-----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, VosAZVr227GJcu4WTKts6FiPlFO9KyMP4Zfv7zGwTS8hdcEzs9PSNN4bDsk8z94F cCXOBCcALkNTccG/jWRy4Q== 0000891618-99-003720.txt : 19990816 0000891618-99-003720.hdr.sgml : 19990816 ACCESSION NUMBER: 0000891618-99-003720 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIRON CENTRAL INDEX KEY: 0000949173 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 770309686 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20815 FILM NUMBER: 99686656 BUSINESS ADDRESS: STREET 1: 297 N BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6509196500 MAIL ADDRESS: STREET 1: 297 NORTH BERNARDO AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 0-20815 AVIRON (Exact name of registrant as specified in its charter) DELAWARE 77-0309686 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 297 North Bernardo Avenue, Mountain View, California 94043 (Address of principal executive offices including zip code) (650) 919-6500 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock $.001 par value 15,820,855 shares ---------------------------- ----------------- (Class) (Outstanding at August 9, 1999)
2 AVIRON TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED) Condensed Balance Sheets as of June 30, 1999 and December 31, 1998 3 Condensed Statements of Operations for the three- and six-month periods ended June 30, 1999 and 1998 4 Condensed Statements of Cash Flows for the six- month periods ended June 30, 1999 and 1998 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II. OTHER INFORMATION 19 ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 21 EXHIBIT INDEX 22
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVIRON CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1999 1998 --------- ------------ (UNAUDITED) (NOTE 1) ASSETS Current Assets: Cash and cash equivalents ....................................... $ 16,196 $ 28,164 Short-term investments .......................................... 46,356 60,692 Accounts receivable ............................................. 2,810 75 Inventory ....................................................... 956 -- Prepaid expenses and other current assets ....................... 1,012 1,228 --------- --------- Total current assets .......................................... 67,330 90,159 Long-term investments ............................................. 8,514 6,002 Property and equipment, net ....................................... 23,443 18,521 Deposits and other assets ......................................... 7,010 6,303 --------- --------- TOTAL ASSETS ...................................................... $ 106,297 $ 120,985 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ................................................ $ 3,929 $ 2,792 Accrued compensation ............................................ 694 804 Accrued clinical trial costs .................................... 253 757 Accrued interest ................................................ 1,438 1,445 Accrued expenses and other liabilities .......................... 5,391 4,584 Current portion of capital lease obligations .................... 291 408 --------- --------- Total current liabilities ..................................... 11,996 10,790 Deferred rent ..................................................... 1,716 1,116 Capital lease obligations, noncurrent ............................. 38 113 Convertible debt .................................................. 100,000 100,000 --------- --------- Total liabilities ................................................. 113,750 112,019 --------- --------- Commitments and contingencies Stockholders' Equity (Deficit): Preferred stock, $0.001 par value; 5.0 million shares authorized, issuable in series; none outstanding at June 30, 1999 and December 31, 1998 ............................................. -- -- Common stock, $0.001 par value; 30.0 million shares authorized, 15.8 million and 15.7 million shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively ............. 16 16 Additional paid-in capital ...................................... 130,890 130,524 Notes receivable from stockholders .............................. (83) (83) Deferred compensation ........................................... (161) (237) Accumulated deficit ............................................. (138,115) (121,254) --------- --------- Total stockholders' equity (deficit)............................... (7,453) 8,966 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 106,297 $ 120,985 ========= =========
See accompanying notes. 3 4 AVIRON CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1999 1998 1999 1998 -------- -------- -------- -------- REVENUES: Contract revenues and grants ............ $ 2,944 $ 134 $ 18,475 $ 387 -------- -------- -------- -------- OPERATING EXPENSES: Research and development .................. 14,362 10,874 28,367 20,657 General, administrative and marketing...... 3,151 2,591 5,833 4,652 -------- -------- -------- -------- TOTAL OPERATING EXPENSES .................... 17,513 13,465 34,200 25,309 -------- -------- -------- -------- LOSS FROM OPERATIONS ........................ (14,569) (13,331) (15,725) (24,922) -------- -------- -------- -------- OTHER INCOME/(EXPENSE): Interest income ........................... 1,062 1,847 2,273 2,800 Interest expense .......................... (1,613) (1,618) (3,187) (1,661) -------- -------- -------- -------- TOTAL OTHER INCOME (EXPENSE), NET ........... (551) 229 (914) 1,139 -------- -------- -------- -------- NET LOSS .................................... $(15,120) $(13,102) $(16,639) $(23,783) ======== ======== ======== ======== Basic and diluted net loss per share ........ $ (0.96) $ (0.84) $ (1.06) $ (1.51) ======== ======== ======== ======== Shares used in computing basic and diluted net loss per share .................. 15,749 15,571 15,726 15,787
See accompanying notes. 4 5 AVIRON CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................. $(16,639) $(23,783) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..................................... 2,193 1,075 Amortization of debt issuance costs ............................... 288 139 Amortization of deferred compensation ............................. 76 223 Changes in assets and liabilities: Accounts receivable ............................................... (2,735) -- Inventory ......................................................... (956) -- Prepaid expenses and other current assets ......................... 216 (114) Deposits and other assets ......................................... (995) 138 Accounts payable .................................................. 1,137 (1,302) Accrued expenses and other liabilities ............................ 186 (560) Deferred rent ..................................................... 600 259 -------- -------- Net cash used in operating activities .................................... (16,629) (23,925) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments .......................................... (28,536) (34,399) Maturities of investments ......................................... 40,138 25,725 Expenditures for property and equipment ........................... (7,115) (9,435) -------- -------- Net cash provided by (used in) investing activities ...................... 4,487 (18,109) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligation .................... (192) (261) Proceeds from convertible debt offering, net ...................... -- 96,000 Repurchase of Common Stock ........................................ -- (13,337) Proceeds from issuance of Common stock, net: ...................... 366 682 -------- -------- Net cash provided by financing activities ................................ 174 83,084 -------- -------- Net increase (decrease) in cash and cash equivalents ..................... (11,968) 41,050 Cash and cash equivalents at beginning of period ......................... 28,164 15,239 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 16,196 $ 56,289 ======== ========
See accompanying notes. 5 6 AVIRON NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information as of June 30, 1999 and for the three-month and six-month periods ended June 30, 1999 and 1998 are unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which Aviron (the Company) considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. The balance sheet data at December 31, 1998 is derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for a full fiscal year. Accounts Receivable Accounts receivable is comprised principally of amounts receivable from partners in connection with reimbursement of certain expenses associated with the development and commercialization of FLUMIST(TM), the Company's live cold-adapted virus vaccine. Inventory Inventory is comprised principally of sprayer components that will be used in the manufacture of commercial batches of FLUMIST(TM) for sale. Inventory is valued at the lower of cost (FIFO) or market value. Comprehensive Income (Loss) Comprehensive income (loss) is not presented separately as it approximates the net loss presented in the statement of operations for the three-month and six-month periods ended June 30, 1999 and 1998. 2. Net Loss Per Share The Company calculates net loss per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires the presentation of basic earnings (loss) per share and diluted earnings per share, if more dilutive, for all periods presented. Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share has not been presented separately as, given the Company's net loss position, the result would be anti-dilutive. 3. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is required to be adopted for the year ending December 31, 2001. Management does not anticipate that the adoption of SFAS 133 will have a significant effect on the results of operations or the financial position of the Company. 6 7 As of January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize certain qualifying computer software costs, which are incurred during the application development stage, and amortize them over the software's estimated useful life. The adoption of SOP 98-1 did not have a significant effect on the results of operations or the financial position of the Company. 4. Collaboration Agreement On January 12, 1999, the Company announced a worldwide collaboration for the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation (Wyeth). On March 15, 1999, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1996 regarding this collaboration. Under the agreement, Aviron is granting Wyeth exclusive worldwide rights to market FLUMIST(TM). Wyeth and Aviron will co-promote FLUMIST(TM) in the United States, while Wyeth will have the exclusive right to market the product outside the United States. In each case, Wyeth will hold the marketing rights for up to eleven years. The collaboration excludes Korea, Australia, New Zealand and certain South Pacific countries. The companies will collaborate on the regulatory, clinical, and marketing programs for the product. As consideration under the agreement, the Company received a cash payment of $15 million for the initial license that was recognized as revenue during the quarter ended March 31, 1999. During the quarter ended June 30, 1999, the Company recorded $2.8 million of revenue in expense reimbursement from Wyeth for a portion of its clinical development and commercialization costs incurred during the period from March 15 through June 30, 1999. In addition, the Company will receive $15.5 million upon acceptance for filing with the U.S. Food and Drug Administration (FDA), and $20 million upon FDA marketing approval for FLUMIST(TM). Compensation for achieving additional development and regulatory milestones is included in the agreement terms. The granting of certain rights under the license would trigger additional payments in excess of $140 million to the Company. Consideration for the license also includes a commitment to provide up to $40 million in future financing to the Company from Wyeth, a portion of which is contingent upon regulatory approval of the product, with the remaining amount to come from participation in the Company's future securities offerings. The potential value for the license fees, milestones and financing support that the Company could receive under the collaboration exceeds $400 million. In addition to the payments mentioned above, the Company anticipates that it will earn product revenues from Wyeth, in the form of product transfer payments and royalties, which increase at higher sales levels. The Company will incur expenses to supply and co-promote the product. 5. Credit Facility On June 23, 1999 the Company entered into a $10 million general line of credit. This credit facility is secured by various assets of the Company and requires the maintenance of a minimum balance in the amount of $20 million of cash and investments. As of June 30, 1999, no amounts have been drawn against the credit line. Once drawn, the loan will be repaid over 48 months. 6. Subsequent Event On July 2, 1999 the Company and Medeva Pharma Limited (Medeva Pharma), a subsidiary of Medeva PLC, extended their collaboration covering the manufacture of key components of FLUMIST(TM) through December 2005. The Company paid Medeva Pharma $1 million upon execution of the agreement and will pay an additional $1 million on December 31, 1999. Under the terms of the new agreement, the Company will make specified payments to Medeva for reaching certain technological, regulatory, and employment milestones, supplying the vaccine components of FluMist(TM), and providing the use of facilities. The Company is required to make minimum payments to Medeva Pharma 7 8 totaling 25 million British Pounds Sterling over the term of the agreement. These minimum payments include all of the milestone, supply, and facility use payments described above. In addition, the Company will make payments to Medeva Pharma totaling $20 million over the term of the agreement based on net sales of FLUMIST(TM). 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the Company's Annual Report on Form 10-K in the section entitled "Business Risks." OVERVIEW Since its inception in April 1992, Aviron has devoted substantially all of its resources to its research and development programs. To date, Aviron has not generated any revenues from the sale of products and does not expect to generate any such revenues until 2000 at the earliest. Aviron has incurred cumulative net losses of approximately $138.1 million as of June 30, 1999 and it expects to incur substantial operating losses over at least the next few years. Aviron has financed its operations through proceeds from private placements of preferred stock, two public offerings and a private placement of Common Stock, a private placement of convertible subordinated notes, revenue from its collaborative agreements, equipment lease financings and investment income earned on cash, cash equivalent balances and marketable securities. On June 30, 1998 Aviron submitted its first Product License Application/Establishment License Application (PLA/ELA) to the U.S. Food and Drug Administration (FDA) for its live cold-adapted influenza vaccine, FLUMIST(TM), a trivalent vaccine. On August 31, 1998 the Company announced that it had received notice from the FDA that its submission was not accepted for filing due to lack of data on manufacturing validation and stability. On December 10, 1998, the Company reported on a meeting with the U.S. Food and Drug Administration Center for Biologics Evaluation and Research (CBER) regarding plans for submission of the Company's license applications for FLUMIST(TM). Requirements for completion of the submission include data on manufacturing and assay validation, stability, and clinical equivalence. If the current manufacturing validation exercises are successful, the Company plans to resubmit its application for U.S. licensure for FLUMIST(TM) to prevent influenza and its complications in children and adults in the fall of 1999. The resubmission will be in the form of a Biological License Application (BLA) in accordance with current FDA requirements. The Company expects its research and development expenditures to increase substantially over the next several years as the Company expands its research and development efforts, preclinical testing and clinical trials with respect to certain of its programs, and manufacturing activities principally in regard to FLUMIST(TM). In addition, general, administrative and marketing expenses are expected to continue to increase as the Company expands its operations and prepares for the potential commercial launch of FLUMIST(TM). The Company announced in late 1998 positive preliminary results of a Phase 2 clinical trial for a live intranasal vaccine for Parainfluenza Virus Type 3 (PIV-3) to protect against croup. The Company intends to continue preparation for further clinical trials for PIV-3. The Company also is developing a subunit vaccine for Epstein-Barr Virus (EBV) to protect against infectious mononucleosis in collaboration with SmithKline Beecham Biologicals, S.A. (SmithKline Beecham). A Phase 1 clinical trial of this vaccine is being completed. In addition, the Company expects to begin a clinical trial by early 2000 for a vaccine candidate for Cytomegalovirus (CMV) with the National Institute of Allergy and Infectious Diseases (NIAID) of the National Institute of Health (NIH). Aviron is also using its proprietary Rational Vaccine Design technologies to develop vaccine candidates for diseases caused by Herpes Simplex Virus Type 2 (HSV-2) and Respiratory Syncytial Virus (RSV). Influenza Clinical Trials The Company has conducted and continues to conduct clinical trials to evaluate safety and efficacy of FLUMIST(TM). To date, the Company has tested FLUMIST(TM) in over 11,000 children and adults in completed clinical trials. The Company's clinical trials relate to the safety, efficacy, and effectiveness of the trivalent formulation of its intranasal spray delivery method. The Company enrolled a total of 647 patients in Phase 1 / Phase 2 clinical trials; 92 patients in a challenge efficacy study in healthy adults, in collaboration with the NIH; 1,602 children in Year 1 of the Phase 3 pediatric protective efficacy trial, 1,358 of whom returned for Year 2 and 948 of whom returned for Year 3 of the trial; and 10,379 adults and children in six additional studies and in a healthy working adult effectiveness trial. The Company has received limited data on the efficacy of FluMist(TM) against culture-confirmed influenza from clinical trials in healthy adults. There can be no assurance that data from such trials, in addition to prior trials, will be sufficient to support the FDA approval in 9 10 healthy children or adults. The Company's clinical trials are being designed to support the planned BLA submission in the fall of 1999 seeking approval of FLUMIST(TM) in several target populations. The estimated timing of submission of this BLA and potential commercialization of FLUMIST(TM) are forward-looking statements subject to risks and uncertainties, and there can be no assurance that such filing or such approval will not be delayed materially or that commercialization will occur as a result of certain factors, including those set forth in "Uncertainties Related to Clinical Trials," "-- Uncertainties Related to Early Stage of Development; Technological Uncertainty" in the "Business Risks" section of the Company's 1998 Annual Report on Form 10-K. Phase 3 Clinical Trials in Children The Company has completed a two-year pivotal Phase 3 clinical trial to evaluate one-and two-dose regimens in children. The Company's clinical trial data suggest that a repeat or booster dose may be required in young children without previous exposure to influenza or influenza vaccines. Two doses of the inactivated injectable influenza vaccine are recommended annually for young children receiving influenza prophylaxis for the first time. The Company enrolled 1,602 children at 10 clinical sites in the pivotal Phase 3 clinical trial, of which 1,314 were vaccinated with a second dose 46 to 74 days after initial vaccination. The primary endpoint of the first stage of the study was defined as protection of children from culture-confirmed influenza during naturally occurring epidemics of influenza. In May 1998, data from the first year of this trial of FLUMIST(TM) were published in The New England Journal of Medicine. In the randomized, placebo-controlled study, results show that only 14 of the 1,070 children vaccinated with FLUMIST(TM) experienced culture-confirmed influenza, while 95 of the 532 placebo recipients experienced culture-confirmed influenza. Of the children who received FLUMIST(TM), only one child developed influenza-associated otitis media (ear infection), while 20 of the placebo recipients developed influenza-associated ear infections. Throughout the entire cough, cold and flu season, 1,070 children vaccinated with FLUMIST(TM) experienced 30 percent fewer ear infections with fever than children who received placebo and a 35 percent reduction in related antibiotic use. The children who participated in the first year of this study were invited back to participate for a second year of the trial during the 1997-98 flu season, and they were vaccinated with either a single dose of FLUMIST(TM) or a placebo spray. In September 1998, the results of Year 2 of the Phase 3 efficacy trial of FLUMIST(TM) in children, conducted in collaboration with NIAID, were presented at the Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC). The study showed that FLUMIST(TM) provided 87 percent protection against culture-confirmed influenza overall, 86 percent protection against A/Sydney, an unexpected variant which was the predominant strain of influenza circulating during the 1997-98 flu season, and 100 percent protection against the influenza strains included in the 1997-98 vaccine. Among the 1,358 participants, there were five cases of influenza due to influenza strains included in the vaccine and 66 cases caused by A/Sydney. Two percent of children vaccinated with FLUMIST(TM) (15 out of 917) experienced culture-confirmed influenza, all of which was attributable to the A/Sydney strain, while 13 percent of the placebo recipients (56 out of 441) experienced culture-confirmed influenza. The difference between these two influenza attack rates is used to calculate the overall protection rate of 87 percent. The incidence of pneumonia and other lower respiratory diseases was also reduced in those children vaccinated with FLUMIST(TM), compared to placebo in Year 2 of the study. Eight children in the placebo group developed influenza-related wheezing, bronchitis or pneumonia, all of which were due to the A/Sydney strain. No children who received FLUMIST(TM) experienced such lower respiratory complications. Among the 15 of the 917 children in the FLUMIST(TM) group who did contract influenza, the illness appeared to be milder than in the control group, based on frequency of complications and duration of fever. The Company began a large scale clinical trial in August 1998 to assess the impact of community-wide influenza immunization. The three-year trial, taking place in Temple, Texas, is expected to enroll up to 15,000 children and is funded by a $3 million grant from the NIAID awarded to the Baylor College of Medicine. The trial will evaluate the impact of vaccinating pre-school and school-age children with FluMist(TM) on the incidence of doctor visits for flu-related illness. 10 11 Clinical Trials in Healthy Adults FLUMIST(TM) has been tested in a double-blind, placebo-controlled challenge efficacy study at two Vaccine Treatment Evaluation Units (VTEUs) involving 92 healthy young adults. Subjects were randomized to receive either FLUMIST(TM), the inactivated injectable vaccine or placebo. There were no serious adverse events attributable to FLUMIST(TM) seen in any subjects, and there were no statistically significant differences in the occurrence of any potential reactions assessed in the study between either vaccine or placebo. Following vaccination and subsequent intranasal administration of the wild-type challenge virus, the incidence of laboratory-documented influenza, a prospectively defined primary endpoint of the trial, was 7 percent in subjects vaccinated with FLUMIST(TM), 13 percent in subjects vaccinated with the inactivated injectable influenza vaccine and 45 percent in subjects who received placebo. The reduction in laboratory-documented influenza compared to placebo was statistically significant for FLUMIST(TM) and the inactivated vaccine. These data have not been peer reviewed. No assurance can be given that the conclusions drawn from this analysis will not change as a result of further study by the Company or during the peer review process. The Company conducted a Phase 3 trial in 4,561 healthy working adults to assess the impact of immunization on the frequency of influenza-like illness, utilization of health care services, and absenteeism from work. Results of this study were published in the July 14, 1999 issue of the Journal of the American Medical Association. The double-blind, placebo-controlled study was conducted at 13 clinical sites nationwide during the 1997-98 flu season. The participants, aged 18 to 65, each received one dose of vaccine. FLUMIST(TM) recipients had reduced illness by multiple definitions including days of febrile illness (22.9 percent less), days of severe febrile illness (27.3 percent less) and days of febrile upper respiratory tract illness (24.8 percent less). Reductions in illness-associated absenteeism and health resource use were observed across several illness definitions. For example, those receiving FluMist(TM) missed 28.4 percent fewer work days due to febrile upper respiratory illness and had a 40.9 percent reduction in health care provider visits. In addition, FluMist(TM) recipients experienced a 45.2 percent reduction in days of prescription antibiotic use and 28.0 percent fewer days of OTC medication due to febrile upper respiratory illness. Data from this study are expected to be part of the Company's BLA submission to the FDA. Clinical Trials in High-Risk Adults The Company has completed a clinical trial for safety in 200 elderly high-risk adults for the use of FLUMIST(TM) for co-administration with the inactivated injectable influenza vaccine. As this trial was not designed to generate efficacy data on use of FLUMIST(TM) in high-risk adults, there can be no assurance that data from this trial, combined with data from the Company's other clinical trials and prior trials, will be sufficient to support FDA approval for use of FLUMIST(TM) in high-risk adults even if the FDA were satisfied with the safety data submitted. Early in the fourth quarter of 1998, the Cooperative Studies program of the Department of Veterans Affairs Office of Research and Development began a one-year trial to evaluate the potential additional benefit of co-administration of FLUMIST(TM) with the flu shot, compared to the flu shot alone, in high-risk patients with chronic obstructive pulmonary disease. This study involved over 2,000 volunteers at 20 participating VA Medical Centers in the United States. Results from this trial are not yet available for analysis. Clinical Trials for Manufacturing Consistency and Process In February 1998, the Company reported positive results from a manufacturing consistency lot trial of bulk vaccine manufactured, blended, and filled into sprayers at Medeva Pharma Limited (Medeva Pharma), formerly Evans Medical Limited, a subsidiary of Medeva PLC. The Company conducted a randomized, double-blind, placebo-controlled trial in 500 children, designed to evaluate the safety and immunogenicity of three new manufacturing lots of FLUMIST(TM). The children were vaccinated between April and September 1997. Analysis of patient diary cards and antibody responses following two doses of FLUMIST(TM) showed consistent safety and immunogenicity for the different lots according to the pre-defined endpoints. 11 12 On June 9, 1999, the Company announced completion of a bridging study on FLUMIST(TM) designed to compare FluMist(TM) blended and filled at Aviron's facility at Packaging Coordinators, Inc. (PCI) in Philadelphia, Pennsylvania, to vaccine manufactured with the process used in earlier clinical trials, blended and filled by Medeva Pharma. The study's primary endpoint was to show that FluMist(TM) blended and filled at Aviron's PCI facility had similar immunogenicity for all three 1997-98 influenza strains to the vaccine blended and filled at Medeva Pharma. The secondary endpoint was to show that the two lots of vaccine had similar safety and tolerability profiles. The 225-person trial was conducted in Australia from December 1998 through March 1999. Participants were children aged 12 to 42 months, randomized to receive vaccine blended and filled at one of the two manufacturing sites. The study was conducted in collaboration with CSL Limited, Aviron's Australian marketing partner for FLUMIST(TM). The Company's preliminary analysis indicates that the results appear to meet all of the Company's objectives. Aviron will include data from this clinical study in its licensing application for the vaccine. Partnering Agreements The Company has entered into several development and marketing agreements with respect to its products. In January 1999, the Company announced a worldwide collaboration for the marketing of FLUMIST(TM) with Wyeth Lederle Vaccines, a business unit of Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation (Wyeth), under which Wyeth and the Company will co-promote FLUMIST(TM) in the United States, while Wyeth will have the exclusive right to market the product outside the United States, except for Korea, Australia, New Zealand and certain countries in the South Pacific region. Wyeth and the Company will collaborate on the regulatory, clinical and marketing programs for FLUMIST(TM). In June 1998, the Company announced the signing of an agreement with CSL Limited to develop, sell and distribute FLUMIST(TM) in Australia, New Zealand and certain countries in the South Pacific region. Under the agreement, CSL Limited and Aviron will jointly carry out additional trials in Australia for FLUMIST(TM). Expenses associated with these agreements are expected to increase as the Company continues preclinical testing and clinical trials and prepares for the potential commercial launch of FLUMIST(TM). No assurance can be given, however, that the Company will receive any future payments from CSL Limited or Wyeth. In October 1995, the Company signed an agreement with SmithKline Beecham defining a collaboration on the Company's EBV vaccine technology. Under the terms of this agreement, the Company granted SmithKline Beecham an exclusive license to produce, use and sell non-live EBV vaccines incorporating the Company's technology for prophylactic and therapeutic uses on a worldwide basis, except in Korea. The Company retained U.S. co-marketing rights to a monovalent EBV vaccine formulation which will be supplied by SmithKline Beecham. The Company is entitled to royalties from SmithKline Beecham based on net sales of the non-live EBV vaccine. No assurance can be given, however, that the Company will receive any future payments from SmithKline Beecham or that SmithKline Beecham will not terminate this agreement. In May 1995, the Company entered into a Development and License Agreement with Sang-A Pharm. Co., Ltd. (Sang-A). The Company granted to Sang-A certain exclusive clinical development and marketing rights in Korea for specified products developed by the Company, including vaccines for influenza (cold-adapted and recombinant), PIV, EBV, CMV, HSV-2 and RSV on meeting certain conditions. However, the Company is under no obligation to develop any product. Sang-A also will make payments to the Company upon Sang-A's meeting certain regulatory milestones for each product in Korea and will pay a royalty to the Company on net sales of such products in South and North Korea. No assurance can be given, however, that the Company will receive any future payments from Sang-A or that Sang-A will not terminate its agreement with the Company. In January 1997, Sang-A declared bankruptcy. The Company is unable to predict what, if any, long-term effect the bankruptcy will have on Sang-A and on the Company's agreement with Sang-A. 12 13 Manufacturing Facilities In April 1997, the Company entered into an agreement with Medeva Pharma for the commercial manufacture of FLUMIST(TM) through December 2001. In July 1999, the agreement with Medeva Pharma was revised and extended through December 2005. In October 1997, the Company entered into an agreement with PCI for the blending, filling, labeling and packaging of FLUMIST(TM) in the United States until October 2004. In 1998, Aviron and PCI opened a 34,000-square-foot manufacturing suite in Philadelphia, Pennsylvania at PCI's site, in which PCI blended, filled and packaged doses of FLUMIST(TM) for use in 1998 - 99 clinical trials. If regulatory approval is received, the PCI facility is expected to be used to blend, fill, label, package and store FLUMIST(TM). The agreements with Medeva Pharma and PCI have required the Company to fund the construction of facilities, improvements, and equipment and will continue to require the Company to incur expenses for the duration of the agreements for facility space, utilities and insurance. In February 1999, the Company announced that it has leased a 69,000 square-foot building in Santa Clara, California. The facility will provide additional laboratory, pilot plant, manufacturing and office space to accommodate growth. This additional space will require the commitment of significant additional funds during 1999, 2000, and 2001 for renovation, equipment and furnishings. In the event of a better than expected market acceptance, the Company may be capacity constrained in its supply of FLUMIST(TM). In order to secure future production capacity, the Company may extend and expand its existing arrangements, collaborate with other third parties, or expand its own manufacturing facilities. Using an alternative supplier or expanding its proprietary facility would require a substantial amount of funds and additional clinical trials and testing. There can be no assurance that an alternative source of supply will be established on a timely basis, or that the Company will have or be able to obtain funds sufficient for building or equipping such additional facilities. The Company is currently evaluating the costs and benefits of developing internal manufacturing capabilities or contracting for expanded or alternative sources of supply from third-party manufacturers for products other than FLUMIST(TM). Research Grants In July 1998, the Company received notice from the NIAID of a Small Business Innovation Research (SBIR) grant to support development of its live attenuated vaccine for the prevention of disease caused by CMV. The $750,000 grant is the second that Aviron has received for research on CMV. In September 1998, the total grant amount was increased by an additional $200,000 to $950,000. A portion of the award has been used to produce recombinant CMV vaccine candidates for human testing. The remainder of the award will be used to determine the safety and immunogenicity of these vaccine candidates in a Phase 1 clinical trial in collaboration with the NIAID Vaccine Treatment and Evaluation Unit network. No assurance can be given, however, that the Company will receive any future grants to support its research or that such research will result in commercially viable products. Business Risks The Company's business is subject to significant risks, including but not limited to the risks inherent in its research and development efforts, including preclinical testing and clinical trials; uncertainties associated both with obtaining and enforcing its patents and with the patent rights of others; the lengthy, expensive and uncertain process of seeking regulatory approvals; uncertainties regarding government reforms and product pricing and reimbursement levels; technological change and competition; manufacturing uncertainties and dependence on third parties. Even if the Company's product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the products will be found unsafe or ineffective during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to 13 14 manufacture on a commercial scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 AND 1998 Revenues The Company earned $2.9 million in revenue for the three months ended June 30, 1999, compared to $134,000 for the three months ended June 30, 1998. The 1999 revenues were comprised principally of $2.8 million in expense reimbursement from Wyeth under the FLUMIST(TM) collaboration agreement, combined with other revenues from other contracts. The 1998 revenue came from both a grant payment from the NIH for research on the Company's CMV vaccine and from contract services rendered to other biotechnology companies. Operating Expenses Research and development expenses increased to $14.4 million in the three months ended June 30, 1999 from $10.9 million for the three months ended June 30, 1998. The increase was due primarily to an increase in development activities, depreciation, documentation, validation, and other expenses associated with the commercial scale-up of the manufacturing facilities associated with FLUMIST(TM). The Company expects these expenses to continue to increase during the remainder of 1999 as development and manufacturing activities expand in preparation for potential commercialization of FLUMIST(TM). These expenses are expected to increase in the future in continued support of these activities. General, administrative and marketing expenses increased to $3.2 million in the three months ended June 30, 1999 from $2.6 million for the three months ended June 30, 1998. This increase was due to additional staffing, legal and other infrastructure costs necessary to support the development of FLUMIST(TM) and other products. These expenses are also expected to increase in the future in continued support of these activities. Net Interest Income (Expense) Net interest income decreased to a net expense of $551,000 in the three months ended June 30, 1999, as compared to net interest income of $229,000 for the three months ended June 30, 1998. The decrease in net interest is primarily due to the reduced balances of cash, cash equivalents, and investment balances as funds have been used to meet net operating expenses and capital requirements. SIX MONTHS ENDED JUNE 30, 1999 AND 1998 Revenues The Company earned $18.5 million in revenues for the six months ended June 30, 1999, compared to $387,000 for the six months ended June 30, 1998. The 1999 revenues are comprised primarily of amounts earned from Wyeth under the FLUMIST(TM) collaboration agreement, which included a non-refundable initial payment in the amount of $15.0 million and $2.8 million in expense reimbursements, combined with other revenues from other contracts and research grants. The 1998 revenues were from a grant payment from the NIH for research on the Company's CMV vaccine and from payments received for services rendered to other biotechnology companies. Operating Expenses Research and development expenses increased to $28.4 million in the six months ended June 30, 1999, from $20.7 million for the six months ended June 30, 1998. The increase was due primarily to an increase in development activities, depreciation, documentation, validation, and other expenses associated with the commercial scale-up of the manufacturing facilities associated with FLUMIST(TM). The Company expects these expenses to increase in 1999 as development and manufacturing activities expand in preparation for potential commercialization of FLUMIST(TM). These expenses are expected to increase in the future in continued support of these activities. 14 15 General, administrative and marketing expenses increased to $5.8 million in the six months ended June 30, 1999, from $4.7 million for the six months ended June 30, 1998. This increase was due to additional staffing, legal and other infrastructure costs necessary to support the development of FLUMIST(TM) and other products. These expenses are expected to increase in the future in continued support of these activities. Net Interest Income (Expense) Net interest decreased to a net expense of $914,000 for the six months ended June 30, 1999, as compared to net interest income of $1.1 million for the six months ended June 30, 1998. The decrease in net interest is due to a combination of increased interest expense associated with the issuance of the Company's convertible debt on March 30, 1998 and decreased interest income associated with a reduction in the average balances of cash, cash equivalents, and investment balances as funds have been used to meet net operating expenses and capital requirements. LIQUIDITY AND CAPITAL RESOURCES The Company had cash, cash equivalents and marketable securities at June 30, 1999 of approximately $71.1 million. In order to preserve principal and maintain liquidity, the Company's funds are invested in United States Treasury and agency obligations, highly rated corporate obligations and other liquid investments. The Company has financed its operations since inception primarily through private placements of Preferred Stock from 1992 to 1995, an initial public offering of Common Stock in November 1996, a private sale of Common Stock in March 1997, a second public offering of Common Stock in August 1997, and a private placement of convertible subordinated notes in March 1998. Through June 30, 1999, the Company had raised approximately $236.3 million from such activities net of offering expenses. In June 1999, the Company entered into a $10 million general line of credit. (See Note 5 to the financial statements.) Cash used in operations was $16.6 million and $23.9 million for the first six months of 1999 and 1998, respectively. The decrease in cash used in operating activities was primarily due to the receipt of the $15.0 million payment from Wyeth, which was partially offset by increases in operating expenses. The Company expects expenditures for research and development, clinical trials and general, administrative and marketing expenses to continue to increase in 1999 as the Company develops its products, expands its clinical trials and prepares for the potential commercial launch of FLUMIST(TM). Cash expended for capital additions and to repay lease financing arrangements amounted to approximately $7.1 million and $9.4 million for the six months ended June 30 of 1999 and 1998, respectively. Capital expenditures decreased in 1999 primarily due to a decrease in the level of expenditures for facilities and equipment at PCI. Capital expenditures are expected to increase during the second half of 1999 and beyond, primarily in connection with the Santa Clara facility. The Company anticipates that its existing cash, cash equivalents and short-term investments, revenues and other advances available under existing collaborations, and borrowings under its existing credit facilities will enable it to maintain its current and planned operations into 2000. The Company's future cash requirements beyond 1999 will depend on numerous factors, including the time and costs involved in obtaining regulatory approvals; the ability to successfully launch FLUMIST(TM) in the United States; continued scientific progress in the research and development of the Company's technology and vaccine programs; the size and complexity of these programs; the ability of the Company to establish and maintain collaborative arrangements; the timing of receipt of milestone payments and loans, if any, under such collaborative agreements; progress with preclinical testing and clinical trials; the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; the cost of constructing or expanding any or all of its manufacturing facilities, and product commercialization activities. In addition, there can be no assurance that, should the Company require outside funding through additional debt or equity financings, such funds will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or to obtain funds through collaborative agreements with others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself, which could materially adversely affect the Company's business, financial condition and results of operations. 15 16 IMPACT OF "YEAR 2000" Many older computer software programs refer to years in terms of their final two digits only. Such programs may interpret the year 2000 to mean the year 1900 instead, the so-called "Year 2000" problem (Y2K). If not corrected, those programs could cause date-related failures. The Company has completed its assessment of Y2K related problems. Four potential areas of exposure --(a) internal information systems, (b) facility support systems, (c) scientific equipment, and (d) the readiness of significant third parties with whom the Company has material business relationships -- have been evaluated. The results of the assessment and the status of remedial action and testing are as indicated below. (a) Internal Information Systems The Company uses a number of computers and computer programs across its entire operations. An inventory has been performed of computer equipment and computer programs, to determine if Y2K problems exist which may affect the Company's internal information processes. - - The Company has completed the process of upgrading its older financial and accounting programs to Y2K compliant systems. These systems will be tested during the third quarter of 1999 to verify Y2K compliance. - - During 1998, the Company also completed the installation of internal systems for the accumulation and statistical evaluation of clinical trial data. These systems will be tested during the third quarter of 1999 to verify Y2K compliance. - - To date, no other significant internal information systems have been identified as non-Y2K compliant. - - Procedures have been enacted to verify the Y2K compliance of new systems. (b) Scientific Equipment All major pieces of scientific equipment have been inventoried. As part of its assessment, the Company made inquiries of its internal staff and third-party vendors, including its suppliers of scientific equipment, to determine if Y2K problems exist which may affect the Company's research and development operations. - - Only one piece of laboratory equipment was found to require remediation in the form of an inexpensive software upgrade. - - To date, no other significant pieces of scientific equipment have been identified as non-Y2K compliant. - - Procedures have been enacted to verify the Y2K compliance of new scientific equipment. (c) Facility Support Systems The Company has made inquiries of its internal staff and third-party vendors of utilities, communication and other facility support systems at the Mountain View and Santa Clara facilities, to determine if Y2K problems exist which may affect communications, administrative or support functions. - - Remediation is necessary for certain of the communication and process systems and for certain of the building control, assess and alarm systems. Hardware replacements and software upgrades are expected to be completed by the end of the third quarter of 1999 at a cost of less than $20,000. These systems will be tested to verify Y2K compliance. Third Parties with Major Business Relationships The Company currently has no products available for commercial sale, and does not anticipate FDA clearance for its lead product, FLUMIST(TM), until mid-2000 at the earliest. In preparation for the potential commercial launch of FLUMIST(TM), the Company has contacted its third party manufacturers and its marketing and distribution partners to determine their level of Y2K readiness. All of these parties have advised us that they have a Y2K plan in place and that remediation steps, if any, will be completed prior to December 1999. It is not possible for the Company to undertake an independent verification and testing of the readiness of these parties for all potential Y2K issues. The failure of any of these parties to successfully identify and remedy the impact of Y2K upon their businesses could 16 17 have a material adverse effect on the Company's business, including delaying or adversely affecting the potential commercial launch of FLUMIST(TM). The Company's remediation steps are expected to be completed during the third quarter of 1999. External and internal costs specifically associated with modifying internal use software for Y2K compliance are expensed as incurred. To this point, these costs have not been material, and the Company does not expect such costs to be material in the future. There can be no assurance, however, that the Company's assessment of Y2K's potential impact will not change as we complete our assessment, or that Y2K will not ultimately cause a material disruption in the business of the Company. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes to interest rates and foreign currency exchange rates. The Company's exposure to such market risk has not changed substantially since December 31, 1998 and reference is made to the more detailed disclosures of market risk included in the Company's Annual Report on Form 10K for such period. Interest Rates -- The Company's investments and interest income are sensitive to changes in the general level of interest rates, primarily U.S. interest rates. In this regard, changes in U.S. interest rates primarily affect the market value of the Company's cash equivalents and investments. To mitigate market risk, the Company places its cash in investments that meet high credit standards, as specified in the Company's investment policy guidelines, and staggers the maturity of the investments to meet expected cash demands. The policy also limits the amount of credit exposure to any one issue, issuer, or type of investment and does not permit derivative financial instruments in its investment portfolio. As a result, the Company does not expect any material loss with respect to its investment portfolio. Foreign Currency Exchange Rates -- The Company pays for the costs of manufacturing and development activities, equipment, and facilities modifications at Medeva Pharma, which is located in the United Kingdom (U.K.) in British Pounds Sterling. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the U.K. The Company is exposed to changes in exchange rates in the United Kingdom. When the U.S. dollar strengthens against the British Pounds Sterling, the U.S. dollar value of British Pounds Sterling-based expenses decreases; when the U.S. dollar weakens, the U.S. dollar value of British Pounds Sterling-based expenses increases. Accordingly, changes in exchange rates, and in particular a weakening of the U.S. dollar, may adversely affect the Company's financial position as expressed in U.S. dollars. 18 19 AVIRON PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On June 30, 1999 the European Patent Office held oral proceedings in an Opposition filed by American Cyanamid against Aviron's granted European Patent No. 0490972 relating to methods and compositions of recombinant negative-strand RNA viruses. At the oral proceedings, the Opposition Division of the European Patent Office informed the Company of its intent to issue a written opinion which upholds claims limited to influenza and denies claims directed to non-segmented negative-strand RNA viruses. This decision will not affect Aviron's FLUMIST(TM) cold-adapted influenza product. Aviron intends to appeal the decision insofar as it relates to the denied claims; the appeal will request the Technical Board of Appeals to reverse the decision with respect to the denial of the claims directed to non-segmented RNA viruses. There can be no assurance that Aviron will be successful in obtaining claims directed to non-segmented RNA viruses as a result of the appeal. If Aviron does not succeed in the appeal of the claims directed to non-segmented RNA viruses it could negatively impact Aviron's ability to exclude others from commercializing an RSV vaccine based on genetically engineered candidates in Europe. On July 8, 1999 a lawsuit entitled Joany Chou v. The University of Chicago, ARCH Development Corp., Bernard Roizman and Aviron Company, was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division by an individual formerly associated with the University of Chicago. The complaint appears to assert claims of inventorship, unjust enrichment, fraud, conversion, breach of fiduciary duty, breach of contract and breach of implied contract. All of the claims appear to relate to patents and patent applications for HSV, and none appear to relate to Aviron's FLUMIST(TM) cold-adapted influenza product or technology, or any other pipeline products in research or development. Dr. Roizman is a founder and director of Aviron and a member of its Scientific Advisory Board. Aviron believes the allegations of the lawsuit are unfounded and intends to vigorously defend itself in the matter. There can be no assurance that the Company will prevail in the defense of this lawsuit. ITEM 2. CHANGES IN SECURITIES. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Stockholders (Annual Meeting) was held on June 3, 1999. At the Annual Meeting, the stockholders of the registrant (i) elected the two people listed below to serve as directors to hold office until the 2002 Annual Meeting of Stockholders and until their successors are elected; (ii) approved an amendment to the Company's 1996 Equity Incentive Plan; and (iii) ratified the selection of Ernst & Young LLP as the Registrant's Independent Accountants for the fiscal year ending December 31, 1999. The Company had 15,768,680 shares of Common Stock outstanding as of April 15, 1999, the record date for the Annual Meeting. At the Annual Meeting, holders of a total of 10,778,993 shares of Common Stock were present in person or represented by Proxy. The following sets forth information regarding the results of the voting at the Annual Meeting. 19 20 PROPOSAL 1 -- ELECTION OF DIRECTORS Director PAUL H. KLINGENSTEIN Votes in Favor ....................... 10,728,367 Votes Against ........................ 50,626
Director JANE E. SHAW, Ph.D. Votes in Favor ....................... 10,727,667 Votes Against ........................ 51,326
PROPOSAL 2 -- AMENDMENT TO THE COMPANY'S 1996 EQUITY INCENTIVE PLAN Votes in Favor ....................... 8,345,026 Votes Against ........................ 2,385,911 Abstentions .......................... 48,056
PROPOSAL 3 -- RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS Votes in Favor ....................... 10,734,910 Votes Against ........................ 12,750 Abstentions .......................... 31,333
ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
ITEM DESCRIPTION ---- ----------- 10.25 Real Property Lease by and between the Registrant and Spieker Properties, L.P. dated February 5, 1999 10.26++ First Amendment to the Influenza Vaccine Collaboration and License and Distribution Agreement by and between the Registrant and CSL Limited, A.C.N. dated June 7, 1999 10.27 Loan and Security Agreement by and between the Registrant and Transamerica Business Credit Corporation dated June 23, 1999 27.1 Financial Data Schedules.
---------- ++ Confidential treatment has been requested for portions of this exhibit. (b) REPORTS ON FORM 8-K None 20 21 AVIRON SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. AVIRON Date: August 13, 1999 By: /s/ J. Leighton Read, M.D. --------------------- ------------------------------- J. Leighton Read, M.D. Chairman and Chief Executive Officer Date: August 13, 1999 By: /s/ Fred Kurland --------------------- ------------------------------- Fred Kurland Senior Vice President and Chief Financial Officer 21 22 EXHIBIT INDEX
NO. OF EXHIBIT DESCRIPTION - -------------- ----------- 10.25 Real Property Lease by and between the Registrant and Spieker Properties, L.P. dated February 5, 1999 10.26++ First Amendment to the Influenza Vaccine Collaboration and License and Distribution Agreement by and between the Registrant and CSL Limited, A.C.N. dated June 7, 1999 10.27 Loan and Security Agreement by and between the Registrant and Transamerica Business Credit Corporation dated June 23, 1999 27.1 Financial Data Schedules.
- ---------- ++ Confidential treatment has been requested for portions of this exhibit. 22 EX-10.25 2 REAL PROPERTY LEASE DATED FEBRUARY 5, 1999 1 Exhibit 10.25 BASIC LEASE INFORMATION INDUSTRIAL NET LEASE DATE: (same as date in first paragraph of Lease) February 5, 1999 TENANT: Aviron, a Delaware corporation TENANT'S NOTICE ADDRESS: 297 North Bernardo Ave., Mountain View, California 94043 TENANT'S BILLING ADDRESS: 297 North Bernardo Ave., Mountain View, California 94043 TENANT CONTACT: Chief Financial Officer PHONE NUMBER: (650) 919-6500 FAX NUMBER: (650) 919-6612 LANDLORD: Spieker Properties, L.P., a California limited partnership LANDLORD'S NOTICE ADDRESS: 2180 Sand Hill Road, Suite 100, Menlo Park, California 94025 LANDLORD'S REMITTANCE ADDRESS: Spieker Properties, P.O. Box 45587, Department 10421, San Francisco, California 94145-0587 Lease ID No. AVIR--- 01 Premises: 3.82 acres of improved land commonly known as 3055 Patrick Henry Drive, Santa Clara, California, together with the Building (defined below) Building: One office/research and development building consisting of approximately 68,987 square feet, together with that certain 5,000 square foot addition described on Schedule 2 attached hereto upon completion by Tenant (the "Additional Space") Permitted Use: Subject to compliance with all laws, office, research and development, manufacturing, storage and related legal uses subject to Landlord's reasonable approval Parking Density: Tenant shall be entitled to the non-exclusive use of all parking spaces at the Premises Scheduled Term Commencement Date: February 5, 1999 Scheduled Length of Term: Nineteen (19) years, 360 days Scheduled Term Expiration Date: January 31, 2019 Base Rent: Base Rent shall commence on the Term Commencement Date and shall be paid pursuant to Schedule 1 attached hereto and made a part hereof. Estimated First Year Operating Expenses: $8,315 per month Security Deposit: $362,182 Tenant's Proportionate Share: 100% 2 Of Premises: 100% The foregoing Basic Lease Information is incorporated into and made a part of this Lease. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Basic Lease Information and the Lease, the latter shall control. LANDLORD TENANT Spieker Properties, L.P., Aviron, a California limited partnership a Delaware corporation By: Spieker Properties, Inc., a Maryland corporation, its general partner By: /s/ [Signature Illegible] By: /s/ Fred Kurland -------------------------------- --------------------------- Its: Regional Senior Vice President Its: Senior Vice President and -------------------------------- Chief Financial Officer -------------------------- II 3 TABLE OF CONTENTS
PAGE ---- 1. PREMISES......................................................................1 2. POSSESSION AND LEASE COMMENCEMENT.............................................1 3. TERM..........................................................................1 4. USE...........................................................................2 A. General................................................................2 B. Limitations............................................................2 C. Compliance with Regulations............................................2 D. Hazardous Materials....................................................2 5. RULES AND REGULATIONS.........................................................4 6. RENT..........................................................................4 A. Base Rent..............................................................4 B. Additional Rent........................................................4 7. OPERATING EXPENSES............................................................4 A. Operating Expenses.....................................................4 (1) Taxes...........................................................5 (2) Insurance.......................................................5 (3) Common Area Maintenance.........................................5 B. Payment of Estimated Operating Expenses................................7 C. Computation of Operating Expense Adjustment............................7 D. Net Lease..............................................................7 E. Tenant Audit...........................................................7 8. INSURANCE AND INDEMNIFICATION.................................................8 A. Landlord's Insurance...................................................8 (1) Property Insurance..............................................8 (2) Optional Insurance..............................................8 B. Tenant's Insurance.....................................................8 (1) Property Insurance..............................................8 (2) Liability Insurance.............................................8 (3) Workers' Compensation and Employers' Liability Insurance........9 (4) Commercial Auto Liability Insurance.............................9 (5) General Insurance Requirements..................................9 C. Indemnification........................................................9 9. WAIVER OF SUBROGATION........................................................10 10. LANDLORD'S REPAIRS AND MAINTENANCE...........................................10 11. TENANT'S REPAIRS AND MAINTENANCE.............................................10 12. ALTERATIONS..................................................................11 13. SIGNS........................................................................13 14. INSPECTION/POSTING NOTICES...................................................13 15. SERVICES AND UTILITIES.......................................................13 16. SUBORDINATION................................................................14 17. FINANCIAL STATEMENTS.........................................................14 18. ESTOPPEL CERTIFICATE.........................................................15
I 4 19. SECURITY DEPOSIT.............................................................15 20. LIMITATION OF TENANT'S REMEDIES..............................................15 21. ASSIGNMENT AND SUBLETTING....................................................16 A. (1) General...........................................................16 (2)Conditions of Landlord's Consent...................................16 (3)...................................................................16 B. Bonus Rent............................................................17 C. Corporation...........................................................17 D. Unincorporated Entity.................................................17 E. Liability.............................................................18 22. AUTHORITY....................................................................18 23. CONDEMNATION.................................................................18 A. Condemnation and Rights to Terminate..................................18 B. Award.................................................................18 C. Waiver of CCP Section 1265.130........................................19 24. CASUALTY DAMAGE..............................................................19 A. General...............................................................19 B. Rebuild and Repair....................................................19 C. Tenant's Fault........................................................19 D. Insurance Proceeds....................................................19 E. Waiver................................................................20 F. Tenant's Personal Property............................................20 25. HOLDING OVER.................................................................20 26. DEFAULT......................................................................20 A. Events of Default.....................................................20 (1) Abandonment....................................................20 (2) Nonpayment of Rent.............................................20 (3) Other Obligations..............................................20 (4) General Assignment.............................................21 (5) Bankruptcy.....................................................21 (6) Receivership...................................................21 (7) Attachment.....................................................21 (8) Insolvency.....................................................21 B. Remedies Upon Default.................................................21 (1) Termination....................................................21 (2) Continuation After Default.....................................21 (3) Increased Security Deposit.....................................21 C. Damages After Default.................................................22 D. Late Charge...........................................................22 E. Interest..............................................................22 F. Remedies Cumulative...................................................22 27. LIENS........................................................................22 28. [Intentionally Deleted]......................................................23 29. TRANSFERS BY LANDLORD........................................................23 30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS..............................23
II 5 31. WAIVER.......................................................................23 32. NOTICES......................................................................24 A. Rent..................................................................24 B. Other.................................................................24 C. Required Notices......................................................24 33. ATTORNEYS' FEES..............................................................24 34. SUCCESSORS AND ASSIGNS.......................................................24 35. FORCE MAJEURE................................................................24 36. SURRENDER OF PREMISES........................................................24 37. MISCELLANEOUS................................................................25 A. General...............................................................25 B. Time..................................................................25 C. Choice of Law.........................................................25 D. Entire Agreement......................................................25 E. Modification..........................................................25 F. Severability..........................................................25 G. Recordation...........................................................25 H. Examination of Lease..................................................25 I. Accord and Satisfaction...............................................25 J. Easements.............................................................25 K. Drafting and Determination Presumption................................26 L. Exhibits..............................................................26 M. No Light, Air or View Easement........................................26 N. No Third Party Benefit................................................26 O. Quiet Enjoyment.......................................................26 P. Counterparts..........................................................26 Q. Multiple Parties......................................................26 R. Prorations............................................................26 38. ADDITIONAL PROVISIONS........................................................26 A. Option to Extend......................................................26 B. Letter of Credit......................................................29 1. Delivery of Letter of Credit.................................................29 2. Replacement of Letter of Credit..............................................29 3. Landlord's Right to Draw on Letter of Credit.................................29 4. LOC Security Deposit.........................................................29 5. Restoration of Letter of Credit and LOC Security Deposit.....................29 C. Option to Purchase....................................................29
Exhibits: Exhibit A...............................Site Plan, Property Description III 6 LEASE THIS LEASE is made as of the 5th day of February, 1999, by and between Spieker Properties, L.P., a California limited partnership (hereinafter called "LANDLORD"), and Aviron, a Delaware corporation (hereinafter called "TENANT"). 1. PREMISES Landlord leases to Tenant and Tenant leases from Landlord, upon the terms and conditions hereinafter set forth, those premises (the "PREMISES") outlined in red on EXHIBIT A, described in the attached legal description and in the Basic Lease Information. The Premises shall consist of the building (the "BUILDING") described in the Basic Lease Information. The common areas shall consist of the public areas surrounding the building which shall constitute the landscaping, walkways, driveways and parking lot and Tenant shall have the exclusive use of the common areas. 2. POSSESSION AND LEASE COMMENCEMENT Term commencement date ("TERM COMMENCEMENT DATE") shall be February 5, 1999. If for any reason Landlord cannot deliver possession of the Premises to Tenant on the scheduled Term Commencement Date, Landlord shall not be subject to any liability therefor, nor shall Landlord be in default hereunder nor shall such failure affect the validity of this Lease, and Tenant agrees to accept possession of the Premises at such time as Landlord is able to deliver the same, which date shall then be deemed the Term Commencement Date. Tenant shall not be liable for any Rent (defined below) for any period prior to the Term Commencement Date. Tenant acknowledges that Tenant has inspected and accepts the Premises in their present condition, broom clean, "as is," and as suitable for, the Permitted Use (as defined below), and for Tenant's intended operations in the Premises, subject to remediation required for Regulatory Approval (as defined below). Subject to remediation required for Regulatory Approval, Tenant agrees that the Premises and other improvements are in good and satisfactory condition as of when possession was taken. Tenant further acknowledges that no representations as to the condition or repair of the Premises nor promises to alter, remodel or improve the Premises have been made by Landlord or any agents of Landlord unless such are expressly set forth in this Lease. Upon Landlord's request, Tenant shall promptly execute and return to Landlord a true and correct "Start-Up Letter" in which Tenant shall agree, among other things, to acceptance of the Premises, in accordance with the terms of this Lease, but Tenant's failure or refusal to do so shall not negate Tenant's acceptance of the Premises or affect determination of the Term Commencement Date. Tenant acknowledges that Landlord is in the process of obtaining regulatory approvals required for the closure or cessation of the operations of the prior tenant, Celtrix Pharmaceuticals (the "Regulatory Approval"). As an accommodation to Tenant, Landlord will deliver the Premises to Tenant prior to obtaining Regulatory Approval upon the following terms and conditions: Tenant shall cooperate with Landlord and Celtrix to allow Landlord and Celtrix to comply with all terms and conditions of the Regulatory Approval imposed by Celtrix Pharmaceuticals, Landlord, the City and County of Santa Clara and any and all agencies having jurisdiction over such Regulatory Approval process, including, but not limited to, the California Department of Health Services and shall cooperate with such parties as reasonably requested. Nothing herein shall entitle Tenant to terminate this Lease as a result of Landlord's failure to obtain Regulatory Approval. Notwithstanding anything contained in this Lease to the contrary, Landlord shall have no obligation to obtain regulatory approvals for the closure or cessation of the operations of Comparative Biosciences, a proposed subtenant of the Premises ("Comparative"). 3. TERM The term of this Lease (the "TERM") shall commence on the Term Commencement Date and continue in full force and effect for the number of months specified as the Length of Term in the Basic Lease Information or until this Lease is terminated as otherwise provided herein. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of months of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date. 7 4. USE A. GENERAL. Tenant shall use the Premises for the permitted use specified in the Basic Lease Information ("PERMITTED USE") and for no other use or purpose. Tenant shall control Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees and subtenants (collectively, "TENANT'S PARTIES") in such a manner that Tenant and Tenant's Parties cumulatively do not exceed the parking density specified in the Basic Lease Information (the "PARKING DENSITY") at any time. So long as Tenant is occupying the Premises, Tenant and Tenant's Parties shall have the exclusive right to use the parking areas, driveways and other common areas of the Premises, subject to the terms of this Lease and such rules and regulations as Landlord may from time to time prescribe. Landlord reserves the right, without notice or liability to Tenant, and without the same constituting an actual or constructive eviction, to alter or modify the common areas from time to time, including the location and configuration thereof, and the amenities and facilities which Landlord may determine to provide from time to time; provided, however, in the event Landlord alters or modifies the common areas, amenities and/or facilities, Landlord shall use reasonable efforts to avoid materially interfering with Tenant's Permitted Use of the Premises. B. LIMITATIONS. Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises or from any portion of the common areas as a result of Tenant's or any Tenant's Party's use thereof, nor take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants or occupants of areas near the Premises, or interfere with their use of their respective premises or common areas. Tenant shall not use or allow the Premises to be used for any improper or unlawful purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings which could endanger the structure, or place any harmful substances in the drainage system of the Premises. No waste, materials or refuse shall be dumped upon or permitted to remain outside the Premises except in trash containers placed inside exterior enclosures designated for that purpose. C. COMPLIANCE WITH REGULATIONS. By entering the Premises, Tenant accepts the Premises in the condition existing as of the date of such entry. Tenant shall at its sole cost and expense strictly comply with all existing or future applicable municipal, state and federal and other governmental statutes, rules, requirements, regulations, laws and ordinances, including zoning ordinances and regulations, and covenants, easements and restrictions of record governing and relating to the use, occupancy or possession of the Premises, to Tenant's use of the common areas, or to the use, storage, generation or disposal of Hazardous Materials (hereinafter defined) (collectively "REGULATIONS"), provided, however, that Tenant shall not be responsible in any way for obtaining the Regulatory Approval. Notwithstanding the foregoing, except if such preexisting condition is aggravated or exacerbated by the willful affirmative act of Tenant or Tenant's Parties, Tenant shall not be liable for any physical condition of the Premises that exists prior to the date of execution of this Lease; provided, however, Tenant acknowledges and agrees that it will repair water damage in the floor of the Building due to water seepage and replace the existing roof. Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant's use of the Premises. Tenant shall at its sole cost and expense promptly comply with the requirements of any board of fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, under or about the Premises or bring or keep anything which will in any way increase the rate of any insurance upon the Premises or upon any contents therein or cause a cancellation of said insurance or otherwise adversely affect said insurance in any manner. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any loss, cost, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any Regulation. Tenant's obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall include, but not be limited to, hazardous, toxic and radioactive materials and those substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or other similar designations in any Regulation. (1) Tenant shall not cause, or allow any of Tenant's Parties to cause, any Hazardous Materials to be handled, used, generated, stored, released or disposed of in, on, under or 2 8 about the Premises or surrounding land or environment in violation of any Regulations. In the event Tenant elects to introduce any Hazardous Materials onto the Premises, Tenant shall file a Hazardous Materials Plan with the appropriate agency in compliance with any Regulation and upon such filing, Tenant shall provide notice and a copy of such filing to Landlord and Landlord's insurance administrator at the address set forth in the Basic Lease Information. Notwithstanding the foregoing, Tenant may handle, store, use and dispose of products containing small quantities of Hazardous Materials for "general office purposes" (such as toner for copiers) to the extent customary and necessary for the Permitted Use of the Premises; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises or surrounding land or environment. Tenant shall immediately notify Landlord in writing of any Hazardous Materials' contamination of any portion of the Premises of which Tenant becomes aware, whether or not caused by Tenant. Landlord shall have the right at all reasonable times to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions, the costs of all such inspections, tests and investigations to be borne by Tenant if and only if Tenant is required to indemnify Landlord as hereinafter provided. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses (including attorneys' and consultants' fees and court costs), demands, causes of action, or judgments directly or indirectly arising out of or related to the use, generation, storage, release, or disposal of Hazardous Materials by Tenant or any of Tenant's Parties in, on, under or about the Premises or surrounding land or environment, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, damage to the environment or natural resources occurring on or off the Premises, losses attributable to diminution in value or adverse effects on marketability, the cost of any investigation, monitoring, government oversight, repair, removal, remediation, restoration, abatement, and disposal, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the expiration or earlier termination of this Lease. Neither the consent by Landlord to the use, generation, storage, release or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligation of indemnification pursuant to this Paragraph 4.D. Landlord shall indemnify, defend (by counsel reasonably acceptable to Tenant), protect and hold Tenant harmless from and against any and all claims, liabilities, losses, costs, damages, injuries or expenses (including attorneys' and consultants' fees and court costs), demands, causes of action, or judgments arising out of any Hazardous Materials contamination existing prior to the date of this Lease, excluding, however, any preexisting Hazardous Materials contamination which is aggravated or exacerbated by a willful affirmative act of Tenant or Tenant's Parties, to the extent of such aggravation or exacerbation, in such case Tenant shall be obligated to indemnify Landlord pursuant to this Section 4.D to the extent of such aggravation or exacerbation, which indemnity shall include, without limitation, damages for personal or bodily injury, property damage, the cost of any investigation, monitoring, government oversight, repair, removal, remediation, restoration, abatement, and disposal, and the preparation of any closure or other required plans. Tenant's and Landlord's obligations pursuant to the foregoing indemnity shall survive the expiration or earlier termination of this Lease. (2) Notwithstanding the provisions of sub-paragraph (1) above, Tenant may handle, store, and use Hazardous Materials, limited to the types, amounts, and use identified in EXHIBIT B attached hereto and made a part hereof. Tenant hereby certifies to Landlord that the information provided by Tenant pursuant to this Paragraph and on such Hazardous Materials Exhibit is true, correct, and complete. Tenant covenants to comply with the additional use restrictions, if any, shown on the attached Hazardous Materials Exhibit. Without limiting Landlord's prior approval rights hereunder, Tenant shall update such Hazardous Materials Exhibit prior to bringing any new Hazardous Materials or to the Premises or prior to substantially increasing the listed quantities. Tenant's business and operations, and more especially its handling, storage, use and disposal of Hazardous Materials in, on, under or about the Premises shall at all times comply with all Regulations pertaining to Hazardous Materials. Tenant shall secure and abide by all permits necessary for Tenant's operations at the Premises. Tenant shall give or post all 3 9 notices required by all applicable Regulations pertaining to Hazardous Materials. Tenant shall immediately notify Landlord in writing of any Hazardous Materials' contamination of any portion of the Premises of which Tenant becomes aware, whether or not caused by Tenant. If Tenant shall at any time fail to comply with this Paragraph, Tenant shall immediately notify Landlord in writing of such noncompliance. (3) Any increase in the premiums for necessary insurance on the Property which arises from Tenant's use, placement and/or storage of Hazardous Materials at or on the Premises shall be solely at Tenant's expense. Tenant shall procure and maintain at its sole expense such additional insurance as may be necessary to comply with any requirement of any Federal, State or local governmental agency with jurisdiction over the Premises. 5. RULES AND REGULATIONS Tenant shall faithfully observe and comply with any rules and regulations and any modifications thereto which Landlord may from time to time reasonably prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises, provided that such rules and regulations shall not materially interfere with Tenant's Permitted Use and in the event of any conflict between the rules and regulations and this Lease, the terms of the Lease shall control. Tenant shall cause Tenant's Parties to comply with such rules and regulations. 6. RENT A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive, without notice or demand throughout the Term, Base Rent as specified in the Basic Lease Information, payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever except for rent abatement specifically provided for in this Lease,, at the Remittance Address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. Base Rent for the first full month of the Term shall be paid by Tenant upon Tenant's execution of this Lease. If the obligation for payment of Base Rent commences on a day other than the first day of a month, then Base Rent shall be prorated and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date. The Base Rent payable by Tenant hereunder is subject to adjustment as provided elsewhere in this Lease, as applicable. As used herein, the term "BASE RENT" shall mean the Base Rent specified in the Basic Lease Information as it may be so adjusted from time to time. B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be paid by Tenant under Paragraph 15, the interest and late charge described in Paragraphs 26.C. and D., and any monies spent by Landlord pursuant to Paragraph 30 or any other sums that become due and owing to Landlord pursuant to the terms and conditions of this Lease, shall be considered additional rent ("ADDITIONAL RENT"). "RENT" shall mean Base Rent and Additional Rent. 7. OPERATING EXPENSES A. OPERATING EXPENSES. In addition to the Base Rent required to be paid hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate Share of the Premises, as defined in the Basic Lease Information, of Operating Expenses (defined below) in the manner set forth below. Landlord's determination of Tenant's Proportionate Share of the Premises shall be conclusive so long as it is reasonably and consistently applied. "OPERATING EXPENSES" shall mean all expenses and costs of every kind and nature which Landlord shall pay or become obligated to pay, because of or in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Premises and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary or desirable to the Premises (as determined in a reasonable manner) other than those expenses and costs which are specifically attributable to Tenant or which are expressly made the financial responsibility of Landlord pursuant to this Lease. Operating Expenses shall include, but are not limited to, the following: 4 10 (1) TAXES. All real property taxes and assessments, possessory interest taxes, sales taxes, personal property taxes, business or license taxes or fees, gross receipts taxes, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, and other impositions, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees "in-lieu" of any such tax or assessment) which are now or hereafter assessed, levied, charged, confirmed, or imposed by any public authority upon the Premises, its operations or the Rent (or any portion or component thereof), or any tax, assessment or fee imposed in substitution, partially or totally, of any of the above. Operating Expenses shall also include any taxes, assessments, reassessments, or other fees or impositions with respect to the development, leasing, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, including, without limitation, by or for Tenant, and all increases therein or reassessments thereof whether the increases or reassessments result from increased rate and/or valuation (whether upon a transfer of the Premises or any portion thereof or any interest therein or for any other reason). Operating Expenses shall not include inheritance or estate taxes imposed upon or assessed against the interest of any person in the Premises, or taxes computed upon the basis of the net income of any owners of any interest in the Premises. If it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after imposition of any such taxes by Landlord as would have been payable to Landlord prior to the payment of any such taxes. (2) INSURANCE. All insurance premiums and costs, including, but not limited to, any deductible amounts, premiums and other costs of insurance paid by Landlord, including for the insurance coverage set forth in Paragraph 8.A. herein. (3) COMMON AREA MAINTENANCE. (a) Repairs, replacements, and general maintenance of and for the Premises and public and common areas and facilities of and comprising the Premises, including, but not limited to, the landscaped areas, parking and service areas, driveways, sidewalks, truck staging areas, and any other items or areas which affect the operation or appearance of the Premises, which determination shall be at Landlord's reasonable discretion, except for: those items expressly made the financial responsibility of Landlord pursuant to Paragraph 10 hereof and those items to the extent paid for by the proceeds of insurance. (b) Repairs, replacements, and general maintenance shall include the cost of any capital improvements made to or capital assets acquired for the Premises that in Landlord's discretion may reduce any other Operating Expenses, including present or future repair work, are reasonably necessary for the health and safety of the occupants of the Premises, or are required to comply with any Regulation, such costs or allocable portions thereof to be amortized over such reasonable period as Landlord shall determine, which shall be substantially in compliance with generally accepted accounting principles, together with interest on the unamortized balance at the publicly announced "prime rate" charged by Wells Fargo Bank, N.A. (San Francisco) or its successor at the time such improvements or capital assets are constructed or acquired, plus two (2) percentage points, or in the absence of such prime rate, then at the U.S. Treasury six-month market note (or bond, if so designated) rate as published by any national financial publication selected by Landlord, plus four (4) percentage points, but in no event more than the maximum rate permitted by law, plus reasonable financing charges. (c) Payment under or for any easement, license, permit, operating agreement, declaration, restrictive covenant or instrument relating to the Premises. (d) All expenses and rental related to services and costs of supplies, materials and equipment used in operating, managing and maintaining the Premises, the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, expenses related to service agreements regarding security, fire and other alarm systems, janitorial services to the extent not addressed in Paragraph 11 hereof, window cleaning, elevator maintenance, Premises exterior maintenance, landscaping and expenses related to the 5 11 administration, management and operation of the Premises, including without limitation salaries, wages and benefits and management office rent. (e) The cost of supplying any services and utilities which benefit all or a portion of the Premises to the extent not addressed in Paragraph 15 hereof. (f) Legal expenses and the cost of audits by certified public accountants. (g) A management fee equal to two and one-half percent (2 1/2%) of the Base Rent. Operating Expenses shall not include except to the extent specifically provided in Paragraph 7(a)(1)-(3) above, (a) The initial construction cost of the Premises; (b) Debt service on any mortgage or deed of trust recorded with respect to the Premises; (c) Costs of capital improvements, replacements or equipment and any amortization expenses thereon; (d) Costs incurred by Landlord for the repair of damage to the Premises, to the extent that Landlord is reimbursed by insurance proceeds; (e) Marketing costs, including leasing commissions, attorneys' fees in connection with disputes with tenants (including Tenant) or with the negotiation and preparation or enforcement of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with prospective tenants or other occupants of the Building or the Premises; (f) Costs incurred by Landlord due to the violation by Landlord of the terms and conditions of any lease of space in the Building or the Premises; (g) Interest, principal, points and fees on debt or amortization payments on any mortgage or deed of trust or any other debt instrument encumbering the Premises or the land on which the Premises is situated; (g) Advertising and promotional expenditures; (i) Costs incurred in connection with upgrading the Premises to comply with disability, life, fire and safety codes in effect prior to the issuance of the temporary certificate of occupancy for the Building; (j) Interest, fines or penalties incurred as a result of a violation of law by Landlord or Landlord's failure to make payments when due unless such failure is commercially reasonable under the circumstances; (k) Costs for acquisition of sculpture, paintings or other objects of art in common areas; (l) The depreciation of the real property structures in the Premises; (m) Landlord's general corporate overhead and general administrative expenses not related to the operation of the Premises; and (n) Any bad debt loss, rent loss or reserves for bad debts or rent loss, or reserves for equipment or capital replacement. (o) Costs incurred by Landlord for remediation of Hazardous Materials existing on the Premises prior to the date of this Lease. The above enumeration of services and facilities shall not be deemed to impose an obligation on Landlord to make available or provide such services or facilities except to the extent if any that 6 12 Landlord has specifically agreed elsewhere in this Lease to make the same available or provide the same. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that it shall be responsible for providing adequate security for its use of the Premises and that Landlord shall have no obligation or liability with respect thereto, except to the extent if any that Landlord has specifically agreed elsewhere in this Lease to provide the same. B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES" for any particular year shall mean Landlord's estimate of the Operating Expenses for such fiscal year made with respect to such fiscal year as hereinafter provided. Landlord shall have the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in a reasonable manner. During the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal year. Tenant shall pay Tenant's Proportionate Share of the Estimated Operating Expenses with installments of Base Rent for the fiscal year to which the Estimated Operating Expenses applies in monthly installments on the first day of each calendar month during such year, in advance. Such payment shall be construed to be Additional Rent for all purposes hereunder. If at any time during the course of the fiscal year, Landlord determines that Operating Expenses are projected to vary from the then Estimated Operating Expenses by more than five percent (5%), Landlord may, by written notice to Tenant, revise the Estimated Operating Expenses for the balance of such fiscal year, and Tenant's monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant's Proportionate Share of the revised Estimated Operating Expenses for such year, such revised installment amounts to be Additional Rent for all purposes hereunder. C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE ADJUSTMENT" shall mean the difference between Estimated Operating Expenses and actual Operating Expenses for any fiscal year determined as hereinafter provided. Within ninety (90) days after the end of each fiscal year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a statement of actual Operating Expenses for the fiscal year just ended, accompanied by a computation of Operating Expense Adjustment. If such statement shows that Tenant's payment based upon Estimated Operating Expenses is less than Tenant's Proportionate Share of Operating Expenses, then Tenant shall pay to Landlord the difference within twenty (20) days after receipt of such statement, such payment to constitute Additional Rent for all purposes hereunder. If such statement shows that Tenant's payments of Estimated Operating Expenses exceed Tenant's Proportionate Share of Operating Expenses, then (provided that Tenant is not in default beyond any applicable cure period under this Lease) Landlord shall pay to Tenant the difference within twenty (20) days after delivery of such statement to Tenant. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Operating Expense Adjustment shall be paid by the appropriate party within twenty (20) days after the date of delivery of the statement. Should this Lease commence or terminate at any time other than the first day of the fiscal year, Tenant's Proportionate Share of the Operating Expense Adjustment shall be prorated based on a month of thirty (30) days and the number of calendar months during such fiscal year that this Lease is in effect. Notwithstanding anything to the contrary contained in Paragraph 7.A or 7.B, Landlord's failure to provide any notices or statements within the time periods specified in those paragraphs shall in no way excuse Tenant from its obligation to pay Tenant's Proportionate Share of Operating Expenses. D. NET LEASE. This shall be a triple net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except as specifically provided to the contrary in this Lease. The provisions for payment of Operating Expenses and the Operating Expense Adjustment are intended to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the ownership, management, maintenance, repair, preservation, replacement and operation of the Premises and its supporting facilities and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary or desirable to the Premises. E. TENANT AUDIT. If Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the right, not later than sixty (60) days following receipt of such statement and upon the condition that Tenant shall first deposit with Landlord the full amount in dispute, to cause Landlord's books and records with respect to Operating Expenses for such fiscal year to be audited by certified public accountants selected by Tenant and subject to Landlord's reasonable right of approval. The Operating 7 13 Expense Adjustment shall be appropriately adjusted on the basis of such audit. If such audit discloses a liability for a refund in excess of five percent (5%) of Tenant's Proportionate Share of the Operating Expenses previously reported, the cost of such audit shall be borne by Landlord; otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not request an audit in accordance with the provisions of this Paragraph 7.E. within twenty (20) days after receipt of Landlord's statement provided pursuant to Paragraph 7.B. or 7.C., such statement shall be final and binding for all purposes hereof. 8. INSURANCE AND INDEMNIFICATION A. LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control. (1) PROPERTY INSURANCE. Landlord agrees to maintain property insurance insuring the Premises (excluding, however, the Initial Tenant Improvements and any Alterations owned by Tenant, which however, shall be insured by Tenant) ("LANDLORD'S PROPERTY INSURANCE") against damage or destruction due to risk including fire, vandalism, and malicious mischief in an amount not less than the replacement cost thereof, in the form and with deductibles and endorsements as selected by Landlord. At its election, Landlord may instead (but shall have no obligation to) obtain "All Risk" coverage, and may also obtain earthquake, pollution, and/or flood insurance in amounts selected by Landlord. (2) OPTIONAL INSURANCE. Landlord shall carry insurance against loss of rent, in an amount equal to the amount of Base Rent and Additional Rent that Landlord could be required to abate to Tenant in the event of condemnation or casualty damage for a period of twelve (12) months; provided, however, Landlord shall have the right, in its sole and absolute discretion, to terminate insurance coverage against loss of rent by providing Tenant fifteen (15) days written notice and upon receipt of such notice by Tenant, Tenant shall immediately maintain such insurance. Landlord may also (but shall have no obligation to) carry such other insurance as Landlord may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms as Landlord shall determine. Landlord shall not be obligated to insure, and shall have no responsibility whatsoever for any damage to, any furniture, machinery, goods, inventory or supplies, or other personal property or fixtures which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises. B. TENANT'S INSURANCE. (1) PROPERTY INSURANCE. Tenant agrees to maintain property insurance insuring the Initial Tenant Improvements and any Alterations owned by Tenant against damage or destruction due to risk including fire, vandalism, and malicious mischief in an amount not less than the replacement cost thereof ("TENANT'S PROPERTY INSURANCE"). Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term, insurance on all personal property and fixtures of Tenant and all improvements, additions or alterations made by or for Tenant to the Premises on an "All Risk" basis, insuring such property for the full replacement value of such property. (2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term Commercial General Liability insurance covering bodily injury and property damage liability occurring in or about the Premises or arising out of the use and occupancy of the Premises, and any part of either, and any areas adjacent thereto, and the business operated by Tenant or by any other occupant of the Premises. Such insurance shall include contractual liability coverage insuring all of Tenant's indemnity obligations under this Lease. Such coverage shall have a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000.00), and a minimum general aggregate limit of Three Million Dollars ($3,000,000.00), with an "Additional Insured - Managers or Lessors of Premises Endorsement" and the "Amendment of the Pollution Exclusion Endorsement." All such policies shall be written to apply to all bodily injury (including death), property damage or loss, personal and advertising injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to add Landlord and any party holding an interest to which this Lease may be subordinated as an additional 8 14 insured, and shall provide that such coverage shall be "PRIMARY" and non-contributing with any insurance maintained by Landlord, which shall be excess insurance only. Such coverage shall also contain endorsements including employees as additional insureds if not covered by Tenant's Commercial General Liability Insurance. All such insurance shall provide for the severability of interests of insureds; and shall be written on an "OCCURRENCE" basis, which shall afford coverage for all claims based on acts, omissions, injury and damage, which occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period, provided, however, that the insurance may be written on a "CLAIMS MADE" basis if a) such claims-made policy has a retroactive date that precedes the commencement of this Lease, and b) Tenant purchases an extended reporting period of at least one year if, within the term of the Lease or three (3) years thereafter, such claims-made policy is canceled or non-renewed and not replaced with a policy having the same or an earlier retroactive date. (3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Tenant shall carry Workers' Compensation Insurance as required by any Regulation, throughout the Term at Tenant's sole cost and expense. Tenant shall also carry Employers' Liability Insurance in amounts not less than One Million Dollars ($1,000,000) each accident for bodily injury by accident; One Million Dollars ($1,000,000) policy limit for bodily injury by disease; and One Million Dollars ($1,000,000) each employee for bodily injury by disease, throughout the Term at Tenant's sole cost and expense. (4) COMMERCIAL AUTO LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term commercial auto liability insurance with a combined limit of not less than One Million Dollars ($1,000,000) for bodily injury and property damage for each accident. Such insurance shall cover liability relating to any auto (including owned, hired and non-owned autos). (5) GENERAL INSURANCE REQUIREMENTS. All coverages described in this Paragraph 8.B. shall be endorsed to (i) provide Landlord with thirty (30) days' notice of cancellation or change in terms; and (ii) waive all rights of subrogation by the insurance carrier against Landlord. If at any time during the Term the amount or coverage of insurance which Tenant is required to carry under this Paragraph 8.B. is, in Landlord's reasonable judgment, materially less than the amount or type of insurance coverage typically carried by owners or tenants of properties located in the general area in which the Premises are located which are similar to and operated for similar purposes as the Premises or if Tenant's use of the Premises should change with or without Landlord's consent, Landlord shall have the right to require Tenant to increase the amount or change the types of insurance coverage required under this Paragraph 8.B. All insurance policies required to be carried by Tenant under this Lease shall be written by companies rated A IX or better in "Best's Insurance Guide" and authorized to do business in the State of California. In any event deductible amounts under all insurance policies required to be carried by Tenant under this Lease shall not exceed Five Thousand Dollars ($5,000.00) per occurrence. Tenant shall deliver to Landlord on or before the Term Commencement Date, and thereafter at least thirty (30) days before the expiration dates of the expired policies, certified copies of Tenant's insurance policies, or a certificate evidencing the same issued by the insurer thereunder; and, if Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at Landlord's option and in addition to Landlord's other remedies in the event of a default by Tenant hereunder, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent. C. INDEMNIFICATION. Tenant shall indemnify, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord harmless from and against any and all claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or expenses, including reasonable attorneys' and consultants' fees and court costs, demands, causes of action, or judgments, directly or indirectly arising out of or related to: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises by Tenant or Tenant's Parties, or from activities or failures to act of Tenant or Tenant's Parties; (2) claims arising from work or labor performed, or for materials or supplies furnished to or at the request of Tenant in connection with performance of any work done for the account of Tenant within the Premises; (3) claims arising from any breach or default on the part of Tenant 9 15 in the performance of any covenant contained in this Lease; and (4) claims arising from the negligence or intentional acts or omissions of Tenant or Tenant's Parties. The foregoing indemnity by Tenant shall not be applicable to claims to the extent arising from the gross negligence or willful misconduct of Landlord. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property in or about the Premises by or from any cause whatsoever (other than Landlord's sole and active negligence, willful misconduct or Landlord's breach of this Lease) and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or other portion of the Premises, or caused by gas, fire, oil or electricity in, on or about the Premises. The provisions of this Paragraph shall survive the expiration or earlier termination of this Lease. 9. WAIVER OF SUBROGATION To the extent permitted by law and without affecting the coverage provided by insurance to be maintained hereunder or any other rights or remedies, Landlord and Tenant each waive any right to recover against the other for: (a) damages for injury to or death of persons; (b) damages to property, including personal property; (c) damages to the Premises or any part thereof; and (d) claims arising by reason of the foregoing due to hazards covered by insurance maintained or required to be maintained pursuant to this Lease to the extent of proceeds recovered therefrom, or proceeds which would have been recoverable therefrom in the case of the failure of any party to maintain any insurance coverage required to be maintained by such party pursuant to this Lease. This provision is intended to waive fully, any rights and/or claims arising by reason of the foregoing, but only to the extent that any of the foregoing damages and/or claims referred to above are covered or would be covered, and only to the extent of such coverage, by insurance actually carried or required to be maintained pursuant to this Lease by either Landlord or Tenant. This provision is also intended to waive fully, and for the benefit of each party, any rights and/or claims which might give rise to a right of subrogation on any insurance carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its rights as specified in this Paragraph 9 with respect to any subtenant that it has approved pursuant to Paragraph 21 but only in exchange for the written waiver of such rights to be given by such subtenant to Landlord upon such subtenant taking possession of the Premises or a portion thereof. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. 10. LANDLORD'S REPAIRS AND MAINTENANCE Landlord shall at Landlord's expense maintain in good repair, reasonable wear and tear excepted, the structural soundness of the roof, foundations, and exterior walls of the Premises. The term "exterior walls" as used herein shall not include windows, glass or plate glass, doors, dock bumpers or dock plates, special store fronts or office entries. Landlord shall maintain in good repair, reasonable wear and tear excepted, the common areas and the costs of such maintenance shall constitute an Operating Expense pursuant to Paragraph 7 above. Any damage caused by or repairs necessitated by any negligence or act of Tenant or Tenant's Parties may be repaired by Landlord at Landlord's option and Tenant's expense. Tenant shall immediately give Landlord written notice of any defect or need of repairs in such components of the Premises for which Landlord is responsible, after which Landlord shall have a reasonable opportunity and the right to enter the Premises at all reasonable times to repair same. Landlord's liability with respect to any defects, repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance, and there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of repairs, alterations or improvements in or to any portion of the Premises or to fixtures, appurtenances or equipment in the Premises, except as provided in Paragraph 24. By taking possession of the Premises, Tenant accepts them "as is," as being in good order, condition and repair and the condition in which Landlord is obligated to deliver them and suitable for the Permitted Use and Tenant's intended operations in the Premises, whether or not any notice of acceptance is given. 11. TENANT'S REPAIRS AND MAINTENANCE Tenant shall at all times during the Term at Tenant's expense maintain all parts of the Premises (except for those parts for which Landlord is responsible under Paragraph 10 above) in a good, clean and secure condition and promptly make all necessary repairs and replacements, as reasonably determined by Landlord, including but not limited to, all windows, glass, doors, 10 16 walls, including demising walls, and wall finishes, floors and floor covering, the roof and roof membrane, heating, ventilating and air conditioning systems, ceiling insulation, truck doors, hardware, dock bumpers, dock plates and levelers, plumbing work and fixtures, downspouts, entries, skylights, smoke hatches, roof vents, electrical, mechanical, lighting or other systems, fire sprinklers and fire sprinkler systems, mechanical rooms, alarm systems, pest extermination, sanitary and storm sewer lines, utility services, telephone equipment and wiring service, lighting, and any other items or areas which affect the operation of appearance of the Premises, with materials and workmanship of the same character, kind and quality as the original. Tenant shall at Tenant's expense also perform regular removal of trash and debris. If Tenant uses rail and if required by the railroad company, Tenant agrees to sign a joint maintenance agreement governing the use of the rail spur, if any. Tenant shall, at Tenant's own expense, enter into a regularly scheduled preventative maintenance/service contract with a reputable, licensed maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within or serving the Premises. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective and a copy thereof delivered to Landlord within thirty (30) days after the Term Commencement Date. If Tenant is in default (after notice and expiration of applicable cure period, if any), Landlord may, upon notice to Tenant, enter into such a service contract on behalf of Tenant or perform the work and in either case charge Tenant the cost thereof along with a reasonable amount for Landlord's overhead. Notwithstanding anything to the contrary contained herein, Tenant shall, at its expense, promptly repair any damage to the Premises resulting from or caused by any negligence or act of Tenant or Tenant's Parties. Nothing herein shall expressly or by implication render Tenant Landlord's agent or contractor to effect any repairs or maintenance required of Tenant under this Paragraph 11, as to all of which Tenant shall be solely responsible. 12. ALTERATIONS A. Tenant shall not make, or allow to be made, any alterations, physical additions, improvements or partitions, including without limitation the attachment of any fixtures or equipment, in, about or to the Premises ("ALTERATIONS") without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed with respect to proposed Alterations which: (a) comply with all applicable Regulations (including, without limitation, the Americans With Disabilities Act) and (b) are, in Landlord's opinion, compatible with the Premises and its mechanical, plumbing, electrical, and heating/ventilation/air conditioning systems. Specifically, but without limiting the generality of the foregoing, Landlord shall have the right of written consent for all plans and specifications for the proposed Alterations, construction means and methods, all appropriate permits and licenses, any contractor or subcontractor to be employed on the work of Alterations, and the time for performance of such work, and may impose rules and regulations for contractors and subcontractors performing such work. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord's consideration of a request for approval hereunder. Tenant shall cause all Alterations to be accomplished in a good and workmanlike manner, and to comply with all applicable Regulations and Paragraph 27 hereof. Tenant shall at Tenant's sole expense, perform any additional work required under applicable Regulations (including, without limitation, the Americans With Disabilities Act) due to the Alterations hereunder. No review or consent by Landlord of or to any proposed Alteration or additional work shall constitute a waiver of Tenant's obligations under this Paragraph 12. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations, including any costs or expenses which Landlord may incur in electing to have outside architects and engineers review said plans and specifications, provided that in no event shall Tenant's reimbursement obligation exceed Five Hundred Dollars ($500) per request for expenses incurred by Landlord in connection with Landlord's consent to an Alteration. Except as provided in Section 24 to the contrary, all such Alterations shall remain the property of Tenant, until the expiration or earlier termination of this Lease, at which time they shall be and become the property of Landlord; provided, however, that concurrently with Tenant's written request for Landlord's consent to any Alteration pursuant to this Paragraph 12, Tenant may request from Landlord a written statement as to whether Landlord will require Tenant to remove such Alteration at the expiration or earlier termination of this Lease. Landlord may, at Landlord's option, require that Tenant, at Tenant's expense, remove any or all Alterations made by Tenant and restore the Premises by the expiration or earlier termination of this Lease, to their condition existing prior to the construction of any such Alterations. All such removals and restoration shall be accomplished in a first-class and good and workmanlike manner so as not to cause any damage to the Premises whatsoever. If Tenant fails to remove 11 17 such Alterations or Tenant's trade fixtures or furniture or other personal property, Landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law, at Tenant's sole expense. If Landlord fails to respond to Tenant's written request as to whether the Alteration must be removed at the expiration or earlier termination of the Lease within fifteen (15) days or Tenant fails to request a written statement from Landlord, Tenant shall be obligated to remove the Alteration upon the expiration of earlier termination of this Lease. In addition to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share of Operating Expenses, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its fixtures or personal property, on the value of Alterations within the Premises, and on Tenant's interest pursuant to this Lease, or any increase in any of the foregoing based on such Alterations. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord. Notwithstanding the foregoing, Tenant shall have the right, without consent of, but upon at least ten (10) business days' prior written notice (as provided under Paragraph 12.B below) to, Landlord, to make non-structural, Alterations within the interior of the Premises (and which are not visible from the outside of the Premises), which do not impair the value of the Premises, and which cost, in the aggregate, less than Fifty Thousand Dollars ($50,000.00) in any twelve (12) month period during the Term of this Lease, provided that such Alterations shall nevertheless be subject to all of the remaining requirements of this Paragraph 12, including without limitation, subparagraphs (a) and (b) above and the requirement that Tenant seek a written determination from Landlord as to whether such Alteration must be removed at the expiration or earlier termination of the Lease, other than the requirement of Landlord's prior consent. In addition, all Alterations shall be performed by duly licensed contractors or subcontractors reasonably acceptable to Landlord, proof of insurance shall be submitted to Landlord as required under Paragraph 8.B above, and Landlord reserves the right to impose reasonable rules and regulations for contractors and subcontractors. Tenant shall, if requested by Landlord, promptly furnish Landlord with complete as-built plans and specifications for any Alterations performed by Tenant to the Premises, at Tenant's sole cost and expense. Tenant may finance Alterations and encumber them and its leasehold interest hereunder with a first priority security interest in the leasehold interest, including, but not limited to, the Alterations constructed thereon, so long as any financing or encumbering by Tenant of its Alterations, including, without limitation, Tenant's Improvements shall be subject to the terms and conditions of this Lease and the rights of any mortgagee of Landlord, Tenant's lender shall have executed Landlord's Disclaimer and Consent substantially in the form of EXHIBIT F attached hereto and made a part hereof, and at the expiration or earlier termination of this Lease any Alterations remaining on the Premises are free and clear of any liens. Landlord and Tenant shall reasonably cooperate with the other party's lender to effectuate such financing at no cost to the other party. B. In compliance with Paragraph 27 hereof, at least ten (10) business days before beginning construction of any Alteration, Tenant shall give Landlord written notice of the expected commencement date of that construction to permit Landlord to post and record a notice of non-responsibility. Upon substantial completion of construction, if the law so provides, Tenant shall cause a timely notice of completion to be recorded in the Santa Clara County Recorder's office. C. Notwithstanding anything contained in Sections 12.A and B to the contrary, Tenant shall construct those certain tenant improvements (the "INITIAL TENANT IMPROVEMENTS") described on and in accordance with EXHIBIT C attached hereto and made a part hereof. Except for the Additional Space which shall be removed upon the expiration or earlier termination of this Lease and in accordance with the removal and restoration requirements hereinafter set forth in this Section 12.C, upon the expiration or earlier termination of this Lease, Tenant shall not be obligated to remove the Initial Tenant Improvements from the Premises. Upon the expiration or earlier termination of this Lease, Tenant, at Tenant's expense, shall remove Tenant's personal property and trade fixtures, a copy of such list is attached hereto as EXHIBIT D ("TENANT'S PERSONAL PROPERTY"), and restore the Premises to its condition as of the date of this Lease, normal wear and tear excepted. All such removals and restoration shall be accomplished in a first-class and good and workmanlike manner so as not to cause any damage to the Premises whatsoever except that which Tenant can and does repair. If Tenant fails to remove Tenant's Personal Property, Landlord may keep and use Tenant's Personal Property or remove any of Tenant's Personal Property and cause Tenant's Personal Property to be stored or sold in accordance with applicable law, at Tenant's sole expense. 12 18 13. SIGNS Tenant shall not place, install, affix, paint or maintain any signs, notices, graphics or banners whatsoever or any window decor which is visible in or from public view or corridors, the common areas or the exterior of the Premises, in or on any exterior window or window fronting upon any common areas or service area or upon any truck doors or man doors without Landlord's prior written approval which Landlord shall have the right to withhold in its absolute and sole discretion; provided that Tenant's name shall be included in any Premises-standard door and directory signage, if any, in accordance with Landlord's signage program, including without limitation, payment by Tenant of any fee charged by Landlord for maintaining such signage, which fee shall constitute Additional Rent hereunder. Any installation of signs, notices, graphics or banners on or about the Premises approved by Landlord shall be subject to any Regulations and to any other requirements imposed by Landlord. Tenant shall remove all such signs or graphics by the expiration or any earlier termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal. Notwithstanding the foregoing, Tenant shall be entitled to use the two (2) existing podiums to affix signs subject to any Regulations and the consent of Landlord which shall not be unreasonably withheld, conditioned or delayed. 14. INSPECTION/POSTING NOTICES Subject to Tenant's reasonable security requirements and the requirements of Good Manufacturing Practice, after reasonable notice, except in emergencies where no such notice shall be required, Landlord and Landlord's agents and representatives, shall have the right to enter the Premises to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs to the portion of the Premises, common areas or the exterior of the Building for which Landlord is responsible, construct improvements or perform alterations to the exterior of the Premises, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord's interest in the Premises or to exhibit the Premises to prospective tenants, purchasers, encumbrancers or to others, or for any other purpose as Landlord may deem reasonably necessary; provided, however, that Landlord shall comply with Tenant's established procedures for entry and shall use reasonable efforts not to unreasonably interfere with Tenant's business operations. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry. Provided Landlord has materially complied with the provisions of this Section 14, Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby unless caused by Landlord's sole and active negligence or willful misconduct. Landlord shall have the right to use any and all means which Landlord may deem necessary or proper to open said doors in an emergency, in order to obtain entry to any portion of the Premises, and any entry to the Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portions thereof. At any time within six (6) months prior to the expiration of the Term or following any earlier termination of this Lease or agreement to terminate this Lease, Landlord shall have the right to erect on the Premises a suitable sign indicating that the Premises are available for lease. 15. SERVICES AND UTILITIES A. Tenant shall pay directly for all water, gas, heat, air conditioning, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or from the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto, and maintenance charges for utilities and shall furnish all electric light bulbs, ballasts and tubes. All sums payable under this Paragraph 15 shall constitute Additional Rent hereunder. B. Tenant acknowledges that Tenant has inspected and accepts the water, electricity, heat and air conditioning and other utilities and services being supplied or furnished to the Premises as of the date Tenant takes possession of the Premises, if any, as being sufficient in their present condition, "as is," for the Permitted Use, and for Tenant's intended operations in the Premises. C. Landlord shall not be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of: 13 19 (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services, or any change in the character or means of supplying or providing any such utilities or services or any supplier thereof; (b) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or any other accidents or other conditions beyond the reasonable control of Landlord or because of any interruption of service due to Tenant's use of water, electric current or other resource in excess of that being supplied or furnished for the use of the Premises as of the date Tenant takes possession of the Premises; or (c) the inadequacy, limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises otherwise; or (d) the partial or total unavailability of any such utilities or services to the Premises, whether by Regulation or otherwise; nor shall any such occurrence constitute an actual or constructive eviction of Tenant. Landlord shall further have no obligation to protect or preserve any apparatus, equipment or device installed by Tenant in the Premises, including without limitation by providing additional or after-hours heating or air conditioning. Tenant may, but shall not be obligated to, upon notice to Landlord, contract with or otherwise obtain any electrical or other such service for or with respect to the Premises or Tenant's operations therein from any supplier or provider of any such service. In the event Tenant elects to obtain any electrical or other service, Tenant shall be solely responsible for any installing, maintaining, repairing, replacing or upgrading such service or any equipment or machinery associated therewith. 16. SUBORDINATION Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be and is hereby declared to be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Premises are situated, or both; and (b) any mortgage or deed of trust which may now exist or be placed upon the Premises and/or the land upon which the Premises are situated, or said ground leases or underlying leases, or Landlord's interest or estate in any of said items which is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord provided that Tenant shall not be disturbed in its possession under this Lease by such successor in interest so long as Tenant is not in default under this Lease. Within ten (10) days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant's attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in the form requested by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of trust, subject to such nondisturbance requirement. In the event this Lease shall be subject to the prior rights of any mortgagee or ground lessor, then Landlord shall secure from such mortgagee or ground lessor an agreement in writing whereby Tenant, so long as Tenant is not in default hereunder, may remain in possession of the Premises pursuant to the terms hereof and without any diminution of Tenant's rights should Landlord become in default with respect to such mortgage or ground lease or should the Premises become the subject of any action to foreclose any mortgage or to dispossess Landlord. Such agreement would provide, among other things, that the new owner following any foreclosure, sale or conveyance shall not be (i) liable for any act or omission of any prior landlord or with respect to events occurring prior to acquisition of ownership; (ii) subject to any offsets or defenses which Tenant might have against any prior landlord; (iii) bound by prepayment of more than one (1) month's Rent; or (iv) liable to Tenant for any security deposit not actually received by such new owner. Each ground landlord, mortgagee, or beneficiary under a deed of trust shall be an express third party beneficiary of the provisions of this Paragraph 16 and any other provisions of this Lease that are for the benefit of such party. 17. FINANCIAL STATEMENTS At the request of Landlord from time to time, Tenant shall provide to Landlord Tenant's then existing financial statements or other information discussing financial worth of Tenant and any guarantor, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management, financing and disposition of the Premises. 14 20 18. ESTOPPEL CERTIFICATE Tenant agrees from time to time, within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), the date to which Rent has been paid, the unexpired portion of this Lease, that there are no current defaults by Landlord or Tenant under this Lease (or specifying any such defaults), that the leasehold estate granted by this Lease is the sole interest of Tenant in the Premises and/or the land at which the Premises are situated, and such other matters pertaining to this Lease as may be reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or prospective purchaser of the Premises or any interest therein. Landlord agrees from time to time, within ten (10) days after request of Tenant, to deliver to Tenant, or Tenant's designee, an estoppel certificate stating that this Lease is in full force and effect, that this Lease has not been modified (or stating all modifications, written or oral, to this Lease), to Landlord's knowledge the date to which Rent has been paid, the unexpired portion of this Lease, that to Landlord's knowledge there are no current defaults by Landlord or Tenant under this Lease (or specifying any such defaults), that the leasehold estate granted by this Lease is the sole interest of Tenant in the Premises and/or the land at which the Premises are situated. Failure by Tenant to execute and deliver such certificate shall constitute an acceptance of the Premises and acknowledgment by Tenant that the statements included are true and correct without exception. Tenant agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period, Landlord may execute and deliver such certificate on Tenant's behalf and that such certificate shall be binding on Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Premises or any interest therein. The parties agree that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease, and shall be an event of default (without any cure period that might be provided under Paragraph 26.A(3) of this Lease) if Tenant fails to fully comply or makes any material misstatement in any such certificate. 19. SECURITY DEPOSIT Tenant agrees to deposit with Landlord upon execution of this Lease, a security deposit as stated in the Basic Lease Information (the "SECURITY DEPOSIT"), which sum shall be held and owned by Landlord, without obligation to pay interest, as security for the performance of Tenant's covenants and obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of damages incurred by Landlord in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may from time to time, without prejudice to any other remedy provided herein or by law, use such fund as a credit to the extent necessary to credit against any arrears of Rent or other payments due to Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default, and Tenant shall pay to Landlord, on demand, the amount so applied in order to restore the Security Deposit to its original amount. Although the Security Deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant at such time after termination of this Lease that all of Tenant's obligations under this Lease have been fulfilled, reduced by such amounts as may be required by Landlord to remedy defaults on the part of Tenant in the payment of Rent or other obligations of Tenant under this Lease, to repair damage to the Premises caused by Tenant or any Tenant's Parties and to clean the Premises. Landlord may use and commingle the Security Deposit with other funds of Landlord. 20. LIMITATION OF TENANT'S REMEDIES The obligations and liability of Landlord to Tenant for any default by Landlord under the terms of this Lease are not personal obligations of Landlord or of the individual or other partners of Landlord or its or their partners, directors, officers, or shareholders, and Tenant agrees to look solely to Landlord's interest in the Premises for the recovery of any amount from Landlord, and shall not look to other assets of Landlord nor seek recourse against the assets of the individual or other partners of Landlord or its or their partners, directors, officers or shareholders. Any lien obtained to enforce any such judgment and any levy of execution thereon shall be subject and subordinate to any lien, mortgage or deed of trust on the Premises. Under no circumstances shall Tenant have the right to offset against or recoup Rent or other payments due and to become due to Landlord hereunder except as expressly provided in Paragraph 23.B. below, which Rent and 15 21 other payments shall be absolutely due and payable hereunder in accordance with the terms hereof. 21. ASSIGNMENT AND SUBLETTING A. (1) GENERAL. Tenant shall not assign or pledge this Lease or sublet the Premises or any part thereof, whether voluntarily or by operation of law, or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, or suffer or permit any such assignment, pledge, subleasing or occupancy, without Landlord's prior written consent which consent shall not be unreasonably withheld, delayed or conditioned except as provided herein. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice (the "TRANSFER NOTICE") (except when no such notice is required under Section 21.A(3) below) at least thirty (30) days prior to the anticipated effective date of the proposed assignment or sublease, which shall contain all of the information reasonably requested by Landlord. Landlord shall then have a period of fifteen (15) days following receipt of the Transfer Notice to notify Tenant in writing that Landlord elects to consent to the proposed assignment or sublease, subject, however, to Landlord's prior written consent of the proposed assignee or subtenant and of any related documents or agreements associated with the assignment or sublease. Consent to any assignment or subletting shall not constitute consent to any subsequent transaction to which this Paragraph 21 applies. (2) CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord's consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold Landlord's consent in the following instances: if the proposed assignee does not agree to be bound by and assume the obligations of Tenant under this Lease in form and substance satisfactory to Landlord; the use of the Premises by such proposed assignee or subtenant would not be a Permitted Use; the proposed assignee or subtenant is not of sound financial condition as determined by Landlord in Landlord's reasonable discretion; the proposed assignee or subtenant is a governmental agency; the proposed assignee or subtenant is a person with whom Landlord is negotiating to lease space in the Premises or is a present tenant of the Premises; the assignment or subletting would entail any Alterations which would lessen the value of the leasehold improvements in the Premises or use of any Hazardous Materials or other noxious use; or Tenant is in default beyond any applicable cure period of any obligation of Tenant under this Lease, or Tenant has defaulted under this Lease on three (3) or more occasions during any twelve (12) months preceding the date that Tenant shall request consent. Failure by or refusal of Landlord to consent to a proposed assignee or subtenant shall not cause a termination of this Lease. At the option of Landlord, a surrender and termination of this Lease shall operate as an assignment to Landlord of some or all subleases or subtenancies. Landlord shall exercise this option by giving notice of that assignment to such subtenants on or before the effective date of the surrender and termination. In connection with each request for assignment or subletting, Tenant shall pay to Landlord Landlord's standard fee for approving such requests which shall not exceed Two Hundred Fifty Dollars ($250), as well as all reasonable costs incurred by Landlord or any mortgagee or ground lessor in approving each such request and effecting any such transfer, including, without limitation, reasonable attorneys' fees. (3) Tenant shall be permitted to transfer to an Affiliate (as defined below) without the consent of Landlord so long as the following conditions are met: (a) unless such notice is prohibited by law in which case no prior notice shall be required, at least ten (10) business days before any such assignment of sublease, Landlord receives written notice of such assignment or sublease (as well as any documents or information reasonably requested by Landlord regarding the proposed intended transfer and the transferee); (b) Tenant is not then and has not been in default under this Lease after notice and expiration of any applicable cure period; (c) if the transfer is an assignment or any other transfer to an Affiliate other than a sublease, the intended assignee assumes in writing all of Tenant's obligations under this Lease relating to the Premises in form satisfactory to Landlord or, if the 16 22 transfer is a sublease, the intended sublessee accepts the sublease in form reasonably satisfactory to Landlord; (d) the use of the Premises by the intended transferee would be a Permitted Use; and (e) the intended transferee has a tangible net worth, as evidenced by financial statements delivered to Landlord and certified by an independent certified public accountant in accordance with generally accepted accounting principles that are consistently applied, of at least equal to the net worth of Tenant at the time of the proposed transfer. No transfer to an Affiliate in accordance with this subparagraph shall relieve Tenant name herein of any obligation under this Lease or alter the primary liability of Tenant named herein for the payment of Rent or for the performance of any other obligation to be performed by Tenant. An "AFFILIATE" means any entity that (i) controls, is controlled by, or is under common control with Tenant, (ii) results from the transfer of all or substantially all of Tenant's assets or stocks, or (iii) results from the merger or consolidation of Tenant with another entity. "CONTROL" means the direct or indirect ownership of more than fifty percent (50%) of the voting securities of an entity or possession of the right to vote more than fifty percent (50%) of the voting interest in the ordinary direction of the entity's affairs. Without limiting the effect of Section 21C, below, notwithstanding anything to the contrary contained herein, Tenant shall have a one (1) time right during the initial Term of this Lease to a transfer by sale or assignment of the interest of Tenant to a publicly held company ("Public Company"), provided that the transferee shall have a tangible net worth, as evidenced by financial statements delivered to Landlord and certified by an independent certified public accountant in accordance with generally accepted accounting principles that are consistently applied, of at least equal to the net worth of Tenant at the time of the proposed transfer. B. BONUS RENT. Any Rent or other consideration realized by Tenant under any such sublease or assignment in excess of the Rent payable hereunder, shall be divided and paid, fifty percent (50%) to Tenant, fifty percent (50%) to Landlord after amortization over the balance of the Term of the following actual and reasonable costs incurred by Tenant: (i) brokerage commission, (ii) legal fees, (iii) additional improvements for the subtenant or assignee and (iv) a portion of the unamortized cost of the Initial Tenant Improvements paid for by Tenant and listed on EXHIBIT C which for purposes of calculating bonus rent, shall be an amount equal to the total cost of the Initial Tenant Improvements amortized at a simple interest rate of ten percent (10%) per annum. Within thirty (30) days after substantial completion of the Initial Tenant Improvements, Landlord and Tenant shall execute an agreement setting forth the actual cost of such Initial Tenant Improvements. Notwithstanding the foregoing, Tenant shall be entitled to retain any Rent or other consideration realized by Tenant (in excess of the Rent payable hereunder) under its sublease with Comparative dated as of February 1, 1999 (the "COMPARATIVE SUBLEASE"). Landlord hereby approves the Comparative Sublease. In any subletting or assignment undertaken by Tenant, Tenant shall diligently seek to obtain the maximum rental amount available in the marketplace for comparable space available for primary leasing. C. CORPORATION. If Tenant is a corporation, a transfer of corporate shares by sale, assignment, bequest, inheritance, operation of law or other disposition (including such a transfer to or by a receiver or trustee in federal or state bankruptcy, insolvency or other proceedings) resulting in a change in the present control of such corporation or any of its parent corporations by the person or persons owning a majority of said corporate shares, shall constitute an assignment for purposes of this Lease. Notwithstanding anything to the contrary in this Lease, the transfer of outstanding capital stock or other listed equity interests, or the purchase of outstanding capital stock or other listed equity interests, or the purchase of equity interests issued in an initial public offering of stock, through the "over-the-counter" market or any recognized national or international securities exchange shall not constitute an assignment for purposes of this Lease. D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture, unincorporated limited liability company or other unincorporated business form, a transfer of the interest of persons, firms or entities responsible for managerial control of Tenant by sale, assignment, bequest, inheritance, operation of law or other disposition, so as to result in a change in the present control of said entity and/or of the underlying beneficial interests of said entity and/or a change in the identity of the persons responsible for the general credit obligations of said entity shall constitute an assignment for all purposes of this Lease. 17 23 E. LIABILITY. No assignment or subletting by Tenant, permitted or otherwise, shall relieve Tenant of any obligation under this Lease or alter the primary liability of the Tenant named herein for the payment of Rent or for the performance of any other obligations to be performed by Tenant, including obligations contained in Paragraph 25 with respect to any assignee or subtenant. Landlord may collect rent or other amounts or any portion thereof from any assignee, subtenant, or other occupant of the Premises, permitted or otherwise, and apply the net rent collected to the Rent payable hereunder, but no such collection shall be deemed to be a waiver of this Paragraph 21, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of the obligations of Tenant under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. 22. AUTHORITY Landlord represents and warrants that it has full right and authority to enter into this Lease and to perform all of Landlord's obligations hereunder and that all persons signing this Lease on its behalf are authorized to do. Tenant and the person or persons, if any, signing on behalf of Tenant, jointly and severally represent and warrant that Tenant has full right and authority to enter into this Lease, and to perform all of Tenant's obligations hereunder, and that all persons signing this Lease on its behalf are authorized to do so. 23. CONDEMNATION A. CONDEMNATION AND RIGHTS TO TERMINATE. If the whole or any substantial part of the Premises should be taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the Permitted Use of the Premises, either party shall have the right to terminate this Lease at its option. If any material portion of the Premises is taken or condemned for any public use under any Regulation, or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease at its option. Notwithstanding anything contained in this Paragraph 23.A to the contrary, in the event Landlord elects to terminate the Lease, Landlord shall provide written notice to Tenant of Landlord's intention to terminate the Lease, and, within ten (10) days after receipt of such written notice from Landlord, Tenant may elect to keep the Lease in full force and effect by delivering written notice thereof (the "ELECTION NOTICE") in which case (i) Tenant shall pay all costs and expenses necessary to restore the Premises and to enable Tenant to use the Premises in accordance with the terms and conditions of this Lease; (ii) Tenant shall continue to pay Rent for the remainder of the Term and all other monetary sums due under this Lease without abatement; and (iii) Landlord shall receive a credit for all sums received or to be received by Tenant from the condemning authority except to the extent specifically provided in Paragraph 23.B to the contrary. In the event Landlord does not deliver written notice to Tenant of Landlord's intention to terminate the Lease as provided herein, (i) Tenant shall continue to pay Rent for the remainder of the Term and all other monetary sums due under this Lease without abatement and (ii) Landlord shall receive a credit for all sums received or to be received by Tenant from the condemning authority except to the extent specifically provided in Paragraph 23.B to the contrary. Notwithstanding anything to the contrary contained in this Paragraph, if the temporary use or occupancy of any part of the Premises shall be taken or appropriated under power of eminent domain during the Term, this Lease shall be and remain unaffected by such taking or appropriation and Tenant shall continue to pay in full all Rent payable hereunder by Tenant during the Term; in the event of any such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which represents compensation for the use of or occupancy of the Premises during the Term, and Landlord shall be entitled to receive that portion of any award which represents the cost of restoration of the Premises and the use and occupancy of the Premises. B. AWARD. Landlord shall be entitled to (and Tenant shall assign to Landlord) any and all payment, income, rent, award or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance and Tenant shall have no claim against Landlord or otherwise for any sums paid by virtue of such proceedings, whether or not attributable to the value of any unexpired portion of this Lease, except as expressly provided in this Lease. Notwithstanding the foregoing, any compensation specifically and separately awarded Tenant for Tenant's personal property and trade fixtures, Initial Tenant Improvements and relocation costs, shall be and remain the property of Tenant. 18 24 C. WAIVER OF CCP SECTION 1265.130. Each party waives the provisions of California Civil Code Procedure Section 1265.130 allowing either party to petition the superior court to terminate this Lease as a result of a partial taking. 24. CASUALTY DAMAGE A. GENERAL. If the Premises should be damaged or destroyed by fire, tornado, or other casualty (collectively, "CASUALTY"), Tenant shall give immediate written notice thereof to Landlord. B. REBUILD AND REPAIR. If the Premises should be damaged by Casualty in whole or in part, then Landlord may elect, in its sole and absolute discretion, to rebuild or repair the Premises by delivering written notice to Tenant of its election within thirty (30) days after Landlord's receipt of notice of the damage or destruction. Upon such election, Landlord shall proceed to rebuild and repair the Premises diligently and to substantially the same condition as the Premises existed at the time of the Casualty with such modifications and alterations as mutually agreed upon by Landlord and Tenant in their respective reasonable discretion. Notwithstanding the above, in the event Landlord elects to rebuild or repair the Premises as provided herein, Landlord shall not be required to rebuild, repair or replace any part of any Alterations (including without limitation, the Initial Tenant Improvements) which may have been placed, on or about the Premises by Tenant and Tenant shall continue to pay Base Rent and Additional Rent under this Lease, with no right to rent abatement unless and to the extent any proceeds of rental interruption insurance are paid. If Landlord elects not to rebuild or repair the Premises, in its sole and absolute discretion, then Landlord shall notify Tenant by delivering written notice of such election within thirty (30) days after Landlord's receipt of notice of the damage or destruction and Landlord shall retain all proceeds of Landlord's Property Insurance. Within ten (10) days after receipt of Landlord's written notice, Tenant, at Tenant's sole cost and expense, may elect by delivering written notice to Landlord to proceed to rebuild and repair the Premises diligently to substantially the same condition as the Premises existed at the time of the Casualty, with such modifications and alterations as mutually agreed upon by Landlord and Tenant in their respective reasonable discretion. Upon such election by Tenant to repair or rebuild the Premises, Tenant shall deposit such amount required to rebuild or repair the Premises as reasonably determined by Landlord with a bank selected by Tenant and approved by Landlord as security for the performance of Tenant's obligations under this Section 24.B. Notwithstanding the foregoing, if the Premises should be damaged by Casualty and Tenant elects to rebuild and repair the Premises, then (i) Tenant shall continue to pay Rent under this Lease, with no right to rent abatement, unless and to the extent any proceeds of rental interruption insurance are paid, (ii) Landlord shall keep any and all insurance proceeds received by Landlord, under any insurance policies maintained by Landlord's Property Insurance, as a result of such Casualty, and shall have no obligation to contribute any of such proceeds to the rebuilding or repairing of the Premises. In the event that Landlord does not elect to rebuild or repair the Premises and/or Tenant does not elect to rebuild or repair the Premises, then either party may terminate this Lease upon ten (10) days advance written notice to the other party and Tenant shall retain all proceeds of Tenant's Property Insurance. Notwithstanding anything contrary contained in this Lease, immediately following the repair or rebuilding of the Premises, Landlord shall be the owner of the Premises and any part that is rebuilt or repaired, regardless of which party pays for the costs of rebuilding or repairing. C. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if the Premises or any portion thereof is damaged by Casualty resulting from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's Parties, Base Rent and Additional Rent shall not be diminished during the repair of such damage except and to the extent of proceeds are paid through rental interruption insurance and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Premises caused thereby. D. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary, except if Tenant elects to rebuild or repair the Premises pursuant to Section 24.B above, if the Premises is damaged or destroyed and are not fully covered by the insurance proceeds received by Landlord or if the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds from Landlord's Property Insurance be applied to such indebtedness, then in either case Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after the date of notice to Landlord that said damage or destruction is not fully covered by insurance or such 19 25 requirement is made by any such holder, as the case may be, whereupon this Lease shall terminate. E. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy in the event of damage or destruction to the Premises. As a material inducement to Landlord entering into this Lease, Tenant hereby waives any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil Code of California with respect to any destruction of the Premises, Landlord's obligation for tenantability of the Premises and Tenant's right to make repairs and deduct the expenses of such repairs, or under any similar law, statute or ordinance now or hereafter in effect. F. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction of the Premises, under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant's personal property or Initial Tenant Improvements. 25. HOLDING OVER Unless Landlord expressly consents in writing to Tenant's holding over, Tenant shall be unlawfully and illegally in possession of the Premises, whether or not Landlord accepts any rent from Tenant or any other person while Tenant remains in possession of the Premises without Landlord's written consent. If Tenant shall retain possession of the Premises or any portion thereof without Landlord's consent following the expiration of this Lease or sooner termination for any reason, then Tenant shall pay to Landlord for each day of such retention one hundred seventy five percent (175%) of the amount of daily rental as of the last month prior to the date of expiration or earlier termination. Tenant shall also indemnify, defend, protect and hold Landlord harmless from any loss, liability or cost, including consequential and incidental damages and reasonable attorneys' fees, incurred by Landlord resulting from delay by Tenant in surrendering the Premises, including, without limitation, any claims made by the succeeding tenant founded on such delay. Acceptance of Rent by Landlord following expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, shall not constitute a renewal of this Lease, and nothing contained in this Paragraph 25 shall waive Landlord's right of reentry or any other right. Additionally, if upon expiration or earlier termination of this Lease, or following demand by Landlord for possession of the Premises, Tenant has not fulfilled its obligation with respect to repairs and cleanup of the Premises or any other Tenant obligations as set forth in this Lease, then Landlord shall have the right to perform any such obligations as it deems necessary at Tenant's sole cost and expense, and any time required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any expiration or earlier termination of this Lease. 26. DEFAULT A. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant: (1) ABANDONMENT. Abandonment of the Premises for a continuous period in excess of five (5) days. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A. being deemed such notice to Tenant as required by said Section 1951.3. (2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any other amount within three (3) days after the Rent or such other amount is due and payable hereunder, as to which time is of the essence. (3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A. and Paragraphs 8, 18 and 38, such failure continuing for fifteen (15) days after written notice of such failure, as to which time is of the essence; provided, however, Tenant shall not be deemed to be in default if the nature of such failure is of a type that cannot reasonably be cured within such fifteen (15) day period and Tenant commences to cure within fifteen (15) days and diligently prosecutes such cure to completion but in no event shall such period to cure exceed ninety (90) days after written notice of such failure to perform by Tenant (except as provided in Paragraph 30 below); Provided, however, that so long as Tenant is diligently pursuing such cure and there is no 20 26 decrease in the value of the Premises as a result of such default, the Landlord in its reasonable discretion may extend the cure period as Landlord deems appropriate. (4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit of creditors. (5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of sixty (60) days. If under applicable law, the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease. (6) RECEIVERSHIP. The employment of a receiver to take possession of substantially all of Tenant's assets or the Premises, if such appointment remains undismissed or undischarged for a period of thirty (30) days after the order therefor. (7) ATTACHMENT. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or Tenant's leasehold of the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of thirty (30) days after the levy thereof. (8) INSOLVENCY. The admission by Tenant in writing of its inability to pay its debts as they become due. B. REMEDIES UPON DEFAULT. (1) TERMINATION. In the event of the occurrence of any event of default, Landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant's right to possession shall terminate, and this Lease shall terminate unless on or before such date all Rent in arrears and all costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other events of default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, including any subtenant or subtenants notwithstanding Landlord's consent to any sublease, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or equity by any reason of Tenant's default or of such termination. Landlord hereby reserves the right, but shall not have the obligation, to recognize the continued possession of any subtenant. The delivery or surrender to Landlord by or on behalf of Tenant of keys, entry codes, or other means to bypass security at the Premises shall not terminate this Lease. (2) CONTINUATION AFTER DEFAULT. Even though an event of default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under Paragraph 26.B.(1) hereof, and Landlord may enforce all of Landlord's rights and remedies under this Lease and at law or in equity, including without limitation, the right to recover Rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a landlord under Section 1951.4 of the Civil Code of the State of California or any successor code section. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver under application of Landlord to protect Landlord's interest under this Lease or other entry by Landlord upon the Premises shall not constitute an election to terminate Tenant's right to possession. (3) INCREASED SECURITY DEPOSIT. If Tenant is in default under Paragraph 26.A.(2) hereof and such default remains uncured for ten (10) days after such occurrence or such default occurs more than three (3) times in any twelve (12) month period, Landlord may require that Tenant increase the Security Deposit to the amount of three (3) times the current month's Rent at the time of the most recent default. 21 27 C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, or any successor code sections. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law or at equity, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent and other amounts that would have been earned after the date of termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award of the amount by which the unpaid Rent and other amounts for the balance of the Term after the time of award exceeds the amount of such Rent loss that the Tenant proves could be reasonably avoided; and (4) any other amount and court costs necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The "worth at the time of award" as used in (1) and (2) above shall be computed at the Applicable Interest Rate (defined below). The "worth at the time of award" as used in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). If this Lease provides for any periods during the Term during which Tenant is not required to pay Base Rent or if Tenant otherwise receives a Rent concession, then upon the occurrence of an event of default, Tenant shall owe to Landlord the full amount of such Base Rent or value of such Rent concession, plus interest at the Applicable Interest Rate, calculated from the date that such Base Rent or Rent concession would have been payable. D. LATE CHARGE. In addition to its other remedies, Landlord shall have the right without notice or demand to add to the amount of any payment required to be made by Tenant hereunder, and which is not paid and received by Landlord on or before the first day of each calendar month, an amount equal to six percent (6%) of the delinquency for each month or portion thereof that the delinquency remains outstanding to compensate Landlord for the loss of the use of the amount not paid and the administrative costs caused by the delinquency, the parties agreeing that Landlord's damage by virtue of such delinquencies would be extremely difficult and impracticable to compute and the amount stated herein represents a reasonable estimate thereof. Any waiver by Landlord of any late charges or failure to claim the same shall not constitute a waiver of other late charges or any other remedies available to Landlord. E. INTEREST. Interest shall accrue on all sums not paid when due hereunder at the lesser of eighteen percent (18%) per annum or the maximum interest rate allowed by law ("APPLICABLE INTEREST RATE") from the due date until paid. F. REMEDIES CUMULATIVE. All rights, privileges and elections or remedies of the parties are cumulative and not alternative, to the extent permitted by law and except as otherwise provided herein. 27. LIENS A. Tenant shall at all times keep the Premises free from liens arising out of or related to work or services performed, materials or supplies furnished or obligations incurred by or on behalf of Tenant or in connection with work made, suffered or done by or on behalf of Tenant in or on the Premises. Notwithstanding the foregoing, the Tenant shall have the right to encumber its leasehold interest hereunder and its interest in the Tenant's Initial Tenant Improvements and/or Alterations with a first prior security interest in the leasehold interest including, without limitation, the Alterations constructed thereon, so long as any financing or encumbering by Tenant of Tenant's Initial Tenant Improvements and/or Alterations shall be subject to the terms and conditions of this Lease and to the rights of any mortgagee of Landlord, Tenant's lender shall have executed Landlord's Disclaimer and Consent substantially in the form of EXHIBIT F attached hereto and made a part hereof, and at the expiration or earlier termination of this Lease any Initial Tenant Improvements or Alterations remaining on the Premises are free and clear of any liens. If Tenant shall not, within ten (10) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord on behalf of Tenant and all expenses incurred by Landlord in connection therefor shall be payable to 22 28 Landlord by Tenant on demand with interest at the Applicable Interest Rate as Additional Rent. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give Landlord not less than ten (10) business days prior written notice of the commencement of any work in the Premises which could lawfully give rise to a claim for mechanics' or materialmen's liens to permit Landlord to post and record a timely notice of non-responsibility, as Landlord may elect to proceed or as the law may from time to time provide, for which purpose, if Landlord shall so determine, Landlord may enter the Premises. Tenant shall not remove any such notice posted by Landlord without Landlord's consent, and in any event not before completion of the work which could lawfully give rise to a claim for mechanics' or materialmen's liens. 28. [INTENTIONALLY DELETED] 29. TRANSFERS BY LANDLORD In the event of a sale or conveyance by Landlord of the Premises or a foreclosure by any creditor of Landlord, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant, to the extent required to be performed after the passing of title to Landlord's successor-in-interest. In such event, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord under this Lease with respect to the performance of the covenants and duties of "Landlord" to be performed after the passing of title to Landlord's successor-in-interest. This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. Landlord's successor(s)-in-interest shall not have liability to Tenant with respect to the failure to perform any of the obligations of "Landlord," to the extent required to be performed prior to the date such successor(s)-in-interest became the owner of the Premises. 30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Base Rent, required to be paid by Tenant hereunder or shall fail to perform any other act on Tenant's part to be performed hereunder, including Tenant's obligations under Paragraph 11 hereof, and such failure shall continue for fifteen (15) days after notice thereof by Landlord, in addition to the other rights and remedies of Landlord, Landlord may make any such payment and perform any such act on Tenant's part; provided, however, in the event that Tenant's failure to perform relates to regulations pertaining to Tenant's Permitted Use and Tenant is diligently pursuing the cure of such failure, notwithstanding the provisions of Paragraph 26.B to the contrary, Landlord shall not be entitled to perform Tenant's obligations if and only to the extent that the performance by Landlord would materially and adversely affect Tenant's rights to cure such failure and such failure by Tenant continues for less than ninety (90) days. In the case of an emergency, no prior notification by Landlord shall be required. Landlord may take such actions without any obligation and without releasing Tenant from any of Tenant's obligations. All sums so paid by Landlord and all incidental costs incurred by Landlord and interest thereon at the Applicable Interest Rate, from the date of payment by Landlord, shall be paid to Landlord on demand as Additional Rent. 31. WAIVER If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein, or constitute a course of dealing contrary to the expressed terms of this Lease. The acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such Rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, 23 29 covenant or condition contained in this Lease may only be made by a written document signed by Landlord, based upon full knowledge of the circumstances. 32. NOTICES Each provision of this Lease or of any applicable governmental laws, ordinances, regulations and other requirements with reference to sending, mailing, or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken: A. RENT. All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at Landlord's Remittance Address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord. B. Other. All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, mailed, certified or registered, postage prepaid or sent by facsimile with confirmed receipt (and with an original sent by commercial overnight courier), and in each case addressed to the party to be notified at the Notice Address for such party as specified in the Basic Lease Information or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Notices shall be deemed served upon receipt or refusal to accept delivery. Tenant appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of occupying the Premises at the time, and, if there is no such person, then such service may be made by attaching the same on the main entrance of the Premises. C. Required Notices. Tenant shall immediately notify Landlord in writing of any notice of a violation or a potential or alleged violation of any Regulation that relates to the Premises, or of any inquiry, investigation, enforcement or other action that is instituted or threatened by any governmental or regulatory agency against Tenant or any other occupant of the Premises, or any claim that is instituted or threatened by any third party that relates to the Premises. 33. ATTORNEYS' FEES If Landlord places the enforcement of this Lease, or any part thereof, or the collection of any Rent due, or to become due hereunder, or recovery of possession of the Premises in the hands of an attorney, Tenant shall pay to Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs, whether incurred at trial, appeal or review. In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action. 34. SUCCESSORS AND ASSIGNS This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is approved by Landlord or as otherwise permitted hereunder, Tenant's assigns. 35. FORCE MAJEURE If performance by a party of any portion of this Lease is made impossible by any prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes for those items, government actions, civil commotions, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform, performance by that party for a period equal to the period of that prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent, however, is not excused by this Paragraph 35. 36. SURRENDER OF PREMISES Subject to the provisions of Paragraph 12, Tenant shall, upon expiration or sooner termination of this Lease, surrender the Premises to Landlord in the same condition as existed on the date 24 30 Tenant originally took possession thereof, including, but not limited to, all interior walls cleaned, all holes in walls repaired, all carpets cleaned, all HVAC equipment in operating order and in good repair, and all floors cleaned, and free of any Tenant-introduced marking or painting, all to the reasonable satisfaction of Landlord. Tenant shall remove all of its debris from the Premises. At or before the time of surrender, Tenant shall (i) comply with the terms of Paragraph 12 hereof with respect to Alterations to the Premises and all other matters addressed in such Paragraph, and (ii) obtain regulatory approvals required for closure or cessation of the operations of Tenant and any subtenant. If the Premises are not so surrendered at the expiration or sooner termination of this Lease, the provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any part thereof shall be surrendered to Landlord upon expiration or sooner termination of the Term. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating, but nothing contained herein shall be construed as an extension of the Term or as a consent by Landlord to any holding over by Tenant. In the event of Tenant's failure to give such notice or participate in such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. Any delay caused by Tenant's failure to carry out its obligations under this Paragraph 36 beyond the term hereof, shall constitute unlawful and illegal possession of Premises under Paragraph 25 hereof. 37. MISCELLANEOUS A. GENERAL. The term "Tenant" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof. B. TIME. Time is of the essence regarding this Lease and all of its provisions. C. CHOICE OF LAW. This Lease shall in all respects be governed by the laws of the State of California. D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda and attachments and the Basic Lease Information, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its Exhibits, addenda and attachments and the Basic Lease Information. E. MODIFICATION. This Lease may not be modified except by a written instrument signed by the parties hereto. Tenant and Landlord accept the area of the Premises as specified in the Basic Lease Information as the approximate area of the Premises for all purposes under this Lease, and acknowledge and agree that no other definition of the area (rentable, usable or otherwise) of the Premises shall apply. Neither Landlord nor Tenant shall be entitled to a recalculation of the square footage of the Premises, rentable, usable or otherwise, and no recalculation, if made, irrespective of its purpose, shall reduce Tenant's obligations under this Lease in any manner, including, without limitation, the amount of Base Rent payable by Tenant or Tenant's Proportionate Share of the Premises. F. SEVERABILITY. If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect. G. RECORDATION. Tenant shall not record this Lease or a short form memorandum hereof. H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not constitute an option or offer to lease and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant. I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount than the total Rent due nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies. All offers by or on behalf of Tenant of accord and satisfaction are hereby rejected in advance. 25 31 J. EASEMENTS. Landlord may grant easements on the Premises and dedicate for public use portions of the Premises without Tenant's consent; provided that no such grant or dedication shall materially interfere with Tenant's Permitted Use of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant's covenants hereunder. K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that this Lease has been agreed to by both the parties, that both Landlord and Tenant have consulted with attorneys with respect to the terms of this Lease and that no presumption shall be created against Landlord because Landlord drafted this Lease. Except as otherwise specifically set forth in this Lease, with respect to any consent, determination or estimation of Landlord required or allowed in this Lease or requested of Landlord, Landlord's consent, determination or estimation shall be given or made solely by Landlord in Landlord's good faith opinion, whether or not objectively reasonable. If Landlord fails to respond to any request for its consent within the time period, if any, specified in this Lease, Landlord shall be deemed to have disapproved such request. L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda and attachments attached hereto are hereby incorporated herein by this reference and made a part of this Lease as though fully set forth herein. M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Premises shall in no way affect this Lease or impose any liability on Landlord. N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord and Tenant and nothing herein is intended to create any third party benefit. O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the observance and performance of all of the other covenants, terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, subject, nevertheless, to all of the other terms and conditions of this Lease. Landlord shall not be liable for any hindrance, interruption, interference or disturbance by other third persons, nor shall Tenant be released from any obligations under this Lease because of such hindrance, interruption, interference or disturbance. P. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original. Q. MULTIPLE PARTIES. If more than one person or entity is named herein as Tenant, such multiple parties shall have joint and several responsibility to comply with the terms of this Lease. R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant hereunder for any fractional month shall be prorated based on a month of thirty (30) days. As used herein, the term "fiscal year" shall mean the calendar year or such other fiscal year as Landlord may deem appropriate. 38. ADDITIONAL PROVISIONS A. OPTION TO EXTEND. (1) Subject to the terms and conditions of this Section 38.A, Tenant shall have one (1) option to extend the Term of this Lease with respect to all of the Premises for a period of seven (7) years commencing on the expiration date of the Term (the "Extension Period"). The option to extend is sometimes referred to herein as the "Option to Extend". (a) The Option to Extend shall be exercised, if at all, by written notice of exercise given to Landlord by Tenant not earlier than August 30, 2017 and not later than October 31, 2017 (the "Expiration Date"). In the event that Tenant fails to deliver such exercise notice to Landlord as provided herein, the Option to Extend shall be null and void and of no further force or effect. (b) Anything herein to the contrary notwithstanding, if Tenant is in default of any monetary obligation hereunder (without regard to any notice or cure period) or is in default of any material non-monetary obligation hereunder following the 26 32 expiration of any applicable notice and cure period, either at the time Tenant exercises the Option to Extend or on the commencement date of the Extension Period, then Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option to Extend upon written notice to Tenant. (2) In the event the Option to Extend is exercised in a timely fashion, this Lease shall be extended for an additional seven (7) years upon all of the terms and conditions of this Lease, provided that (i) Tenant shall not receive any tenant improvement allowance or other allowance, (ii) Tenant shall take the Premises in its AS-IS condition, (iii) the Rent for such Extension Period shall be adjusted to equal the "Fair Market Rent" for the Premises and (iv) Tenant shall have no further options to extend the Term of this Lease. For purposes hereof, "Fair Market Rent" shall mean the prevailing gross rental rate per annum per square foot as of the commencement date of the Extension Period, including, without limitation, base rent, additional rent and all other monetary payments (including base rent increases and step-ups) agreed to be paid by new tenants generally for first-class fully improved research and development space with ancillary office space in a condition (including the state of build out) and location comparable to the Premises in comparable first-class buildings in the City of Santa Clara for seven (7) year terms, pursuant to new leases entered into by such other tenants, and considering any rental abatement and any other similar concessions granted in connection with new leases for such comparable space (and other similar items). For purposes of this Section 38.A, "fully improved research and development space with ancillary office space" shall mean such facilities which are improved with research and development space with ancillary office space comparable to those in existence in the Premises on the date of this Lease. (3) Within thirty (30) days after receipt of Tenant's written notice of its to exercise the Option to Extend, Landlord shall notify Tenant in writing of Landlord's proposed Fair Market Rent for the term of the Extension Period, based on the provisions of Section 2 above. Within thirty (30) days after receipt of such notice from Landlord, Tenant shall have the right either to (i) accept Landlord's statement of Fair Market Rent as the Fair Market Rent for the Extension Period, or (ii) elect to arbitrate Landlord's estimate of Fair Market Rent, such arbitration to be conducted pursuant to the provisions hereof. Failure on the part of Tenant to require arbitration of Fair Market Rent within thirty (30) such day period shall constitute acceptance of the Fair Market Rent for the Extension Period, as proposed by Landlord. If Tenant elects arbitration, the arbitration shall be concluded within ninety (90) days after the date of Tenant's election. To the extent that arbitration has not been completed prior to the expiration of the Term of the Lease, Tenant shall pay Fair Market Rent in an amount equal to the rate proposed by Landlord, and the Fair Market Rent shall be adjusted, if necessary, once the Fair Market Rent is ultimately determined by arbitration. Should the monthly installments of Fair Market Rent as adjusted for the period following the completion of such arbitration exceed the amount previously paid by Tenant for such period, Tenant shall pay the entire difference to Landlord within thirty (30) days following delivery of written demand. Should the monthly installments of Fair Market Rent as adjusted following completion of such arbitration be less than the amount previously paid by Tenant for such period, Landlord shall credit such difference against the next installment(s) of Fair Market Rent coming due. Upon determination of the Fair Market Rent for the Extension Period (whether by mutual agreement or by arbitration), the parties shall enter into an amendment to this Lease memorializing such determination. (4) In the event of arbitration, the judgment or the award rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding between the parties. The arbitration shall be conducted and determined in the City and County of Santa Clara in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes except to the extent that the procedures mandated by said rules shall be modified as follows: (a) Tenant shall make demand for arbitration in writing within thirty (30) days after service of Landlord's determination of Fair Market Rent given under Section 3 above, specifying therein the name and address of the person to act as the arbitrator on its behalf. The arbitrator shall be a leasing agent with at least ten (10) years experience and otherwise familiar with the Fair Market Rent of first- 27 33 class fully improved research and development and office space in the City of Santa Clara who would qualify as an expert witness over objection to give opinion testimony addressed to the issue in a court of competent jurisdiction. Failure on the part of Tenant to make a proper demand in a timely manner for such arbitration shall constitute a waiver of the right thereto. Within fifteen (15) days after the service of the demand for arbitration, Landlord shall give notice to Tenant, specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator, within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. (b) In the event that two (2) arbitrators are chosen pursuant to Section 4(a) above, the arbitrators so chosen shall, within fifteen (15) days after the second arbitrator is appointed, appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two (2) arbitrators pursuant to Section 4(a). In the event the two (2) arbitrators are unable to agree upon such appointment within ten (10) days after expiration of said fifteen (15) day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon, within a further period of fifteen (15) days. If the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by the then Chief Judge of the United States District Court having jurisdiction over the City and County of Santa Clara, acting in his private and not in his official capacity, and the other party shall not raise any question as to such Judge's full power and jurisdiction to entertain the application for and make the appointment. The third arbitrator shall decide the dispute if it has not previously been resolved by following the procedure set forth below. (c) Where the determination of Fair Market Rent cannot be resolved by settlement between the parties during the course of arbitration, the issue shall be resolved by the third arbitrator in accordance with the following procedure. The arbitrator selected by each of the parties shall state in writing his or her determination of the Fair Market Rent supported by the reasons therefor with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his or her determination of Fair Market Rent. The third arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions. The resolution he or she chooses as most closely approximating his or her determination shall constitute the decision of the arbitrators and be final and binding upon the parties. (d) In the event of a failure, refusal or inability of any arbitrator to act, his or her successor shall be appointed by him, but in the case of the third arbitrator, his or her successor shall be appointed in the same manner as provided for appointment of the third arbitrator. The arbitrators shall decide the issue within fifteen (15) days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and the arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expenses of its respective arbitrator and both shall share the fee and expenses of the third arbitrator. The attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. (e) The third arbitrator shall have the right to consult experts and competent authorities to obtain factual information or evidence pertaining to a determination of Fair Market Rent, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The third arbitrator shall render his or her decision in writing with counterpart copies to each party. The third arbitrator shall have no power to modify the provisions of this Lease. 28 34 (f) The Option to Extend granted to Tenant pursuant to this Section 38.A shall be personal to Aviron and shall not be assigned, transferred or otherwise conveyed by Aviron, provided, that Aviron shall be entitled to assign, transfer or otherwise convey the Option to Extend and the Lease to an Affiliate or a Public Company to the extent provided and subject to the terms and conditions of Section 21.A.3. Except as provided in the previous sentence, in the event Aviron attempts to or assigns, transfers or otherwise conveys the Option to Extend granted hereunder or the Lease or attempts any of the foregoing, the Option to Extend granted herein and the Lease shall automatically terminate. B. LETTER OF CREDIT. 1. DELIVERY OF LETTER OF CREDIT. In lieu of depositing a security deposit with Landlord, Tenant shall, on execution of this Lease, deliver to Landlord and cause to be in effect during the Lease Term an unconditional, irrevocable letter of credit ("LOC") in the amount specified for the Security Deposit in the Basic Lease Information, as it may be increased as provided in this Lease (the "LOC Amount") which LOC shall renew automatically from year to year. The LOC shall be in a form reasonably acceptable to Landlord and shall be issued by an LOC bank selected by Tenant and acceptable to Landlord. An LOC bank is a bank that accepts deposits, maintains accounts, has a local office that will negotiate a letter of credit, and the deposits of which are insured by the Federal Deposit Insurance Corporation. Tenant shall pay all expenses, points, or fees incurred by Tenant in obtaining the LOC. The LOC shall not be mortgaged, assigned or encumbered in any manner whatsoever by Tenant without the prior written consent of Landlord. Tenant acknowledges that Landlord has the right to transfer or mortgage its interest in the Premises, the Building and in this Lease and Tenant agrees that in the event of any such transfer or mortgage, Landlord shall have the right to transfer or assign the LOC and/or the LOC Security Deposit (as defined below) to the transferee or mortgagee, and in the event of such transfer, Tenant shall look solely to such transferee or mortgagee for the return of the LOC and/or the LOC Security Deposit. 2. REPLACEMENT OF LETTER OF CREDIT. Tenant may, from time to time, replace any existing LOC with a new LOC if the new LOC (a) becomes effective prior to the expiration of the LOC that it replaces; (b) is in the required LOC amount; (c) is issued by an LOC bank reasonably acceptable to Landlord; and (d) otherwise complies with the requirements of this Paragraph 38.B. 3. LANDLORD'S RIGHT TO DRAW ON LETTER OF CREDIT. Landlord shall hold the LOC as security for the performance of Tenant's obligations under this Lease. If, after notice and failure to cure within any applicable period provided in this Lease, Tenant defaults on any provision of this Lease, Landlord may, without prejudice to any other remedy it has, draw on that portion of the LOC necessary to (a) pay Rent or other sum in default; (b) pay or reimburse Landlord for any amount that Landlord may spend or become obligated to spend in exercising Landlord's rights under Paragraph 30; and/or (c) compensate Landlord for any expense, loss, or damage that Landlord may suffer because of Tenant's default. If Tenant fails to renew or replace the LOC prior to its expiration, Landlord may, without prejudice to any other remedy it has, draw on the entire amount of the LOC. 4. LOC SECURITY DEPOSIT. Any amount of the LOC that is drawn on by Landlord but not applied by Landlord shall be held by Landlord as a security deposit (the "LOC SECURITY DEPOSIT") in accordance with Paragraph 19 of this Lease. 5. RESTORATION OF LETTER OF CREDIT AND LOC SECURITY DEPOSIT. If Landlord draws on any portion of the LOC and/or applies all or any portion of such draw, Tenant shall, within five (5) business days after demand by Landlord, either (a) deposit cash with Landlord in an amount that, when added to the amount remaining under the LOC and the amount of any LOC Security Deposit, shall equal the LOC Amount then required under this Paragraph 38.B; or (b) reinstate the LOC to the full LOC Amount. 29 35 C. OPTION TO PURCHASE. (1) Landlord hereby grants to Tenant an option to purchase the Premises (the "First Option to Purchase") pursuant to the terms and conditions of this Section 38.C and the Purchase Agreement attached hereto as EXHIBIT E. The First Option to Purchase shall be exercisable at any time from the Term Commencement Date until September 30, 2000 (the "First Option Term") and subject to the requirements contained herein. The First Option to Purchase may be exercised by: (a) delivering written notice to Landlord (the "First Option Exercise Notice") not later than ninety (90) days prior to the proposed Closing Date (as defined in the Purchase Agreement) but in any event not later than September 30, 2000 and not earlier than one hundred twenty (120) days prior to the proposed Closing Date and in accordance with the notice provisions contained in the Basic Lease Information, (b) delivering a copy of the Purchase Agreement executed by Tenant, and (c) depositing the sum of Five Hundred Thousand Dollars ($500,000) with the Title Company (as defined in the Purchase Agreement) and held in accordance with the terms and conditions of the Purchase Agreement. The First Option Exercise Notice shall affirmatively state that the Tenant exercises the First Option to Purchase without condition or qualification. Subject to the terms and conditions of the Purchase Agreement, in the event Tenant exercises the First Option to Purchase, in no event shall the Closing Date be later than January 31, 2001. (2) In the event Tenant does not exercise the First Option to Purchase as set forth herein, Landlord hereby grants to Tenant an option to purchase the Premises (the "Second Option to Purchase," together with the First Option to Purchase hereinafter referred to collectively as the "Option to Purchase") pursuant to the terms and conditions of this Section 38.C. and the Purchase Agreement attached hereto as EXHIBIT E. The Second Option to Purchase shall be exercisable from April 1, 2018 to May 31, 2018 (the "Second Option Term") and subject to the requirements contained herein. The Second Option to Purchase may only be exercised by: (a) delivering written notice to Landlord (the "Second Option Exercise Notice") not later than May 31, 2018 and not earlier than April 1, 2018 and in accordance with the notice provisions contained in the Basic Lease Information, (b) delivering a copy of the Purchase Agreement executed by Tenant, and (c) depositing the sum of Five Hundred Thousand Dollars ($500,000) with the Title Company (as defined in the Purchase Agreement) and held in accordance with the terms and conditions of the Purchase Agreement; provided, however, prior to delivering the Second Option Exercise Notice, Tenant shall have first exercised the Option to Extend pursuant to the terms and conditions of Section 38.A. above. The Second Option Exercise Notice shall affirmatively state that the Tenant exercises the Second Option to Purchase without condition or qualification. Subject to the terms and conditions of the Purchase Agreement, in the event Tenant exercises the Second Option to Purchase, the Closing Date shall be January 31, 2019. (3) The purchase price (the "Purchase Price") for the First Option to Purchase or the Second Option to Purchase, as applicable, shall be equal to the "Fair Market Value" for the Premises at the time Tenant delivers the First Option Exercise Notice or the Second Option Exercise Notice, as applicable. For purposes hereof, "Fair Market Value" shall mean the amount that a third party independent buyer would pay for the Premises and the amount that a third party independent seller would accept for the Premises under no compulsion to buy or sell, respectively, and taking into account all circumstances of the Premises, including, but not limited to, the physical, economic and other market conditions of the Premises, and purchase price for first-class space in a condition (including the state of build out) and location comparable to the Premises in comparable first-class "biotech" buildings in the San Mateo, Santa Clara, Alameda and San Francisco counties. In addition, for purposes of determining "Fair Market Value", the appraisers shall be instructed to appraise the Premises on the basis that it is an income producing property. For purposes of the appraisal, the appraisers shall be instructed to assume that this Lease will remain in effect during the entire Term (and the Term as extended pursuant to the Option to Extend in the case of the Second Option to Purchase); that Tenant will pay when due all Base Rent (calculated pursuant to Section 38.A above in the case of the Second Option to Purchase), Additional Rent and all other sums due hereunder (including, without limitation, all adjustments thereto provided for hereunder); and that the Tenant will comply with the terms of the Lease during the Term hereof (and 30 36 the Term as extended pursuant to the Option to Extend in the case of the Second Option to Purchase). (a) On or before the date that is fifteen (15) days after receipt of the First Option Exercise Notice or Second Option Exercise Notice, as applicable, Landlord shall notify Tenant in writing of Landlord's proposed Purchase Price, based on the provisions of Section 3 above. Within fifteen (15) days after receipt of such notice from Landlord, Tenant shall have the right either to (i) accept Landlord's statement of Purchase Price as the Purchase Price for the Premises, or (ii) elect to arbitrate the Fair Market Value of the Premises, such arbitration to be conducted pursuant to the provisions hereof. Failure on the part of Tenant to require arbitration of Fair Market Value within such fifteen (15) day period shall constitute acceptance of the Purchase Price for the Premises, as proposed by Landlord. If Tenant elects arbitration, the arbitration shall be concluded as expeditiously as possible but in any event within sixty (60) days after the date of Tenant's election. To the extent that arbitration has not been completed as provided herein, Tenant shall pay the Purchase Price proposed by Landlord, and the Purchase Price shall be adjusted, if necessary, pursuant to a provision in the Purchase Agreement which shall survive the Closing Date, once the Fair Market Value is ultimately determined by arbitration. Should the Purchase Price as determined by arbitration exceed the Purchase Price previously paid by Tenant, Tenant shall pay the entire difference to Landlord within thirty (30) days following delivery of written demand. Should the Purchase Price as determined by arbitration be less than the Purchase Price previously paid by Tenant, Landlord shall pay the entire difference to Tenant within thirty (30) days following delivery of written demand. Upon determination of the Purchase Agreement (whether by mutual agreement or by arbitration), the parties shall incorporate the Purchase Price into the Purchase Agreement. (b) In the event of arbitration, the judgement or award rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding between the parties. The arbitration shall be conducted and determined in the City and County of Santa Clara in accordance with the then prevailing rules of the American Arbitration Association or its successor for arbitration of commercial disputes except to the extent that the procedures mandated by said rules shall be modified as follows: (c) Tenant shall make demand for arbitration in writing within fifteen (15) days after service of Landlord's delivery of notice of the Purchase Price, specifying therein the name and address of the person to act as the arbitrator on its behalf. The arbitrator shall be a MAI appraiser with at least ten (10) years experience and otherwise familiar with the Fair Market Values of first-class buildings in a condition (including the state of build out) and location comparable to the Premises in comparable first-class "biotech" buildings in the San Mateo, Santa Clara, Alameda and San Francisco counties who would qualify as an expert witness over objection to give opinion testimony addressed to the issue in a court of competent jurisdiction. Failure on the part of Tenant to make a proper demand in a timely manner for such arbitration shall constitute a waiver of the right thereto. Within fifteen (15) days after the service of the demand for arbitration, Landlord shall give notice to Tenant, specifying the name and address of the person designated by Landlord to act as arbitrator on its behalf who shall be similarly qualified. If Landlord fails to notify Tenant of the appointment of its arbitrator, within or by the time above specified, then the arbitrator appointed by Tenant shall be the arbitrator to determine the issue. (d) In the event that two (2) arbitrators are chosen pursuant to Section 4(a) above, the arbitrators so chosen shall, within fifteen (15) days after the second arbitrator is appointed, appoint a third arbitrator, who shall be a competent and impartial person with qualifications similar to those required of the first two (2) arbitrators pursuant to Section 4(a). In the event the two (2) arbitrators are unable to agree upon such appointment within ten (10) days after expiration of said fifteen (15) day period, the third arbitrator shall be selected by the parties themselves, if they can agree thereon, within a further period of five (5) days. If 31 37 the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by the then Chief Judge of the United States District Court having jurisdiction over the City and County of Santa Clara, acting in his private and not in his official capacity, and the other party shall not raise any question as to such Judge's full power and jurisdiction to entertain the application for and make the appointment. The third arbitrator shall decide the dispute if it has not previously been resolved by following the procedure set forth below. (e) Where the determination of Fair Market Value cannot be resolved by settlement between the parties during the course of arbitration, the issue shall be resolved by the third arbitrator in accordance with the following procedure. The arbitrator selected by each of the parties shall state in writing his or her determination of the Fair Market Value supported by the reasons therefor with counterpart copies to each party. The arbitrators shall arrange for a simultaneous exchange of such proposed resolutions. The role of the third arbitrator shall be to select which of the two proposed resolutions most closely approximates his or her determination of Fair Market Value. The third arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions. The resolution he or she chooses as most closely approximating his or her determination shall constitute the decision of the arbitrators and be final and binding upon the parties. (f) In the event of a failure, refusal or inability of any arbitrator to act, his or her successor shall be appointed by him, but in the case of the third arbitrator, his or her successor shall be appointed in the same manner as provided for appointment of the third arbitrator. The arbitrators shall decide the issue within ten (10) days after the appointment of the third arbitrator. Any decision in which the arbitrator appointed by Landlord and the arbitrator appointed by Tenant concur shall be binding and conclusive upon the parties. Each party shall pay the fee and expenses of its respective arbitrator and both shall share the fee and expenses of the third arbitrator. The attorneys' fees and expenses of counsel for the respective parties and of witnesses shall be paid by the respective party engaging such counsel or calling such witnesses. (g) The third arbitrator shall have the right to consult experts and competent authorities to obtain factual information or evidence pertaining to a determination of Fair Market Value, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine. The third arbitrator shall render his or her decision in writing with counterpart copies to each party. The third arbitrator shall have no power to modify the provisions of this Lease. (4) So long as all conditions to the exercise of the Option to Purchase are satisfied or are waived in writing by Landlord, Tenant may exercise the Option to Purchase in accordance with this Section 38.C and in no other manner. In the event that Tenant fails to deliver the First Option Exercise Notice or the Second Option Exercise Notice to Landlord as provided herein, the First Option Exercise Notice or the Second Option Exercise Notice, as applicable, shall be null and void and of no further force or effect. (5) Anything herein to the contrary notwithstanding, if Tenant is in default of any monetary obligation hereunder (without regard to any notice or cure period) or is in default of any material non-monetary obligation hereunder following the expiration of any applicable notice and cure period, either at the time Tenant exercises the Option to Purchase or on the Closing Date, then Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the First Option to Purchase, or the Second Option to Purchase, as applicable, upon written notice to Tenant. Any inspection or testing of the Premises by Tenant shall be conducted in accordance with the Purchase Agreement. (6) The First Option to Purchase and the Second Option to Purchase granted to Tenant pursuant to this Section 38.C shall be personal to Aviron and shall not be assigned, transferred or otherwise conveyed by Aviron; provided, that Aviron shall be entitled to assign, transfer or otherwise convey the First Option to Purchase or the Second Option to Purchase, as applicable, or assign the Lease to an Affiliate or a Public 32 38 Company to the extent provided and subject to the terms and conditions of Section 21.A.3. Except as provided in the previous sentence, in the event Aviron attempts to or assigns, transfers or otherwise conveys the First Option to Purchase and/or the Second Option to Purchase granted hereunder or assign the Lease or attempts any of the foregoing, both the First Option to Purchase and the Second Option to Purchase granted herein and the Lease shall automatically terminate. (7) Landlord and tenant agree that Tenant's failure to perform as required in this Section 38.C may result in substantial losses to Landlord, including, but not limited to, the loss of prospective tenants and/or purchasers of the Premises. As a consequence thereof, Landlord and Tenant agree that time is truly of the essence of each of the provisions of this Section 38.C and the Purchase Agreement. (8) On the Closing Date, this Lease shall automatically terminate, Rent and other charges owing to Landlord, if any, shall be prorated as of the Closing Date and neither Landlord nor Tenant shall have any further obligations hereunder except as specifically provided herein to the contrary. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year first above written. LANDLORD Spieker Properties, L.P., a California limited partnership By: Spieker Properties, Inc., a Maryland corporation, its general partner By: /s/ [Signature Illegible] -------------------------------- Its: Regional Senior Vice President -------------------------------- Date: February 5, 1999 TENANT Aviron, a Delaware corporation By: Fred Kurland ------------------------------------- Its: Senior Vice President and Chief Financial Officer ------------------------------------- Date: February 5, 1999 33 39 EXHIBIT A SITE PLAN, PROPERTY DESCRIPTION All of that real property situated in the City of Santa Clara, County of Santa Clara, State of California, described as follows: Parcel B, as shown on that Parcel Map filed for record in the Office of the Recorder of the County of Santa Clara, State of California on October 10, 1979 in Book 450 of Maps, page(s) 56. ARB No. 104-4-42.08. EX-10.26 3 FIRST AMENDMENT TO AGREEMENT DATED JUNE 7, 1999 1 CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.26 FIRST AMENDMENT TO THE INFLUENZA VACCINE COLLABORATION AND LICENSE AND DISTRIBUTION AGREEMENT This FIRST AMENDMENT TO THE INFLUENZA VACCINE COLLABORATION AND LICENSE AND DISTRIBUTION AGREEMENT (the "Amendment") is made this _7th_ day of _____June__, 1999, by and between CSL LIMITED, A.C.N. 051 588 348 whose head office is situated at 45 Poplar Road, Parkville in the State of Victoria, 3052, Australia (hereinafter, "CSL Limited") and its Affiliates in the Territory (hereinafter, collectively referred to as "CSL"), and AVIRON of 297 North Bernardo Avenue, Mountain View, in the State of California 94043, U.S.A. (hereinafter referred to as "Aviron"), each of which may be hereinafter referred to together as "the Parties" or each individually as a "Party". RECITALS WHEREAS, Aviron and CSL have entered into that certain Influenza Vaccine Collaboration and License and Distribution Agreement dated June 19, 1998 (the "Agreement") regarding the clinical development and commercialization of Aviron's proprietary intranasally delivered cold adapted influenza vaccine in [*] formulation in certain territories; and WHEREAS, the Parties now desire to expand the scope of the Agreement to include such vaccine in [*] formulation; NOW, THEREFORE, the Parties hereby agree as follows: 1. Section 1.3 of the Agreement is hereby amended as follows: "Aviron Product" means (a) Aviron's live, intranasally delivered, cold adapted influenza vaccine in a [*] formulation that, during the dating period established by the FDA, [*]; and (b) the [*]. 2. Section 1.6 of the Agreement is hereby amended as follows: "Bridging Studies" means: (a) those certain "bridging studies" required to be conducted to obtain Regulatory Approval in the Territory for the [*] Aviron Product by demonstrating [*], in order to [*] for the [*]; and (b) those certain "bridging studies" required to be conducted to obtain Regulatory Approval in the Territory for the [*] by demonstrating its [*], in order to [*] for the [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 1 2 3. Section 1.15 of the Agreement is hereby amended as follows: "Development and Regulatory Costs" means the costs incurred by either Party or for its account specifically identifiable to the development of the Aviron Product for Regulatory Approval in the Territory and shall consist of (a) [*] costs associated with the conduct of the [*]; (b) Cost of Goods Shipped of any Aviron Product [*]; and (c) direct labor and materials and out-of-pocket costs associated with the [*] in the Territory as specified in the Development Plan and approved by the Steering Committee, and all calculated in accordance with reasonable cost accounting methods, consistently applied by the Party performing the work. 4. Section 1.19 of the Agreement is hereby amended as follows: "[*] Aviron Product" means Aviron's live, intranasally delivered, cold adapted influenza vaccine in a formulation which, during the dating period established by the FDA, [*], as further described in the PLA. 5. Section 1.20 of the Agreement is hereby amended as follows: "[*] CSL Product" means any influenza vaccine (whether live or killed) product [*], but specifically excluding the [*] Aviron Product. 6. Section 1.25 of the Agreement is hereby amended as follows: "Market Launch" means the first to occur of (a) the first commercial sale of the [*] Aviron Product in the Territory by CSL or its Affiliate, or (b) the first commercial sale of the [*] Aviron Product in the Territory by CSL or its Affiliate. 7. The following provision is hereby inserted as Section 4.8 of the Agreement: 4.8 Development of Aviron Product outside of Territory. Notwithstanding any other provision of this Agreement, the Steering Committee shall have [*] of the Aviron Product outside of the Territory. 8. The following provision is hereby inserted as Section 4.9 of the Agreement: 4.9 Failure to Obtain Regulatory Approval. In the event that CSL has not obtained Regulatory Approval for the [*] Aviron Product in the Territory within the [*] following the date that the [*] Aviron Product is approved for commercial sale in the United States by the FDA, Aviron shall have the right to [*] with respect to the [*] Aviron Product upon [*] written notice. 9. Section 6.1(a) of the Agreement is hereby amended as follows: Supply by Aviron. It is Aviron's intention to supply, or cause to be supplied, finished Aviron Product to CSL for sale in the Territory. Any such supply shall be pursuant to a separate supply agreement. Such supply agreement will contain standard industry terms, including without limitation provisions regarding forecasts, ordering, delivery and acceptance. Aviron [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3 Product provided to CSL pursuant to such supply agreement will be invoiced to CSL at Aviron's [*], which [*] shall not be [*]. Such agreement will also provide that: (i) Aviron shall in good faith attempt to meet CSL's Aviron Product requirements, provided that in the event that [*], Aviron reserves the right to [*]; (ii) Aviron shall [*] to supply [*] Aviron Product to CSL to the extent that such supply would prevent [*] and/or meeting its obligations under an [*] with [*] Aviron Product for [*] the Territory; (iii) Aviron shall not be held liable for [*]; (iv) such Aviron Product shall be manufactured in accordance with the specifications approved by the TGA and in compliance with Good Manufacturing Practices; and (v) following the earlier of (A) the [*] of the date that the [*] Aviron Product receives approval from the FDA for commercial sale in the United States, or (B) the expiration or termination of [*] as of the Effective Date between [*] relating to the [*] Aviron Product, as such [*] (it being understood that [*] shall have no obligation to [*] may at its election and upon [*] prior written notice, [*] Aviron Product to [*] under this Agreement, provided that in such event, [*] shall be deemed to have [*] under the [*] Aviron Product for [*] in the Territory during the term of this Agreement. 10. The following provision is hereby inserted as Section 6.2 to the Agreement: 6.2 [*]. To the extent that doing so is consistent with [*] to its [*] may become a [*] for the [*] Aviron Product. 11. Section 18.1 of the Agreement is hereby amended as follows: Term of Agreement. (a) Initial Term. This Agreement shall expire upon the sixth anniversary of the date of the first commercial sale of the Liquid Aviron Product in the Territory by CSL or its Affiliate, provided that (i) if there has been no such commercial sale of the [*] Aviron Product within six (6) years of the Effective Date, then this Agreement shall expire upon the sixth anniversary of the date of the first commercial sale of the [*] Aviron Product in the Territory by CSL or its Affiliate, and (ii) if there has been no such commercial sale of either the [*] Aviron Product or the [*] Aviron Product within six (6) years of the Effective Date, then this Agreement shall expire upon the sixth anniversary of the Effective Date (each such expiration, the "Initial Term"). (b) Renewal. In the event one of the following events (each, a "Triggering Event") has occurred: (i) CSL and its Affiliate has sold in the Territory at least [*] of the Aviron Product (whether the [*] Aviron Product or the [*] Aviron Product) in [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 4 the aggregate in [*] years from the first commercial sale of the [*] Aviron Product in the Territory by CSL or its Affiliate; or (ii) CSL has obtained [*] for the [*] Aviron Product in Australia for [*] any time prior to the expiration of the Initial Term; or (iii) CSL has obtained [*] for the [*] Aviron Product in Australia for [*] any time prior to the expiration of the Initial Term; then CSL shall have the right, upon thirty (30) days written notice to Aviron (but in no event after the termination or expiration of the Initial Term, except with Aviron's prior written consent), to renew the term of this Agreement for an additional six (6) years, subject to Aviron's right to terminate during such additional term, as provided in Section 18.2(d). It is understood by the Parties that such renewal shall occur no more than once and shall be on the same terms and conditions as herein contained. In the event that none of the Triggering Events have occurred prior to expiration of the Initial Term, this Agreement shall terminate, unless otherwise agreed upon by the Parties. 12. The following provisions are hereby inserted as Sections 10.2(n) and 10.2(o) of the Agreement: (n) Section 3.5 (United States government "march-in" rights); (o) Section 8.5 ([*]). 13. The following provisions of Section 1.1 of the Option Agreement, which is attached and incorporated into the Agreement as Schedule 7.7 thereof, are hereby amended as follows: Acceptance Period means the period commencing on the first of (i) the date [*], or (ii) the date [*], and ending at 4 p.m. (Melbourne time) on the date five (5) years after the date of commencement of the Acceptance Period. Application Period means the period commencing on the date [*], and ending at 4 p.m. (Melbourne time) on the date five (5) years after the date of commencement of the Application Period. Relevant Condition Precedent means: (a) In the case of the Option referred to in Clause 2.1(a), the occurrence of the event which causes [*]; (b) In the case of the Option referred to in Clause 2.1(b), the occurrence of the event which causes [*]; and (c) In the case of the Option referred to in Clause 2.1(c), the occurrence of the event which causes the Third Period to commence. Third Period means the period commencing on the first to occur of: [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 5 (a) the date CSL first [*]; or (b) the date that [*]; and ending at 4 p.m. (Melbourne time) on the date [ * ] after the date of commencement of the Third Period. 14. All capitalized words used in this Amendment shall have the meanings ascribed to them in the Agreement, unless otherwise indicated. 15. Except as explicitly set forth in this Amendment, all other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by the respective duly authorized officers as of the date first written above. CSL LIMITED, A.C.N. AVIRON By: /s/ Stan McLiesh By: /s/ Carol A. Olson ----------------------------------- ----------------------------------- Printed Name: Stan McLiesh Printed Name: Carol A. Olson ------------------------- ------------------------- Title: General Manager Pharmaceuticals Title: Senior Vice President -------------------------------- -------------------------------- /s/ P. Turvey - -------------------------------------- Peter Turvey (date) Company Secretary [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6 420703 v2/PA 90m702!.DOC 072699/1648 420703 v3/PA 90m703!.DOC 072699/1648 [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE, 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EX-10.27 4 LOAN AND SECURITY AGREEMENT DATED JUNE 23, 1999 1 EXHIBIT 10.27 EXECUTION COPY THE INDEBTEDNESS CREATED PURSUANT TO THIS LOAN AND SECURITY AGREEMENT IS "DESIGNATED SENIOR INDEBTEDNESS" AS THAT TERM IS DEFINED IN THE INDENTURE, DATED AS OF MARCH 15, 1998, BETWEEN AVIRON AND MARINE MIDLAND BANK WITH RESPECT TO THE 5 3/4% CONVERTIBLE SUBORDINATED NOTES OF AVIRON DUE 2005 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT dated as of June 23, 1999, is made by AVIRON (the "Borrower"), a Delaware corporation having its principal place of business and chief executive office at 297 North Bernardo Avenue, Mountain View, California 94043, in favor of Transamerica Business Credit Corporation, a Delaware corporation (the "Lender"), having its principal office at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, and an office at 76 Batterson Park Road, Farmington, Connecticut 06032-2571. W I T N E S S E T H : WHEREAS, the Borrower has requested that the Lender make loans to it; and WHEREAS, the Lender has agreed to make such loans on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Lender to make such loans, the Borrower hereby agrees with the Lender as follows: SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings, and shall be equally applicable to both the singular and plural forms of the terms defined: "Affiliate" shall mean as to any Person, any other Person who directly or indirectly controls, is under common control with, is controlled by or is a director or officer of such Person. As used in this definition, "control" (including its correlative meanings, "controlled by" and "under common control with") means possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of voting securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person who owns directly or indirectly ten percent (10%) or more of the securities having ordinary voting power for the election of the members of the board of 2 directors or other governing body of a corporation or ten percent (10%) or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation, partnership or other Person. "Agreement" shall mean this Loan and Security Agreement, as amended, supplemented, or otherwise modified from time to time. "American Home Products Corporation" shall mean American Home Products Corporation, a Delaware corporation. "Applicable Law" shall mean the laws of the State of Illinois (or any other jurisdiction whose laws are mandatorily applicable notwithstanding the parties' choice of Illinois law) or, with respect to laws limiting the rates of interest charges on loans, the laws of the United States of America, whichever laws allow the greater interest to be charged thereon, as such laws now exist or may be changed or amended or come into effect in the future. "Business Day" shall mean any day other than a Saturday, Sunday, or public holiday or the equivalent for banks in Chicago, Illinois. "Cash Equivalents" shall mean (i) securities issued, guaranteed or insured by the United States or any of its agencies; (ii) certificates of deposit maturing no more than one (1) year from the date of investment issued by (x) the Lender or its Affiliates; (y) any U.S. federal or state chartered commercial bank of recognized standing which has capital and unimpaired surplus in excess of $500,000,000; or (z) any bank or its holding company that has a short-term commercial paper rating of at least A-1 or the equivalent by Standard & Poor's Ratings Services or at least P-1 or the equivalent by Moody's Investors Service, Inc.; (iii) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within two (2) years from the date of acquisition thereof; (iv) corporate commercial paper, corporate notes and bonds, bankers acceptances, certificates of deposit and repurchase agreements which, if Short Term, have a minimum credit rating of A-1 or P-1 or, if Long Term, have a minimum credit rating of A by Standard & Poor's Ratings Services or the equivalent by Moody's Investors Service, Inc., provided that the investments referred to in this clause shall mature no more than two (2) years from the date of purchase by the Borrower and no single investment shall be in an amount greater than $7,500,000 unless such investment is issued by the United States Government or any of its agencies or is a repurchase agreement collateralized by same or is an approved money market fund; (v) non-diversified short duration mutual funds with an average -2- 3 credit rating of at least A- by Standard & Poor's Ratings Services or the equivalent by Moody's Investors Service, Inc. and a duration not to exceed one and one-half (1.5) years; (vi) investments in money market funds registered under the Investment Company Act of 1940, which have net assets of at least $500,000,000 and at least eighty-five percent (85%) of whose assets consist of securities and other obligations of the type described in clauses (i) through (v) above; and (vii) other instruments, commercial paper or investments acceptable to the Lender in its sole discretion. "Cash Covenant" shall have the meaning specified in Section 7. "Cash Covenant Default" shall have the meaning specified in Section 9(n). "Code" shall have the meaning specified in Section 10(a)(viii). "Collateral" shall have the meaning specified in Section 2. "Effective Date" shall mean the date on which all of the conditions specified in Section 3.3 shall have been satisfied. "Equipment" shall have the meaning specified in Section 2. "Event of Default" shall mean any event specified in Section 9. "Financial Statements" shall have the meaning specified in Section 6.1. "First Loan" shall have the meaning specified in Section 3.1. "First Note" shall mean the promissory note, substantially in the form of Exhibit A, as amended, supplemented or otherwise modified from time to time. "Fourth Note" shall mean the promissory note, substantially in the form of Exhibit D, as amended, supplemented or otherwise modified from time to time. "GAAP" shall mean generally accepted accounting principles in the United States of America, as in effect from time to time. "Governing Documents" shall mean the Borrower's -3- 4 certificate of incorporation and bylaws, or similar organizational documents of the Borrower. "Indebtedness" shall mean, with respect to any Person, as of the date of determination thereof (without duplication), (i) all obligations of such Person for borrowed money of any kind or nature, including funded and unfunded debt, and Swaps regardless of whether the same is evidenced by any note, debenture, bond or other instrument, (ii) all obligations of such Person to pay the deferred purchase price of property or services (other than current trade accounts payable under normal trade terms and which arise in the ordinary course of business), (iii) all obligations of such Person to acquire or for the acquisition or use of any fixed asset, including capitalized lease obligations (other than, in any such case, any portion thereof representing interest or deemed interest or payments in respect of taxes, insurance, maintenance or service), or improvements which are payable over a period longer than one year, regardless of the term thereof or the Person or Persons to whom the same are payable, (iv) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right to be secured by) a Lien on any asset of such Person whether or not the Indebtedness is assumed by such Person, provided that for the purpose of determining the amount of Indebtedness of the type described in this clause (iv), if recourse with respect to such Indebtedness is limited to the assets of such Person, then the amount of Indebtedness shall be limited to the fair market value of such assets, (v) all Indebtedness of others to the extent guaranteed by such Person and (vi) all obligations of such Person in respect of letters of credit, bankers acceptances or similar instruments issued or accepted by banks or other financial institutions for the account of such Person. "Intellectual Property" shall have the meaning specified in Section 2. "Letter of Credit" shall have the meaning specified in Section 9(n). "Lien" shall mean any lien, claim, charge, encumbrance, pledge, security interest, assignment, hypothecation, deed of trust, mortgage, lease, conditional sale, retention of title or other preferential arrangement having substantially the same economic effect as any of the foregoing, whether voluntary or imposed by law. "Loan Documents" shall mean, collectively, this Agreement, the Notes and all other documents, agreements, certificates, instruments, and opinions executed and delivered in connection herewith and therewith, as the same may be amended, supplemented or otherwise modified from time to time. -4- 5 "Loans" shall mean the First Loan and the Subsequent Loans. "Long Term" shall mean maturing at any time after the date that is the one-year anniversary from the date of issuance. "Material Adverse Change" shall mean, with respect to any Person, a material adverse change in the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise) of such Person taken as a whole. "Material Adverse Effect" shall mean, with respect to any Person, a material adverse effect on the business, prospects, operations, results of operations, assets, liabilities, or condition (financial or otherwise) of such Person taken as a whole. "Notes" shall mean the First Note, the Second Note, the Third Note and the Fourth Note. "Obligations" shall mean all indebtedness, obligations, and liabilities of the Borrower under the Loan Documents, whether on account of principal, interest, rent, finance charges, indemnities, fees (including, without limitation, attorneys' fees, remarketing fees, origination fees, collection fees, and all other professionals' fees), costs, expenses, taxes, or otherwise. "Permitted Indebtedness" shall mean (a) Indebtedness of the Borrower in favor of the Lender, (b) Indebtedness secured by any Permitted Liens, (c) Subordinated Indebtedness, (d) Swaps which are not speculative and which hedge pre-existing risks and (e) extensions, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness above, but only to the extent such extensions, refinancings, modifications, amendments or restatements (other than under clause (a)) do not increase the Indebtedness of the Borrower. "Permitted Liens" shall mean (a) Liens for taxes, assessments, and other governmental charges or levies or the claims or demands of landlords, carriers, warehousemen, mechanics, laborers, materialmen, and other like Persons arising by operation of law in the ordinary course of business for sums which are not yet due and payable, or Liens which are being contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are maintained to the extent required by GAAP; (b) deposits, pledges or Liens to secure the payment of workmen's compensation, unemployment insurance, or other social security benefits or obligations, public or statutory obligations, surety or appeal -5- 6 bonds, bid or performance bonds, or other obligations of a like nature incurred in the ordinary course of business; (c) licenses, leases, restrictions, or covenants for or on the use of Equipment or Intellectual Property which do not materially impair either the use of such Equipment or Intellectual Property in the operation of the business of the Borrower or the value thereof; (d) attachment or judgment Liens that do not constitute an Event of Default; (e) Liens in favor of the Lender; (f) Liens on Equipment leased by the Borrower or any of its subsidiaries pursuant to an operating or capital lease in the ordinary course of business (including proceeds thereof and accessions thereto) incurred solely for the purpose of financing the lease of such Equipment; (g) easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property not constituting a Material Adverse Effect; (h) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of customs duties in connection with the importation of goods; (i) Liens constituting rights of setoff of a customary nature or banker's or securities intermediaries' Liens with respect to amounts on deposit or investment deposits, whether arising by operation of law or by contract, in connection with arrangements entered into with banks in the ordinary course of business; (j) earn-out and royalty obligations existing on the date hereof or entered into in connection with an acquisition permitted by Section 5.14; (k) Liens (i) on assets acquired by the Borrower or its subsidiaries after the date of this Agreement which Liens existed prior to such acquisition or (ii) on assets acquired or held by the Borrower or its subsidiaries to secure the purchase price of such assets or Indebtedness incurred solely for the purpose of financing the acquisition of such assets, provided that (A) each such Lien shall attach only to the property to be acquired; (B) such Liens shall be created substantially simultaneously with the acquisition of such assets; (C) a description of the assets so acquired is furnished to the Lender; and (D) the principal amount of the Indebtedness secured by such Liens shall at no time exceed $5,000,000 in the aggregate; (l) Liens in favor of American Home Products Corporation to secure Subordinated Indebtedness; and (m) Liens securing loans up to $38,000,000 to the Borrower on terms satisfactory to the Lender in its sole discretion to be used to finance the construction by the Borrower of a bulk manufacturing facility at which the Borrower's "FluMist" product will be manufactured and personal property and leasehold improvements to be situated therein; provided, however, that in no event shall any Lien securing assets of the type specified in the last sentence of Section 2 be deemed to be a "Permitted Lien." "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party, or government (including any division, agency, or -6- 7 department thereof), and the successors, heirs, and assigns of each. "Receivables" shall have the meaning specified in Section 2(iii). "Second Note" shall mean the promissory note, substantially in the form of Exhibit B, as amended, supplemented or otherwise modified from time to time. "Short Term" shall mean maturing at any time on or before the date that is the one-year anniversary from the date of issuance. "Solvent" shall mean, with respect to any Person, that as of the date as to which such Person's solvency is measured: (a) the fair saleable value of its assets is in excess of the total amount of its liabilities (including contingent liabilities as valued in accordance with GAAP) as they become absolute and matured; (b) it has sufficient capital to conduct its business; and (c) it is able generally to meet its debts as they mature. "Subordinated Indebtedness" shall mean the convertible subordinated Indebtedness issued by the Borrower under the Trust Indenture dated March 5, 1998, by and between the Borrower and Marine Midland Bank, as Trustee, and any Indebtedness of the Borrower (other than Indebtedness owed to Affiliates of the Borrower) which is subordinated to the Obligations on terms and under documentation in form and substance satisfactory to the Lender in its sole discretion. "Subsequent Loans" shall have the meaning specified in Section 3.1. "Swaps" shall mean, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person -7- 8 thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "Taxes" shall have the meaning specified in Section 5.5. "Third Note" shall mean the promissory note, substantially in the form of Exhibit C, as amended, supplemented or otherwise modified from time to time. SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower hereby assigns and grants to the Lender a continuing general lien on, and security interest in, all the Borrower's right, title, and interest in and to the collateral described in the next sentence (the "Collateral") to secure the payment and performance of all the Obligations. The Collateral consists of (i) all present and future machinery, equipment, furniture, fixtures, leasehold improvements, conveyors, tools, materials, storage and handling equipment, hydraulic presses, cutting equipment, computer equipment and hardware, including central processing units, terminals, drives, memory units, printers, keyboards, screens, peripherals and input or output devices, molds, dies, stamps, and other equipment of every kind and nature and wherever situated now or hereafter owned and held for use by the Borrower or in which the Borrower may have any interest as lessee (to the extent of such interest), together with all additions and accessions thereto, all replacements and all accessories and parts therefor, all manuals, blueprints, know-how, warranties and records in connection therewith (including, without limitation, any computer software, whether on tape, disc, card, strip or cartridge or in any other form) and all rights against suppliers, warrantors, manufacturers, and sellers or others in connection therewith, together with all substitutes for any of the foregoing (collectively, "Equipment"); (ii) all present and future goods intended for sale, lease or other disposition by the Borrower including, without limitation, all raw materials, work in process, systems, accessories, spare parts, finished goods and other retail inventory, goods in the possession of outside processors or other third parties, consigned goods (to the extent of the consignee's interest therein), materials, parts and supplies of any kind, nature or description which are -8- 9 or might be used in connection with the manufacture, packing, shipping, advertising, selling or finishing of any such goods, all documents of title or documents representing the same and all records, files and writings (including, without limitation, any computer software, whether on tape, disc, card, strip or cartridge or in any other form) with respect thereto; (iii) all of the Borrower's present and future accounts (including rights to receive payments for goods sold or services rendered arising out of the sale or delivery of personal property or work done or labor performed), contract rights, agreements, understandings, open purchase and sale orders, promissory notes, chattel paper, documents, tax refunds, rights to receive tax refunds, bonds, certificates, insurance policies, insurance proceeds, licenses, rights to receive fees, royalties and other payments under license agreements, permits, franchise rights, authorizations, customer and supplier lists, rights of indemnification, contribution and subrogation, leases, computer tapes, programs, discs and software, computer service contracts, deposits, causes of action, choses in action, judgments, designs, blueprints, quotations and bids, plans, specifications, sales literature, all other general intangibles, claims against third parties of every kind or nature, investment securities, notes, drafts, acceptances, letters of credit and rights to receive payments under letters of credit, deposit accounts, book accounts, prepaid expenses, credits and reserves and all forms of obligations whatsoever owing, instruments, documents of title, leasehold rights, including in any goods, books, ledgers, files (including credit and project files) and records (including tax records) with respect to any collateral or security, together with all right, title, security and guaranties with respect thereto, including any right of stoppage in transit (collectively, "Receivables"); and (iv) all proceeds of the foregoing. Notwithstanding the foregoing, "Collateral" shall not include patents, patent applications, copyrights (registered and unregistered), trademarks, trade names, service marks, names, logos, goodwill, trade secrets, know-how and royalties for any of the foregoing (collectively, "Intellectual Property"). Notwithstanding anything to the contrary, the grant of a security interest as provided in this Agreement shall not extend to, and the term "Collateral" shall not include, any accounts, general intangibles, instruments or chattel paper of the Borrower (whether owned or held as licensee or lessee, or otherwise), to -9- 10 the extent that (i) such accounts, general intangibles, instruments, or chattel paper are not assignable as a matter of law or under the terms of the license, lease or other agreement applicable thereto (but solely to the extent that any such restriction shall be effective under Applicable Law), without the consent of the Person to whose benefit such restrictions exist and (ii) such consent has not been obtained; provided, however, that the foregoing grant of security interest shall extend to, and the term "Collateral" shall include, (A) any and all proceeds of any general intangibles, accounts, instruments or chattel paper which are otherwise excluded to the extent that the assignment or encumbrance of such proceeds is not so restricted, including under Section 9-318 of the Code, and (B) upon obtaining the consent of any such licensor, lessor or other applicable party's consent with respect to any such otherwise excluded general intangibles, accounts, instruments or chattel paper, and all proceeds thereof that might otherwise have been excluded from such grant of a security interest and the term "Collateral." SECTION 3. THE LOANS. SECTION 3.1. BORROWING. The Loans shall be in an aggregate amount not greater than $10,000,000 available for borrowing, upon the satisfaction of the conditions in Section 3.3 of this Agreement, in up to four, but no less than two, installments (the first of which being referred to herein as the "First Loan" and the remaining installments being referred to herein as the "Subsequent Loans"), each of which shall be in an amount of not less than $2,500,000 and shall be made on or before December 31, 1999. Notwithstanding anything herein to the contrary, the Lender shall be obligated to make the Loans only after the Lender, in its sole discretion, determines that the applicable conditions for borrowing contained in Section 3.3 are satisfied. SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not directly or indirectly use any proceeds of the Loan other than to finance the purchase or lease of Equipment. SECTION 3.3. CONDITIONS TO LOANS. The obligation of the Lender to make the Loans is subject to the following conditions: (a) In the case of the First Loan, the Lender's receipt of the following, each dated the date of the making of the Loan or as of an earlier date acceptable to the Lender, in form and substance satisfactory to the Lender and its counsel: (i) completed requests for information (Form UCC-11) listing all effective Uniform Commercial Code financing statements naming the Borrower as debtor and all tax lien, judgment, and litigation searches for the -10- 11 Borrower as the Lender shall deem necessary or desirable, in each case with results satisfactory to the Lender; (ii) Uniform Commercial Code financing statements (Form UCC-1) duly executed by the Borrower (naming the Lender as secured party and the Borrower as debtor and in form acceptable for filing in all jurisdictions that the Lender deems necessary or desirable to perfect the security interests granted to it hereunder) and, if applicable, termination statements or other releases duly filed in all jurisdictions that the Lender deems necessary or desirable to perfect and protect the priority of the security interests granted to it hereunder; (iii) the First Note, duly executed by the Borrower; (iv) certificates of insurance required under Section 5.4 together with loss payee endorsements for all such policies naming the Lender as lender loss payee and as an additional insured; (v) copies of the Governing Documents of the Borrower and a copy of the resolutions of the Board of Directors of the Borrower (or a unanimous consent of directors in lieu thereof) authorizing the execution, delivery, and performance of this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, attached to which is a certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) that such copies of the Governing Documents and resolutions are true, complete, and accurate, have not been amended or modified since the date of such certification and are in full force and effect and (B) the incumbency, names, and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party; (vi) a certified copy of a certificate of the Secretary of State of the state of Delaware, dated a recent date, listing the certificate of incorporation of the Borrower and each amendment thereto on file in such official's office and certifying that (A) such amendments are the only amendments to such certificate of incorporation on file in that office, (B) the Borrower has paid all franchise taxes to the date of such certificate and (C) the Borrower is in good standing in that jurisdiction; (vii) a certified copy of a certificate of the -11- 12 Secretary of State of California, dated a recent date, certifying that the Borrower is in good standing in that jurisdiction; (viii) the opinion of counsel for the Borrower covering such matters incident to the transactions contemplated by this Agreement as the Lender may reasonably require; (ix) a copy of the Borrower's Statement on Form 10-Q for its fiscal quarter ended March 31, 1999 filed with the United States Securities and Exchange Commission; and (x) such other agreements and instruments as the Lender reasonably deems necessary in connection with the transactions contemplated hereby. (b) In the case of a Subsequent Loan, the Lender's receipt of the Second Note, the Third Note or the Fourth Note, as the case may be, duly executed by the Borrower. (c) There shall be no pending or, to the knowledge of the Borrower after due inquiry, threatened litigation, proceeding, inquiry, or other action (i) seeking an injunction or other restraining order, damages, or other relief with respect to the transactions contemplated by this Agreement or the other Loan Documents or (ii) which affects or could reasonably be expected to affect the business, prospects, operations, assets, liabilities, or condition (financial or otherwise) of the Borrower, except, in the case of clause (ii), where such litigation, proceeding, inquiry, or other action could not reasonably be expected to have a Material Adverse Effect in the judgment of the Lender. (d) The Borrower shall have paid to the Lender all fees and expenses required to be paid by it to the Lender as of such date as specified in the commitment letter agreement dated May 7, 1999 between the Borrower and the Lender. (e) All representations and warranties of the Borrower contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of the making of the applicable Loan; provided, however, that those representations and warranties expressly referring to another date shall be true and correct in all material respects as of such date. (f) No Event of Default or event which with the giving of notice or the passage of time, or both, would constitute an Event of Default shall be continuing or would result from the making of the applicable Loan. -12- 13 (g) the Lender shall have conducted and completed due diligence to its satisfaction with respect to the Borrower's marketing and development arrangement with American Home Products Corporation for the Borrower's "FluMist" product. SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES. SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS; NO TRADE NAMES. The Borrower (a) is duly organized, validly existing, and in good standing under the laws of the State of Delaware, (b) has the power and authority to own its properties and assets and to transact the businesses in which it is presently, or proposes to be, engaged, and (c) is duly qualified and authorized to do business and is in good standing in every jurisdiction in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under the Loan Documents or (iii) the rights of the Lender hereunder. The Borrower does not use, and has not used during the past five years, any trade or other fictional name. SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and performance by the Borrower of each of the Loan Documents to which it is a party are within the powers of the Borrower, do not contravene the Governing Documents and do not (a) violate any law or regulation, or any order or decree of any court or governmental authority, (b) conflict with or result in a breach of, or constitute a default under, any material indenture, mortgage or deed of trust, or any material lease, agreement or other instrument binding on the Borrower or any of its properties or (c) require the consent of, authorization by, approval of, notice to or filing or registration with any Person. This Agreement is, and each of the other Loan Documents to which the Borrower is or will be a party, when delivered will be, the legal, valid, and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and except as such enforceability may be limited by general principles of equity, whether considered in a suit in law or in equity). -13- 14 SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and will be Solvent upon the completion of all transactions contemplated to occur hereunder (including, without limitation, the making of the Loans); the security interests granted herein constitute and shall at all times constitute the only Liens on the Collateral (other than Permitted Liens, of which those specified in clauses (a), (f), (g), (h), (i) and (k) of the definition of "Permitted Liens" may have priority over the Lender's Liens); and the Borrower is, or will be at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer, and create a security interest therein, free and clear of any and all claims or Liens in favor of any other Person other than Permitted Liens. SECTION 4.4. NO JUDGMENTS, LITIGATION. Except as set forth on Schedule 4.4, no judgments are outstanding against the Borrower nor is there now pending or, to the best of the Borrower's knowledge, threatened any litigation, contested claim, or governmental proceeding by or against the Borrower. SECTION 4.5. NO DEFAULTS. The Borrower is not in default and has not received a notice of default under any material contract, lease, or commitment to which it is a party or by which it is bound. The Borrower knows of no dispute regarding any contract, lease, or commitment which could have a Material Adverse Effect on the Borrower. SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, (i) except as set forth on Schedule 4.6, each item of the Collateral consisting of goods is located at the address of the Borrower specified in the introductory paragraph of this Agreement and (ii) the principal place of business and chief executive office of the Borrower and the office where the Borrower keeps its records is the address of the Borrower specified in the introductory paragraph of this Agreement. None of the Collateral is evidenced by promissory notes or other instruments. SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default has occurred and is continuing nor has any event occurred which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. None of the Collateral is subject to contractual obligations that may restrict or inhibit the Lender's rights or ability to sell or otherwise dispose of the Collateral or any part thereof after an Event of Default. -14- 15 SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST. This Agreement creates a valid and, upon completion of all required filings of financing statements and similar registrations and except with respect to deposit accounts and investment property, perfected first priority and exclusive security interest in the Collateral (other than Permitted Liens), securing the payment of all the Obligations. There is no contractual or other restriction applicable to the granting by the Borrower of the Liens hereunder. SECTION 4.10. ACCURACY AND COMPLETENESS OF INFORMATION. All data, reports and information heretofore, contemporaneously or hereafter furnished by or on behalf of the Borrower in writing to the Lender or for purposes of or in connection with this Agreement or any other Loan Document, or any transaction contemplated hereby or thereby, are or will be true and accurate in all material respects on the date as of which such data, reports and information are dated or certified and not incomplete by omitting to state any material fact necessary to make such data, reports and information not misleading at such time. There are no facts now known to the Borrower which individually or in the aggregate would reasonably be expected to have a Material Adverse Effect on the Borrower and which have not been specified herein, in the Financial Statements, or in any certificate, opinion, or other written statement previously furnished by the Borrower to the Lender. SECTION 5. COVENANTS OF THE BORROWER. SECTION 5.1. EXISTENCE, ETC. The Borrower will: (a) retain its existence and its current yearly accounting cycle, (b) maintain in full force and effect all licenses, bonds, franchises, leases, trademarks, patents, contracts and other rights necessary or desirable in the commercially reasonable judgment of the Lender to the conduct of its business, (c) continue in, and limit its operations to, the same general lines of business as those presently conducted by it and (d) comply with all applicable laws and regulations of any federal, state or local governmental authority except where any noncompliance with respect to such laws and regulations could not reasonably be expected to have a Material Adverse Effect. -15- 16 SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in any event within five Business Days after the Borrower learns of the following, the Borrower will give written notice to the Lender of (a) any proceeding instituted or threatened to be instituted by or against the Borrower in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign) involving a sum, together with the sum involved in all other similar proceedings, in excess of $500,000 in the aggregate, (b) any contract that is terminated or amended and which has had or could reasonably be expected to have a Material Adverse Effect on the Borrower, (c) the occurrence of any Material Adverse Change with respect to the Borrower and (d) the occurrence of any Event of Default or event or condition which, with notice or lapse of time, or both, would constitute an Event of Default, together with a statement of the action which the Borrower has taken or proposes to take with respect thereto. SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower will maintain books and records pertaining to the Collateral in such detail, form, and scope as the Lender shall require in its commercially reasonable judgment. The Borrower agrees that the Lender or its agents may enter upon the Borrower's premises at any time and from time to time during normal business hours and upon reasonable notice, and at any time on and after the occurrence of an Event of Default (without notice), for the purpose of inspecting the Collateral and any and all records pertaining thereto. -16- 17 SECTION 5.4. INSURANCE. The Borrower will maintain insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, and covering such risks as are at all times satisfactory to the Lender. All such policies shall be made payable to the Lender, in case of loss, under a standard non-contributory "lender" or "secured party" clause and are to contain such other provisions as the Lender may reasonably require to protect the Lender's interests in the Collateral and to any payments to be made under such policies. Certificates of insurance policies are to be delivered to the Lender, premium prepaid, with the loss payable endorsement in the Lender's favor, and shall provide for not less than thirty days' prior written notice to the Lender of any alteration or cancellation of coverage. If the Borrower fails to maintain such insurance, the Lender may arrange for (at the Borrower's expense and without any responsibility on the Lender's part for) obtaining the insurance. During the continuance of an Event of Default, the Lender shall have the sole right, in the name of the Lender or the Borrower, to file claims under any insurance policies, to receive and give acquittance for any payments that may be payable thereunder, and to execute any endorsements, receipts, releases, assignments, reassignments, or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes, assessments, claims and other charges ("Taxes") lawfully levied or assessed against the Borrower or the Collateral other than taxes that are being diligently contested in good faith by the Borrower by appropriate proceedings promptly instituted and for which an adequate reserve is being maintained by the Borrower in accordance with GAAP. If any Taxes remain unpaid after the date fixed for the payment thereof, and if any Lien shall be claimed therefor, then, without notice to the Borrower, the Lender may pay such Taxes on the Borrower's behalf, and the amount thereof shall be included in the Obligations. -17- 18 SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES ON COLLATERAL. The Borrower will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein. The Borrower will not permit any notice creating or otherwise relating to Liens on the Collateral or any portion thereof to exist or be on file in any public office other than Permitted Liens. The Borrower shall promptly pay, when payable, all transportation, storage, and warehousing charges and license fees, registration fees, assessments, charges, permit fees, and taxes (municipal, state and federal) which may now or hereafter be imposed upon the ownership, leasing, renting, possession, sale or use of the Collateral, excluding, however, (i) all taxes on or measured by the Lender's income and (ii) all charges, fees, taxes and assessments that are being diligently contested in good faith by the Borrower for which a reserve has been taken in accordance with GAAP. SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE OR IDENTITY. The Borrower will not (a) change the location of its chief executive office or establish any place of business other than those specified herein or (b) move or permit the movement of any item of Collateral from such location if, after giving effect thereto, the aggregate value of the Collateral not at such locations would exceed $250,000, except that the Borrower may change its chief executive office and move or permit the movement of any item of Collateral to other locations within the United States provided that the Borrower has delivered to the Lender (i) prior written notice thereof and (ii) duly executed financing statements and other agreements and instruments (all in form and substance satisfactory to the Lender) necessary or, in the opinion of the Lender, desirable to perfect and maintain in favor of the Lender a first priority security interest in such Collateral. -18- 19 SECTION 5.8. FURTHER ASSURANCES. The Borrower will, promptly upon request by the Lender, execute and deliver or use its best efforts to obtain any document reasonably required by the Lender (including, without limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination agreements with respect to the Obligations under the Loan Documents and the Collateral), give any notices, execute and file any financing statements, intellectual property assignments, mortgages, or other documents (all in form and substance satisfactory to the Lender), mark any chattel paper or deliver any chattel paper or instruments to the Lender, and take any other actions that are necessary or, in the reasonable opinion of the Lender, desirable to perfect or continue the perfection and the first priority of the Lender's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of any Person (other than Permitted Liens), or to effect the purposes of this Agreement. The Borrower hereby authorizes the Lender to file one or more financing or continuation statements, intellectual property assignments and amendments thereto, relating to all or any part of the Collateral without the signature of the Borrower where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. To the extent required under this Agreement, the Borrower will pay all reasonable costs incurred in connection with any of the foregoing. SECTION 5.9. NO DISPOSITION OF COLLATERAL. The Borrower will not in any way hypothecate or create or permit to exist any Lien on any of the Collateral, except for the Lien and security interest granted hereby and Permitted Liens, and the Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise dispose of any of the Collateral other than (i) sales of inventory in the ordinary course of the Borrower's business, (ii) non-exclusive licenses and similar arrangements for the use of the property of the Borrower or its subsidiaries in the ordinary course of business, or (iii) used, worn-out or obsolete equipment. In the event the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Lender shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange, or other disposition, and the Borrower will hold the proceeds thereof in a separate account for the benefit of the Lender. Following such a sale, the Borrower will transfer such proceeds to the Lender in kind. -19- 20 SECTION 5.10. NO LIMITATION ON LENDER'S RIGHTS. The Borrower will not enter into any contractual obligations (other than Permitted Liens) which may restrict or inhibit the Lender's rights or ability to sell or otherwise dispose of the Collateral or any part thereof. SECTION 5.11. PROTECTION OF COLLATERAL. The Lender shall have the right at any time to make any payments and do any other acts the Lender deems necessary to protect its security interests in the Collateral, including, without limitation, the rights to satisfy, purchase, contest, or compromise any Lien (other than Permitted Liens) which, in the judgment of the Lender, appears to be prior to or superior to the security interests granted hereunder, and appear in, and defend any action or proceeding purporting to affect its security interests in, or the value of, any of the Collateral. The Borrower hereby agrees to reimburse the Lender for all payments made and expenses reasonably incurred in accordance with the terms of this Agreement including fees, expenses, and disbursements of attorneys and paralegals (including the allocated costs of in-house counsel) acting for the Lender, including any of the foregoing payments under, or acts taken to protect its security interests in, any of the Collateral, which amounts shall be secured under this Agreement, and agrees that it shall be bound by any payment reasonably made or act reasonably taken by the Lender hereunder absent the Lender's gross negligence or willful misconduct. The Lender shall have no obligation to make any of the foregoing payments or perform any of the foregoing acts. The powers conferred on the Lender hereunder are (i) solely to protect its interest in the Collateral, (ii) do not extend beyond such interest and (iii) shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession, the accounting for money actually received by it hereunder and the obligations of the Lender under Section 11.8(b), the Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. -20- 21 SECTION 5.12. DELIVERY OF ITEMS. The Borrower will (a) promptly (but in no event later than five Business Days) after its receipt thereof, deliver to the Lender any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes in excess of $250,000, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case come into the possession of the Borrower, or shall cause the issuer thereof to deliver any of the same directly to the Lender, in each case with any necessary endorsements in favor of the Lender and (b) deliver to the Lender as soon as available copies of any and all press releases and other similar communications issued by the Borrower. SECTION 5.13. SOLVENCY. The Borrower shall be and remain Solvent at all times. SECTION 5.14. FUNDAMENTAL CHANGES. The Borrower will not (a) amend or modify its name, unless the Borrower delivers to the Lender thirty days prior to any such proposed amendment or modification written notice of such amendment or modification and within ten days before such amendment or modification delivers executed Uniform Commercial Code financing statements (in form and substance satisfactory to the Lender) or (b) merge or consolidate with any other entity or make any material change in its capital structure (other than the Borrower's issuance of equity capital or Subordinated Indebtedness), provided that such merger or consolidation may be made as long as the Borrower is the surviving entity and an Event of Default does not exist before and would not exist after giving effect to such transaction, and provided, further, that any subsidiary of the Borrower may merge into the Borrower or another wholly-owned subsidiary of the Borrower. -21- 22 SECTION 5.15. INDEBTEDNESS. The Borrower will not incur or suffer to exist any Indebtedness other than Permitted Indebtedness. SECTION 5.16. CERTAIN INTELLECTUAL PROPERTY. (i) The Borrower will not in any way hypothecate or create or permit to exist any Lien on any of the Intellectual Property, and the Borrower will not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise dispose of any of the Intellectual Property. Notwithstanding the foregoing, the Borrower may in the ordinary course of its business (A) grant licenses with respect to any of the Intellectual Property, (B) amend existing license agreements under which the Borrower is licensee or licensor and (C) assign any of the Intellectual Property, provided that no such license may be granted or assignment made to secure Indebtedness of the Borrower to any Person other than the Lender. (ii) The Borrower agrees that, should it obtain an ownership interest in (x) any material patent or (y) any exclusive rights as a licensee under a material patent license, (A) the provisions of Section 5.16(i) shall automatically apply thereto and (B) with respect to any ownership interest in any such patent or patent license that the Borrower should obtain, it shall give notice thereof to the Lender in writing, promptly after obtaining such ownership interest. (iii) The Borrower agrees to take all necessary steps including, without limitation, in the United States Patent and Trademark Office or in any court, to (A) maintain each of its patents and patent licenses and (B) pursue each of its patent applications, now or hereafter owned or submitted by it, including, without limitation, the filing of divisional, continuation, continuation-in-part and substitute applications, the filing of applications for reissue, renewal or extensions, the payment of maintenance fees, and the participation in interference, reexamination, opposition or infringement and misappropriation proceedings, except in each case to the extent reasonably necessary to further the economic interest of the Borrower. Except to the extent reasonably necessary to further its best economic interests, the Borrower agrees to take corresponding steps with respect to each new or acquired patent, patent application, or any rights obtained under any patent license, in each case, to -22- 23 which it is now or later becomes entitled. Any expenses incurred in connection with such activities shall be borne by the Borrower. (iv) The Borrower shall take all commercially reasonable additional steps not set forth in subsections (i) and (ii) hereof which the Lender requests to preserve and protect the Borrower's material patents and patent licenses. (v) The Borrower shall not abandon any patent or any pending patent application without the written consent of the Lender, except, in each case in which the Borrower has reasonably determined that any of the foregoing is not of material economic value to the Borrower. (vi) In the event that the Borrower becomes aware that any of its material patents has been infringed or misappropriated by a third party, the Borrower shall notify the Lender promptly in writing, in reasonable detail, and shall take such actions as are reasonably appropriate under the circumstances to protect such patent including, without limitation, suing for damages or for an injunction against such infringement or misappropriation. Any expense incurred in connection with such activities shall be borne by the Borrower. The Borrower will advise the Lender promptly in writing, in reasonable detail, of any material adverse determination or the institution of any proceeding (including, without limitation, the institution of any proceeding in the United States Patent and Trademark Office or any court) regarding any of its material patents. SECTION 5.17. ADDITIONAL REQUIREMENTS. The Borrower will take all such further actions and execute all such further documents and instruments as the Lender may reasonably request. SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in full of all Obligations, the Borrower shall deliver to the Lender the following financial information: SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available, but not later than 120 days after the end of each fiscal year of the Borrower and its consolidated subsidiaries, the consolidated balance sheet, income statement, and statements of cash flows and shareholders' equity for the Borrower and its consolidated subsidiaries (the "Financial Statements") for such year, reported on by independent certified public accountants without an adverse qualification; and -23- 24 SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as available, but not later than forty-five days after the end of each of the first three fiscal quarters in any fiscal year of the Borrower and its consolidated subsidiaries, the Financial Statements for such fiscal quarter, together with a certification duly executed by a responsible officer of the Borrower that such Financial Statements have been prepared in accordance with GAAP and are fairly stated in all material respects. SECTION 7. CASH COVENANT. Until termination of the Lender's obligations to make any Loan under this Agreement and payment and satisfaction in full of all Obligations, the Borrower shall at all times maintain verifiable cash balances (other than cash securing any Letter of Credit) in its bank accounts and Cash Equivalents which are free and clear of all Liens of at least $20,000,000 in the aggregate (the "Cash Covenant"). SECTION 8. LIMITED RELEASE. In the event that the Borrower enters into a definitive agreement with a third party lender to finance the acquisition or construction by the Borrower of a bulk manufacturing facility, the Lender shall release its Liens on personal property purchased for use in and to be located at such facility and leasehold improvements to such facility, but only to the extent the purchase of such Equipment has not been financed by the Lender and only if such third party lender shall have made a written request to the Lender to release such Liens in accordance with Section 11.1. SECTION 9. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) failure of the Borrower to pay any of the obligations required to be paid by the Borrower under or in connection with the Notes, this Agreement or any other Loan Document when due, whether at stated maturity, by acceleration or otherwise; (b) any representation or warranty made or deemed made by the Borrower under or in connection with any Loan Document or any Financial Statement shall prove to have been incorrect in any material respect when made; (c) failure of the Borrower to perform or observe (i) any of the terms, covenants or agreements contained in Sections 5.2, 5.4, 5.7, 5.9, 5.10, 5.14, 5.15, 5.17, 6.1 or 6.2 or (ii) any other term, covenant, or agreement contained in any Loan Document (other than the other Events of Default specified in this Section) that has not been cured within fifteen days after such failure occurs; -24- 25 (d) any provision of any Loan Document to which the Borrower is a party shall for any reason cease to be valid and binding on the Borrower, or the Borrower shall so state; (e) dissolution, liquidation, winding up or cessation of the Borrower's business, failure of the Borrower generally to pay its debts as they mature, admission in writing by the Borrower of its inability generally to pay its debts as they mature, or calling of a meeting of the Borrower's creditors for purposes of compromising any of the Borrower's debts; (f) the commencement by or against the Borrower of any bankruptcy, insolvency, arrangement, reorganization, receivership, or similar proceeding under any federal or state law and, in the case of any such involuntary proceeding, such proceeding remains undismissed or unstayed for forty-five days following the commencement thereof, or any action by the Borrower is taken authorizing any such proceeding; (g) an assignment for the benefit of creditors is made by the Borrower, whether voluntary or involuntary, the appointment of a trustee, custodian, receiver, or similar official for the Borrower or for any substantial property of the Borrower, and in the case of any such involuntary appointment, such appointment remains undismissed or unstayed for forty-five days following the commencement thereof, or any action by the Borrower authorizing any such proceeding; (h) the Borrower shall default in (i) the payment of principal or interest on indebtedness of $250,000 or in the aggregate at any one time (other than the Obligations), beyond the period of grace, if any, provided in the instrument or agreement under which such indebtedness was created; or (ii) the observance or performance of any other agreement or condition relating to any such indebtedness or contained in any instrument or agreement relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such indebtedness to cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity; -25- 26 (i) the Borrower suffers and sustains a Material Adverse Change; (j) any tax Lien, other than a Permitted Lien, is filed of record against the Borrower and is not bonded or discharged within thirty Business Days; (k) one or more judgments in excess of $250,000 in the aggregate are entered against the Borrower and such judgments shall not be stayed, vacated, bonded, or discharged within sixty days; (l) any material covenant, agreement, or obligation, as determined in the good faith business judgment of the Lender, made by the Borrower and contained in or evidenced by any of the Loan Documents shall cease to be enforceable, or shall be determined to be unenforceable, in accordance with its terms; the Borrower shall deny or disaffirm any of the Obligations or any Liens granted in connection therewith; or any Liens granted on any of the Collateral in favor of the Lender shall be determined to be void, voidable, or invalid, or shall not be given the priority contemplated by this Agreement; (m) this Agreement shall for any reason (other than pursuant to the terms hereof) cease to create a valid and perfected senior lien on the Collateral, subject only to the Liens specified in the definition of "Permitted Liens," purported to be covered hereby; (n) the Borrower shall fail to be in compliance with the Cash Covenant at any time (a "Cash Covenant Default") and (ii) deliver to the Lender within five days of a Cash Covenant Default an irrevocable standby letter of credit (the "Letter of Credit"), from a bank or other financial institution, and on terms and conditions, in each case satisfactory to the Lender in its sole discretion, in an amount equal to the then unpaid portion of the Obligations naming the Lender as beneficiary; (o) the Letter of Credit required to be delivered to the Lender under Section 9(n) shall cease to be valid and enforceable in accordance with its terms for any reason; or (p) there occurs a change in ownership of an aggregate of more than 35% of any equity interests of the Borrower having voting rights in any transaction or related series of transactions (other than in connection with any offering of equity securities by the Borrower) or any of such interests becomes subject to any contractual, judicial or statutory Lien. -26- 27 SECTION 10. REMEDIES. (a) If any Event of Default shall have occurred and be continuing, the Lender may, without prejudice to any of its other rights under any Loan Document or Applicable Law: (i) declare all Obligations under the Loan Documents to be immediately due and payable (except with respect to any Event of Default set forth in Section 9(f), in which case all Obligations under the Loan Documents shall automatically become immediately due and payable without necessity of any declaration) without presentment, representation, demand of payment, or protest, which are hereby expressly waived; (ii) take possession of the Collateral and, for that purpose may enter, with the aid and assistance of any person or persons and subject to applicable law, any premises where the Collateral or any part thereof is, or may be placed, and remove the same; (iii) remove for copying all documents, instruments, files and records (including the copying of any computer records) relating to the Borrower's Receivables, or use (at the expense of the Borrower) such supplies or space of the Borrower at the Borrower's places of business necessary to administer and collect the Borrower's Receivables; (iv) terminate its obligation, if any, to give additional (or to continue) financial accommodations of any kind to the Borrower; (v) accelerate or extend the time of payment, compromise, issue credits, or bring suit on the Borrower's Receivables (in the name of the Borrower or the Lender) and otherwise administer and collect such Receivables; (vi) sell, assign and deliver the Borrower's Receivables with or without advertisement, at public or private sale, for cash, on credit or otherwise, subject to applicable law; (vii) use all computer software programs, data bases, processes, trademarks, tradenames and materials used by the Borrower in connection with its businesses or in connection with the Collateral (with respect to which the Lender shall have a limited license therefor); and -27- 28 (viii) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein (or in any other Loan Document) or otherwise available to it, all the rights and remedies of a secured party under the applicable Uniform Commercial Code (the "Code") whether or not the Code applies to the affected Collateral and also may (i) require the Borrower to, and the Borrower hereby agrees that it will at its expense and upon request of the Lender forthwith, assemble all or part of the Collateral as directed by the Lender and make it available to the Lender at a place to be designated by the Lender that is reasonably convenient to both parties and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Lender may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least five Business Days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Lender in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Lender, be held by the Lender as collateral for, or then or at any time thereafter applied in whole or in part by the Lender against, all or any part of the Obligations in such order as the Lender shall elect. Any surplus of such cash or cash proceeds held by the Lender and remaining after the full and final payment of all the Obligations shall be paid over to the Borrower or to such other Person to which the Lender may be required under Applicable Law, or directed by a court of competent jurisdiction, to make payment of such surplus. -28- 29 SECTION 11. MISCELLANEOUS PROVISIONS. SECTION 11.1. NOTICES. Except as otherwise provided herein, all notices, approvals, consents, correspondence or other communications required or desired to be given hereunder shall be given in writing and shall be delivered by overnight courier, hand delivery, or certified or registered mail, postage prepaid, if to the Lender, then to Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut 06032-2571, Attention: Legal Department, with a copy to the Lender at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department, and if to the Borrower, then to Aviron, 297 North Bernardo Avenue, Mountain View, California 94043, Attention: Chief Financial Officer, or such other address as shall be designated by the Borrower or the Lender to the other party in accordance herewith. All such notices and communications shall be effective when received or when delivery is refused. SECTION 11.2. CONFIDENTIALITY. Neither the Borrower nor any of its agents shall use or refer to the Lender or to any Affiliate of the Lender in any disclosure (including, without limitation, press releases and financial statements) made in connection with the Loan Documents or any of the transactions contemplated thereunder without the prior written consent of the Lender. SECTION 11.3. HEADINGS. The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement. SECTION 11.4. ASSIGNMENTS. The Borrower shall not have the right to assign the Notes or this Agreement or any interest therein. The Lender may assign its rights and delegate its obligations under the Notes, this Agreement or any other Loan Document. SECTION 11.5. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment or waiver of any provision of this Agreement and any consent to any departure by the Borrower from any provision of this Agreement shall be effective only by a writing signed by the Lender and the Borrower and shall bind and benefit the Borrower and the Lender and their respective successors and assigns. -29- 30 SECTION 11.6. BORROWER REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) the Borrower shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Borrower from any of its duties or obligations under the contracts and agreements included in the Collateral and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Lender be obligated to perform any of the obligations or duties of the Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 11.7. INTERPRETATION OF AGREEMENT. Time is of the essence in each provision of this Agreement of which time is an element. All terms not defined herein or in the Notes shall have the meaning set forth in the Code, except where the context otherwise requires. To the extent a term or provision of this Agreement conflicts with any term or provision of the Notes, this Agreement shall control with respect to the subject matter of such term or provision. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 11.8. CONTINUING SECURITY INTEREST. (a) This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the final payment in full of the Obligations, (ii) be binding upon the Borrower and its successors and assigns and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of the Lender and its successors, transferees, and assigns. (b) Upon the final payment in full of the Obligations, the security interest provided herein shall terminate with respect to all Collateral and the Lender shall at the expense of the Borrower return to the Borrower all Collateral then held by the Lender, if any, and at the expense of the Borrower shall execute, in form for filing, termination statements of the security interest herein granted or any other documents reasonably requested by the Borrower to evidence such termination, and thereafter, no party shall have any further right or obligation hereunder except for the obligations of the Borrower under Section 11.10. -30- 31 SECTION 11.9. REINSTATEMENT. To the extent permitted by law, this Agreement and the rights and powers granted to the Lender hereunder and under the Loan Documents shall continue to be effective or be reinstated if at any time any amount received by the Lender in respect of the Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation, or reorganization of the Borrower or upon the appointment of any receiver, intervenor, conservator, trustee, or similar official for the Borrower or any substantial part of its assets, or otherwise, all as though such payments had not been made. SECTION 11.10. SURVIVAL OF PROVISIONS. All representations, warranties, and covenants of the Borrower contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final payment and performance by the Borrower of the Obligations. SECTION 11.11. INDEMNIFICATION. The Borrower agrees to indemnify and hold harmless the Lender and its directors, officers, agents, employees and counsel from and against any and all costs, expenses, claims or liability incurred by the Lender or such other Person hereunder and under any other Loan Document or in connection herewith or therewith, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Lender or such other Person. SECTION 11.12. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be an original, but both of which shall together constitute one and the same instrument. Each of this Agreement and the other Loan Documents may be executed and delivered by telecopier or other facsimile transmission all with the same force and effect as if the same was a fully executed and delivered original manual counterpart. SECTION 11.13. SEVERABILITY. In case any provision in or obligation under this Agreement, the Notes or any other Loan Document shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. -31- 32 SECTION 11.14. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or omission of the Lender to exercise any right or remedy hereunder, whether before or after the occurrence of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Lender of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy. SECTION 11.15. ENTIRE AGREEMENT. The Borrower and the Lender agree that this Agreement and the other Loan Documents are the complete and exclusive statement and agreement between the parties with respect to the subject matter hereof, superseding all proposals and prior agreements, oral or written, and all other communications between the parties with respect to the subject matter hereof. SECTION 11.16. SETOFF. In addition to and not in limitation of all rights of offset that the Lender may have under Applicable Law, and whether or not the Lender has made any demand or the Obligations of the Borrower have matured, the Lender shall have the right to appropriate and apply to the payment of the Obligations all deposits and other obligations then or thereafter owing by the Lender to or for the credit or the account of the Borrower. SECTION 11.17. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 11.18. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SECTION 11.19. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING, (A) ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (B) THE RIGHT TO INTERPOSE -32- 33 ANY NONCOMPULSORY SETOFF, COUNTERCLAIM OR CROSS-CLAIM. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR IT SPECIFIED IN SECTION 11.1. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND REMEDIES. -33- 34 IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to be duly executed and delivered by its proper and duly authorized officer as of the date first set forth above. AVIRON By: /s/ FRED KURLAND ------------------------------- Fred Kurland Senior Vice President and Chief Financial Officer By: /s/ J. LEIGHTON READ ------------------------------- Name: J. Leighton Read Title: Chairman of the Board and Chief Executive Officer Accepted as of the 22nd day of June, 1999 TRANSAMERICA BUSINESS CREDIT CORPORATION By: /s/ GARY P. MORO ------------------------------- Name: Gary P. Moro Title: Vice President -34- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 16,196 54,870 2,810 0 956 67,330 30,563 7,120 106,297 11,996 100,000 0 0 16 (7,469) 106,297 0 2,944 0 0 17,513 0 1,062 (15,120) 0 (15,120) 0 0 0 (15,120) (0.96) (0.96)
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