpose. However, notwithstanding the generality of the foregoing provisions of this paragraph, Lessee agrees that Mortgagee shall have the right at any time to subordinate the Mortgage, and any such other mortgagee or ground lessor shall have the right at any time to subordinate any such Prior Encumbrances, to the Lease. 5. New Lease. Upon the written request of either Mortgagee or Lessee to the other given at the time of any foreclosure, trustee's sale or conveyance in lieu thereof, the parties agree to execute a lease of the Demised Premises upon the same terms and conditions as the Lease between Lessor and Lessee, which lease shall cover any unexpired term of the Lease existing prior to such foreclosure, trustee's sale or conveyance in lieu of foreclosure, provided the terms and conditions of any such new lease are substantively the same as in the Lease and do not increase Lessee's economic obligations. 6. Notice. Lessee agrees to give written notice to Mortgagee of any default by Lessor or Borrower under the Lease not less than thirty (30) days prior to terminating the Lease or exercising any other right or remedy thereunder or provided by law. Lessee further agrees that it shall not terminate the Lease or exercise any such right or remedy provided such default is cured within thirty (30) days; provided, however, that if such default cannot by its nature be cured within thirty (30) days, then Lessee shall not terminate the Lease or exercise any such right or remedy, provided the curing of such default is commenced within such thirty (30) days and is diligently prosecuted thereafter. Such notices shall be delivered by certified mail, return receipt requested to General Electric Capital Realty Group Attn: Mike Jaynes 15479 Dallas Parkway, Suite 400 4 Dallas, Texas 75248-2661 7. Mortgagee. The term "Mortgagee" shall be deemed to include General Electric Capital Realty Group and any of its successors and assigns, including anyone who shall have succeeded to Lessor's interest in and to the Lease and the Project by, through or under judicial foreclosure or sale under any power or other proceedings brought pursuant to the Mortgage, or deed in lieu of such foreclosure or proceedings, or otherwise. 8. Estoppel. Lessee hereby certifies, represents and warrants to Mortgagee that: (a) That the Lease is a valid lease and in full force and effect. That it is not aware of any existing default in any of the terms and conditions thereof and no event has occurred which, with the passing of time or giving of notice or both, would constitute an event of default; (b) That the Lease has not been amended, modified, supplemented, extended, renewed or assigned by Lessee, and represents the entire agreement of the parties; (c) That, except, as provided in the Lease, Lessee is entitled to no rent concessions or abatements; (d) That Lessee shall not pay rental under the Lease in excess of one (1) month's rent in advance (except for any deposit or letter of credit in the nature of security. Lessee agrees that Lessee shall, upon written notice by Mortgagee, pay to Mortgagee, when due, all rental due under and in accordance with the Lease; (e) That all obligations and conditions under the Lease to be performed to date have been satisfied, free of defenses and set-offs; and (f) That Lessee has not received written notice of any claim, litigation or proceedings, pending or threatened, against or relating to -Lessee, or with respect to the Demised Premises which would affect its performance under the Lease. Lessee has not received written-notice of any-violations of any federal, state, county or municipal statutes, laws, codes, ordinances, rules, regulations, orders, decrees or directives relating to the use or condition of the Demised Premises or Lessee's operations thereon. (g) On the date or this Agreement, the proposed lease has been executed by Lessee and forwarded to Lessor for execution and an executed copy returned to Lessee. Until execution by Lessor and return of an executed copy to Lessee, the Lease will not have become effective. Paragraphs 8(a) through (e) above should be read in light of this paragraph 8(g). 5 9. Modification and Successors. This Agreement may not be modified orally or in any manner other than by an agreement, in writing, signed by the parties hereto and their respective successors in interest. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors and assigns. 10. Counterparts. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all parties hereto, notwithstanding that all parties are not signatories to the original or the same counterpart. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MORTGAGEE: GENERAL ELECTRIC CAPITAL REALTY GROUP, a New York corporation By: --------------------------------- Its --------------------------------- LESSEE: PALATIN TECHNOLOGIES, INC. a Delaware corporation By: /s/ Edward J. Quilty ---------------------- 6 STATE OF TEXAS ) )Ss. COUNTY OF DALLAS ) BE IT REMEMBERED, that on this ____ day of _____, 1997, before me the subscriber,_____________________, personally appeared_____________ who, I am satisfied, is the person who signed the within instrument as __________________________ of General Electric Capital Realty Group, a New York Corporation, the entity named therein and he thereupon acknowledged that the said instrument made by the corporation and sealed with its corporate seal, was signed, sealed with the corporate seal and delivered by him as such officer and is the voluntary act and deed of the corporation, made by virtue of authority from its Board of Directors. _______________________ Notary Public, in and for the State of Texas My Commission expires ___________ STATE OF NEW JERSEY ) )ss. COUNTY OF MERCER ) BE IT REMEMBERED, that on this 31st day of March, 1997, before me the subscriber, Janet R. Schneider, personally appeared Edward J. Quilty who, I am satisfied, is the person who signed the within instrument as the CEO of Palatin Technologies, Inc., the entity named therein and he thereupon acknowledged that the said instrument made by the corporation and sealed with its corporate seal, was signed, sealed with the corporate seal and delivered by him as such officer and is the voluntary act and deed of the corporation, made by virtue of authority from its Board of Directors. /s/ Janet R. Schneider - ------------------------ Notary Public, in and for the State of My Commission expires _________ Janet R. Schneider NOTARY PUBLIC OF NEW JERSEY MY COMMISSION EXPIRES JULY 31, 2000 7 EXHIBIT E GENERAL ELECTRIC CAPITAL REALTY GROUP TENANT'S ESTOPPEL CERTIFICATE ----------------------------- PREMISES: Edison Corporate Center, 125 May Street, Suite 500 (10,538 square feet), Edison, New Jersey ("PREMISES") LANDLORD: WHC-Six Real Estate L.P., a Delaware limited partnership ("LANDLORD") LEASE DATED: March 13, 1997 ("LEASE") TENANT: Palatin Technologies, Inc., a Delaware corporation ("TENANT") TENANT`S NOTICE ADDRESS: 214 Carnegie Center, Suite 100. Princeton, New Jersey 08540 DATE: __________________, 1997 The undersigned, Tenant, hereby certifies to GENERAL ELECTRIC CAPITAL REALTY GROUP, a New York corporation ("GECRG"), that: 1. Tenant shall accept possession of the Premises pursuant to the Lease. The Lease term shall commence on the earlier of (i) ninety-seven (97) days following the date that the existing tenant in the Premises vacates the Premises or (ii) the date-a temporary or permanent certificate of occupancy is issued for the Initial Portion of Premises (9,000 square feet) ("Commencement Date"). The termination date of the Initial Term of the Lease is ten (10) years following the Commencement Date. If the Commencement Date is not the first day of a calendar month, then the Term shall be extended for the number of days between the Commencement Date and the first day of the following month. Subject to the Basic Rent adjustment as provided in paragraph 3(a)(ii) of the Lease, monthly rent under the Lease is as follows: Basic Rent, $9,640.83 per month for months 1-12, $9,897.17 per month for months 13-24, $10,538.00 per month for months 25-36, $13,:72.50 per month for months 37-60, $16,685.17 per month for months 61-120, plus additional rent as provided in the Lease. 2. Any improvements-required by the terms of the Lease to be made by Landlord prior to the Commencement Date with respect to the Premises have been completed to the satisfaction of Tenant in all respects, and Landlord has fulfilled all of its duties under the Lease, performance of which was due prior to the date of this certificate. 3. The Lease has not been assigned, modified, supplemented or amended in any way by the Tenant. The Lease constitutes the entire agreement between the parties and there are no other agreements between Landlord and Tenant concerning the Premises. 4. The Lease is valid and in full force and effect, and, to the best of Tenant's knowledge, neither Landlord nor Tenant is in default thereunder. Tenant has no defense, setoff or counterclaim against Landlord arising out of the Lease or in any way relating thereto, or arising out of any other transaction between Tenant and Landlord, and no event has occurred and no condition exists, which, with the giving of notice or the passage of time, or both, will constitute a default under the Lease. 5. No rent or other sum payable to Landlord under the Lease has been paid in advance in excess of an amount equal to one month's Basic Rent, except for any deposit or letter of credit in the nature of security. 6. The minimum monthly rental rate presently payable under the Lease on and after the Commencement Date is $9,640.83. 7. Tenant acknowledges that Tenant has received this Estoppel Certificate as notice that the Lease will be assigned to GECRG and Tenant has received no notice of a prior assignment, hypothecation or pledge of the Lease or the rents, income, deposits or profits arising thereunder. GECRG hereby advises, and Tenant understands, that under the provisions of the assignment, the Lease cannot be terminated (either directly or by the exercise of any option which could lead to termination) or modified in any of its terms, or consent be given to the release of any party having liability thereon, without the prior written consent of GECRG, that without such consent, no rent may be collected or-accepted in excess of one month's rent in advance and that the interest of the Landlord in the Lease has been assigned to GECRG solely as security for the purposes specified in the assignment and GECRG assumes no duty, liability or obligations whatever under the Lease or any extension or renewal thereof. 8. Tenant hereby acknowledges and agrees that if GECRG shall succeed to the interest of Landlord under the Lease, GECRG shall assume (only while owner of and in possession or control of the building of which the Premises are a part) and perform all of Landlords obligations under the Lease, but, except as may otherwise specifically set forth in the Subordination, Non-Disturbance and Attornment Agreement between GECRG and the Tenant, or elsewhere in this certificate shall not be liable for any act or omission of any prior landlord (including the present landlord), liable for the return of any security deposit, subject to any offset or defense which Tenant may have against any such prior landlord or bound by any rent or additional rent Tenant may have paid for more than the current month to any such prior landlord or bound by any assignment, surrender, termination, cancellation, waiver, release, amendment or modification of the Lease made without its express written consent. 9. Tenant shall give GECRG prompt written notice of any default of Landlord under the Lease, if such default entitles Tenant, under law or otherwise, to terminate the Lease, reduce rent or credit or offset any amount against future rents and shall give GECRG reasonable time (but in no event less than 30 days after receipt of such notice) to cure or commence curing such default prior to exercising (and as a condition precedent to its right to exercise), any right Tenant may have to terminate the Lease or to reduce rent or credit or offset any amounts against the rent. Tenant shall give written notice of any default of Landlord to any successor in interest of GECRG, any purchaser at a foreclosure sale under the mortgage, any transferee who acquired the property by deed in lieu of foreclosure or any successor or assign thereof of whose name and address Tenant shall have been advised by written notice from GECRG or its then current successor in interest. 10. Tenant shall not look to the Mortgagee, as mortgagee, mortgagee in possession, or successor in title to the Mortgaged Property, in connection with the return of or accountability with respect to any security deposit required by Landlord, unless said sums have actually been received by Mortgagee as security for Tenant's performance under the Lease. 11. Tenant shall neither suffer nor itself manufacture, store, handle, transport, dispose of, spill, leak, dump any toxic or hazardous waste, waste product or substance (as they may be defined in any federal or state statute, rule or regulation pertaining to or governing such wastes, waste products or substances) on the Mortgaged Property at any time during the term, or extended term, of the Lease, except as permitted by the Lease. 12. All notices and other communications from Tenant to GECRG shall be in writing and shall be delivered or mailed by registered mail, postage paid, return receipt requested, addressed to GECRG at: General Electric Capital Realty Group Attn: Mike Jaynes 16479 Dallas Parkway, Suite 400 Dallas, Texas 75248-2661 or at such other address as GECRG, any successor, purchaser or transferee shall furnish to Tenant in writing. 13. This Estoppel Certificate is being executed and delivered by Tenant(s) for the benefit of GECRG in connection with its loan to Landlord which, Tenant is informed by GECRG, is secured or to be secured in part by an assignment to GECRG of Landlord's interest in the Lease, and (b) with the intent and understanding that the above statements will be relied upon by GECRG. 14. On the date of this certificate, the proposed Lease has been executed by Tenant and forwarded to Landlord for execution an an executed copy returned to Tenant. Until execution by Landlord and return of an executed copy to tenant, the Lease will not have become effective and no obligations of Landlord or Tenant will have arisen under the Lease. The foregoing Certificate should be read in light of this paragraph 14, e.g., paragraph 2, no improvements have been made (or buildout allowance paid) because performance thereof was not due as of the Certificate date. TENANT: Palatin Technologies, Inc. a Delaware corporation /s/ Edward J. Quilty By:----------------------- EXHIBIT F RENEWAL OPTION (a) Renewal. Provided no Event of Default exists, Tenant shall have option(s) ("Renewal Option(s)") to extend the term of this Lease for two (2) additional periods of five (5) years each ("Renewal Term(s)"), by giving Landlord notice thereof not more than twelve (12), but at least nine (9) months' notice, prior to the date of expiration of the then current term of this Lease. If Tenant shall exercise the Renewal Option(s), then this Lease shall be extended for the then upcoming Renewal Term upon all of the terms, covenants and conditions contained in this Lease, except that, during the Renewal Term, the annual Basic Rent for said term shall be 95% of the annual market rental value ("Market Value Rent") of the Premises on the date that Tenant exercises the applicable Renewal Option ("Exercise Date"), determined as provided in subparagraph (b) below. In calculating the Market Value Rent, the following assumptions shall be made: (i) the Landlord can deliver possession of the Premises on the first day of the respective Renewal Term; (ii) the Premises or respective portions thereof are in the same condition they were in immediately after the completion of any build-out thereof, subject to normal wear and use, and the Tenant would accept them in that condition without any further improvement; (iii) the improvements then in place in the Premises have no special value to the Tenant beyond the value they would have to a reasonable willing tenant seeking combination office and laboratory space; (iv) this Lease remains in effect in accordance with its terms; (v) the Landlord is required to pay a standard brokerage commission with respect to the respective Renewal Term; and (vi) the Landlord will be granting no concessions during the respective Renewal Term. (b) Arbitration. The term "Market Value Rent" shall mean the annual fixed rent that a willing tenant would pay and a willing landlord would accept in an arms-length lease of the Premises as of the Exercise Date, assuming the same terms and conditions set forth in this Lease and using the assumptions described in (a) above. If Landlord and Tenant shall fail to agree upon the Market Value Rent within sixty (60) days after the Exercise Date, then Landlord and Tenant each shall give notice ("Determination Notice") to the other setting forth their respective determinations of the Market Value Rent, and, subject to the provisions of subparagraph (c) below, either party may apply to the American Arbitration Association or any successor thereto for the designation of an arbitrator satisfactory to both parties to render a final determination of the Market Value Rent. If Landlord and Tenant cannot agree upon an arbitrator, the parties shall jointly apply to the assignment judge of Middlesex County to select an arbitrator. The arbitrator shall be a real estate appraiser, consultant or broker who shall have at least fifteen (15) years continuous experience in the business of appraising or office and laboratory leasing. The arbitrator shall conduct such hearings and investigations as the arbitrator shall deem appropriate and shall, within thirty (30) days after having been appointed, choose one of the determinations set forth in either Landlord's or Tenant's Determination Notice, and that choice by the arbitrator shall be binding upon Landlord and Tenant. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this subparagraph (b), and the parties shall share equally all other expenses and fees of any such arbitration. The determination rendered in accordance with the provisions of this subparagraph (b) shall be final and binding in fixing the Market Value Rent. The arbitrator shall not have the power to add to, modify or change any of the provisions of this Lease. (c) Arbitration cancelled. In the event that the determination of the Market Value Rent set forth in the Landlord's and Tenant's Determination Notices shall differ by less than three (3%) percent per rentable square foot per annum for the applicable Renewal Term, then the Market Value Rent shall not be determined by arbitration, but shall instead be set by taking the average of the determination set forth in Landlord's and Tenant's Determination Notices. Only if the determinations set forth in Landlord's and Tenant's Determination Notices shall differ by more than three (3%) percent per rentable square foot per annum for the applicable Renewal Term shall the actual determination of Market Value Rent be made by an arbitrator as set forth in subparagraph (b) above. (d) Late determination. If for any reason the Market Value Rent shall not have been determined prior to the commencement of the Renewal Term, then, until the Market Value Rent and, accordingly, the annual Basic Rent, shall have been finally determined, the annual Basic Rent shall remain the same as payable during the last year of the expiring term of the Lease. Upon final determination of the Market Value Rent, an appropriate adjustment to the annual Basic Rent shall be made reflecting such final determination, and Landlord or Tenant, as the case may be, shall promptly refund or pay to the other any overpayment or deficiency, as the case may be, in the payment of annual Basic Rent from the commencement of the Renewal Term to the date of such final determination. (e) In the event the Premises has been expanded, the Renewal Option(s) contained herein shall apply to the then existing Premises, as expanded on a co-termination basis. (f) Tenant shall have no further renewal options unless expressly granted by Landlord in writing. (g) Landlord shall lease to Tenant the Premises in their then-current condition, and Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, and the like) or other tenant inducements. (h) Tenant's rights under this Exhibit shall terminate if Tenant fails to timely exercise its option(s) under this Exhibit, time being of the essence with respect to Tenant's exercise thereof or Tenant assigns any of its interest in this Lease or sublets any portion of the Premises, other than an assignment or subletting to an Affiliate. (i) In no event shall Tenant be entitled to exercise an option for any Renewal Term unless it or an Affiliate is occupying all of the Premises at the time of exercise. EXHIBIT G RIGHT OF FIRST OFFER Subject to then-existing renewal or expansion options of other tenants, and the existing tenants' desires (whether or not set forth in their leases) to extend their terms provided no Event of Default then exists, Landlord shall, prior to offering the same to others, and first offer to lease to Tenant the space designated on page 2 of this Exhibit (the "Offer Space") in an "AS-IS" condition; such offer shall be in writing and specify the rent to be paid for the Offer Space and the date on which the Offer Space shall be included in the Premises (the "Offer Notice"). Tenant shall notify Landlord in writing whether Tenant elects to lease the entire Offer Space at the rental rate set forth in the Offer Notice, within 10 days after Landlord delivers to Tenant the Offer Notice. If Tenant timely elects to lease the Offer Space, then Landlord and Tenant shall execute an amendment to this Lease, effective as of the date the Offer Space is to be included in the Premises, on the same terms as this Lease except as follows: (a) the rentable area of the Premises and Tenant's proportionate share of applicable Rent obligations shall be increased by the rentable area in the Offer Space; (b) the Basic Rent shall be increased by the amount specified for such space in the Offer Notice; (c) Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, and the like) or other tenant inducements; and (d) The Term shall be co-terminous with the Premises. If Tenant fails or is unable to timely exercise its right hereunder, then such right shall forever lapse, time being of the essence with respect to the exercise thereof, and Landlord may lease the Offer Space to third parties on such terms as Landlord may elect provided Landlord initially offers the Offer Space to the third parties upon the same terms as offered to Tenant, but Landlord shall be entitled to conclude its transaction with the third party on terms other than initially offered to the third party. Tenant may not exercise its rights under this Exhibit if an Event of Default exists or Tenant or an Affiliate is not then occupying the entire Premises. Tenant's rights under this Exhibit shall terminate if (a) this Lease or Tenant's right to possession of the Premises is terminated or (b) Tenant assigns any of its interest in this Lease or sublets any portion of the Premises, other than an assignment to an Affiliate. 1 of 2 [DIAGRAM OF FIRST OFFER SPACE ON FIRST FLOOR PLAN] 2 of 2 EXHIBIT H LETTER OF CREDIT [BANK LETTERHEAD] , 1997 IRREVOCABLE, UNCONDITIONAL LETTER OF CREDIT NO. Archon Group, L.P. 600 Las Colinas Boulevard, Suite 1900 Irving Texas 75039 Gentlemen: _________________________________, a national banking association ("Bank"), of ____________________________, hereby issues its Irrevocable, Unconditional Letter of Credit in favor of WHC-Six Real Estate, L.P., a Delaware limited partnership, and/or its successors and assigns ("Landlord") for the account of Palatin Technologies, Inc., a Delaware corporation, ("Tenant") up to the aggregate amount of $185,000, available at sight by the drafts of Landlord on the Bank. Drafts drawn on this Letter of Credit will be honored when presented, accompanied only by a letter or certificate executed by a representative of Landlord stating that it is entitled to draw on this Letter of Credit under the terms of the Lease Agreement, dated as of ____________, 1997, between Landlord and Tenant. Partial draws shall be permitted hereunder. This Letter of Credit may be assigned. The Bank shall be entitled (and required) to rely upon the statements contained in the above-described letter or certificate and will have no obligation to verify the truth of any statements set forth therein. The Bank hereby agrees with drawers, endorsers and bona fide holders of this Letter of Credit that all drafts drawn by reason of this Letter of Credit and in accordance with the above conditions, will meet with due honor when presented at the office of the Bank in ____________________. The obligations of the Bank shall not be subject to any claim or defense by reason of the invalidity, illegality or inability to enforce any of the agreements set forth in the Lease. This Letter of Credit is subject to the Uniform Customs and Practices for Documentary Credits (1993 Revision) fixed by the International Chamber of Commerce (publication 400) when not in conflict with the express terms of this Letter of Credit or with the provisions of Article 5, N.J.S.A. 12A:5- 101 et seq. of the New Jersey Uniform Commercial Code, as amended. This Letter of Credit shall terminate at 3:00 p.m. Eastern Daylight Savings Time or Eastern Standard Time, as applicable, on the first anniversary date following the date hereof. Amounts drawn upon this Letter of Credit are to be endorsed on the reverse side of this Letter of Credit by the negotiating bank. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES THAT MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. --------------------------- By: ------------------------ Name: ---------------------- Title: --------------------- EX-10.28 5 AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to that certain Employment Agreement dated as of November 16, 1995 (the "Employment Agreement") between RhoMed Incorporated, a Delaware corporation ("RhoMed"), and Edward J. Quilty, an individual residing at 1031 Creamery Rd., Newtown, Pennsylvania 18940 (the "Executive"), is made and entered into as of _____________, 1996, by and among RhoMed, the Executive, and Palatin Technologies, Inc., a Delaware corporation of which RhoMed is a wholly-owned subsidiary ("Palatin"). WHEREAS, Palatin desires to employ the Executive, and the Executive desires to be employed by Palatin, on the same terms and capacities as are contemplated in the Employment Agreement, by amending the Employment Agreement to effect such employment, and whereas RhoMed has consented to such arrangement; WHEREAS, the Executive, RhoMed and Palatin have determined that it is in the best interest of the parties to this Amendment to clarify certain of the terms of the Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Effective as of _________, 1996, RhoMed will not be a party to the Employment Agreement and the Employment Agreement shall from such time and thereafter be between Palatin and the Executive, and all references in the Employment Agreement to "RhoMed" shall be references to "Palatin." 2. The merger of Palatin's wholly-owned subsidiary, Interfilm Acquisition Corporation, with and into RhoMed on June 25, 1996 (the "Merger") was not intended to and did not constitute a "change-in-control" under Paragraph C of Article FIFTH of the Employment Agreement. Upon the execution hereof, each reference in the Employment Agreement to "the Employment Agreement", "this Agreement", "hereby", "hereunder", "herein", "hereof" or words of like import referring to the Employment Agreement shall mean and refer to the Employment Agreement as amended by this Amendment to the Employment Agreement. All other provision of the Employment Agreement shall remain in full force and effect except and to the extent explicitly amended hereby. This Amendment may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties hereto have signed this Amendment or caused this Amendment to be signed by their respective officers thereunto duly authorized as of the date first written above. PALATIN TECHNOLOGIES, INC. RHOMED INCORPORATED /s/ Edward J. Quilty /s/ John J. McDonough By:----------------------- By:---------------------- Name: E. J. Quilty Name: John J. McDonough Title: Chairman & CEO Title: VP & CFO /s/ Edward J. Quilty By:----------------------- Edward J. Quilty 2 EX-27 6 FDS -- FY 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1 U.S. Dollars Year JUN-30-1997 JUL-1-1996 JUN-30-1997 1 12,806,717 0 84,562 0 0 13,066,275 1,159,145 237,049 14,062,865 2,738,727 1,889,139 0 1,378 30,204 9,802,966 14,062,865 22,184 722,357 0 5,943,866 0 0 374,664 0 0 5,300,164 0 0 0 (5,300,164) (2.80) (2.80)
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