-----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, ObkndEMhlefFJtxcnyYKsFv2a4nIIs7HYkIYF/DhbGZ/Xc7+jAwYnCDPHvKTog61 pxQmuAZ15KjKpApTJ1USAw== 0000950135-97-001435.txt : 19970329 0000950135-97-001435.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950135-97-001435 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GELTEX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001001425 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043136767 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26872 FILM NUMBER: 97567566 BUSINESS ADDRESS: STREET 1: 303 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6172905888 MAIL ADDRESS: STREET 1: 303 BEAR HILL RD CITY: WALTHAM STATE: MA ZIP: 02154 10-K405 1 GELTEX PHARMACEUTICALS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1996 Commission File Number 0-26872 ------- GELTEX PHARMACEUTICALS, INC. ---------------------------- (Exact name of Registrant as Specified in its Charter) Delaware 04-3136767 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 303 Bear Hill Road Waltham, Massachusetts 02154 - ---------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 290-5888 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share -------------------------------------- (Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value, based upon the closing sale price of the shares as reported by the NASDAQ National Market System, of voting stock held by non-affiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) at March 21, 1997 was $ 206,475,839. As of March 21, 1997, 13,524,002 shares of the registrant's Common Stock, $.01 par value per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report on Form 10-K. 2 PART I ITEM 1. BUSINESS - ---------------- OVERVIEW GelTex Pharmaceuticals, Inc. ("GelTex" or the "Company") is developing non-absorbed, polymer-based pharmaceuticals that selectively bind and eliminate target substances from the intestinal tract. In January and March 1997, GelTex successfully completed two Phase III clinical studies of RenaGel(R) phosphate binder for the control of elevated phosphorus levels in chronic kidney failure patients. These studies showed that RenaGel significantly decreased average serum phosphorus levels. The Company intends to file a New Drug Application ("NDA") with the United States Food and Drug Administration ("FDA") for RenaGel in the fourth quarter of 1997. In February 1997, GelTex completed two Phase II trials of CholestaGel(R) non-absorbed cholesterol reducer. The first study demonstrated clinically and statistically significant reductions in LDL cholesterol levels in patients with hypercholesterolemia (elevated cholesterol). The second study demonstrated similar cholesterol lowering activity between once daily and split dosing. The Company intends to initiate another Phase II study with a tablet formulation of CholestaGel in the second quarter of 1997. In 1996, the Company strengthened its efforts in the infectious disease area by increasing the size of the research team devoted to this program and focusing efforts in this area on Cryptosporidium parvum. THE COMPANY'S TECHNOLOGY During the digestive process, the intestinal tract delivers nutrients and water to the bloodstream and eliminates waste products and indigestible materials through the bowel. Absorption of nutrients, electrolytes, water and certain digestive substances such as bile acids is controlled by the intestinal wall, which acts as a gateway from the intestines to the bloodstream, allowing small molecules to pass from the intestinal tract into the bloodstream and preventing larger molecules from entering circulation. Orally administered drugs are either absorbed through the intestinal wall into the bloodstream, or are non-absorbed and achieve their intended therapeutic effect by acting in the intestinal tract. Non-absorbed drugs are less likely to cause the toxicities associated with many absorbed drugs. GelTex's pharmaceuticals act in the intestinal tract without absorption into the bloodstream, thereby minimizing the potential for adverse effects. The Company's product development approach represents an advance in the use of polymer hydrogels as pharmaceuticals. The Company's technology combines an understanding of chemical interactions necessary for molecular recognition with the ability to design and synthesize polymer hydrogels. The Company's technology enables it to combine commercially available monomers that have distinct structural qualities to create proprietary, non-absorbed polymers that selectively bind target molecules. The Company designs its polymers to carry a high density of selective binding sites for the targeted molecules, making them potent at low dosage levels. GelTex's products are designed to be orally administered in capsule or tablet form. The hydrogels are not broken down during the digestive process and, as a result, are too large to be absorbed through the intestinal wall and into the bloodstream. As the hydrogels pass through the stomach and into the intestines, they selectively and tightly bind targeted molecules and absorb significant amounts of water, forming a soft, gelatinous material. In this form, the hydrogel passes easily through the intestinal tract and, with the attached target molecules, is excreted from the body. The Company's enabling technology offers the following benefits: * Broad Application to Diseases and Conditions. The Company believes its enabling technology is applicable to a broad range of diseases and conditions treatable through the intestinal tract such as elevated cholesterol, elevated phosphorus levels, certain infectious diseases, ulcers, and inflammatory bowel disease. * Low Risk of Adverse Side Effects. The Company's polymer-based products are designed to be non-absorbed and well tolerated. Since the products act only in the intestinal tract and are not 1 3 absorbed into the bloodstream, they are less likely to cause the toxicities associated with many absorbed drugs. * Convenient Oral Dosage Form. The Company's polymer-based products are designed to be potent at low dosage levels, thereby permitting oral administration in a convenient capsule or tablet form. PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS The key elements of the Company's product development and commercialization strategy include: (i) applying the Company's polymer technology to produce drug therapies that act in the intestinal tract; (ii) producing pharmaceuticals for which there are major and well defined markets; (iii) producing pharmaceuticals that offer significant improvements over available therapies or treat diseases for which no effective therapy currently exists; and (iv) collaborating with strategic partners to fund and assist in product development activities, as well as the manufacture and distribution of the Company's products. The Company believes that the safety profile and well defined clinical pathways of its products have contributed to its clinical progress to date. The Company has novel pharmaceutical products in various stages of research and development for the treatment of elevated cholesterol, elevated phosphorus and C. parvum. The table below outlines the status of the Company's product development and research programs. - ------------------------------------------------------------------------------------------------------------------
PRODUCT/PROGRAM INTENDED INDICATIONS DEVELOPMENT STATUS --------------- -------------------- ------------------ RenaGel Control of elevated phosphorus levels in patients with Phase IIb clinical trial chronic kidney failure completed in April 1996; Phase III clinical trials completed in March 1997 CholestaGel Treatment of elevated cholesterol in patients with Phase IIb and IIc primary hypercholesterolemia (elevated low-density clinical trials completed lipoprotein (LDL) cholesterol) in February 1997; Phase IId clinical trial planned for mid-1997 Infectious Diseases: C. parvum Treatment of cryptosporidiosis in Research immunocompromised patients ----------- Notes "Clinical trials" refers to testing in humans. See "Government Regulation." "Research" includes the discovery or creation of prototype compounds, in vitro studies of those compounds and preliminary evaluation in animals. - ------------------------------------------------------------------------------------------------------------------
RENAGEL Overview The United States Health Care Financing Administration ("HCFA") estimates that in 1995 more than 200,000 patients in the United States underwent chronic dialysis treatment for end-stage kidney disease. According to HCFA, the number of end-stage kidney failure patients in the United States is increasing by 8% to 10% per year. In western Europe, the number of dialysis patients in 1995 was estimated to be 159,000 and to be increasing by approximately 5% to 7% per year. In Japan, the number of dialysis patients in 1995 was estimated to be 138,000 and to be increasing by approximately 6% per year. 2 4 Control of blood phosphorus levels is central to the prevention of renal bone disease in patients with chronic kidney failure. Phosphate is absorbed into the bloodstream through the small intestine from protein-rich high-phosphate foods such as meat, fish and dairy products. Healthy kidneys maintain a delicate balance between phosphorus and calcium levels in the blood by excreting excess phosphorus in the urine. In patients with chronic kidney failure, the kidneys are unable to remove enough phosphorus to maintain the necessary balance. Elevated phosphorus levels signal the body to excrete parathyroid hormone (PTH), which breaks down bone to release calcium into the blood in an effort to reestablish the balance between calcium and phosphorus. Chronic kidney failure patients with uncontrolled elevated phosphorus levels (hyperphosphatemia) experience bone loss as well as calcification of the circulatory system caused by excessive amounts of phosphorus and calcium in the blood. To reduce elevated phosphorous levels, nearly all dialysis patients use some form of phosphate binder, currently the only available treatment for hyperphosphatemia. Phosphate binders bind dietary phosphate in the intestinal tract, thereby preventing its absorption into the bloodstream. The Company estimates that the worldwide market for phosphate binders for dialysis patients is $300 million. In addition to the dialysis population, many patients in the early stages of chronic kidney failure (the pre-dialysis population) use phosphate binders. An estimated 600,000 Americans can be classified as pre-dialysis patients. Currently available phosphate binders include calcium acetate, the only FDA-approved phosphate binder, and calcium carbonate and aluminum hydroxide, neither of which is approved in the United States for the control of hyperphosphatemia in patients with chronic kidney failure. Calcium acetate and calcium carbonate, the most commonly used agents, must be taken at sufficient doses to achieve adequate reductions in phosphate absorption, which can lead to constipation and noncompliance. In addition, calcium therapy requires frequent monitoring because its use can cause dangerous elevations of blood calcium levels (hypercalcemia). Hypercalcemia occurs in 25% to 50% of patients taking calcium-based binders. Aluminum hydroxide is more effective at lower doses than calcium acetate or calcium carbonate, but it is infrequently used because aluminum absorbed from the intestinal tract accumulates in the tissues of patients with chronic kidney failure, causing aluminum-related osteomalacia (softening of the bones) and dialysis dementia (deterioration of intellectual function). The Company believes that a non-absorbed, non-calcium-based phosphate binder will offer significant benefits in the treatment of hyperphosphatemia in patients with chronic kidney failure. RenaGel Phosphate Binder GelTex is developing RenaGel phosphate binder, an orally administered, non-absorbed hydrogel intended to control hyperphosphatemia in patients with chronic kidney failure. The product is designed to provide significant advantages over currently available phosphate binders. RenaGel binds dietary phosphate without the use of either calcium or aluminum and, therefore, will not cause hypercalcemia or aluminum toxicities. The Company intends to supply RenaGel in a convenient capsule form that is more palatable than the chalky chewable and acidic uncoated tablet forms of currently available phosphate binders. The Company filed an Investigational New Drug Application ("IND") for RenaGel with the FDA in November 1994. In December 1994, the Company initiated a double-blind, randomized, placebo-controlled, dose-escalation Phase I clinical trial, designed to establish safety, toleration and phosphate binding efficacy in 24 healthy volunteers. The trial demonstrated that RenaGel was well tolerated, and all subjects completed the trial without any drug-related adverse reactions. The trial also demonstrated a dose-dependent decrease in urinary phosphorus excretion, indicating that RenaGel bound dietary phosphate, leaving less to be absorbed into the bloodstream. The safety, efficacy and tolerability of RenaGel in 36 patients on dialysis was studied in a double-blind, randomized, cross-over, placebo-controlled Phase IIa clinical trial completed in August 1995. This study was designed to demonstrate that RenaGel is equivalent in potency to currently available calcium-based phosphate binders. In this study, RenaGel was shown to be safe and well tolerated by patients on dialysis. All patients completed drug treatment, and the adverse reaction profile of RenaGel was similar to that of the placebo. This trial demonstrated that RenaGel produces a dose-dependent decrease in serum phosphorus levels and is approximately equal in potency to the currently available calcium-based phosphate binders. The Company completed a two month open-label, dose titration Phase IIb clinical trial in 48 dialysis patients in April 1996 at five clinical sites. This trial design followed the expected treatment regimen for RenaGel, which will 3 5 involve initiation of therapy at a low dose, followed by bi-weekly dose titration until the dose reflects the unique dietary phosphate intake of each patient. Results of this trial demonstrated that RenaGel significantly decreased serum phosphorus without increasing serum calcium, while maintaining adequate control of PTH levels. GelTex initiated two pivotal Phase III clinical trials with RenaGel in June 1996. These studies were completed in the first quarter of 1997. The first trial, a 172-patient open-label placebo controlled study, confirmed and expanded the results of the Company's Phase IIb study, demonstrating RenaGel's ability to control phosphate levels without elevating calcium levels. Results of this study also suggest that reducing phosphorus levels in the absence of calcium supplementation can aid in the control of PTH levels. The second Phase III study, an 82-patient crossover study, was designed to compare the safety and efficacy of RenaGel with that of calcium acetate (PhosLo(R)). A preliminary analysis of the results of this trial shows that RenaGel is as effective as calcium acetate in reducing serum phosphorus levels with significantly fewer incidents of hypercalcemia. The Company expects to file a NDA for RenaGel with the FDA in the fourth quarter of 1997. In December 1994, GelTex granted Chugai Pharmaceutical Co., Ltd. ("Chugai") an exclusive license to develop and commercialize RenaGel in Japan and other Pacific Rim countries. See "Development and Marketing Agreements." CHOLESTAGEL Overview Elevated LDL cholesterol (hypercholesterolemia) has been widely recognized as a significant risk factor for coronary heart disease since the mid-1980s. As a result of the increased awareness and the broad prevalence of elevated LDL cholesterol, cholesterol-reducing drugs have emerged as one of the largest and fastest growing pharmaceutical product categories. Worldwide, more than 21 million people used cholesterol-reducing drugs in 1996, representing a global market exceeding $6 billion. While the risks of hypercholesterolemia are well recognized, the condition remains significantly under-treated worldwide. According to a 1993 report from the National Cholesterol Education Program ("NCEP") of the National Institutes of Health, an estimated 65 million Americans have elevated cholesterol levels. Of these, 13 million would require both drug and diet therapy to achieve adequate reductions in cholesterol levels. A separate 1993 study showed that only 5 million Americans were receiving cholesterol-reducing drugs. Worldwide, only an estimated one-third of individuals who should be receiving cholesterol-reducing drugs are receiving therapy. The market for cholesterol-reducing drugs is expected to grow as awareness and diagnosis continue to increase. Physicians frequently prescribe a low fat, low cholesterol diet (the NCEP Step I diet) as an initial approach to lowering elevated cholesterol. In cases where dietary changes alone do not adequately lower a patient's cholesterol levels, drug therapy may be needed. Physicians have the option of prescribing one of two types of therapies: non-absorbed cholesterol-reducing drugs (i.e., bile acid sequestrants) or several classes of absorbed agents. One class of absorbed agents is the HMG-CoA reductase inhibitors, the most widely prescribed class of cholesterol-reducing agents in the United States. Worldwide sales of the three leading HMG-CoA reductase inhibitors each exceeded $1 billion in 1995. These drugs work by blocking cholesterol synthesis and enhancing the liver's ability to clear LDL cholesterol from the blood. Bile acid sequestrants, an alternative therapy to absorbed agents such as HMG-CoA reductase inhibitors, have been marketed for decades. Bile acids are synthesized by the liver from cholesterol and secreted into the intestines to aid digestion of fats. Bile acid sequestrants bind to bile acids in the intestinal tract and increase their excretion from the body. To replenish the bile acid pool, the liver draws cholesterol from the bloodstream, resulting in a reduction in blood cholesterol levels. Bile acid sequestrants work without entering the bloodstream and are generally regarded as safer than absorbed agents such as HMG-CoA reductase inhibitors, which require frequent liver function tests. Since cholesterol-reducing therapy typically involves a life-long drug regimen, many doctors prescribe bile acid sequestrants as first-line drug therapy, especially for primary prevention and in younger patients. 4 6 Sales of bile acid sequestrants in the United States exceeded $140 million in 1995. The most widely prescribed bile acid sequestrant in the United States is cholestyramine, a polymer resin which is based on a single monomer. Cholestyramine is an inefficient and weak binder of bile acids and, therefore, must be taken in large quantities. Typically, patients must drink a mixture of two to three tablespoons of cholestyramine in eight ounces of water twice a day. The unpleasant intestinal side effects and necessarily large doses of currently available bile acid sequestrants prompt many patients to discontinue this therapy. As a result, many physicians either switch patients to or initially prescribe HMG-CoA reductase inhibitors. The Company believes that CholestaGel, a bile acid sequestrant with improved efficacy and tolerability in a convenient capsule or tablet form, will increase patient acceptance and use of bile acid sequestrant therapy. CholestaGel Non-Absorbed Cholesterol Reducer GelTex is developing CholestaGel, an orally administered, non-absorbed hydrogel intended to reduce elevated LDL cholesterol levels in patients with hypercholesterolemia. The Company believes that the structural design of CholestaGel represents a significant advance over existing bile acid sequestrants in that it carries a high density of bile acid binding sites, making it more potent at lower doses than currently marketed agents. The Company expects CholestaGel to meet the needs of the market for a non-absorbed cholesterol-reducing drug that is safe and well tolerated in long term use, that is effective at low doses and is available in a convenient capsule or tablet form. CholestaGel may be particularly appropriate therapy for young people with elevated cholesterol levels who may be on therapy for the rest of their lives. CholestaGel may also expand treatment of mild-to-moderate cholesterol elevations (LDL cholesterol from 130 to 160 mg/dL) by giving physicians a safer therapy to prescribe to patients at lower risk of coronary heart disease. In addition, those patients with established coronary heart disease may benefit by combining low doses of CholestaGel and HMG-CoA reductase inhibitors, since currently available bile acid sequestrants are approved for use in combination with HMG-CoA reductase inhibitors. The Company filed an IND for CholestaGel with the FDA in May 1995. In June 1995, the Company initiated a double-blind, placebo-controlled, dose-escalation Phase I clinical trial in 24 healthy volunteers to assess the safety and tolerability of CholestaGel. Data from this trial indicate that CholestaGel was well tolerated by all subjects at all dosage levels, and there were no drug-related adverse events. In addition, CholestaGel caused a significant dose-dependent reduction in LDL cholesterol in healthy volunteers. Even though the starting cholesterol levels of the subjects were low, the use of CholestaGel resulted in statistically significant reductions of LDL cholesterol in all dosage groups. In March 1996, the Company completed a Phase IIa study of CholestaGel initiated in August 1995. This double-blind, placebo-controlled, dose-ranging study was designed to evaluate the safety, tolerability and lipid-lowering efficacy of CholestaGel in subjects with LDL cholesterol levels exceeding 160 mg/dL. Analysis of the data from this study indicates that patients receiving 1.2 grams b.i.d. (twice daily) of CholestaGel experienced an average 27 mg/dL (15%) reduction in LDL cholesterol, and patients receiving 3.6 grams b.i.d. experienced an average 50 mg/dL (29%) reduction. Patients receiving placebo experienced no meaningful change in LDL cholesterol levels. No dose-limiting side effects were reported. In February 1997, the Company completed a Phase IIb, 147-patient dose ranging study looking at four dose levels of CholestaGel. Preliminary analysis of the data from this study indicates patients receiving 1 to 6 grams b.i.d. of CholestaGel experienced an average 30 mg/dL (15%) reduction in LDL cholesterol and patients receiving 2.0 grams b.i.d. experienced an average 35 mg/dL (17%) reduction. This study also showed that CholestaGel was well tolerated with a lack of gastrointestinal side effects such as constipation, which are significant problems with existing bile acid sequestrants. In February 1997, the Company also completed a Phase IIc clinical trial of CholestaGel. This study compared once daily dosing versus twice daily dosing in 119 patients. All patients took a total of 1.6 grams per day. Results of this study indicate that once daily dosing is at least as effective as split dosing. The Phase IIb and IIc studies were conducted with CholestaGel material manufactured by an improved process which extends the shelf life of the product and lowers the cost of goods without affecting the cholesterol lowering 5 7 activity of the product. The Company intends to initiate a Phase IId study in the second quarter of 1997 to test what it believes to be the optimum dosage form of CholestaGel, a 650 mg tablet. The Company is continuing to conduct research regarding potential additional benefits of cholesterol-reduction with CholestaGel. The Company is conducting animal studies to examine the effects of CholestaGel on the early stages of atherosclerosis formation (fat deposits on the artery wall). In these experiments, animals fed diets high in fat develop high cholesterol and widespread arterial fat deposits similar to those found in humans. When these animals are treated with CholestaGel, blood cholesterol levels are reduced and fat deposition on the artery walls is decreased or prevented. In addition to this research, the Company is continuing to identify more potent bile acid sequestering polymers and has synthesized several candidates. In June 1996, the Company received notice from Ono Pharmaceutical Co., Ltd., that it had terminated its agreement to develop CholestaGel in Japan, China, Korea and Taiwan. Upon such termination, GelTex reacquired all rights to the product in those countries. INFECTIOUS DISEASE RESEARCH Overview The Company is applying its expertise in polymer chemistry and molecular recognition technology to develop polymers designed to treat infectious diseases in the intestinal tract by mimicking the body's natural antibody response to pathogens. In addition to the Company's internal drug discovery and screening programs, GelTex is collaborating with researchers at Kansas State University, Tufts University and the VA Palo Alto Healthcare System, who are developing or have established screening procedures and are testing the effectiveness of GelTex's compounds in treating targeted infectious diseases. These screening procedures use animal and cell culture models which enable the Company to receive information concerning its products in a short time period. Like antibodies, these polymers are intended to act by selectively recognizing, binding to and inactivating specific sites on the pathogen's surface that are used to infect cells on the intestinal wall. The Company believes that once these sites are blocked, infection will not continue to occur. The pathogens are then expected to pass through the intestinal tract and be excreted from the body. GelTex believes that the use of these polymers may be less likely than current antibiotic therapies to result in the development of microbial resistance. GelTex is focusing its research efforts in this area toward designing and testing polymers for the treatment of cryptosporidiosis. The Company chose this disorder because (i) no effective drug therapies exist, (ii) the potentially relevant molecular recognition fragments have been identified and (iii) disease models are available for testing drug candidates for this condition. In November 1994, GelTex was awarded a $2 million grant from the United States Department of Commerce's Advanced Technology Program. The grant, which is administered by the National Institute of Standards and Technology, provides partial funding for this program distributable over a three year period. Cryptosporidium parvum C. parvum is a water borne parasite that can cause cryptosporidiosis, a debilitating diarrheal disease. In healthy individuals, the immune system is able to control and eradicate the parasite within 7 to 14 days of infection. In those individuals with compromised immune function, such as patients with AIDS and immunosuppressed transplant recipients, the immune system cannot clear the parasite for months or even years. Patients become rapidly dehydrated, must be hospitalized for long periods of time and sometimes die from the symptoms of the infection. There is currently no effective therapy for cryptosporidiosis. Each year, approximately 10% to 15% of the United States AIDS population develops cryptosporidiosis. C. parvum colonizes epithelial cells on the surface of the intestinal tract. During the course of its life cycle, the parasite produces spores (merozoites) which float freely for a period of time in the intestinal lumen before infecting new cells. GelTex is designing polymers that will bind to C. parvum merozoites during this free-floating period. Both epithelial cells and C. parvum have short life-spans and are shed from the intestinal wall in a matter of days. Thus, the Company believes that a polymer ingested over the course of several days would bind and eliminate each 6 8 new generation of merozoites, preventing the infection of new epithelial cells and reducing colonization or eliminating the pathogen from the intestinal tract. OTHER APPLICATIONS OF GELTEX'S TECHNOLOGY In addition to its development programs and infectious disease research, the Company is currently evaluating a number of other product development opportunities using its technology. Specifically, the Company believes that conditions of the intestinal tract such as ulcers and inflammatory bowel diseases could be treated with polymer-based products developed using the Company's enabling technology. DEVELOPMENT AND MARKETING AGREEMENTS GelTex intends to commercialize its products through development and marketing agreements with pharmaceutical companies. GelTex expects that such agreements will provide the Company with (i) financial support in the form of license, research and development and/or milestone payments, (ii) capabilities in research and development and sales and marketing and (iii) a revenue stream on product sales following regulatory approvals. The Company currently has a major development and marketing agreement in effect with Chugai. In December 1994, GelTex granted Chugai an exclusive license to develop and commercialize RenaGel in Japan and other Pacific Rim countries. Chugai, a leading Japanese pharmaceutical company, is the largest distributor in Japan of rHuEPO, a product which is used to treat anemia in patients with chronic kidney failure. The agreement provides for Chugai to fund the development of RenaGel in Japan and other Pacific Rim countries and grants Chugai the exclusive right to manufacture and market the product in the territory. Under the agreement, Chugai made an upfront license payment to GelTex and has agreed to make milestone payments to GelTex, payable throughout the development process in Japan. Chugai will pay a royalty to GelTex on net product sales in the territory. Chugai has the right to terminate the agreement on short notice at any time prior to product approval in Japan. Termination will relieve Chugai of any further payment obligations under the agreement and will end any license granted to Chugai by GelTex. In December 1996, Chugai informed the Company that it had initiated a Phase I clinical trial for RenaGel in Japan, resulting in a $1 million milestone payment to GelTex. RAW MATERIAL AND MANUFACTURING The Company's two lead products are manufactured from a raw material for which the Company has a single source of supply. The supplier has a composition of matter patent covering the material, and the Company believes that no additional suppliers have been licensed. In order to address issues of supply of this raw material, the Company has entered negotiations with the supplier to obtain a manufacturing license. Should the Company or its corporate partners be unable to secure an adequate supply of the material or to secure such supply at commercially reasonable rates, the Company may be unable to commercialize these products as planned. The Company has chosen not to build the capacity to manufacture its potential products and, therefore, purchases from third party manufacturers its compounds for preclinical research and clinical trial purposes and expects to be dependent on third party manufacturers for commercial production. The Company believes that it will be able to negotiate arrangements with third party manufacturers on commercially reasonable terms and that it will not be necessary for it to develop internal manufacturing capability in order to successfully commercialize its products. The Company does not have long term, fixed price manufacturing agreements with respect to RenaGel or CholestaGel with any suppliers. In the event that the Company is unable to obtain contract manufacturing, or obtain such manufacturing on commercially reasonable terms, it may need to acquire manufacturing capability or it may be unable to commercialize its products as planned. The Company has obtained pharmaceutical grade bulk production quantities of its lead compounds, RenaGel and CholestaGel from two suppliers (one for each compound). This bulk production is being used in clinical trials of these products. The Company is continuing to work with its third party manufacturers to optimize processes for the manufacture of commercial quantities of RenaGel and CholestaGel. In the event the continuing process development work is not successful, the Company's profit margins could be adversely affected. 7 9 The Company is currently exploring relationships with other suppliers to complement its relationships with its existing suppliers. The Company has established a quality control program, including a set of standard operating procedures, intended to ensure that third party manufacturers under contract produce the Company's compounds in accordance with the FDA's current Good Manufacturing Practices. The production of GelTex's compounds is based in part on technology that the Company believes to be proprietary. GelTex maintains confidentiality agreements, contractual arrangements and patent filings to protect this proprietary knowledge. In the event that such manufacturers fail to abide by the limitations or confidentiality restrictions in the manufacturing arrangements, the proprietary nature of GelTex's technology could be adversely affected and, consequently, any competitive advantage that GelTex has achieved as a result of the proprietary nature of this technology could be jeopardized. PATENTS, TRADE SECRETS AND LICENSES Protection of the Company's proprietary rights is important to maintaining its competitive position. The Company actively seeks, when appropriate, protection for its products and proprietary information by means of United States and foreign patents, trademarks and contractual arrangements. In addition, the Company relies upon trade secrets and contractual arrangements to protect certain of its proprietary information and products. The Company has three issued U.S. patents. The first, covers technology related to RenaGel and a class of other orally administered non-absorbed phosphate-binding polymers and their use in the treatment of hyperphosphatemia. The second covers methods of binding iron in the gastrointestinal tract with non-absorbed, polymer-based pharmaceuticals, thereby reducing iron absorption into the bloodstream. The third, issued in March 1996, covers technology related to CholestaGel and other polymeric materials. The Company also has approximately 16 pending United States patent applications and has filed approximately 37 international and foreign counterparts. There can be no assurance that any patents will issue from any of the Company's patent applications. Further, there can be no assurance that any current or future patents will provide the Company with significant protection against competitive products or otherwise be of commercial value. Much of the Company's technology and many of its processes are dependent upon the knowledge, experience and skills of its scientific and technical personnel. To protect its rights to its proprietary know-how and technology, the Company requires all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company. These agreements require disclosure and assignment to the Company of ideas, developments, discoveries and inventions made by employees, consultants, advisors and, when possible, collaborators. There can be no assurance that these agreements will effectively prevent disclosure of the Company's confidential information or will provide meaningful protection for the Company's confidential information if there is unauthorized use or disclosure. Furthermore, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technology. COMPETITION The pharmaceutical industry is intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in activities similar to those of the Company, including research and development of products for hypercholesterolemia, hyperphosphatemia and cryptosporidiosis. In the cholesterol-reduction field, products are currently available that address some of the needs of the market. These products include other bile acid sequestrants, HMG-CoA reductase inhibitors, fibric acid derivatives and niacin. In 1995, sales of HMG-CoA reductase inhibitors represented approximately 74% of the market for cholesterol-reducing drugs sold in the United States. Worldwide sales of the three leading HMG-CoA reductase inhibitors each exceeded $1 billion in 1995. Bile acid sequestrants work without entering the bloodstream and are generally regarded as safer than absorbed agents such as HMG-CoA reductase inhibitors, which require frequent liver function tests. However, the unpleasant intestinal side affects and necessarily large doses of currently available bile acid sequestrants prompt many patients to discontinue this therapy. The most widely prescribed bile acid sequestrant in the United States is cholestyramine, a polymer resin which is based on a single monomer. 8 10 Cholestyramine is an inefficient and weak binder of bile acids and, therefore, must be taken in large quantities. The Company believes that CholestaGel will effectively compete with currently available bile acid sequestrants by offering improved efficacy and tolerability and a more palatable formulation than that of currently available bile acid sequestrants. However, currently marketed products often have a significant competitive advantage over new entrants, and there can be no assurance that the Company will be able to secure a sufficient percentage of its targeted market to meet its current revenue projections. Failure to do so will adversely affect the Company's ability to achieve and sustain profitability. See "CholestaGel-CholestaGel Non-Absorbed Cholesterol Reducer." Phosphate binders are currently the only available treatment for hyperphosphatemia. There are several phosphate binders available. A prescription calcium acetate preparation is currently the only product approved in the United States for the control of elevated phosphorus levels in patients with chronic kidney failure. Other products used as phosphate binders include over-the-counter calcium- and aluminum-based antacids and dietary calcium supplements. Calcium acetate and calcium carbonate, the most commonly used agents, must be taken at sufficient doses to achieve adequate reductions in phosphate absorption, which can lead to constipation and noncompliance. In addition, calcium therapy requires frequent monitoring because its use can cause dangerous elevations of blood calcium levels (hypercalcemia). Aluminum hydroxide is more effective at lower doses than calcium acetate or calcium carbonate, but it is infrequently used because aluminum absorbed from the intestinal tract accumulates in the tissues of patients with chronic kidney failure, causing aluminum-related osteomalacia (softening of the bones) and dialysis dementia (deterioration of intellectual function). RenaGel binds dietary phosphate without the use of either calcium or aluminum and, therefore, will not cause hypercalcemia or aluminum toxicities. The Company believes that RenaGel will effectively compete with existing phosphate binders by offering an excellent tolerability profile and a more palatable formulation than that of currently available phosphate binders. However, currently marketed products often have a significant competitive advantage over new entrants, and there can be no assurance that the Company will be able to secure a sufficient percentage of its targeted market to meet its current revenue projections. Failure to do so will adversely affect the Company's ability to achieve and sustain profitability. See "RenaGel-RenaGel Phosphate Binder." In addition to currently available therapies, several of the Company's competitors are engaged in development activities and clinical trials of bile acid sequestrants and other types of cholesterol-reducing agents. Many of the Company's competitors have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than the Company. These competitors may also compete with the Company in establishing development and marketing agreements with pharmaceutical companies. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which the Company is working. GOVERNMENT REGULATION The development, manufacture and potential sale of therapeutics is subject to extensive regulation by United States and foreign governmental authorities. In particular, pharmaceutical products are subject to rigorous preclinical and clinical testing and to other approval requirements by the FDA in the United States under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act and by comparable agencies in most foreign countries. Before testing of any agents with potential therapeutic value in healthy human test subjects or patients may begin, stringent government requirements for preclinical data must be satisfied. The data, obtained from studies in several animal species, as well as from laboratory studies, are submitted in an IND application or its equivalent in countries outside the United States where clinical studies are to be conducted. The preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. In Phase I, which frequently begins with the initial introduction of the compound into healthy human subjects prior to introduction into patients, the product is tested for safety, adverse affects, dosage, tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication, to determine dose tolerance and the optimal dose range as well as to gather additional information relating to safety and potential adverse effects. Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at 9 11 geographically dispersed study sites, in order to determine the overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Data from preclinical and clinical trials are submitted to the FDA as a NDA for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new drug is likely to take a number of years and require the expenditure of substantial resources. Preparing a NDA or marketing authorization application involves considerable data collection, verification, analysis and expense, and there can be no assurance that FDA or any other health authority approval will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity of the disease and the availability of alternative treatments. The FDA or other health authorities may deny a NDA or marketing authorization application if the authority's regulatory criteria are not satisfied or may require additional testing or information. Even after initial FDA or other health authority approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or other regulatory authorities may require post-marketing reporting to monitor the side effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling or a change in manufacturing facility, an application seeking approval of such changes will be required to be submitted to the FDA or other regulatory authority. Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements. Further, the FDA regulates the export of products produced in the United States and may prohibit the export even if such products are approved for sale in other countries. In addition to the statutes and regulations described above, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resources Conservation and Recovery Act and other present and potential future federal, state and local regulations, and by the Nuclear Regulatory Commission. Completing the multitude of steps necessary before marketing can begin requires the expenditure of considerable resources and a lengthy period of time. Delay or failure in obtaining the required approvals, clearances, permits or inclusions by the Company, its corporate partners or its licensees would have a materially adverse effect on the ability of the Company to generate sales or royalty revenue. The impact of new or changed laws or regulations cannot be predicted with any accuracy. HUMAN RESOURCES As of March 24, 1997, GelTex had 45 full-time employees. Thirty-two of these individuals (13 of whom hold Ph.D. or M.D. degrees) are involved in research and development, and thirteen are in general and administrative functions. Members of the Company's scientific advisory board come from a number of different disciplines, with expertise in polymer chemistry, medicinal chemistry, molecular recognition, clinical pharmacology and clinical medicine. See "Management - Executive Officers" and "- Scientific and Bile Acid Advisory Boards." RESEARCH AND DEVELOPMENT COSTS The information required by Item 101(c)(xi) of Regulation S-K is incorporated by reference from Part II, Item 8 "Financial Statements and Supplementary Data" and specifically from the "Statement of Operations" set forth on page F-4 of the Company's attached financial statements. 10 12 ITEM 1(a) MANAGEMENT - -------------------- EXECUTIVE OFFICERS The executive officers of the Company, who are elected to serve at the discretion of the Board of Directors, are as follows: NAME AGE POSITION ---- --- -------- Mark Skaletsky 48 President, Chief Executive Officer, Treasurer and Director Dennis Goldberg, Ph.D. 48 Vice President, Product Development and Regulatory Affairs W. Harry Mandeville, Ph.D. 47 Vice President, Chemical Technology Joseph Tyler 46 Vice President, Manufacturing MARK SKALETSKY, President, Chief Executive Officer, Treasurer and Director. Mr. Skaletsky joined GelTex in May 1993 as President, Chief Executive Officer and a Director of the Company and has served as Treasurer of the Company since August 1993. Mr. Skaletsky previously served from 1988 to 1993 as Chairman and Chief Executive Officer of Enzytech, Inc., a biotechnology company, and President and Chief Operating Officer of Biogen, Inc., a biotechnology company, from 1983 to 1988. He is a director of Isis Pharmaceuticals, Inc. Mr. Skaletsky received his B.S. in Finance from Bentley College. DENNIS GOLDBERG, PH.D., Vice President, Product Development and Regulatory Affairs. Dr. Goldberg joined GelTex in October 1993 from Transcend Therapeutics, Inc. (formerly Free Radical Sciences, Inc.), a pharmaceutical company, where he was a co-founder and served as Vice President, Research and Development since 1993. From 1990 to 1993, he was Director, Research and Development at Clintec Nutrition Co., a clinical nutrition and pharmaceutical company which is a joint venture between Baxter Healthcare, Inc. and Nestle S.A. Dr. Goldberg received his Ph.D. in Physiology and Biochemistry from Temple University. W. HARRY MANDEVILLE, PH.D., Vice President, Chemical Technology. Dr. Mandeville joined the Company in 1992 from his position as Director, Research, Development and Engineering, Chemical Products Group at the Waters Chromatography Division of Millipore Corp., an analytical instrumentation company, which he joined in 1987. Dr. Mandeville received his Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology. JOSEPH TYLER, Vice President, Manufacturing. Mr. Tyler joined GelTex in April 1995 from Stryker Biotech, a medical device company, which he joined in 1992, serving as Director, Operations. From 1990 to 1992, Mr. Tyler was employed at Abbott Biotech (formerly Damon Biotech), a biologicals company, as Director, Manufacturing and later as General Manager. Mr. Tyler received his M.S. in Biochemical Engineering from Cornell University. SCIENTIFIC AND BILE ACID ADVISORY BOARDS The Company's Scientific Advisory Board consists of individuals with demonstrated expertise in various fields who advise the Company concerning long-term scientific planning, research and development. Members also evaluate the Company's research programs, recommend personnel to the Company and advise the Company on technological matters. In addition to its Scientific Advisory Board, GelTex has established consulting relationships with a number of scientific and medical experts who advise the Company on a project-specific basis. One of the most important of these is the Company's Bile Acid Advisory Board, a group of leading experts in the field of bile acids and bile acid sequestrants who help to guide the Company's efforts in this area. 11 13 No member of the Scientific Advisory Board or the Bile Acid Advisory Board is employed by the Company, and members may have other commitments to or consulting or advisory contracts with their employers or other entities that may conflict or compete with their obligations to the Company. Accordingly, such persons are expected to devote only a small portion of their time to the Company. The members of the Company's Scientific Advisory and Bile Acid Advisory Boards are:
NAME PRINCIPAL OCCUPATION ---- -------------------- SCIENTIFIC ADVISORY BOARD George Whitesides, Ph.D. (Chairman) Mallinckrodt Professor of Chemistry, Harvard University Joseph Bonventre, M.D. Associate Professor of Medicine, Harvard Medical School; Associate Professor of Health Sciences and Technology, Massachusetts Institute of Technology Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard University, Brigham and Women's Hospital John Thomas LaMont, M.D. Chief, Division of Gastroenterology, Beth Israel Hospital; Charlotte F. & Irving W. Rabb Professor of Medicine, Harvard Medical School Andrew G. Plaut, M.D. Professor of Medicine, Tufts University School of Medicine; Director, Core Center for Gastroenterology Research, an NIH Center at New England Medical Center Hospital and Tufts University School of Medicine BILE ACID ADVISORY BOARD Martin C. Carey, M.D., D.Sc. Professor of Medicine, Harvard University, Brigham and Women's Hospital Scott Grundy, M.D., Ph.D. Professor of Internal Medicine and BioChemistry University of Texas Southwest Medical Center Alan Hofmann, M.D., Ph.D. Professor of Medicine in Gastroenterology, University of California, San Diego Willis Maddrey, M.D. Executive Vice President, Clinical Affairs, Southwest Medical Center Robert Nicolosi, Ph.D. Director of Cardiovascular Research, University of Massachusetts, Lowell Ken Setchell, Ph.D. Professor, Department of Pediatrics, Director of Clinical Mass Spectrometry, Children's Hospital, Cincinnati Randolph C. Steer, M.D., Ph.D. Independent Pharmaceutical Consultant
12 14 ITEM 2. PROPERTIES - ------------------ The Company leases approximately 12,000 square feet of laboratory and office space in one building at 303 Bear Hill Road in Waltham, Massachusetts. The lease expires in 2004. The description of the lease terms is incorporated herein by reference from Note 12 of the Notes to Financial Statements. On February 28, 1997, the Company entered into a new lease, expiring in 2007, for a 25,200 square foot administrative and research and development facility, located at 9 Fourth Avenue in Waltham, Massachusetts. Upon the completion of the construction of leasehold improvements at the new facility, the Company plans to move all of its operations and personnel and sublease the existing facility. The Company believes that the new facility will be adequate to meet the Company's needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS - ------------------------- The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- The Company's Common Stock is traded on the over-the-counter market under the symbol "GELX", and is listed on the Nasdaq National Market. The following table sets forth the high and low sales prices for the Company's Common Stock as reported by the Nasdaq National Market for the period from the date the Company's Common Stock first began trading until December 31, 1996: Year Ended December 31, 1995 High Low ---------------------------- ---- --- Fourth Quarter (from November 8, 1995) 12 1/2 9 1/2 Year Ended December 31, 1996 ---------------------------- First Quarter 25 5/8 12 Second Quarter 26 1/4 17 1/8 Third Quarter 20 1/2 11 1/2 Fourth Quarter 24 1/2 16 13/15 The Company has never paid a cash dividend. The Company intends to retain all of its earnings, if any, for use in its business and does not intend to pay cash dividends in the foreseeable future. Future dividend policy will depend, among other factors, upon the Company's earnings and its financial condition. As of March 21, 1997, there were approximately 132 holders of record of the Company's Common Stock. 13 15 ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The following selected financial data for the five years ended December 31, 1996 are derived from the Company's financial statements. The data set forth below should be read in conjunction with the Company's financial statements, related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The Company is considered a development stage company as described in Note 1 of Notes to Financial Statements.
YEAR ENDED DECEMBER 31, 1992(1) 1993 1994 1995 1996 STATEMENT OF OPERATIONS DATA: Revenue License fee and research revenue ..... $ -- $ -- $ 3,000,000 $ 750,000 $ 1,244,474 Research grant ....................... -- -- -- 157,410 418,541 ---------- ----------- ----------- ----------- ------------ Total revenue ............................ -- -- 3,000,000 907,410 1,663,015 Costs and expenses: Research and development ............. 283,396 808,191 3,655,067 6,503,788 21,755,298 General and administrative ........... 123,333 776,747 1,279,728 1,873,247 2,923,569 Other, nonrecurring costs ............ -- -- -- -- 230,000 ---------- ----------- ----------- ----------- ------------ Total costs and expenses ................. 406,729 1,584,938 4,934,795 8,377,035 24,908,867 ---------- ----------- ----------- ----------- ------------ Loss from operations ..................... (406,729) (1,584,938) (1,934,795) (7,469,625) (23,245,852) Interest income .......................... 11,733 65,514 303,475 684,138 3,342,723 Interest expense ......................... -- -- (51,757) (99,158) (75,015) ---------- ----------- ----------- ----------- ------------ Net loss ................................. $ (394,956) $(1,519,424) $(1,683,077) $(6,884,645) $(19,978,144) ========== =========== =========== =========== ============ Net loss per share ....................... $ (0.27) $ (0.85) $ (1.60) =========== =========== ============ Shares uses in computing net loss per share ............................ 6,139,000 8,109,000 12,513,000 DECEMBER 31, 1992(1) 1993 1994 1995 1996 BALANCE SHEET DATA: Cash, cash equivalents and marketable securities ........................... $ 420,758 $ 5,625,637 $13,953,090 $33,175,098 $ 73,424,559 Working capital .......................... 394,508 5,398,601 12,665,333 31,824,253 72,460,802 Total assets ............................. 511,178 5,991,780 16,110,669 35,993,277 78,068,470 Long-term obligations, less current portion .............................. -- -- 670,693 419,569 124,360 Stockholders' equity ..................... 470,808 5,721,252 13,978,974 33,649,999 75,056,475 - ----------- (1) Operations of the Company commenced in January 1992.
14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ----------------------------------------------------------------------- Since inception, the Company has devoted substantially all of its resources to its research and product development programs. GelTex has generated no revenues from product sales and has been dependent upon funding from external financing, a strategic corporate alliance, interest income and government grants. The Company has not been profitable since inception and has incurred a cumulative net loss of $30.5 million through December 31, 1996. Losses have resulted principally from costs incurred in research, development and clinical testing of potential products and from general and administrative expenses. The Company expects its research and development expenses to continue to increase in connection with the advancement of its potential products through clinical trials, the continuing development of a process for the manufacture of commercial quantities of its products and the expansion of its programs. As a result, the Company expects to incur increasing operating losses over the next several years. The Company's ability to achieve profitability is dependent on its ability to develop and obtain regulatory approval for its products, to enter into agreements for product development and commercialization with corporate partners, to secure supply of the raw material for its lead products and to secure contract manufacturing services for the commercial supply of its products at an acceptable cost. RESULTS OF OPERATIONS Fiscal Years Ended 1996, 1995 and 1994 The Company earned revenues of $1.7 million during 1996, consisting of $1.2 million in milestone payments and research revenue from its corporate partner and $419,000 from a grant under the United States Department of Commerce's Advanced Technology Program. In comparison, the Company earned revenues of $907,000 during 1995, consisting of $750,000 of research revenue from a corporate partner and $157,000 from the same Department of Commerce program and $3.0 million in 1994 from a non-recurring license fee. The Company's total operating expenses for 1996 were $25.0 million, compared to $8.4 million for 1995 and $4.9 million for 1994. Research and development expenses more than tripled to $21.8 million for 1996 from the $6.5 million that was spent in 1995, compared to a 78% increase in 1995 from the $3.7 million that was spent in 1994. These increases were due primarily to increasing third party expenses associated with the development of CholestaGel and RenaGel (including the production of clinical trial material, clinical trial expenses and process development expenses) and increases in research and development personnel costs to expand the infectious disease program and begin preparation for filing a NDA for RenaGel. General and administrative expenses increased approximately 56% to $2.9 million in 1996 from $1.9 million for 1995 and $1.3 million in 1994 due primarily to increased business development expenses and increased administrative personnel costs. In addition, in 1996, the Company experienced additional administrative costs associated with being a new public company. Interest income increased to $3.3 million in 1996 from $684,000 and $303,000 in 1995 and 1994, respectively, due primarily to higher average cash and marketable securities balances resulting from the Company's initial public offering in November 1995 and from a follow-on public offering in May 1996. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through December 31, 1996 primarily with $87.3 million in net proceeds from two public offerings of equity securities, $17.8 million from private sales of equity securities, $5.0 million from license fees and research revenues from collaborative research agreements and $4.4 million in interest income. Cash and marketable securities were $73.4 million at December 31, 1996, compared to $33.2 million at December 31, 1995. The Company leases its administrative and research and development facility under a long term operating lease expiring in 2004 and certain leasehold improvements and equipment under capital leases expiring in 1997. Upon the expiration of the capital leases, the Company intends to exercise its option to purchase the leasehold improvements and equipment at a cost of $230,000, all of which was charged to operations in the period ended December 31, 1996. On February 28, 1997, the Company entered into a lease, expiring in 2007, for a new administrative and research and development facility at an annual cost of $302,000 for the first five years and $353,000 for the remainder of the lease term. Upon the completion of the construction of leasehold improvements at the new facility, the Company plans to move all of its operations and personnel and sublease the existing facility 15 17 and accompanying leasehold improvements. The Company expects to finance the cost of the leasehold improvements, estimated at approximately $5.0 million, with additional bank financing. At December 31, 1996, the Company had $1.0 million available through December 18, 1997 on a line of credit with a bank and had $288,000 outstanding on various lines of credit with the bank. The amounts outstanding bear interest at the prime rate and are due in monthly installments through March 1999. At December 31, 1996, the Company had net operating losses of approximately $31.0 million which expire through 2011. Since the Company expects to incur substantial losses for at least the next several years, the Company believes that it is more likely than not that all of the deferred tax assets will not be realized, and therefore no tax benefit for the prior losses has been provided. The future utilization of net operating loss carryforwards may be subject to limitation under the changes in stock ownership rules of the Internal Revenue Code of 1986, as amended. Because of this limitation, it is possible that taxable income in future years, which would otherwise be offset by net operating losses, will not be offset and therefore will be subject to tax. See Note 8 of the Notes to the Financial Statements. The Company believes that its cash and marketable securities balance and the interest income thereon, should be sufficient to fund its operating expenses as currently planned through at least 1998. However, the Company's cash requirements may vary materially from those now planned because of results of research and development, results of clinical trials, its ability to enter into new relationships with strategic partners, competitive technological advances, the FDA regulatory process and other factors. Adequate additional funds, whether through sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to delay, scale back or eliminate certain of its research and product development programs or to license third parties to commercialize products or technologies under terms that the Company might otherwise find unacceptable. FACTORS AFFECTING FUTURE OPERATING RESULTS The discussion in this section as well as elsewhere in this Annual Report on Form 10-K contains forward-looking statements that represent the current expectations of the Company's management. Actual results could differ materially from those projected due to factors affecting the Company's cash requirements as described in the preceding paragraph. In addition, the Company's ability to achieve the results projected is subject to certain risks and uncertainties regarding the Company's business such as those set forth below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Dependence on Single Source of Supply The Company uses a single supplier to provide a raw material necessary for the manufacture of CholestaGel and RenaGel. The supplier has a composition of matter patent covering the material, and the Company believes that there are no alternative suppliers of this material. The Company does not have a long-term supply agreement with the supplier. The Company has entered into negotiations to obtain a manufacturing license to enable it to manufacture the raw material. Should the Company or its corporate partners be unable to secure an adequate supply of the material, or to secure such supply at commercially reasonable rates, the Company may be unable to commercialize its products as planned. Dependence on Others for Manufacturing; Process Development Risks The Company is continuing to work with its third party manufacturers to optimize processes for the manufacture of commercial quantities of CholestaGel and RenaGel. The Company will rely upon such third parties to manufacture commercial quantities of the products. In the event that the Company's process development work is unsuccessful, the Company's profit margins could be adversely affected. 16 18 Dependence on Corporate Alliances The Company intends to enter into additional development and marketing agreements for the continued development and commercialization of CholestaGel and for the commercialization of RenaGel. The Company plans to rely upon corporate partners to conduct certain clinical trials, obtain certain regulatory approvals for and market these products. If the Company is unable to conclude agreements with partners as planned, the Company will have to either delay the continued development and commercialization of the products or consume its resources to fund such activities. This could result in a need for the Company to seek additional sources of funding and there can be no assurance that such funding will be available to the Company when needed or on acceptable terms. No Assurance of FDA Approval; Comprehensive Government Regulation The Company's potential products require governmental approvals for commercialization, which have not yet been obtained. The regulatory process, which includes preclinical, clinical and, in certain instances, post-marketing testing to establish safety and efficacy, can take many years and require the expenditure of substantial resources. Delays in obtaining such approvals could adversely affect the marketing of products developed by the Company and the Company's ability to generate commercial product revenue. Competition The biotechnology and pharmaceutical industries are subject to rapid and significant technological change. Competitors of the Company in the United States and abroad are numerous and include, among others, pharmaceutical and biotechnology companies, universities and other research institutions. The Company's success depends upon developing and maintaining a competitive position in the development of products and technologies in its areas of focus. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any which are being developed by the Company or which would render the Company's technology and products obsolete or noncompetitive. Many of these competitors have substantially greater financial and technical resources and production and marketing capabilities than the Company, and certain of these competitors may compete with the Company in establishing development and marketing agreements with pharmaceutical companies. In addition, many of the Company's competitors have greater experience than the Company in conducting preclinical testing and human clinical trials and obtaining FDA and other regulatory approvals. The Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company or its partners. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- Financial Statements and Supplementary Data appear at pages F-1 through F-17 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE --------------------------------------------------------------- Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- (a) DIRECTORS. The information with respect to directors required by this item is incorporated herein by reference from the section entitled "Election of Directors" in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 22, 1997 (the "1997 Proxy Statement"). (b) EXECUTIVE OFFICERS. See the section entitled "Management-Executive Officers" in Item 1(a) in Part I above. 17 19 ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by this item is incorporated herein by reference from the section entitled "Executive Compensation" in the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by this item is incorporated herein by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information required by this item is incorporated herein by reference from the section entitled "Certain Transactions" in the 1997 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS: Index to Financial Statements....................................F-1 Report of Independent Auditors...................................F-2 Balance Sheets as of December 31, 1996 and 1995..................F-3 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 and the period November 15, 1991 (date of inception) through December 31, 1996.........F-4 Statements of Changes in Stockholders Equity for the period from November 15, 1991 (date of inception) through December 31, 1996 .....................................F-5 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and the period November 15, 1991 (date of inception) through December 31, 1996.........F-7 Notes to Financial Statements....................................F-8 18 20 (2) FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) EXHIBITS Exhibit Number Description - -------------- ----------- 3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. 3.2 Certificate of Designation. Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 3.3 Amended and Restated By-laws of the Company, as amended. Filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 4.1 Specimen certificate for shares of Common Stock of the Company. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 4.2 Rights Agreement dated as of March 1, 1996 between the Company and American Stock Transfer & Trust Company. Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated March 1, 1996 and incorporated herein by reference. 10.1# 1992 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-08535) and incorporated herein by reference. 10.2 Express Master Lease Agreement with Equipment Schedule No. VL-1 between the Company and Comdisco, Inc. dated September 27, 1993. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.3# Letter Agreement between the Company and Dennis Goldberg dated October 1, 1993. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.4 Promissory Note executed by the Company in favor of Silicon Valley Bank dated December 9, 1993 with Commercial Security Agreement attached thereto. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.5 Agreement of Sublease between the Company and H&Q Waltham Limited Partnership dated May 4, 1994, with Exhibit B thereto (Lease Agreement between the Company and Hickory Drive Properties Realty Trust dated April 12, 1994). Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.6 Assignment and Assumption Agreement and Landlord Consent among Registrant and Hickory Drive Properties Realty Trust and H&Q Waltham Limited Partnership dated May 4, 1994. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.7* License Agreement between the Company and Chugai Pharmaceutical Co., Ltd. dated December 26, 1994. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 19 21 10.8 Promissory Note executed by the Company in favor of Silicon Valley Bank dated February 2, 1995. Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.9# Letter Agreement between the Company and Joseph E. Tyler dated March 28, 1995. Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.10 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.11 Form of Restricted Common Stock Purchase Agreement. Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.12# Form of Incentive Stock Option Certificate. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.13 Forms of Nonstatutory Stock Option Certificate. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.14# 1995 Director Stock Option Plan. Filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.15# 1995 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-00864) and incorporated herein by reference. 10.16 Lease Agreement dated February 28, 1997, between the Company and J. F. White Properties, Inc. Filed herewith. 11.1 Statement re: computation of per share earnings. Filed herewith. 23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith. 24.1 Power of Attorney. Contained on signature page hereto. 27.1 Financial Data Schedule. Filed herewith. (EDGAR filing only). ---------------------- * Certain confidential material contained in Exhibit 10.7 has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. # Identifies a management contract or compensatory plan or agreement in which an executive officer or director of the Company participates. 20 22 (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the fiscal quarter ended December 31, 1996. 21 23 INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors..........................................F-2 Balance Sheets as of December 31, 1996 and 1995.........................F-3 Statements of Operations for the years ended December 31, 1996, 1995 and 1994, and the period from November 15, 1991 (date of inception) through December 31, 1996...........................F-4 Statements of Changes in Stockholders' Equity for the period from November 15, 1991 (date of inception) through December 31, 1996...............................................F-5 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994, and the period from November 15, 1991 (date of inception) through December 31, 1996...........................F-7 Notes to Financial Statements...........................................F-8 F-1 24 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders GelTex Pharmaceuticals, Inc. We have audited the accompanying balance sheets of GelTex Pharmaceuticals, Inc. (a development stage company) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996 and the period from November 15, 1991 (date of inception) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GelTex Pharmaceuticals, Inc. (a development stage company) at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 and for the period November 15, 1991 (date of inception) through December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Boston, Massachusetts February 21, 1997 F-2 25 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
DECEMBER 31, 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents (inclusive of reverse repurchase agreements of $8,720,000 and $3,726,000 at December 31, 1996 and December 31, 1995, respectively) $ 20,801,465 $ 12,179,988 Marketable securities 52,623,094 20,995,110 Prepaid expenses and other current assets 1,923,878 572,864 ------------ ------------ Total current assets 75,348,437 33,747,962 Long-term receivables 20,000 20,000 Property and equipment, net 2,246,910 1,948,788 Intangible assets, net 453,123 276,527 ------------ ------------ $ 78,068,470 $ 35,993,277 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,495,869 $ 1,388,416 Current portion of long-term obligations 391,766 535,293 ------------ ------------ Total current liabilities 2,887,635 1,923,709 Long-term obligations, less current portion 124,360 419,569 Commitments and contingencies Stockholders' equity: Undesignated Preferred Stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding -- -- Common Stock, $.01 par value, 50,000,000 and 20,000,000 shares authorized; 13,521,302 and 10,535,065 shares issued and outstanding at December 31, 1996 and 1995, respectively 135,213 105,350 Additional paid-in capital 105,407,670 44,000,986 Deferred compensation (46,129) (55,825) Unrealized gain on available-for-sale securities 19,967 81,590 Deficit accumulated during the development stage (30,460,246) (10,482,102) ------------ ------------ Total stockholders' equity 75,056,475 33,649,999 ------------ ------------ $ 78,068,470 $ 35,993,277 ============ ============
The accompanying notes are an integral part of the financial statements. F-3 26 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
FOR THE PERIOD NOVEMBER 15, 1991 (DATE OF INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31 1996 1995 1994 1996 ---- ---- ---- ---- REVENUE: License fee and research revenue $ 1,244,474 $ 750,000 $ 3,000,000 $ 4,994,474 Research grant 418,541 157,410 575,951 ------------ ----------- ----------- ------------ Total revenue 1,663,015 907,410 3,000,000 5,570,425 COSTS AND EXPENSES: Research and development 21,755,298 6,503,788 3,655,067 33,005,740 General and administrative 2,923,569 1,873,247 1,279,728 6,976,624 Other, nonrecurring costs 230,000 -- -- 230,000 ------------ ----------- ----------- ------------ Total costs and expenses 24,908,867 8,377,035 4,934,795 40,212,364 ------------ ----------- ----------- ------------ Loss from operations (23,245,852) (7,469,625) (1,934,795) (34,641,939) Interest income 3,342,723 684,138 303,475 4,407,623 Interest expense (75,015) (99,158) (51,757) (225,930) ------------ ----------- ----------- ------------ Net loss $(19,978,144) $(6,884,645) $(1,683,077) $(30,460,246) ============ =========== =========== ============= Net loss per share $ (1.60) $ (.85) $ (.27) ============ =========== =========== Shares used in computing net loss per share 12,513,000 8,109,000 6,139,000
The accompanying notes are an integral part of the financial statements. F-4 27 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Deficit Unrealized Accumulated Gain (Loss) Preferred Stock Common Stock Additional during the on Available Total --------------- ------------ Paid-In Deferred Development for Sale Stockholder's Shares Amounts Shares Amounts Capital Compensation Stage Securities Equity ------ ------- ------ ------- ------- ------------ ----- ---------- ------ Sale of Common Stock, January, April and May 1992 276,000 $2,760 $ 2,760 Issuance of Common Stock in exchange for intangible assets, January 1992 270,000 2,700 2,700 Sale of Series A Preferred Stock net of issuance costs of $19,696, March and June 1992 700,000 $ 855,304 855,304 Issuance of Common Stock as compensation, May 1992 40,000 400 $4,600 5,000 Net loss $ (394,956) (394,956) --------- ----------- ------- ----- ----- ----------- ---------- ----------- Balance at December 31, 1992 700,000 855,304 586,000 5,860 4,600 (394,956) 470,808 Sale of Series B Preferred Stock net of issuance costs of $55,132, August 1993 2,656,000 6,584,868 6,584,868 Issuance of Series B Preferred Stock in exchange for cancellation of indebtedness, August 1993 74,000 185,000 185,000 Net loss (1,519,424) (1,519,424) --------- ----------- ------- ----- ----- ----------- ---------- ----------- Balance at December 31, 1993 3,430,000 7,625,172 586,000 5,860 4,600 (1,914,380) 5,721,252 Sale of Common Stock, May 1994 2,916 29 335 364 Sale of Series C Preferred Stock net of issuance costs of $36,742, August 1994 3,168,949 10,040,516 10,040,516 Sale of warrants to purchase 32,500 shares of Series B Preferred Stock 325 325 Unrealized loss on available-for-sale securities $ (100,406) (100,406) Net loss (1,683,077) (1,683,077) --------- ----------- ------- ----- ----- ----------- ---------- ----------- Balance at December 31, 1994 6,598,949 17,665,688 588,916 5,889 5,260 (3,597,457) (100,406) 13,978,974
The accompanying notes are an integral part of the financial statements. F-5 28 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (Continued)
Deficit Unrealized Accumulated Gain (Loss) Preferred Stock Common Stock Additional during the on Available Total --------------- ------------ Paid-In Deferred Development for Sale Stockholder's Shares Amounts Shares Amounts Capital Compensation Stage Securities Equity ------ ------- ------ ------- ------- ------------ ----------- ----------- ----------- Issuance of Common Stock under stock option plan and exercise of warrants 472,200 $ 4,722 $ 110,533 $ 115,255 Adjustment to unrealized gain (loss) on available-for-sale securities $181,996 181,996 Deferred compensation associated with stock option grants 77,178 $(77,178) -- Amortization of deferred compensation 21,353 21,353 Issuance of Common Stock upon conversion of all outstanding Preferred Stock (6,598,949) $(17,665,688) 6,598,949 65,989 17,599,699 -- Issuance of Common Stock through an Initial Public Offering, net of offering costs of $2,512,934 2,875,000 28,750 26,208,316 26,237,066 Net loss $ (6,884,645) (6,884,645) --------- ------------ ---------- -------- ------------ -------- ------------ ------- ------------ Balance at December 31, 1995 -0- -0- 10,535,065 105,350 44,000,986 (55,825) (10,482,102) 81,590 $33,649,999 Issuance of Common Stock under stock option plan and exercise of warrants 103,837 1,039 152,868 153,907 Issuance of Common Stock under employee stock purchase plan 7,400 74 113,919 113,993 Adjustment to unrealized gain (loss) on available-for-sale securities (61,623) (61,623) Amortization of deferred compensation 9,696 9,696 Issuance of Common Stock through a Secondary Public Offering, net of offering costs of $327,602 2,875,000 28,750 61,139,897 61,168,647 Net loss (19,978,144) (19,978,144) --------- ------------ ---------- -------- ------------ -------- ------------ ------- ------------ Balance at December 31, 1996 -0- -0- 13,521,302 $135,213 $105,407,670 $(46,129) $(30,460,246) $19,967 $ 75,056,475 ========= ============ ========== ======== ============ ======== ============ ======= ============
The accompanying notes are an integral part of the financial statements. F-6 29 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
FOR THE PERIOD NOVEMBER 15, 1991 (DATE OF INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31 1996 1995 1994 1996 ---- ---- ---- ---- OPERATING ACTIVITIES Net loss $(19,978,144) $ (6,884,645) $(1,683,077) $ (30,460,246) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 745,805 503,730 276,322 1,666,274 Common Stock compensation --- --- --- 5,000 Changes in operating assets and liabilities: Prepaid expenses and other current assets (1,351,014) (399,619) (129,753) (1,923,878) Long term receivables --- 20,000 --- (20,000) Accounts payable and accrued expenses 1,107,453 333,501 784,387 2,495,869 ------------ ------------ ----------- ------------- Net cash used in operating activities (19,475,900) (6,427,033) (752,121) (28,236,981) INVESTING ACTIVITIES Purchase of marketable securities (89,360,425) (21,713,604) (7,493,386) (121,573,585) Proceeds from sale and maturities of marketable securities 57,670,818 8,293,470 3,006,170 68,970,458 Purchase of intangible assets (327,829) (265,469) (67,079) (737,587) Purchase of property and equipment, net (882,998) (497,889) (879,216) (2,603,261) ------------ ------------ ----------- ------------- Net cash used in investing activities (32,900,434) (14,183,492) (5,433,511) (55,943,975) FINANCING ACTIVITIES Sale of Common Stock and warrants, net of issuance costs 61,322,554 26,352,321 689 87,678,324 Proceeds from employee stock purchase plan 113,993 --- --- 113,993 Sale of Preferred Stock, net of issuance costs --- --- 10,040,516 17,480,688 Proceeds from lease financing of assets --- 300,000 248,290 735,000 Payments on notes payable and capital lease obligations (438,736) (421,918) (163,220) (1,025,584) ------------ ------------ ----------- ------------- Net cash provided by financing activities 60,997,811 26,230,403 10,126,275 104,982,421 ------------ ------------ ----------- ------------- Increase in cash and cash equivalents 8,621,477 5,619,878 3,940,643 20,801,465 Cash and cash equivalents at beginning of period 12,179,988 6,560,110 2,619,467 --- ------------ ------------ ----------- ------------- Cash and cash equivalents at end of period $20,801,465 $ 12,179,988 $ 6,560,110 $ 20,801,465 =========== ============ =========== ============= Schedule of noncash investing and financing activities: Property and equipment acquired under capital leases --- --- $ 992,000 $ 1,110,000
The accompanying notes are an integral part of the financial statements. F-7 30 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. NATURE OF BUSINESS AND ORGANIZATION GelTex Pharmaceuticals, Inc. (the Company) was incorporated in November 1991 and commenced operations in 1992. The Company is a development-stage enterprise as it has not derived revenues from planned principal operations. The Company is engaged in the design and development of non-absorbed polymer-based pharmaceuticals that selectively bind to and eliminate target substances from the intestinal tract. Since inception, principal activities have been to perform research and technology development, develop business plans, obtain financing and recruit and train employees. The Company's ability to progress beyond the development stage is dependent upon the timely and successful development of its products and the adequacy of future capital raising. 2. SIGNIFICANT ACCOUNTING POLICIES RECENT ACCOUNTING PRONOUNCEMENTS In 1996, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of adoption did not have a material impact on the Company's financial position or results of operations. In 1996, the Company also adopted Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock-based compensation plans. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost in 1996 and 1995 was immaterial. Note 10 to the Financial Statements contains a summary of the pro forma effects to reported net loss and loss per share in 1996 and 1995 as if the Company had elected to recognize compensation expense based on the fair value at grant date of the options as prescribed by SFAS 123. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an initial maturity of three months or less and money market funds to be cash equivalents. These cash equivalents are classified as "available-for-sale" and are carried at fair value, with unrealized gains and losses reported in a separate component of stockholders' equity. Realized gains and losses and declines in value which are judged to be other than temporary on available-for-sale securities are included in investment F-8 31 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) income. The cost of securities sold is based on the specific identification method. Interest and dividends and amortization of premiums and accretion of discounts on available-for-sale securities are included in interest income. At December 31, 1996 and 1995, the Company held certain securities under agreements to resell on January 2, 1997 and 1996, respectively ("Reverse Repurchase Agreements"). Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held in the Company's safekeeping account at its investment advisor bank. The Company purchases only high grade securities, typically with short maturities. MARKETABLE SECURITIES Marketable securities consist of U.S. government obligations and high-grade commercial instruments maturing within one to two years and are classified as available-for-sale. The Company considers these investments, which represent funds available for current operations, an integral part of their cash management activities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation on an ongoing basis. PROPERTY AND EQUIPMENT Equipment, furniture and fixtures are stated at cost and are being depreciated using the straight-line method over estimated useful lives of five years. Equipment under capital leases is stated at the present value of future lease obligations and is depreciated over the life of the leases. Leasehold improvements are stated at cost and are amortized over the remaining life of the related building lease. (See Note 9). INTANGIBLE ASSETS The Company capitalizes the costs of purchased technology and obtaining patents on its technology. These capitalized costs are amortized over their estimated future lives of five years using the straight-line method. Accumulated amortization at December 31, 1996 and 1995 was $287,172 and $135,939 respectively. REVENUE RECOGNITION The Company recognizes grant revenue as reimbursable expenses are incurred. The Company recognizes license fee revenue as earned. F-9 32 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) NET LOSS PER SHARE Net loss per share is computed using the weighted average number of outstanding shares of Common Stock and Common Stock equivalents, assuming the conversion of Series A, B and C Convertible Preferred Stock into common shares as of their original date of issuance, which occurred upon completion of the initial public offering in November 1995, and the exercise of stock options and warrants using the treasury stock method. Common Stock equivalent shares are excluded from the computation if their effect is anti-dilutive; however, pursuant to the requirements of the Securities and Exchange Commission, common equivalent shares relating to stock options (using the treasury stock method and the initial public offering price) issued during the twelve months prior to the initial filing of the initial public offering are included for all periods prior to the offering whether or not they are anti-dilutive. 3. AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities: DECEMBER 31, 1996: ------------------ Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- U.S. Corporate Securities $48,336,763 $ --- $(4,030) $48,332,733 U.S. Government Obligations 20,106,537 23,997 --- 20,130,534 Money Market Accounts 4,928,183 --- --- 4,928,183 ------------ ------- ------- ----------- Total Securities $73,371,483 $23,997 $(4,030) $73,391,450 =========== ======= ======= =========== DECEMBER 31, 1995: ------------------ Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- U.S. Corporate Securities $12,310,155 $15,465 $ $12,325,620 U.S. Government Obligations 14,899,366 66,125 --- 14,965,491 Money Market Accounts 5,702,093 --- --- 5,702,093 ----------- ------- ------- ----------- Total Securities $32,911,614 $81,590 $ --- $32,993,204 =========== ======= ======= ===========
F-10 33 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED) The fair value of available-for-sale securities is determined using the published closing prices of these securities as of December 31, 1996 and 1995. These securities are classified at their estimated fair value in the accompanying balance sheet as follows:
December 31, 1996 1995 ---- ---- Cash equivalents $20,768,356 $11,998,094 Marketable securities 52,623,094 20,995,110 ------------ ----------- $73,391,450 $32,993,204 =========== ===========
The cost and estimated fair value of available-for-sale debt securities at December 31, 1996, by contractual maturity, are shown below.
Estimated Cost Fair Value ---- ---------- Due in one year or less $57,356,400 $57,390,422 Due in one year through two years 11,086,900 11,072,845 ----------- ----------- $68,443,300 $68,463,267 =========== ===========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at December 31:
1996 1995 ---- ---- Accounts payable $1,209,777 $ 636,653 Accrued research and development expenses 711,153 417,412 Accrued compensation 329,548 182,275 Accrued other 245,391 152,076 ---------- ---------- $2,495,869 $1,388,416 ========== ==========
5. PROPERTY AND EQUIPMENT At December 31, property and equipment consisted of the following:
1996 1995 ---- ---- Leasehold improvements $1,718,986 $1,682,036 Equipment 1,758,117 912,069 ---------- ---------- 3,477,103 2,594,105 Less accumulated depreciation and amortization 1,230,193 645,317 ---------- ---------- Property and equipment, net $2,246,910 $1,948,788 ========== ==========
F-11 34 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT (CONTINUED) Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was approximately $585,000, $400,000 and $250,000, respectively. At December 31, 1996 and 1995, property under capitalized leases includes $92,194 in equipment and $900,000 in leasehold improvements with aggregate accumulated amortization at December 31, 1996 and 1995 of $299,677and $224,798 respectively. 6. STOCKHOLDERS' EQUITY In November 1995, the Company completed an initial public offering of its common stock, selling 2,875,000 common shares, with net proceeds to the Company of $26,237,066 after deducting offering costs. Concurrent with the completion of the initial public offering, all 6,598,949 shares of Series A, B and C Convertible Preferred Stock were converted into 6,598,949 shares of Common Stock pursuant to the conversion terms of the preferred stock agreements. In connection with this conversion, all such shares of convertible preferred stock were retired. Effective upon the completion of the initial public offering, the Company authorized 5,000,000 shares of undesignated preferred stock with a par value of $.01. In February 1996, the Board of Directors approved an increase in the authorized shares of common stock to 50,000,000 shares which was approved at the 1996 Annual Meeting of Stockholders. In May 1996, the Company completed a public offering of its common stock, selling 2,875,000 common shares, with net proceeds to the Company of $61,168,647 after deducting offering costs. The Company has a Shareholder Rights Plan (the "Rights Plan") designed to protect shareholders from unsolicited attempts to acquire the Company on terms that do not maximize stockholder value. In connection with the Rights Plan, the Board of Directors designated 500,000 shares of the Company's preferred stock as Series A Junior Participating Preferred Stock. Under the Rights Plan, a right to purchase one one-hundredth of one share of the Series A Junior Participating Stock (the "Rights") was distributed as a dividend for each share of Common Stock. The terms of the Rights Plan provide that the Rights will become exercisable upon the earlier of the tenth day after any person or group acquires 20% or more of the Company's outstanding Common Stock or the tenth business day after any person or group commences a tender or exchange offer which would, if completed, result in the offer or owning 20% or more of the Company's outstanding Common Stock. The Rights may generally be redeemed by action of the Board of Directors at $0.001 per Right at any time prior to the tenth day following the public announcement that any person or group has acquired 20% or more of the outstanding Common Stock of the Company. The Rights expire on March 11, 2006. The Rights have certain anti-takeover effects in that they would cause substantial dilution to the party attempting to acquire the Company. In certain circumstances, the Rights allow the Company's stockholders to purchase the number of shares of the Company's Common Stock having a market value at the time of the transaction equal to twice the exercise price of the Rights, or in certain circumstances, the stockholders would be able to acquire that number of shares of the acquirer's common stock having a market value, at the time of the transaction, equal to twice the exercise price of the Rights. The Company will continue to issue Rights with future issuances of common stock. F-12 35 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS Under the Company's 1992 Equity Incentive Plan (the "Plan"), all employees of the Company and others who have made a significant contribution to the Company are eligible for awards. At December 31, 1996, the Company has reserved 1,725,000 shares of its Common Stock for awards. Awards can consist of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards and other stock-based awards. Incentive and nonstatutory options granted under the Plan may be exercisable upon grant and vest over five years or may be exercisable over a four-year vesting period; however, the Company maintains the right to repurchase any unvested shares of Common Stock upon termination of such stockholder's employment with the Company. Of the total options outstanding at December 31, 1996, options to purchase 225,000 shares of the Company's Common Stock vest upon the earlier of the achievement by the Company of certain product development milestones or December 2004. Incentive stock options are granted with an option price of not less than the fair market value of the Common Stock at the award date. Nonstatutory options may be granted at prices as determined by the Board of Directors. Stock appreciation rights may be awarded in tandem with stock options or alone. Stock appreciation rights granted alone may be granted at prices as determined by the Board. The Board may also award performance shares, restricted stock and stock units subject to such terms, restrictions, performance criteria, vesting requirements and other conditions deemed appropriate. The Company has a 1995 Employee Stock Purchase Plan (the "ESPP") which provides for the grant of rights to eligible employees to purchase up to 250,000 shares of the Company's Common Stock at the lesser of 85% of the fair market value at the beginning or the end of the established offering period. There were 7,400 shares issued under the ESPP at an average price of $16 in 1996. There were no shares issued under the ESPP in 1995. Under the Company's 1995 Director Stock Option Plan (the "Directors Plan"), all directors who are not employees of the Company are currently eligible to participate in the Directors Plan. The Directors Plan provides for the granting of options with a term of 10 years to purchase up to 75,000 shares of Common Stock at an exercise price equal to the fair market value of Common Stock at the date of grant. Generally, upon election or re-election at each annual meeting, each eligible director shall be granted options to purchase 4,000 shares of Common Stock for each year of the term of office to be served. The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans, including its 1992 Equity Incentive Plan, its 1995 Employee Stock Purchase Plan, and its 1995 Director Stock Option Plan. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation expense for the Company's stock-based compensation plans been determined based upon the fair market value at the grant date for stock option awards ("stock options") and at the end of the plan period for stock purchased under its Employee Stock Purchase Plan ("stock purchase shares"), consistent with the methodology prescribed under SFAS 123, the Company's net loss and loss per share would have been $20,415,636, or $1.63 per share, and $6,928,242 or $.85 per share, in 1996 and 1995. F-13 36 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS (CONTINUED) The fair value of stock options granted and stock purchase shares issued during 1996 and 1995 was estimated at the date of the grant and the end of the plan period, respectively, using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: volatility of 60% and 60%, risk-free interest rate of 6.2% and 6.3%, weighted-average expected life (years) of 4 and 6.4, and no dividends. The effects on fiscal 1996 and 1995 pro forma net loss and loss per share of expensing the estimated fair value of stock options and stock purchase shares are not necessarily representative of the effects of reported net loss for future years due to such things as the vesting period of the stock options and the potential for issuance of additional stock options and stock purchase shares in future years. The weighted average per-share exercise price of stock options granted, exercised and canceled during 1996 was $18.48, $2.02 and $5.53, respectively. The weighted average fair value of stock options granted during 1996 was $9.38. The weighted-average fair value of stock purchase shares issued during 1996 was $5.49. A summary of activity in the Plan and the Directors Plan through December 31, 1996 follows:
Options --------------------------------------------------------------- Available Price for Award Outstanding Per Share --------- ----------- --------- Authorized 400,000 --- Awarded (40,000) 40,000 $.125 ------- --------- Balance at December 31,1992 360,000 40,000 $.125 Authorized 150,000 --- Awarded (411,000) 411,000 $.125 -- $.25 ------- --------- Balance at December 31, 1993 99,000 451,000 $.125 -- $.25 Authorized 150,000 --- Awarded (219,500) 219,500 $.25 -- $.32 Exercised --- (2,916) $.125 Canceled 22,084 (22,084) $.25 -- $.32 ------- --------- Balance at December 31, 1994 51,584 645,500 $.125 -- $.32 Authorized 700,000 --- Awarded (589,150) 589,150 $.32 -- $11.25 Exercised --- (449,450) $.125 -- $.32 ------- --------- Balance at December 31, 1995 162,434 785,200 $.125 -- $11.25 Authorized 400,000 --- Awarded (336,400) 336,400 $11.75-- $24.25 Exercised --- (76,668) $.125 -- $13.00 Canceled or repurchased 35,051 (31,151) $.25 -- $9.00 ------- --------- BALANCE AT DECEMBER 31, 1996 261,085 1,013,781 $.125 -- $24.25 ======= =========
F-14 37 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. EQUITY INCENTIVE PLANS AND STOCK WARRANTS (CONTINUED) A summary of the weighted-average exercise price and remaining contractual life of options outstanding under the Plan and the Directors Plan as of December 31, 1996 follows:
Weighted-Average Remaining Options Weighted-Average Contractual Life Price Per Share Outstanding Exercise Price (Years) --------------- ----------- -------------- ------- $.125 - $.32 534,617 $ .28 7.71 $9 - $15 227,764 $11.73 9.15 $16 - $24.25 251,400 $20.37 9.64
A summary of the weighted-average exercise price of options exercisable under the Plan and the Directors Plan as of December 31, 1996 follows:
Options Weighted-Average Price Per Share Exercisable Exercise Price --------------- ----------- -------------- $.125 - $.32 309,617 $ .30 $9 - $15 119,697 $11.77 $16 - $24.25 43,499 $20.56
At December 31, 1996, the Company had warrants outstanding to purchase shares of the Company's Common Stock. The warrants, which provide for the purchase of 11,400 shares at an exercise price of $2.50, expire on November 8, 2000. 8. INCOME TAXES At December 31, 1996, the Company had net operating loss carryforwards of $30,932,000 and research and development tax credit carry forwards of approximately $1,290,000, which expire through 2011. Since the Company has incurred only losses since its inception and due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has fully reserved this tax benefit. Additionally, the future utilization of net operating loss carryforwards and tax credits will be subject to limitations under the change in stock ownership rules of the Internal Revenue Service. Significant components of the Company's deferred tax assets as of December 31 are as follows:
1996 1995 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 12,373,000 $ 4,182,000 Research and development tax credits 1,290,000 697,000 Other 236,000 100,000 ------------ ----------- Total deferred tax assets 13,899,000 4,979,000 Valuation allowance (13,708,000) (4,836,000) ------------ ----------- Net deferred tax assets 191,000 143,000 Deferred tax liabilities: Intangible assets and other (191,000) (143,000) ------------ ----------- Total deferred tax liabilities (191,000) (143,000) ------------ ----------- Net deferred tax asset (liability) $ --- $ --- ============ ===========
The valuation allowance increased by $8,872,000 and $3,032,000 during 1996 and 1995, respectively, due primarily to the increase in tax credits and net operating loss carryforwards. F-15 38 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. LONG TERM OBLIGATIONS The Company has issued notes payable to finance purchases of new equipment. Additionally, the Company has financed certain leasehold improvements and equipment under capital leases expiring in 1997. Long term obligations consist of the following: December 31, 1996 1995 ---- ---- Note payable to a bank bearing interest at prime (8.25% at December 31, 1996) due in monthly installments through March 1999 $288,398 $388,207 Capital lease obligations 227,728 566,655 -------- -------- 516,126 954,862 Less current portion 391,766 535,293 -------- -------- $124,360 $419,569 ======== ========
In 1996, the Company determined that it was likely to exercise an option to acquire title to certain leasehold improvements which is payable in July 1997. Accordingly, the accompanying statement of operations includes a nonrecurring charge of $230,000 for such option. At December 31, 1996, annual note maturities and capital lease payments over the next three years are as follows: 1997 $391,766 1998 113,632 1999 10,728 -------- $516,126 ========
In December 1996, the interest rate on notes payable to a bank existing as of the prior year were reduced from prime plus 1.5% to prime. Given the variable rate of interest, the carrying value of the notes payable approximates their fair value at December 31, 1996. The notes payable require the Company to maintain a minimum cash balance and net worth (as defined). The Company has a $1,000,000 line of credit available through December 18, 1997 with a bank for the purchase of new equipment. Borrowings bear interest at the prime rate and are secured by equipment. The line requires repayment of any outstanding amounts in 36 equal monthly installments and maintenance of a minimum liquidity balance and tangible net worth (as defined). There were no borrowings outstanding under this line at December 31, 1996. 10. LICENSE AGREEMENTS In December 1994 and October 1995, the Company entered into license agreements (the "Agreements") with two Japanese pharmaceutical companies (the "Partners") whereby the Company granted to the Partners licenses to make, use, and sell certain of the Company's products in certain areas of the world, as defined by the Agreements (the "Territories"). The Agreements require the Partners to bear all costs to develop and commercialize the licensed products in the respective Territories. In consideration of these Agreements, the Company received a non-refundable license fee in 1994, research support revenue in 1995 and 1996, and a milestone payment in 1996. The payment of the license fee received in 1994 and the milestone payment in 1996 were made net of a 10% withholding tax, which was paid on the Company's F-16 39 GELTEX PHARMACEUTICALS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. LICENSE AGREEMENTS behalf by the respective partner. The Agreement requires the Company to remit to this partner any future tax benefit received by the Company as a result of the withholding taxes paid. The 1995 Agreement was canceled in 1996. The 1994 Agreement calls for additional milestone payments to be paid to the Company through the commercialization of the product licensed under the Agreement and royalties based on certain percentages of sales, as defined in the Agreement. 11. RESEARCH GRANT In February 1995, the Company was awarded a Federal research grant of $2.0 million. The grant is to be paid to the Company for reimbursement of expenses related to the development of certain products through January 1998. 12. COMMITMENTS The Company leases its administrative and research and development facilities under a long-term operating lease expiring in 2004. The future minimum lease payments under this noncancelable lease are as follows: 1997 $ 75,000 1998 75,000 1999 75,000 2000 75,000 2001 75,000 Thereafter 187,500 -------- Total minimum lease payments $562,500 ========
Rental expense charged to operations during the years ended December 31, 1996, 1995 and 1994 was approximately $76,425, $78,928 and $111,000, respectively. F-17 40 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GELTEX PHARMACEUTICALS, INC. Date: March 26, 1997 By: /s/ Mark Skaletsky _______________________________ Mark Skaletsky President and Chief Executive Officer We, the undersigned officer and directors of GelTex Pharmaceuticals, Inc., hereby severally constitute Mark Skaletsky and Elizabeth Grammar, and each of them singly, our true and lawful attorneys, with full power to them and each of them to sign for use, in our names and in the capacity indicated below, any and all amendments to this Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Mark Skaletsky Director and President, Chief March 26, 1997 - ---------------------- Executive Officer and Treasurer Mark Skaletsky (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) /s/ Robert Carpenter - ---------------------- Chairman of the Board March 26, 1997 Robert Carpenter and Director /s/ Ernest Parizeau - ---------------------- Director March 26, 1997 Ernest Parizeau /s/ Barbara A. Piette - ---------------------- Director March 26, 1997 Barbara A. Piette /s/ Henri Termeer - ---------------------- Director March 26, 1997 Henri Termeer /s/ Jesse Treu - ---------------------- Director March 26, 1997 Jesse Treu /s/ George Whitesides - ---------------------- Director March 26, 1997 George Whitesides 22 41 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference. 3.2 Certificate of Designation. Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 3.3 Amended and Restated By-laws of the Company, as amended. Filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 4.1 Specimen certificate for shares of Common Stock of the Company. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 4.2 Rights Agreement dated as of March 1, 1996 between the Company and American Stock Transfer & Trust Company. Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated March 1, 1996 and incorporated herein by reference. 10.1# 1992 Equity Incentive Plan, as amended. Filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-08535) and incorporated herein by reference. 10.2 Express Master Lease Agreement with Equipment Schedule No. VL-1 between the Company and Comdisco, Inc. dated September 27, 1993. Filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.3# Letter Agreement between the Company and Dennis Goldberg dated October 1, 1993. Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.4 Promissory Note executed by the Company in favor of Silicon Valley Bank dated December 9, 1993 with Commercial Security Agreement attached thereto. Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.5 Agreement of Sublease between the Company and H&Q Waltham Limited Partnership dated May 4, 1994, with Exhibit B thereto (Lease Agreement between the Company and Hickory Drive Properties Realty Trust dated April 12, 1994). Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.6 Assignment and Assumption Agreement and Landlord Consent among Registrant and Hickory Drive Properties Realty Trust and H&Q Waltham Limited Partnership dated May 4, 1994. Filed as Exhibit 10.10 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.7* License Agreement between the Company and Chugai Pharmaceutical Co., Ltd. dated December 26, 1994. Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.8 Promissory Note executed by the Company in favor of Silicon Valley Bank dated February 2, 1995. Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 42 10.9# Letter Agreement between the Company and Joseph E. Tyler dated March 28, 1995. Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.10 Form of Common Stock Purchase Agreement. Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.11 Form of Restricted Common Stock Purchase Agreement. Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.12# Form of Incentive Stock Option Certificate. Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.13 Forms of Nonstatutory Stock Option Certificate. Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-97322) and incorporated herein by reference. 10.14# 1995 Director Stock Option Plan. Filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 10.15# 1995 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-00864) and incorporated herein by reference. 10.16 Lease Agreement dated February 28, 1997, between the Company and J. F. White Properties, Inc. Filed herewith. 11.1 Statement re: computation of per share earnings. Filed herewith. 23.1 Consent of Ernst & Young LLP, independent auditors. Filed herewith. 24.1 Power of Attorney. Contained on signature page hereto. 27.1 Financial Data Schedule. Filed herewith. (EDGAR filing only). - ---------------------- * Certain confidential material contained in Exhibit 10.7 has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. # Identifies a management contract or compensatory plan or agreement in which an executive officer or director of the Company participates. EX-10.16 2 LEASE AGREEMENT 1 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") made as of the 28th day of February, 1997 between Nine Fourth Avenue LLC, a Massachusetts limited liability company and having offices at c/o J.F. White Properties, Inc., One Gateway Center, Newton, Massachusetts 02158 (the "Lessor"), and GelTex Pharmaceuticals, Inc., a Delaware corporation with a principal office at 303 Bear Hill Road, Waltham, Massachusetts 02154(the "Lessee"). In consideration of the rents and the covenants to be paid and performed by the Lessee and upon the terms and conditions of this Lease, the Lessor leases to Lessee and Lessee hires from Lessor the following: a parcel of land (the "Land") known as 120 Third Avenue (also known as 9 Fourth Avenue) in Waltham, Massachusetts and more particularly described on a plan of land dated June 22, 1988 and recorded with the Middlesex County Registry of Deeds as Plan No. 1365 of 1988, a copy of which is attached to this Lease as Exhibit A and an approximately 25,200 square foot building (the "Building") located on the Land together with the other improvements located on the Land (hereinafter referred to as the "Premises" or the "Demised Premises"). 1.0 REFERENCE DATA Each reference in this Lease to any term defined in this Article shall be deemed and construed to incorporate the data stated following that term in this Article. ADDITIONAL RENT: Sums or other charges payable by Lessee to Lessor under this Lease, other than Annual Base Rent. ANNUAL BASE RENT: --------------------------------------------------------------------------
Period Annual Base Monthly Rent Installment -------------------------------------------------------------------------- April 1, 1997 through March 31, 2002 $302,400.00 $25,200.00 -------------------------------------------------------------------------- April 1, 2002 through March 31, 2007 $352,800.00 $29,400.00 --------------------------------------------------------------------------
BROKER: Lynch Murphy Walsh & Partners, Inc. and Whittier Partners BUILDING: The building as defined above BUSINESS DAY: All days except Saturdays, Sundays and days defined as "legal holidays" for the entire state under the laws of the Commonwealth of Massachusetts DEMISED PREMISES: The Premises as defined above LAND: The parcel of land as defined above LEASE YEAR: A twelve (12) month period beginning on Term Commencement Date -1- 2 LESSEE'S ADDRESS: Until the Term Commencement Date, GelTex Pharmaceuticals, Inc., 303 Bear Hill Road, Waltham, Massachusetts 02154, and thereafter, the Premises LESSOR'S ADDRESS: c/o J.F. White Properties, Inc., One Gateway Center, Newton, MA 02158 MORTGAGE: A mortgage, deed of trust, trust indenture, or other security instrument of record creating an interest in or affecting title to the Land or Building or any part thereof, and any renewal, modification, consolidation or extension of any such instrument. MORTGAGEE: The holder of any Mortgage. OPTION ANNUAL BASE RENT: Fair market rent for the Premises determined as of the Option Notice Date in accordance with Section 3.2, "Option to Extend". OPTION NOTICE DATE: April 1, 2006. OPTION TERM: A period of time commencing on the Option Term Commencement Date and ending on the Option Term Expiration Date. OPTION TERM COMMENCEMENT DATE: April 1, 2007. OPTION TERM EXPIRATION DATE: March 31, 2012. PROPERTY: The Land, the Building and all other improvements to the Land. RENT: Annual Base Rent and Additional Rent. TERM COMMENCEMENT DATE: April 1, 1997. TERM EXPIRATION DATE: March 31, 2007. TERM: A period of time commencing on the Term Commencement Date and ending on the Term Expiration Date. USE OF THE DEMISED PREMISES: General office and research and development, including, but not limited to, research and development involving small animal studies and other activities customarily undertaken by companies engaged in the biomedical, -2- 3 biotechnology or pharmaceutical industry. 2.0 DESCRIPTION OF DEMISED PREMISES 2.1 DEMISED PREMISES. The demised premises shall be the Demised Premises (as the same may from time to time be constituted after changes therein and additions to this Lease). 2.2 APPURTENANT RIGHTS. Lessee shall have, as appurtenant to the Demised Premises, rights to use in common with others, subject to reasonable rules and regulations from time to time made by Lessor, communicated to Lessee, those common roadways and walkways necessary for access to the Demised Premises and utilities serving the Premises. Lessor agrees that Lessor will take all reasonable action necessary to provide uninterrupted (except in emergencies) access to the Demised Premises by use of public or private roadways or easements. 3.0 TERM OF LEASE; OPTION TO EXTEND TERM 3.1 TERM. The term of this Lease shall be for the Term (or until such Term shall sooner cease or expire) commencing on the Term Commencement Date and ending on the Term Expiration Date. 3.2 OPTION TO EXTEND. So long as this Lease is in full force and effect and Lessee is not and has not at any time been in default under the Lease beyond any applicable cure period, Lessee may extend the Term of this Lease for the period of the Option Term by giving notice to Lessor on or before the Option Notice Date. The terms and conditions applicable to such option term shall be the same as set forth in this Lease except that the Lessee shall have no further right to extend the Term of this Lease and the Annual Base Rent payable by Lessee with respect to the Option Term shall be the Option Annual Base Rent, but not less than the Annual Base Rent immediately prior to the start of the Option Term. The fair market rental value of the Demised Premises may be mutually agreed to by Lessor and Lessee and, if they have not so agreed in writing in any case within one (l) month following the exercise of such option, the same shall be determined by appraisers, one to be chosen by Lessor, one to be chosen by Lessee, and a third to be selected by the two first chosen. In determining the fair market value of the Demised Premises, the parties shall take into account, not only the prevailing market terms (such as rent rates, amount of allowances, free rent periods and other similar factors), but also that Lessee has built out the then existing leasehold improvements and fixtures at Lessee's expense. As a result, the parties agree that the fair market rental value of the Demised Premises will be consistent with that of Class A office space (on the assumption that the Lessor had built out the Demised Premises for such use at Lessor's expense) or any other higher use at that time in comparable buildings in the area, but not with that of a built-out research and development laboratory. All appraisers chosen or selected hereunder shall be independent of the parties, shall have received the M.A.I. (Member, Appraisal Institute) designation from the American Institute of Real Estate Appraisers and shall have had at least five (5) years of experience in appraising commercial real estate. The unanimous written decision of the two first chosen, without selection and participation of a third appraiser, or otherwise the written decision of a majority of three appraisers chosen and selected as aforesaid, shall be conclusive and binding upon Lessor and Lessee. Lessor and Lessee shall each notify the other of its appraiser within thirty (30) days following expiration of the aforesaid one (l) month period and, unless such two appraisers shall have reached a unanimous decision within seventy-five (75) days from said expiration, they shall within a further fifteen (15) days elect a third appraiser and notify Lessor -3- 4 and Lessee thereof. The third appraiser shall deliver to the Lessor and Lessee the written decision of the majority of them within 30 days of the selection of the third appraiser. Lessor and Lessee shall each bear the expense of the appraiser chosen by it and shall equally bear the expense of the third appraiser (if any). If, as contemplated by this Section, Annual Base Rent with respect to any Option Term shall not have been determined before the commencement date of such Option Term, then such Option Term may commence and from and after such commencement date, until the amount of such Option Annual Base Rent is so determined either by agreement of the parties or by appraisal, Lessee shall make payments towards such Option Annual Base Rent at the rates applicable for Annual Base Rent immediately prior to the commencement date of such Option Term, subject to retroactive adjustment in conformity with and payment of any additional amount within fifteen (15) days of the determination of Option Annual Base Rent for such option term pursuant to this Section. In no event shall the provisions of this Section be deemed to authorize an Annual Base Rent less than the Annual Base Rent immediately prior to the start of any Option Term. If the Lessee exercises its option to extend this Lease, the phrase Annual Base Rent as used in this Lease shall mean the Option Annual Base Rent during the Option Term and the word Term as used in this Lease shall mean the combined terms of the Term and the Option Term. 4.0 OCCUPANCY 4.1 OCCUPANCY AS IS. Lessee shall accept occupancy of the Demised Premises "as is", and any work necessary to prepare the Demised Premises for occupancy by Lessee shall be performed by Lessee in compliance with the terms and provisions of this Lease at its own expense. Lessor shall provide Lessee with an allowance of $145,400 for Lessee to perform work with respect to bringing the existing roof and existing HVAC systems in good repair, upgrading the fire alarm systems, installing new windows in existing openings, upgrading the building entrance and facade, and repairing the sidewalk and parking areas, all to be performed by Lessee in accordance with the requirements of Article 8 of this Lease, including, without limitation, submission and approval of plans and specifications describing the proposed work. Lessor shall make the Premises available to Lessee for early occupancy in accordance with Section 4.2 of this Lease at least sixty (60) days before the Term Commencement Date. If Lessor is delayed in making the Premises available by such date, because of strikes, labor difficulties, inability to obtain materials, fire, governmental regulations, or any other circumstances beyond its control, then such date will be postponed for a period of time equal to the delay thus incurred. Failure on the part of the Lessor to make the Premises available as described in this Section shall not constitute a breach or default on the part of the Lessor under this Lease or give rise to any claims of damage or expenses of any kind against the Lessor by Lessee, either direct or consequential. In the event Premises are not made available to Lessee at least sixty (60) days prior to the Term Commencement Date because of Lessor but not Lessee, the Term Commencement Date, the Term Expiration Date, the Option Notice Date, the Option Term Commencement Date and the Option Term Expiration Date shall be adjusted to reflect the date that Lessor makes the premises available to Lessee that is sixty (60) days prior to the adjusted Term Commencement Date. Lessor shall not adjust the Rent. Lessor shall not adjust the Term Commencement Date, the Term Expiration Date, the Option Notice Date, the Option Term Commencement Date or the Option Term Expiration Date in the event such delay of Lessor's work is caused by Lessee. 4.2 EARLY OCCUPANCY. Notwithstanding anything to the contrary provided in this Lease, Lessor shall notify Lessee when the Premises are available for Lessee to install its equipment and -4- 5 furnishings, or to perform other work to be done by Lessee. It is understood that upon such notification, the Lessee may occupy the Premises prior to the Term Commencement Date for the purposes of preparing the Premises for its occupancy on all of the terms and conditions of the Lease except the obligation to pay rent shall not apply to the first sixty (60) days of such occupancy, provided that such occupancy by Lessee shall not interfere with Lessor's performance of its obligations under this Lease. However, if Lessee is given the Premises more than sixty (60) days prior to the Term Commencement Date, then it shall pay rent from the end of such sixty (60) day period at daily rate calculated from the Annual Base Rent for the first year of the Term of this Lease 5.0 USE OF PREMISES 5.1 PERMITTED USE. Lessee shall continuously during the Term of this Lease occupy and use the Demised Premises for the permitted Use of the Demised Premises and for no other purpose. Service and utility areas (whether or not a part of the Demised Premises) shall be used only for the particular purpose for which they are designated. 5.2 PROHIBITED USES. Lessee shall not use, or suffer or permit the use of, or suffer or permit anything to be done in or anything to be brought into or kept in the Premises or any part of the Premises (i) which would violate any covenant, agreement, term, provision or condition of this Lease, (ii) which would violate any law, ordinance, by-law, code, rule, regulation or order applicable to the Premises, (iii) for any unlawful purpose or in any unlawful manner, or (iv) which, in the reasonable judgment of Lessor shall in any way (a) impair or tend to impair the appearance or reputation of the Building or the Property, or (b) disturb the quiet enjoyment of any of the other tenants or occupants of nearby properties, whether through the transmission of noise or odors or vibrations or otherwise; provided, however, that the Lessor agrees that the Lessee's use of the Demised Premises for the Use of the Demised Premises shall not be restricted as a result of this subsection (iv). No supplies or materials shall be stored outside of the Building. Lessee shall not bring or permit to be brought into or keep in or on the Premises or elsewhere in the Building or on the Land, any oil or any toxic, hazardous, inflammable, combustible or explosive fluids, materials, chemicals or substances, (including without limitation any hazardous substances within the meaning of Chapter 21E of the Massachusetts General Laws) (except such as are related to Lessee's use of the Demised Premises, provided that the same are stored and handled in a proper fashion consistent with applicable legal standards), or cause or permit any offensive odors to emanate from or permeate the Premises. The Demised Premises shall be maintained in a sanitary condition, and kept free of rodents and vermin (except as such are related to Lessee's Use of the Demised Premises so long as such are contained, controlled and kept in accordance with industry practices and with applicable laws and regulations). Lessee shall suitably store all trash and rubbish in the Demised Premises or other locations reasonably designated by Lessor from time to time. 5.3 LICENSES AND PERMITS. If any governmental license, permit or approval shall be required for the proper and lawful conduct of Lessee's business, Lessee, at Lessee's expense, shall duly procure and maintain and comply with such licenses, permits and approvals and submit the same to inspection by Lessor. Lessee, at Lessee's expense, shall at all times comply with the terms and conditions of each such license or permit. 6.0 RENT 6.1 ANNUAL BASE RENT. Lessee shall pay to Lessor, without any set-off or deduction, at -5- 6 Lessor's Address, or to such other person or at such other place as Lessor may designate by notice to Lessee, the Annual Base Rent. The Annual Base Rent shall be paid in equal Monthly Installments in advance on or before the first Business Day of each calendar month during the Term of this Lease and shall be apportioned for any fraction of a month in which the Term Commencement Date or the last day of the Term of this Lease may fall. Rent for the first full month of the initial Term for which rent is due shall be paid by Lessee upon the execution of this Lease. 6.2 TAXES. "Real Estate Taxes" shall mean all taxes, assessments and betterments, levied, assessed or imposed by any governmental authority upon the Property, or arising from, or imposed on, the ownership or operation of the Property, or the ownership of the tenant's interest under any ground lease and any payment in lieu of any of the same required now or in the future. Lessee shall pay to Lessor as Additional Rent all Real Estate Taxes, pro-rated with respect to any portion of a tax year in which the Term of this Lease begins or ends. Such payments are to be made by the Lessee to the Lessor in installments corresponding to the installments in which said taxes are payable by the Lessor. Each payment shall be due and payable within fifteen (15) days after written notice by the Lessor to the Lessee of the amount of such installment. If Lessor shall receive any refund of any real estate taxes of which Lessee has paid a portion pursuant to this Section, then, out of any balance remaining after deducting Lessor's expenses incurred in obtaining such refund, Lessor shall pay or credit to Lessee the same proportionate share of said balance, prorated as set forth above, but in no event more than the amount paid by the Lessee with respect to the year in question. Lessor shall have no obligation to seek any such and Lessee shall have no right to seek or to control any abatement, dispute, or other proceeding with any governmental agencies or entities with respect to the real estate taxes as described in this Section. Lessor agrees to provide Lessee with copies of all invoices for Real Estate Taxes promptly after receipt of same by Lessor. If the Lessee makes a timely (as measured by the time deadlines for filing an abatement application) request for the Lessor to pursue an abatement, the Lessor shall proceed with an abatement application and the related procedures at the expense of the Lessee. If such abatement is successful, the expense of pursuing the abatement shall be reimbursed from the tax refund resulting from such abatement. Lessee shall, if, as and when demanded by Lessor and with each Monthly Installment of Annual Base Rent, make tax fund payments to Lessor. "Tax fund payments" refer to such payments as Lessor shall determine to be sufficient to provide in the aggregate a fund adequate to pay, when they become due and payable, all payments required from Lessee under this Section. In the event that tax fund payments are so demanded, and the aggregate of said tax fund payments is not adequate to pay such taxes, Lessee shall pay to Lessor the amount by which such aggregate is less than the amount of said taxes, such payment to be due and payable at the time set forth above. Any surplus tax fund payments shall be accounted for to Lessee after such surplus has been determined, and shall be credited by Lessor against future tax fund payments or refunded to Lessee at Lessor's option within a reasonable period of time. If during the term of this Lease or any extension thereof, a tax or excise on rents or other tax (excluding income, inheritance, estate, or gift taxes or transfer taxes on transfers by Lessor), however described, shall be levied or assessed against Lessor by the Commonwealth of Massachusetts or any political subdivision thereof on account of the rental hereunder, such tax or excise on rents or other taxes assessed on the land and buildings of which the Demised Premises form a part shall be deemed to constitute Real Estate Taxes for the purposes of this Section. -6- 7 It is also understood and agreed that the term Real Estate Taxes includes betterments and improvement assessments that may be assessed after the date of this Lease or during any extension thereof, provided, however, that the Lessor shall for the purposes of this Section, be deemed to have elected to pay any such assessments over the longest period of time permitted by law (whether or not the Lessor in fact makes such election), and only those installments which are or would be payable with respect to the tax years which are included in the term of this Lease or any extension thereof (with interest which is or would be payable thereon) shall be included in the Real Estate Taxes for said tax years for the purposes of this Section. In the event the taxing authorities shall, during the term of this Lease, or any extension thereof, assess along with Real Estate Taxes, personal property, excise or other taxes (including, without limitation, any occupancy, sales, use or other tax) on the Premises or on the Lessee's use of the Premises or on Lessee's trade fixtures, leasehold improvements, furnishings, lighting fixtures, heating and cooling equipment or other equipment in or on the Premises, the taxes thus assessed shall be paid by Lessee within fifteen (15) days of notice by Lessor of the amount due. 6.3 NET LEASE. Lessee agrees that this Lease is a fully "net lease" and that Lessor has no obligation to provide or pay for any utilities, services, work or anything whatsoever with respect to the Premises or in connection with Lessee's use or occupancy of the Premises, except for those items Lessor has specifically agreed to perform in Sections 13 and 14 of this Lease. Lessee shall provide, maintain and pay for all utilities (including, without limitation, electricity, gas telephone, cable, sewer, water, etc.), services (including, without limitation, heat and air conditioning), work and anything whatsoever with respect to the Premises or in connection with Lessee's use or occupancy of the Premises, except for those items Lessor has specifically agreed to perform in Sections 13 and 14 of this Lease. 6.4 LATE PAYMENT CHARGE. If any installment of Rent or Additional Rent or any other sum due from Lessee shall not be received by Lessor on the date such installment or sum is due, Lessor reserves the right to assess, and Lessee then shall pay, a late payment charge equal to one and one-half percent of the total amount that is in arrears after the expiration of the applicable notice and cure period provided in the section of this Lease entitled "15.5 - Grace Period" and a further late payment charge equal to one and one-half percent of the amount then outstanding may be assessed for each additional thirty (30) day period (or any fraction thereof) that such amount remains unpaid. Acceptance of such late payment charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of Lessor's other rights and remedies granted by this Lease. 6.5 MANAGEMENT FEE. In addition to Annual base Rent and if Lessor elects to perform the tasks delineated in the last sentence of Section 8.1, Lessee shall pay Lessor an annual management fee equal to two percent (2.0%) of the Annual Base Rent which fee shall be payable in equal monthly installments with each Monthly Installment of Annual Base Rent. 7.0 LESSOR'S RESERVATION 7.1 INTERRUPTION OR CURTAILMENT OF SERVICES. Lessor reserves the right to interrupt, curtail, stop or suspend the furnishing of services and the operation of any building system, when necessary by reason of (a) accident or emergency, or (b) repairs, alterations, replacements or improvements in the reasonable judgment of Lessor necessary to be made with respect to Lessee's failure to perform its obligations under this Lease, or (c) difficulty or inability in securing supplies or labor, or of strikes, or of any other cause beyond the reasonable control of -7- 8 Lessor, whether such other cause be similar or dissimilar to those specifically mentioned, until said cause has been removed. Lessor shall have no responsibility or liability for any such interruption, curtailment, stoppage, or suspension of service or system, except that Lessor shall exercise reasonable diligence to eliminate the cause of same and shall use reasonable efforts to minimize interference with the operation of the Premises for the Use of the Demised Premises. 8.0 MAINTENANCE OF AND IMPROVEMENTS TO PREMISES 8.1 MAINTENANCE. Lessee, at its sole cost and expense, shall keep, repair (including repairs in the nature of replacements) and maintain the Premises and all private roadways, easement areas, areas adjacent to the foregoing, sidewalks, landscaped areas and curbs appurtenant to the Premises, including, without limitation, landscaping, parking areas and driveways, windows and plate glass, mechanical, electrical and plumbing systems, telephone and cable systems, exterior lighting systems, sprinkler systems, heating, ventilating and air conditioning systems and equipment (including conduit and duct), load-bearing and non-load bearing interior and exterior walls, roofs, foundations, substructure and structural frame for the Building, and utility and other systems, in good order, condition and repair. Lessee shall keep in good repair and in clean orderly condition the outside surface areas of the Premises, including, without limitation, general maintenance, removal of snow and ice, sealing the pavement and walkway surfaces with a method acceptable to Lessor, keeping surfaces in good condition free from defects, keeping surfaces clean, maintaining planting, shrubbery and planters and maintaining and operating the outside illumination of these areas. At the election of Lessor, Lessor may arrange for, at the expense of Lessee, the maintenance and care of all or any portion of the exterior grounds (including, without limitation, landscaping or snow removal) and other elements of the exterior. 8.2 ALTERATIONS AND IMPROVEMENTS BY LESSEE. Except as set forth in the following sentence, Lessee shall make no alterations, removals, additions or improvements in or to the Demised Premises or the Building without first obtaining Lessor's written consent, which consent will not be unreasonably withheld. Notwithstanding the preceding sentence, Lessee shall be permitted to make non-structural interior changes to the Demised Premises which cost less than $75,000 without the consent of the Lessor; provided Lessee shall notify Lessor in writing of such changes and provide Lessor with a copy of a plan showing the changes. All alterations, removals, additions or improvements in or to the Demised Premises or the Building, when the same requires Lessor's consent, shall be by contractors or mechanics which shall first have been approved in writing by Lessor which approval of contractors or mechanics shall not be unreasonably withheld. No such installations or other work requiring Lessor's consent shall be undertaken or begun by Lessee until Lessor has approved written plans and specifications therefor which approval shall not be unreasonably withheld; and no amendments or additions to such plans and specifications shall be made without prior written consent of Lessor which consent shall not be unreasonably withheld. Any such alteration, removal, addition and improvement shall be done at the sole expense of Lessee and, with respect to activities that affect the exterior of the Building or the Land, at such times and in such manner as Lessor may reasonably designate. 8.3 LESSEE'S CONTRACTORS - MECHANICS' AND OTHER LIENS - STANDARD OF LESSEE'S PERFORMANCE - COMPLIANCE WITH LAWS. Whenever Lessee shall make any alteration, removal, addition or improvement or do any other work (including, without limitation, work under Sections 8.1 or 8,2) in or to the Demised Premises (whether or not the same requires Lessor's consent), Lessee will strictly observe the following covenants and agreements: -8- 9 (a) In no event shall any material or equipment be incorporated in or added to the Demised Premises in connection with any such alteration, removal, addition or improvement which is subject to any lien, charge, mortgage or other encumbrance of any kind whatsoever or is subject to any security interest or any form of title retention agreement. This paragraph 8.3(a) shall not prevent Lessee from giving a security interest in the ice machines, drying ovens and telephone/data network equipment provided it does not create any lien against the Demised Premises. Any notice of contract or mechanic's or materialmen's lien filed against the Demised Premises or the Building for work claimed to have been done for, or materials claimed to have been furnished to Lessee shall be removed or discharged by Lessee within thirty (30) days thereafter, at the expense of Lessee, by filing the bond required by law or otherwise. If Lessee fails so to remove or discharge any lien, Lessor may do so, by filing the bond required by law when such bonding is available as a full and complete remedy to protect Lessor's interests and if it is not so available by other appropriate means, at Lessee's expense and Lessee shall reimburse Lessor for any expenses or costs incurred by Lessor in so doing within fifteen (15) days after rendition of a bill therefor. (b) All installations or work done by Lessee under this or any other Article of this Lease shall be at its own expense (unless expressly otherwise provided) and shall at all times comply with (i) laws, rules, orders and regulations of governmental authorities having jurisdiction thereof; (ii) orders, rules and regulations of any Board of Fire Underwriters, or any other body hereafter constituted exercising similar functions, and governing insurance rating bureaus; (iii) plans and specifications prepared by and at the expense of Lessee showing all work and, if required by the provisions of this Lease, approved by Lessor prior to the commencement of any work, and (iv) be performed by contractors or mechanics which shall first have been approved in writing by Lessor which approval of contractors or mechanics shall not be unreasonably withheld. (c) Lessee shall procure all necessary permits before undertaking any work in the Demised Premises; do all such work in a good and workmanlike manner, employing materials of good quality and complying with all governmental requirements, and defend, save harmless, exonerate and indemnify Lessor from all injury, loss or damage to any person or property occasioned by or growing out of such work. 8.4 FIXTURES, EQUIPMENT AND IMPROVEMENTS - REMOVAL BY LESSEE. Except for the ice machines, drying ovens and telephone/data network equipment, all fixtures, equipment, improvements and appurtenances attached to or built into the Demised Premises prior to or during the Term, or any extension thereof, whether by Lessor, at its expense or at the expense of Lessee, or by Lessee shall be and remain part of the Demised Premises and shall not be removed by Lessee at the end of the Term. Where not built into the Demised Premises, and if furnished and installed by and at the sole expense of Lessee, all removable electrical fixtures, carpets, drinking or tap water facilities, furniture, or trade fixtures or business equipment shall not be deemed to be included in such fixtures, equipment and improvements and may be, and upon the request of Lessor will be, removed by Lessee, at Lessee's expense, upon the condition that such removal shall not materially damage the Premises and in the event of any damage to the Premises, Lessee shall repair the damage to the Demised Premises or the Building arising from such removal at the expense of Lessee, provided, however, that any of such items toward which Lessor shall have granted any allowance or credit to Lessee shall be deemed not to have been furnished and installed in the Demised Premises by or at the sole expense of Lessee. 8.5 LESSEE'S IMPROVEMENTS AND CONDITION OF PREMISES AT TERMINATION. Upon the termination -9- 10 of this Lease and any extension thereof, by its own terms or otherwise, Lessee will remove its goods and effects and those of all persons claiming under the Lessee from the Demised Premises and will peaceably yield up to the Lessor the Demised Premises and all alterations, erections, additions and improvements pursuant to the article entitled "Fixtures, Equipment and Improvements - Removal by Lessee", in good repair, order, and condition in all respects, reasonable use and wear (which for the purposes of this paragraph shall not be deemed to include holes in floors or walls or special wiring, conduit, piping and similar devices caused by the installation of Lessee's fixtures or equipment) and damage by fire and other casualty excepted provided that in the event of damage by fire or other casualty, Lessee shall transfer to Lessor all of Lessee's interest with respect to such damage in insurance proceeds (including participation in any settlement) from insurance provided under Section 9.1(II). It is further agreed and understood that at the termination of this Lease or any extension of this Lease, Lessee shall have restored the Demised Premises to good repair, order and condition in all respects (reasonable wear and tear excepted and casualty repaired in accordance with Article 13), including but not limited to repair of all floor surfaces damaged by the removal of partitions, machinery and equipment, and shall restore all floor areas to a good condition and repair, using materials to provide a consistent floor surface, satisfactory to Lessor; and shall have cleaned and removed accumulations of dirt and particles, oils, greases, and discolorations from all surfaces resulting from Lessee's processes and shall leave the Premises broom clean. 9.0 INSURANCE, INDEMNIFICATION, EXONERATION AND EXCULPATION 9.1 PROPERTY INSURANCE. (I) Lessor shall procure and keep in force insurance in the following forms and amounts with respect to the Building (including an amount sufficient to build out the Building as Class A office space), but not with respect to the Lessee's improvements: (a) building insurance on a "Special Form" (formerly "All Risk" form) (including earthquake and flood in reasonable amounts as determined by Lessor) in an amount not less than 100% of the then full replacement cost of the Premises and the Building or such other amount as is acceptable to Lessor and personal property insurance (on Lessor's personal property, if any, included in the Building) on the "Special Form" in the full amount of the replacement cost of the personal property; (b) insurance for loss or damage or loss of use (direct or indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Premises, in the minimum amount of $5,000,000 or in such greater amounts as are then customary for properties similar to the Premises; and (c) insurance against abatement or loss of rent in case of loss under Section 9.1(I)(a) or Section 9.1(I)(b) or other peril similarly insured against, in an amount equal to Rent payments to be made by Lessee for eighteen months based on the Rent paid or payable for the most recent complete Lease Year. The phrase "replacement cost" shall mean the actual replacement cost of the Premises including an increased cost of construction endorsement, if available, and the cost of debris removal, as well as the cost of architectural, engineering and other expenses in connection with reconstructing the Premises. -10- 11 Lessee shall pay to Lessor as Additional Rent Lessor's expense of procuring the insurance described in this section 9.1(I) and of procuring Lessor's general liability insurance, pro-rated with respect to any portion of a lease year in which the Term of this Lease begins or ends. Such payments are to be made by the Lessee to the Lessor in installments corresponding to the installments in which said insurance expenses are payable by the Lessor. Each payment shall be due and payable within fifteen (15) days after written notice by the Lessor to the Lessee of the amount of such installment. Lessee shall, if, as and when demanded by Lessor and with each Monthly Installment of Annual Base Rent, make insurance fund payments to Lessor. "Insurance fund payments" refer to such payments as Lessor shall determine to be sufficient to provide in the aggregate a fund adequate to pay, when they become due and payable, all payments required from Lessee under this Section. If the aggregate of said insurance fund payments is not adequate to pay Lessor's insurance expenses with respect to this Section 9.1(I), Lessee shall pay to Lessor the amount by which such aggregate is less than the amount of said expenses, such payment to be due and payable within fifteen (15) days of notice by Lessor of the amount due. Any surplus insurance fund payments shall be accounted for to Lessee after such surplus has been determined, and shall be credited by Lessor against future insurance fund payments or refunded to Lessee at Lessor's option within a reasonable period of time. (II) Lessee, at Lessee's expense, shall procure and keep in force insurance in the following forms and amounts with respect to the Lessee's improvements: (a) building insurance on a "Special Form" (formerly "All Risk" form) (including earthquake and flood in reasonable amounts as determined by Lessor) in an amount not less than 100% of the then full replacement cost of Lessee's improvements to the Premises and the Building or such other amount as is acceptable to Lessor and personal property insurance (on Lessee's personal property, if any, included in the Building) on the "Special Form" in the full amount of the replacement cost of the personal property; (b) insurance for loss or damage or loss of use (direct or indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Premises, in the minimum amount of $5,000,000 or in such greater amounts as are then customary for properties similar to the Premises; and (c) insurance against abatement or loss of rent in case of loss under Section 9.1(II)(a) or Section 9.1(II)(b) or other peril similarly insured against, in an amount equal to Rent payments to be made by Lessee for eighteen months based on the Rent paid or payable for the most recent complete Lease Year. The phrase "replacement cost" shall mean the actual replacement cost of Lessee's improvements to the Premises including an increased cost of construction endorsement, if available, and the cost of debris removal, as well as the cost of architectural, engineering and other expenses in connection with reconstructing Lessee's improvements to the Premises. 9.2 INSURANCE. Lessee shall procure, keep in force and pay for insurance covering all claims and demands for injury to or death of persons or damage to property arising out of or related to Lessee's occupancy of the Premises. Insurance shall not be in amounts less than the following: COMMERCIAL GENERAL LIABILITY $1,000,000 combined single limit per occurrence, Coverage A $1,000,000 any one person or organization, Coverage B -11- 12 $10,000,000 products/completed operations liability aggregate (claims-made coverage permitted for products/completed operations liability coverage only) $ 10,000 medical payments $ 50,000 fire damage legal liability $ 2,000,000 general aggregate, applying per location, per project OR $4,000,000 general aggregate The general liability is to be written on the 1988 Insurance Services Office form and shall extend to broad form contractual liability covering the indemnification provisions of this Lease, premises-operations liability, independent contractors liability, products and completed operations liability, personal injury liability, host liquor liability, "fire legal Liability", contractual liability coverage. UMBRELLA LIABILITY $3,000,000 each occurrence $3,000,000 aggregate Coverage to be at least as broad as under the underlying General Liability, Automobile Liability and Employer's Liability policies WORKERS' COMPENSATION Coverage A Workers' Compensation -Statutory Coverage B Employer's Liability - $500,000 bodily injury by accident, each accident $500,000 bodily injury by disease, each employee $500,000 bodily injury by disease, policy aggregate AUTOMOBILE LIABILITY $1,000,000 Combined single limit, each accident applying to all owned, hired and non-owned automobiles, GLASS COVERAGE Covering glass windows in the Premises, if any, in such reasonable amounts as may be established from time to time by Lessor. CONTENTS AND LEASEHOLD IMPROVEMENTS COVERAGE Adequately insuring all property situated in the Demised Premises and belonging to or removable by Lessee. BUSINESS INTERRUPTION COVERAGE Insurance shall not be less than such higher amounts as are customarily carried by responsible tenants of comparable premises in the Greater Boston area and as may be required by Lessor from time to time. 9.3 ADDITIONAL INSUREDS. The Lessee shall add the Lessor and such other entities or individuals with an interest in the Property as the Lessor may, from time to time, direct as Additional Insureds on a primary and noncontributing basis on Lessee's Commercial General Liability, Umbrella Liability and Automobile Liability policies. -12- 13 With respect to business interruption coverages, the Lessor shall be named as an Additional Insured and Loss Payee As Their Interest May Appear. With respect to glass, contents and leasehold improvement coverages, the Lessor shall be named as an Additional Insured. Lessee shall use all reasonable efforts to have its General Liability, Automobile Liability and Umbrella policies endorsed to waive the carriers' right of subrogation against Lessor. 9.4 CERTIFICATES OF INSURANCE. All insurance required under this Article shall be effected with insurers authorized to do business in the Commonwealth of Massachusetts under valid and enforceable policies. All insurance companies shall have a Best rating of not less than A/XII, or an equivalent rating in the event Best ceases to provide such rating service. Such insurance shall provide that it shall not be canceled without at least thirty (30) days prior written notice to each insured named therein. On or before the first day of the term of this Lease and thereafter not less than fifteen (15) days prior to the expiration date of each expiring policy, original copies of the policies provided for in this Lease, issued by the respective insurers, or certificates of such policies, setting forth in full the provisions thereof and issued by such insurers, together with evidence reasonably satisfactory to Lessor of the payment of all premiums for such policies, shall be delivered by Lessee to Lessor, or to any additional or named insureds, entities or individuals as the Lessor may from time to time direct. 9.5 LESSEE'S COMPLIANCE. Lessee covenants and agrees that during the Term and for such further time as Lessee shall hold the Demised Premises or any part of the Demised Premises, Lessee will comply with all requirements of the Insurance Services Offices of Massachusetts and/or the Factory Mutual Engineering Association (or any similar bodies succeeding to their respective powers) and any local Board of Fire Underwriters; will not make, allow or suffer any use or occupation of the Demised Premises that may make any insurance on the Building, or the contents thereof, void or voidable; and that in the event that Lessee does or permits anything to be done on the Demised Premises or on the Property (including, without limiting the generality of the foregoing, anything which in any way affects the sprinkler system) which: (a) is classified as a "common hazard" or "special hazard" by said Insurance Services Offices of Massachusetts (or its successor); (b) causes an aftercharge or (c) otherwise increases insurance rates and premium charges over those which would apply but for the doing of such thing, including, but without limiting the generality thereof, increases resulting from the refusal of the Factory Mutual Engineering Association (or any similar body succeeding to its business) to continue coverage of the Building; then the Lessee will pay to Lessor within fifteen (15) days of written notice all increased premium charges caused by the same for any and all of the following insurance: insurance on the Property against damage by fire, with extended coverage, demolition, sprinkler leakage and vandalism and malicious mischief endorsements; Lessor's rental insurance; use and occupancy insurance carried by any tenant of any portion of the Property; insurance on the contents of Lessor against damage by fire (with extended coverage, sprinkler leakage and vandalism and malicious mischief endorsements) or water. 9.6 INDEMNIFICATION BY LESSEE. To the fullest extent permitted by law (and not limited by the amounts of any insurance coverage required of Lessee under this Lease), the Lessee agrees to indemnify and hold harmless the Lessor (which term shall include, without limitation, the officers, trustees, directors, partners, beneficiaries, joint venturers, members, stockholders or other principals or representatives, disclosed or undisclosed, of Lessor or any managing agent) and such other entities or individuals as the Lessor may, from time to time, direct as additional -13- 14 insureds on Lessee's general liability, umbrella liability, automobile, glass, contents and leasehold improvements and business interruption coverage policies, from and against any and all claims, liabilities, penalties, damages or expenses (including, without limitation, reasonable attorneys' fees) asserted against or incurred by them: (a) on account of or based upon any injury to person, or loss of or damage to property sustained or occurring on the Demised Premises on account of or based upon the act, omission, fault, negligence or misconduct of any person whomsoever (other than Lessor or its agents, contractors or employees) or based on the Lessee's failure to perform its obligations under this Lease, including, without limitation, any claims under liquor liability, "dram shop" or similar laws; (b) on account of or based upon any injury to person or loss of or damage to property, sustained or occurring elsewhere (other than on the Demised Premises) in or about the Property arising out of the use or occupancy of the Property or Demised Premises by Lessee, or any person claiming by, through or under Lessee (including, without limitation, any claims under liquor liability, "dram shop" or similar laws) or arising out of the Lessee's failure to perform its obligations under this Lease, and caused by any person other than the Lessor or its agents, contractors, or employees; and (c) on account of or based upon (including moneys due on account of) any work or thing whatsoever done (other than by Lessor or its contractors, or agents or employees of either) in the Demised Premises during the Term of this Lease and during the period of time, if any, prior to the Term Commencement Date when Lessee may have been given access to the Demised Premises; and, in case any action or proceeding be brought against Lessor by reason of any of the foregoing, Lessee, upon notice from Lessor, shall, at Lessee's expense, resist or defend such action or proceeding and employ counsel therefor reasonably satisfactory to Lessor, it being agreed that such counsel as may act for insurance underwriters of Lessee engaged in such defense shall be deemed satisfactory. 9.7 INDEMNIFICATION BY LESSOR. Lessor represents that to the best of Lessor's knowledge and belief there are no hazardous substances contaminating the Building and there is no friable asbestos present in the Building. Should Lessee discover during its initial buildout of the Demised Premises that the Building contains hazardous materials or friable asbestos, Lessor shall reimburse Lessee for the cost of removal and disposal of such hazardous materials or friable asbestos; provided Lessor participates in the selection of the contractor to perform such work and the pricing of the same. Lessor shall indemnify and hold harmless the Lessee, its officers, directors, employees and shareholders from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses incurred by Lessee as a result of any contamination of the Land (but not of the Building or any improvements to the Land) by hazardous substances that was present, whether known or unknown, prior to the date of this Lease. Such damages may include, without limitation, costs associated with the removal and cleanup of such contamination. Lessee shall promptly notify Lessor of any hazardous substance contaminating the Land or the Building, and with respect to such contamination of the Land that is covered by Lessor's indemnity provide Lessor with an opportunity to respond to the situation. In case any action or proceeding be brought against Lessee by reason of any contamination of the Land that is covered by Lessor's indemnity, Lessor, upon notice from -14- 15 Lessee, shall, at Lessor's expense, resist or defend such action or proceeding and employ counsel therefor reasonably satisfactory to Lessee, it being agreed that such counsel as may act for insurance underwriters of Lessor engaged in such defense shall be deemed satisfactory. 9.8 PROPERTY OF LESSEE. In addition to and not in limitation of the foregoing, and subject only to provisions of applicable law, Lessee covenants and agrees that all merchandise, furniture, fixtures and property of every kind, nature and description which may be in or upon the Demised Premises or elsewhere on the Property during the Term of this Lease, shall be at the sole risk and hazard of Lessee, and that if the whole or any part thereof shall be damaged, destroyed, stolen or removed for any cause or reason whatsoever other than the negligence or misconduct of Lessor, no part of said damage or loss shall be charged to, or borne by Lessor. 9.9 LESSOR'S LIABILITY. Lessor shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, electrical disturbance, water, rain, ice or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or sub-surface or from any other place or caused by any other cause of whatever nature, unless caused by or due to the negligence of Lessor, its agents, contractors or employees; nor shall Lessor or its agents be liable for any such damage caused by other tenants or persons in the Building or caused by operations in construction of any private, public or quasi-public work; nor shall Lessor be liable for any latent defect in the Demised Premises or elsewhere in the Building or the Property. 9.10 WAIVER OF SUBROGATION. The parties to this Lease shall each endeavor to procure an appropriate clause in, or endorsement on, any fire or extended coverage insurance policy covering the Demised Premises and the Building and personal property, fixtures and equipment located thereon or therein, pursuant to which the insurance companies waive subrogation or consent to a waiver of right of recovery, and having obtained such clauses and/or endorsements of waiver of subrogation or consent to a waiver of right of recovery each party to this Lease agrees that it will not make any claim against or seek to recover from the other for any loss or damage to its property or the property of others resulting from fire or other perils covered by such fire and extended coverage insurance; provided, however, that the release, discharge, exoneration and covenant not to sue contained in this Lease shall be limited by the terms and provisions of the waiver of subrogation clauses and/or endorsements or clauses and/or endorsements consenting to a waiver of right of recovery and shall be co-extensive therewith. If either party may obtain such clause or endorsement only upon payment of an additional premium, such party shall promptly so advise the other party and shall be under no obligation to obtain such clause or endorsement unless such other party pays the premium. 10.0 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC. Lessee covenants and agrees that neither this Lease nor the term and estate by this Lease granted nor any interest herein or therein, will be assigned, mortgaged, pledged, encumbered or otherwise transferred (whether voluntarily or by operation of law), and that neither the Demised Premises, nor any part thereof, will be encumbered in any manner by reason of any act or omission on the part of Lessee, or used or occupied, or permitted to be used or occupied, or utilized for any reason whatsoever, by anyone other than Lessee in its Use of the Demised Premises, or for any use or purpose other than Use of the Demised Premises, or be sublet, or offered or advertised for subletting, without the prior written consent of Lessor in every case, which consent will not be unreasonably withheld. For purposes of this Lease, the transfer of a -15- 16 controlling interest in the corporation or other entity constituting Lessee shall be deemed an assignment of this Lease. Lessor agrees that Lessor will not unreasonably withhold its consent to an assignment by the Lessee of the Lessee's interest in this Lease for security purposes in connection with a financing of Lessee's improvements to the Demised Premises; provided such assignment is junior to the interests of Lessor in all respects and shall not encumber the real estate of which the Demised Premises are a part. In connection with any request by Lessee for such consent or intention by Lessee to make an assignment in accordance with the provisions of second paragraph of this Article, Lessee shall submit to Lessor, in writing, a statement containing the name of the proposed assignee, subtenant or other third party, such information as to its financial responsibility and standing as Lessor may require, and all of the terms and provisions upon which the proposed transaction is to take place. Lessee shall reimburse Lessor promptly, as Additional Rent, for reasonable legal and other expense incurred by Lessor in connection with any request by Lessee for any consent required under the provisions of this Article. The listing of any name other than that of Lessee, whether on the doors of the Demised Premises or on the Building, or otherwise, shall not operate to vest any right or interest in this Lease or in the Demised Premises or be deemed to be the written consent of Lessor mentioned in this Article, it being expressly understood that any such listing is a privilege extended by Lessor revocable at will by written notice to Lessee. If this Lease be assigned, or if the Demised Premises or any part thereof be sublet or occupied (other than Use of the Demised Premises by Lessee) by anybody other than Lessee, Lessor may at any time and from time to time, collect rent and other charges from the assignee, subtenant or occupant, and apply the net amount collected to the Rent and other charges reserved in this Lease, but no such assignment or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupant as a tenant, or a release of Lessee from the further performance by Lessee of covenants on the part of Lessee contained in this Lease. The consent by Lessor to an assignment or subletting or occupancy shall not in any way be construed to relieve Lessee from obtaining the express consent in writing of Lessor to any further assignment or subletting or occupancy. Notwithstanding any consent by Lessor, no assignment or subletting of the Demised Premises by Lessee shall relieve Lessee from Lessee's obligation to pay rent to Lessor or from Lessee's obligation to observe or perform any and all of the terms, provisions, covenants and conditions of this Lease. 11.0 MISCELLANEOUS COVENANTS 11.1 RULES AND REGULATIONS. Lessee and Lessee's servants, employees, agents, visitors and licensees will faithfully observe such Rules and Regulations as are attached to this Lease as Exhibit B and made a part of this Lease or as Lessor hereafter at any time or from time to time may make and may communicate in writing to Lessee and which in the reasonable judgment of Lessor shall be necessary for the reputation, safety, care or appearance of the Property, or the preservation of good order therein, or the operation or maintenance of the Property, or the equipment thereof, provided, however, that in the case of any conflict between the provisions of this Lease and any such Rules and Regulations, the provisions of this Lease shall control, and provided further that nothing contained in this Lease shall be construed to impose upon Lessor any duty or obligation to enforce such Rules and Regulations and Lessor shall not be -16- 17 liable to Lessee for violation of the same. Notwithstanding the foregoing provisions of this Section 11.1, Lessor agrees that Lessee's use of the Demised Premises for the Use of the Demised Premises shall not be restricted as a result of this Section 11.1. 11.2 NUISANCE. Lessee shall not permit any nuisance or use or practice on or about the Premises which is in violation of any municipal ordinance, law, rule or regulation or any state or federal laws. 11.3 ACCESS TO PREMISES. Lessee shall: (i) permit Lessor to erect, use and maintain pipes, ducts and conduits in and through the Premises, provided the same do not materially reduce the floor area or materially adversely affect the appearance of the Premises; (ii) permit the Lessor and any Mortgagee to have access to and to enter upon the Premises at all reasonable hours for the purposes of inspection or of making repairs, replacements or improvements in or to the Premises or the Building with respect to Lessor's performance of its rights or obligations under this Lease or of complying with all laws, orders and requirements of governmental or other authority or of exercising any right reserved to Lessor by this Lease (including the right during the progress of any such repairs, replacements or improvements or while performing work and furnishing materials in connection with compliance with any such laws, orders or requirements to take upon or through, or to keep and store within, the Demised Premises all necessary materials, tools and equipment); and (iii) permit Lessor, at reasonable times, to show the Demised Premises during ordinary business hours to any Mortgagee, prospective purchaser of any interest of Lessor in the Property, prospective Mortgagee, or prospective assignee of any Mortgage, and during the period of twelve months next preceding the Term Expiration Date to any person contemplating the leasing of the Demised Premises or any part thereof. If Lessee shall not be personally present to open and permit any entry into the Demised Premises at any time when for any reason an entry therein shall be necessary or permissible, Lessor or Lessor's agents must nevertheless be able to gain such entry by contacting a responsible representative of Lessee, whose name, address and telephone number shall be furnished by Lessee. Lessor shall exercise its rights of access to the Demised Premises permitted under any of the terms and provisions of this Lease only following reasonable written notice to Lessee (except in emergencies, in which case such notice shall not be required) containing a description of the work and in such manner as to minimize, to the extent practicable, interference with Lessee's use and occupation of the Demised Premises. In exercising its rights to enter the Demised Premises, Lessor shall be subject to such reasonable business confidentiality, safety and security conditions as Lessee may specify, including conditions permitting Lessor to enter the Building only when accompanied by a representative of Lessee. If an excavation shall be made upon land adjacent to the Demised Premises or shall be authorized to be made, Lessee shall afford, to the person causing or authorized to cause such excavation, license to enter upon the Demised Premises for the purpose of doing such work as said person shall deem necessary to preserve the Building from injury or damage and to support the same by proper foundations without any claim for damage or indemnity against Lessor, or diminution or abatement of Rent. 11.4 ACCIDENTS. Lessee shall give to Lessor prompt notice of any fire or accident in the Demised Premises or in the Building and of any damage to the Demised Premises. 11.5 SIGNS, BLINDS AND DRAPES. Lessee shall not place any signs on the exterior of the Building or on or in any window, public corridor or door visible from the exterior of the Demised Premises. No drapes or blinds may be put on or in any window which present a non-uniform appearance or an unattractive color as viewed from the exterior. Lessee may erect, and, if erected, shall maintain and replace, on or about the Premises one usual sign as is customary for the Use of the Demised Premises and in compliance with all applicable laws and as Lessee may -17- 18 desire, subject to Lessor's prior written approval which approval shall not be unreasonably withheld. All such signs shall comply with all the requirements of the City of Waltham and other governmental laws and regulations. 11.6 ESTOPPEL CERTIFICATE. Lessee shall at any time and from time to time upon not less than fifteen (15) days' prior notice by Lessor or by a Mortgagee to Lessee, execute, acknowledge and deliver to the party making such request a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), and the dates to which Rent has been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate Lessor is in default in performance of any covenant, agreement, term, provision or condition contained in this Lease and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant to this Lease may be relied upon by any prospective purchaser of any interest in the Property, any Mortgagee or prospective Mortgagee, any lessee or prospective lessee thereof, any prospective assignee of any Mortgage, or any other party designated by Lessor. The form of any such estoppel certificate requested by a Mortgagee shall be satisfactory to such Mortgagee. 11.7 REQUIREMENTS OF LAW - FINES AND PENALTIES. Lessee at its sole expense shall comply with all laws, rules, orders and regulations of federal, state, county and local governments (including, without limitation, the Americans with Disabilities Act, Public Law 101-336, 42 U.S.C. ss.ss.12101 et seq., as amended; the Resource Conservation and Recovery Act, 42 U.S.C. ss.9602 et seq., 6901 et seq., as amended; the Comprehensive Environmental Response, Compensation and Responsibility Act of 1980, codified in scattered sections of 26 U.S.C., 33 U.S.C., 42 U.S.C. and 42 U.S.C. ss.9602 et seq., as amended; the Toxic Substances Control Act, 15 U.S.C. ss.2061 et seq., as amended; the Massachusetts Oil and Hazardous Materials Release Prevention and Response Act, M.G.L. c.21E, as amended; and the Massachusetts Hazardous Waste Management Act, M.G.L. c.21C, as amended) and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Lessor or Lessee with respect to and arising out of Lessee's use or occupancy of the Demised Premises. If Lessee receives notice of any violation of law, ordinance, order or regulation applicable to the Demised Premises, it shall give prompt notice thereof to Lessor. 11.8 FLOOR LOADING. Lessee shall not place a load upon any floor of the Premises exceeding the floor load per square foot area which such floor was designed to carry and which is allowed by law. 12.0 PARKING Lessee, at its expense, shall operate, maintain and keep in repair the automobile parking facilities on the Premises to accommodate Lessee's employees, visitors and patrons and other customers. 13.0 CASUALTY In the event of loss of, or damage to, the Demised Premises or the Building by fire or other casualty, the rights and obligations of the parties to this Lease shall be as follows: (a) If the Demised Premises, or any part thereof, shall be damaged by fire or other casualty, Lessee shall give prompt notice thereof to Lessor, and Lessor, upon receiving such notice, shall proceed promptly and with due diligence, subject to unavoidable delays, to repair, -18- 19 or cause to be repaired, such damage with respect to the portion of the Building that Lessor is obligated to provide insurance coverage for under Section 9.1(I) and Lessee shall proceed promptly and with due diligence, subject to unavoidable delays, to repair, or cause to be repaired, such damage with respect to Lessee's improvements. If Lessee shall be unable to utilize the Demised Premises, or any part thereof, for the Use of the Demised Premises by reason of damage to the portion of the Building that Lessor is obligated to provide insurance coverage for under Section 9.1(I), Annual Base Rent shall proportionately abate for the period from the date of such damage to the date when such damage shall have been repaired. The period within which the required repairs may be accomplished shall be extended by the number of days lost as a result of unavoidable delays, which term shall be defined to include all delays referred to in the article contained in this Lease entitled "INABILITY TO PERFORM - EXCULPATORY CLAUSE". (b) Notwithstanding anything in this Lease to the contrary, Lessor shall not be obligated to expend more in restoring the Premises under this Article than Lessor receives in insurance proceeds from the property insurance provided under Section 9.1 (c) If, as a result of fire or other casualty, the whole or a substantial portion of the Building is rendered untenantable and Lessor reasonably determines that the Building cannot be restored within eighteen months of the occurrence of such fire or casualty, Lessor, within 120 days from the date of such fire or casualty, may elect to terminate this Lease by notice to Lessee, specifying a date not less than twenty (20) nor more than forty (40) days after the giving of such notice on which the Term of this Lease shall terminate and the Lease shall so terminate. (d) Upon the occurrence of the following, Lessee may elect to terminate this Lease upon written notice to Lessor, specifying a date not less than twenty (20) days nor more than forty (40) days after the giving of such notice on which the Term of this Lease shall terminate and the Lease shall terminate: (I) the Lessor fails to give written notice withinninety (90) days of the fire and casualty of Lessor's intention to restore the portion of the Building that Lessor is obligated to provide insurance coverage for under Section 9.1(I) or (ii) Lessor fails to restore the portion of the Building that Lessor is obligated to provide insurance coverage for under Section 9.1(I) within twelve months of the fire or other casualty. (e) Lessor shall not be required to repair or replace any of Lessee's improvements or any of Lessee's business machinery, equipment, cabinet work, furniture, personal property or other installations or improvements, and no damages, compensation or claim shall be payable by Lessor for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Property, except to the extent caused by the negligence of the Lessor, its agents, contractors or employees. (f) The provisions of this Article shall be considered an express agreement governing any instance of damage or destruction of the Property or the Demised Premises by fire or other casualty, and any law now or hereafter in force providing for such a contingency in the absence of express agreement shall have no application. (g) In the event of any termination of this Lease pursuant to this Article, the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date originally fixed in this Lease for the end of the Term of this Lease. Lessee shall have access to the Demised Premises for a period of thirty (30) days after the date of termination in order to remove Lessee's personal property. -20- 20 (h) Lessor's architect's certificate, given in good faith, shall be deemed conclusive of the statements therein contained and binding upon Lessee with respect to the performance and completion of any repair or restoration work undertaken by Lessor pursuant to this Article or the Article contained in this Lease entitled "CONDEMNATION - EMINENT DOMAIN". 14.0 CONDEMNATION - EMINENT DOMAIN In the event that the whole of the Premises shall be taken or appropriated by eminent domain or shall be condemned for any public or quasi-public use either permanently or for a period of at ;east one year, this Lease shall cease and terminate as of the date the taking, appropriating or condemning agency has the right to possession of the Premises; provided, however, if the taking is temporary, Lessee shall have the option to continue this Lease by so notifying Lessor in writing within sixty (60) days of the taking, and, upon such notification, the provisions of this paragraph shall apply as if such taking were for a period of less than one year. If less than the whole of the Premises is so taken, appropriated or condemned and the floor area of the Premises is reduced by more than twenty percent (20%) by such taking, appropriation or condemnation, Lessee shall have the option, by notice in writing to the other within 30 days following the date on which Lessee received notice of such taking, appropriation or condemnation, to terminate this Lease. Upon the giving of any such notice of termination by Lessee, this Lease and the Term of this Lease shall terminate on or retroactively as of the date on which Lessee shall be required to vacate any part of the Demised Premises. In the event of any such termination, this Lease and the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date originally fixed in this Lease for the end of the Term of this Lease. In the event of any other taking, appropriation or condemnation or if Lessee is entitled to terminate this Lease but does not elect to do so, Lessor will, with reasonable diligence and at Lessor's expense, restore the remainder of the Demised Premises as nearly as practical to the same condition as obtained prior to such taking, appropriation or condemnation in which event (i) a just proportion of the Annual Base Rent, according to the nature and extent of the taking, appropriation or condemnation and the resulting permanent injury to the Premises, shall be permanently abated, and (ii) a just proportion of the remainder of the Annual Base Rent, according to the nature and extent of the taking, appropriation or condemnation and the resultant injury sustained by the Premises, shall be abated until what remains of the Premises shall have been restored as fully as may be for permanent use and occupation by Lessee for the Use of the Demised Premises hereunder. Except for any award specifically reimbursing Lessee for moving, relocation or Lessee's improvement (reduced by any cost to bring the Demised Premises into Class A office space) expenses, except for any award specifically made to Lessee for interruption of Lessee's business and except for any award made to Lessee for damage or loss of Lessee's personal property and equipment, there are expressly reserved to Lessor all rights to compensation and damages created, accrued or accruing by reason of any such taking, appropriation or condemnation. In implementation and in confirmation of which Lessee does acknowledge that Lessor shall be entitled to receive and retain all such compensation and damages, grants to Lessor all and whatever rights (if any) Lessee may have to such compensation and damages, and agrees to execute and deliver all and whatever further instruments of assignment as Lessor may from time -21- 21 to time request. In any condemnation proceeding, Lessee and Lessor shall each seek its award in conformity with this Article, at its respective expense; provided that Lessee shall not initiate, prosecute or acquiesce in any proceedings that may result in diminution of any award payable to Lessor. In the event of any taking of the Demised Premises or any part thereof for a period of less than one year, (i) this Lease shall be and remain unaffected thereby, and (ii) Lessee shall be entitled to negotiate with the taking authority and to receive for itself any award made for such use, provided, that if any taking is for a period extending beyond the Term of this Lease, such award shall be apportioned between Lessor and Lessee as of the Term Expiration Date. 15.0 DEFAULT 15.1 CONDITIONS OF LIMITATION - RE-ENTRY - TERMINATION. This Lease and the term and estate of this Lease are upon the condition that if (a) Lessee shall neglect or fail to perform or observe any of the Lessee's covenants contained in this Lease, including (without limitation) the covenants with regard to the payment when due of Rent; or (b) Lessee shall be involved in financial difficulties as evidenced by an admission in writing by Lessee of Lessee's inability to pay its debts generally as they become due, or by the making or offering to make a composition of its debts with its creditors; or (c) Lessee shall make an assignment or trust mortgage, or other conveyance or transfer of like nature, of all or a substantial part of its property for the benefit of its creditors, or (d) the leasehold created by this Lease shall be taken on execution or by other process of law and shall not be revested in Lessee within sixty (60) days thereafter; or (e) a receiver, sequester, trustee or similar officer shall be appointed by a court of competent jurisdiction to take charge of all or a substantial part of Lessee's property and such appointment shall not be vacated within sixty (60) days; or (f) any proceeding shall be instituted by or against Lessee pursuant to any of the provisions of any Act of Congress or state law relating to bankruptcy, reorganization, arrangements, compositions or other relief from creditors, and, in the case of any such proceeding instituted against it, if Lessee shall fail to have such proceeding dismissed within sixty (60) days or if Lessee is adjudged bankrupt or insolvent as a result of any such proceeding; or (g) any event shall occur or any contingency shall arise whereby this Lease, or the term and estate created by this Lease, would (by operation of law or otherwise) devolve upon or pass to any person, firm or corporation other than Lessee, except as expressly permitted under Article 10 of this Lease; or (h) Lessee shall vacate all or substantially all of the Demised, then, and in any such event Lessor may, in a manner consistent with applicable law, immediately or at any time thereafter declare this Lease terminated by notice to Lessee or, without further demand or notice, enter into and upon the Demised Premises (or any part thereof in the name of the whole), and in either such case (and without prejudice to any remedies which might otherwise be available for arrears of rent or other charges due under this Lease or for any breach of covenant or obligation of Lessee under this Lease and without prejudice to Lessee's liability for damages as hereinafter stated or otherwise under the law), this Lease shall terminate. The words "re-entry" and "re-enter" as used in this Lease are not restricted to their technical legal meaning. As used in items (b), (c), (d) and (e) of this Section, the term "Lessee" shall also be deemed to refer to any guarantor of Lessee's obligations under this Lease. 15.2 DAMAGES - TERMINATION. Upon the termination of this Lease under the provisions of this Article, Lessee shall pay to Lessor the Rent payable by Lessee to Lessor up to the time of such termination, shall continue to be liable for any preceding breach of covenant or obligation of Lessee under this Lease, and in addition, shall pay to Lessor as damages, at the election of Lessor either: -21- 22 (x) the amount by which, at the time of the termination of this Lease (or at any time thereafter if Lessor shall have initially elected damages under Subparagraph (y), below), (i) the aggregate of the Rent projected over the period commencing with such time and ending on the originally-scheduled Term Expiration Date as stated in Article 1) exceeds (ii) the aggregate projected rental value of the Demised Premises for such period, or, (y) amounts equal to the Rent which would have been payable by Lessee had this Lease not been so terminated, payable upon the due dates therefor specified in this Lease following such termination and until the originally-scheduled Term Expiration Date as specified in Article 1, provided, however, if Lessor shall re-let the Demised Premises during such period, that Lessor shall credit Lessee with the net rents received by Lessor from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Lessor from such re-letting the expenses incurred or paid by Lessor in terminating this Lease, as well as the expenses of re-letting, including altering and preparing the Demised Premises for new tenants, brokers' commissions, and all other similar and dissimilar expenses properly chargeable against the Demised Premises and the rental therefrom, it being understood that any such re-letting may be for a period equal to or shorter or longer than the remaining term of this Lease; and provided, further, that (i) in no event shall Lessee be entitled to receive any excess of such net rents over the sums payable by Lessee to Lessor hereunder and (ii) in no event shall Lessee be entitled in any suit for the collection of damages pursuant to this Subparagraph (y) to a credit in respect of any net rents from a re-letting except to the extent that such net rents are actually received by Lessor prior to the commencement of such suit. If the Demised Premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot area basis shall be made of the rent received from such re-letting and of the expenses of re-letting. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Lessor from time to time at its election, and nothing contained in this Lease shall be deemed to require Lessor to postpone suit until the date when the term of this Lease would have expired if it had not been terminated hereunder. Nothing contained in this Lease shall be construed as limiting or precluding the recovery by Lessor against Lessee of any sums or damages to which, in addition to the damages particularly provided above, Lessor may lawfully be entitled by reason of any default under this Lease on the part of Lessee. 15.3 FEES AND EXPENSES. If Lessee shall default in the performance of any covenant or obligation on Lessee's part to be performed as contained in this Lease, Lessor may after providing Lessee with five (5) days written notice and opportunity to commence a cure (except for emergencies, in which case such notice shall not be required) immediately, or at any time thereafter, without notice, perform the same for the account of Lessee. If Lessor at any time is compelled to pay or elects (in accordance with this Section) to pay any sum of money, or do any act which will require the payment of any sum of money, by reason of the failure of Lessee to comply with any provision of this Lease, or if Lessor is compelled to or does incur any expense, including without limitation reasonable attorneys' fees, in instituting, prosecuting and/or defending any action or proceeding instituted by reason of any default of Lessee under this Lease or any costs incurred in recovering possession of the Premises after the termination of the Lease, Lessee shall on demand pay to Lessor by way of reimbursement the sum or sums so paid by Lessor with all interest, costs and damages. -22- 23 15.4 LESSOR'S REMEDIES NOT EXCLUSIVE. The specified remedies to which Lessor may resort under this Lease are cumulative and are not intended to be exclusive of any remedies or means of redress to which Lessor may at any time be lawfully entitled, and Lessor may invoke any remedy (including without limitation the remedy of specific performance) allowed at law or in equity as if specific remedies were not provided for in this Lease. 15.5 GRACE PERIOD. Notwithstanding anything to the contrary contained in this Lease with respect to Lessee's failure to perform Lessee's obligations under this Lease, Lessor agrees not to take any action to terminate this Lease (a) for default by Lessee in the payment when due of Rent, if Lessee shall cure such default within ten (10) days after written notice thereof given by Lessor to Lessee, or (b) for default by Lessee in the performance of any other covenant, if Lessee shall cure such default within a period of thirty (30) days after written notice thereof given by Lessor to Lessee (except where the nature of the default is such that remedial action should appropriately take place sooner, as indicated in such written notice), or with respect to covenants other than to pay a sum of money within such additional period as may reasonably be required to cure such default if (because of governmental restrictions or any other cause beyond the reasonable control of Lessee) the default is of such a nature that it cannot be cured within such thirty (30)-day period, provided, however, that there shall be no extension of time beyond such thirty (30)-day period for the curing of any such default unless, not more than twenty (20) days after the receipt of the notice of default, Lessee in writing (i) shall specify the cause on account of which the default cannot be cured during such period and shall advise Lessor of its intention duly to institute all steps necessary to cure the default and (ii) shall as soon as may be reasonable duly institute and thereafter diligently prosecute to completion all steps necessary to cure such default. 16.0 ABANDONED PROPERTY Any personal property in which Lessee has an interest which shall remain in the Building or on the Demised Premises after the expiration or termination of the Term of this Lease shall be conclusively deemed to have been abandoned, and may be disposed of in such manner as Lessor may see fit; provided, however, that, if any part thereof shall be sold, that Lessor may receive and retain the proceeds of such sale and apply the same, at its option, against the expenses of the sale, the cost of moving and storage, any arrears of Rent payable hereunder by Lessee to Lessor and any damages to which Lessor may be entitled under Article 19 of this Lease or pursuant to law, with the balance if any, to be paid to Lessee. 17.0 SUBORDINATION AND NON-DISTURBANCE This Lease is subject and subordinate in all respects to all mortgages and other matters of record and to mortgages which may hereafter be placed on or affect the Land, the Building or the Property or Lessor's interest or estate therein, and to each advance made or hereafter to be made under any such mortgage, and to all renewals, modifications, consolidations, replacements and extensions thereof and substitutions therefore; provided, however, that so long as Lessee is not in default of any of the material provisions of this Lease continuing beyond any applicable notice, grace and cure period, Lessee's rights under this Lease shall not be disturbed. This section shall be self operative and no further instrument of subordination shall be required. In confirmation of such subordination and non-disturbance agreement, Lessee agrees upon request of Lessor to execute and deliver promptly any certificate acknowledging or confirming such subordination and non-disturbance which Lessor or any mortgagee or their respective successor in interest may request. Lessor agrees to make reasonable efforts to obtain a subordination and non-disturbance agreement from any Mortgagee. -23- 24 18.0 QUIET ENJOYMENT Lessor covenants that if, and so long as, Lessee keeps and performs each and every covenant, agreement, term, provision and condition contained in this Lease on the part and on behalf of Lessee to be kept and performed, Lessee shall quietly enjoy the Demised Premises from and against the claims of all persons claiming by, through or under Lessor subject, nevertheless, to the covenants, agreements, terms, provisions and conditions of this Lease and to all Mortgages to which this Lease is subject and subordinate. Without incurring any liability to Lessee, Lessor may permit access to the Demised Premises and open the same, whether or not Lessee shall be present, upon any demand of any receiver, trustee, assignee for the benefit of creditors, sheriff, marshal or court officer entitled to, or reasonably purporting to be entitled to, such access for the purpose of taking possession of, or removing Lessee's property or for any other lawful purpose (but this provision and any action by Lessor hereunder shall not be deemed a recognition by Lessor that the person or official making such demand has any right or interest in or to this Lease, or in or to the Demised Premises), or upon demand of any representative of the fire, police, building, sanitation or other department of the city, county, state or federal governments. 19.0 ENTIRE AGREEMENT - WAIVER - SURRENDER 19.1 Entire Agreement. This Lease and the Exhibits made a part of this Lease contain the entire and only agreement between the parties relative to the Demised Premises and any and all statements and representations, written and oral, including previous correspondence and agreements between the parties to this Lease, are merged in this Lease. Lessee acknowledges that all representations, and statements upon which it relied in executing this Lease are contained in this Lease and that Lessee in no way relied upon any other statements or representations, written or oral. Any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. Nothing in this Lease shall prevent the parties from agreeing to amend this Lease and the Exhibits made a part of this Lease as long as such amendment shall be in writing and shall be duly signed by both parties. 19.2 WAIVER. The failure of Lessor or Lessee to seek redress for violation, or to insist upon the strict performance or of any covenant or condition of this Lease, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. Neither the receipt by Lessor of Rent nor the payment by Lessee of Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No provisions of this Lease shall be deemed to have been waived by Lessor or Lessee unless such waiver be in writing signed by the waiving party. No payment by Lessee or receipt by Lessor of a lesser amount than the monthly rent stipulated in this Lease shall be deemed to be other than on account of the stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such rent or pursue any other remedy in this Lease provided. 19.3 SURRENDER. No act or thing done by Lessor during the term of this Lease demised shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such -24- 25 surrender shall be valid, unless in writing signed by Lessor. No employee of Lessor or of Lessor's agents shall have any power to accept the keys of the Demised Premises prior to the termination of this Lease. The delivery of keys to any employee of Lessor or of Lessor's agents shall not operate as a termination of the Lease or a surrender of the Demised Premises. 20.0 INABILITY TO PERFORM - EXCULPATORY CLAUSE Lessor or Lessee shall be relieved from performing its obligations under this Lease (other than Lessee's obligations to pay Rent and make other monetary payments under this Lease, which shall not be excused or delayed by the provisions of this Article) if it is prevented or delayed from doing so by reason of strikes or labor troubles or any other similar or dissimilar cause whatsoever beyond its reasonable control, including but not limited to, governmental preemption in connection with a national emergency or by reason of any rule, order or regulation of any department or subdivision thereof of any governmental agency or by reason of the conditions of supply and demand which have been or are affected by war, hostilities or other similar or dissimilar emergency. Lessor's or Lessee's financial inability to perform shall not relieve Lessor or Lessee, respectively, from performance of its obligations under this Lease. In each such instance of inability of Lessor or Lessee to perform, Lessor or Lessee, as the case may be, shall exercise reasonable diligence to eliminate the cause of such inability to perform. Lessee shall neither assert nor seek to enforce any claim for breach of this Lease against any of Lessor's assets other than Lessor's interest in the Land and Building of which the Premises are a part and in the rents, issues, proceeds and profits thereof, and Lessee agrees to look solely to such interest for the satisfaction of any liability of Lessor under this Lease, it being specifically agreed that in no event shall Lessor (which term shall include, without limitation, the officers, trustees, directors, partners, beneficiaries, joint venturers, members, stockholders or other principals or representatives, disclosed or undisclosed, of Lessor or any managing agent) ever be personally liable for any such liability. This paragraph shall not limit any right that Lessee might otherwise have to obtain injunctive relief against Lessor or to take any other action which shall not involve the personal liability of Lessor to respond in monetary damages from Lessor's assets other than the Lessor's interest in said real estate, as aforesaid. Neither Lessor nor Lessee shall be liable for consequential damages. 21.0 LESSOR'S CONSENT It is understood and agreed that whenever Lessor's consent or approval is required, either expressed or implied, by any provision of this Lease, the consent or approval may be granted or withheld arbitrarily in Lessor's sole discretion unless otherwise specifically stated in such provision. Notwithstanding anything to the contrary contained in the Lease, if any provision of the Lease obligates Lessor not to unreasonably withhold its consent or approval, an action for specific performance will be Lessee's sole right and remedy in any dispute as to whether Lessor has breached such obligation. 22.0 BILLS AND NOTICES All bills and statements for reimbursement or other payments or charges due from Lessee to Lessor hereunder shall be due and payable in full thirty (30) days, unless otherwise provided in this Lease, after submission thereof by Lessor to Lessee. Lessee's failure to make timely payment of any amounts indicated by such bills and statements, whether for work done by Lessor at Lessee's request, reimbursement provided for by this Lease or for any other sums properly -25- 26 owing by Lessee to Lessor, shall be treated as a default in the payment of Rent, in which event Lessor shall have all rights and remedies provided in this Lease for the nonpayment of Rent. Any notice by either party to the other party shall be in writing. Any notice from the Lessor to the Lessee related to the Demised Premises or to the occupancy thereof shall be deemed duly served if and when such notice is delivered, attempted to be delivered or refused, whichever shall first occur, to the Lessee at the Lessee's Address by registered or certified mail, return receipt requested, postage prepaid or by FedEx, UPS or other nationally known reputable overnight courier service. Any notice from the Lessee to the Lessor related to the Demised Premises or to the occupancy thereof shall be deemed duly served if and when such notice is delivered, attempted to be delivered or refused, whichever shall first occur, to the Lessor at the Lessor's Address by registered or certified mail, return receipt requested, postage prepaid or by FedEx, UPS or other nationally known reputable overnight courier service. The Lessor may change the Lessor's Address and the Lessee may change the Lessee's Address by delivering or sending a notice in accordance with the foregoing paragraph to the other party stating the change and setting forth the changed address, provided such changed address is within the United States. 23.0 HOLDOVER If the Lessee remains in the Premises beyond the expiration or earlier termination of the Term of this Lease such holding over shall not be deemed to create any tenancy, but the Lessee shall be a tenant-at-sufferance only and shall pay rent to Lessor at the times and manner determined by Lessor at a daily rate in an amount equal to three times the daily rate of the Rent and other sums payable under this Lease as of the last day of the Term of this lease. 24.0 PARTIES BOUND - SEIZIN OF TITLE The covenants, agreements, terms, provisions and conditions of this Lease shall bind and benefit the successors and assigns of the parties to this Lease with the same effect as if mentioned in each instance where a party to this Lease is named or referred to, except that no violation of the provisions of the article contained to this Lease entitled "ASSIGNMENT, MORTGAGING, SUBLETTING, ETC." of this Lease shall operate to vest any rights in any successor or assignee of Lessee. If, in connection with or as a consequence of the sale, transfer or other disposition of the real estate (Land and/or Building, either or both, as the case may be) of which the Demised Premises are a part, Lessor ceases to be the owner of the reversionary interest in the Demised Premises, Lessor shall be entirely freed and relieved from the performance and observance thereafter of all covenants and obligations hereunder accruing thereafter on the part of Lessor to be performed and observed, it being understood and agreed in such event (and it shall be deemed and construed as a covenant running with the land) that the person succeeding to Lessor's ownership of said reversionary interest shall thereupon and thereafter assume, and perform and observe, any and all of such covenants and obligations of Lessor. 25.0 MISCELLANEOUS 25.1 SEPARABILITY. If any provision of this Lease or portion of such provision or the application thereof to any person or circumstance is for any reason held invalid or unenforceable, the -27- 27 remainder of the Lease (or the remainder of such provision) and the application thereof to other persons or circumstances shall not be affected thereby. In the event that any charge under this Lease is interpreted to be the payment of interest, the rate of interest shall be equal to the lesser of the amount stated in the Lease or the maximum amount permitted by law. 25.2 CAPTIONS. The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease nor the intent of any provisions thereof. 25.3 LESSOR OR LESSEE. The words "Lessor" and "Lessee" as used in this Lease may extend to and be applied to several parties whether male or female and to corporations and partnerships, and words importing the singular may include the plural and all obligations of the Lessee as defined in this Lease shall be joint and several. Each of the provisions of this Lease shall bind and inure to the benefit of the heirs, legal representatives, successors and assigns of the parties to this Lease and it is specifically understood that the Lessor has the right to assign all of its right, title and interest, or any portion thereof, in and to this Lease and any amendments to this Lease to any other party or entity during the Term of this Lease and any extension thereof and that the Lessee shall execute any and all instruments that may be necessary to acknowledge and assent to such assignment. 25.4 BROKER. Each party represents and warrants that it has not directly or indirectly dealt, with respect to the leasing of space in the Building, with any broker or had its attention called to the Demised Premises or other space to let in the Building, by any broker other than the broker, if any, listed in the Article contained in this Lease entitled "REFERENCE DATA" whose commission shall be the responsibility of Lessor. Each party agrees to exonerate and save harmless and indemnify the other against any claims for a commission by any other broker, person or firm, with whom such party has dealt in connection with the execution and delivery of this Lease or out of negotiations between Lessor and Lessee with respect to the leasing of other space in the Building. 25.5 GOVERNING LAW. This Lease is made pursuant to, and shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. 25.6 ASSIGNMENT OF LEASE AND/OR RENTS. With reference to any assignment by Lessor of its interest in this Lease and/or the Rent payable under this Lease, conditional in nature or otherwise, which assignment is made to or held by a bank, trust company, insurance company or other institutional lender holding a Mortgage on the Building, Lessor and Lessee agree: (a) that the execution thereof by Lessor and acceptance thereof by such Mortgagee shall never be deemed an assumption by such Mortgagee of any of the obligations of the Lessor hereunder, unless such Mortgagee shall, by written notice sent to the Lessee, specifically otherwise elect; and (b) that, except as aforesaid, such Mortgagee shall be treated as having assumed the Lessor's obligations hereunder only upon foreclosure of such Mortgagee's Mortgage and the taking of possession of the Demised Premises after having given notice of its intention to succeed to the interest of the Lessor under this Lease. 25.7 NOTICE OF LEASE. Lessee agrees that it will not record this Lease in any Registry of Deeds or Registry District, provided however that either party shall at the request of the other, execute -27- 28 and deliver a recordable Notice of this Lease in the form prescribed by and as required by Chapter 183, Section 4 of the Massachusetts General Laws. IN WITNESS WHEREOF, Lessor and Lessee have caused this instrument to be executed under seal, all as of the day and year first above written. NINE FOURTH AVENUE LLC By: J. F. White Properties, Inc., Manager By /s/ James A. Magliozzi ---------------------------- James A. Magliozzi, President. GELTEX PHARMACEUTICALS, INC. By: /s/ Mark Skaletsky ---------------------------- Name: Mark Skaletsky Title: President Duly Authorized 29 EXHIBIT A [MAP] 30 EXHIBIT B RULES AND REGULATIONS 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls of the Property shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the premises demised to any occupant. 2. No awnings or other projections shall be attached to the outside walls or windows of the Building without the prior written consent of Lessor. No curtains, blinds, shades, or screens shall be attached or hung in, or used in connection with, any window or door of the premises demised to any occupant, without the prior written consent of Lessor. Such awnings, projections, curtains, blinds, shades, screens or other fixtures must be of a quality type, design and color, and attached in a manner, approved by Lessor in writing in advance. 3. No sign, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed on any part of the outside of the premises without the prior written consent of Lessor. 4. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building. 5. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. 6. Lessor shall have the right to prohibit any advertising by any occupant which, in Lessor's opinion, tends to impair the reputation of the Building or its desirability as a building, and upon notice from Lessor, such occupant shall refrain from or discontinue such advertising. 7. No premises shall be used, or permitted to be used, for lodging or sleeping, or for any immoral or illegal purpose. 8. Canvassing, soliciting and peddling in the Building are prohibited and each occupant shall cooperate in seeking their prevention. 9. If the premises demised become infested with vermin, such tenant, at its sole cost and expense, shall cause its premises to be exterminated from time to time, to the satisfaction of Lessor, and shall employ such exterminators therefor as shall be approved by Lessor in writing and in advance. EX-11.1 3 STATEMENT RE: COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1995 ---- ---- Weighted average common shares outstanding $ 12,513,000 $ 1,935,000 Effect of Convertible Preferred Stock - assumed --- 5,774,000 converted at date of issuance Effect of Common and Common equivalent Shares issued by the Company during the twelve month period immediately preceding the Company's initial public offering in November 1995, as if they were outstanding for all periods presented prior to the initial public offering (using the treasury stock method) --- 400,000 ------------ ----------- Shares used in computing net loss per share 12,513,000 8,109,000 Net loss $(19,978,144) $(6,884,645) ============ =========== Net loss per share $ (1.60) $ (.85) ============ ===========
EX-23.1 4 CONSENT OF ERNST AND YOUNG 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-00864, 333-06779, 333-08535) of GelTex Pharmaceuticals, Inc. of our report dated February 21, 1997 with respect to the financial statements of GelTex Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Boston, Massachusetts March 25, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 20,801 52,623 238 0 0 75,348 3,477 1,230 78,068 2,888 0 0 0 135 74,921 78,068 0 1,663 0 0 24,909 0 75 (19,978) 0 (19,978) 0 0 0 (19,978) (1.60) (1.60)
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