-----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, GgzL07mS7UKAVY/e+HYUeUyt28jG1NB8aTU1IcPm0cVKsTekhJTvHnlZhSz3Cdmf d7A6RYePgoQutTf7vUsHYA== 0000891618-01-502227.txt : 20020410 0000891618-01-502227.hdr.sgml : 20020410 ACCESSION NUMBER: 0000891618-01-502227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNETICS CORP CENTRAL INDEX KEY: 0001004960 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943173928 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27406 FILM NUMBER: 1788177 BUSINESS ADDRESS: STREET 1: 3400 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4158432800 MAIL ADDRESS: STREET 1: 3400 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 FORMER COMPANY: FORMER CONFORMED NAME: CONNECTIVE THERAPEUTICS INC DATE OF NAME CHANGE: 19951214 10-Q 1 f75747e10-q.txt FORM 10-Q FOR PERIOD ENDED 9/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 Commission file number: 0-27406 CONNETICS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3173928 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 3400 WEST BAYSHORE ROAD PALO ALTO, CALIFORNIA 94303 (Address of principal executive offices) Registrant's telephone number, including area code: (650) 843-2800 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 at least the past 90 days. Yes [X] No [ ] As of November 8, 2001, 30,032,722 shares of the Registrant's common stock were outstanding, at $0.001 par value. CONNETICS CORPORATION TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 ................................................ 3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000 ........ 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 ......................... 5 Notes to Condensed Consolidated Financial Statements ............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 12 Item 3. Quantitative and Qualitative Disclosures About Market Risks ...... 26 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................. 27 (a) Exhibits ..................................................... 27 (b) Reports on Form 8-K .......................................... 27
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONNETICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, December 31, 2001 2000 (unaudited) (Note 1) ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 15,997 $ 58,577 Short-term investments 34,814 21,607 Accounts receivable 4,309 2,749 Other current assets 1,398 545 --------- --------- Total current assets 56,518 83,478 Property and equipment, net 2,465 1,807 Deposits and other assets 329 428 Goodwill and other purchased intangibles, net 14,033 -- --------- --------- Total assets $ 73,345 $ 85,713 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,933 $ 5,115 Accrual for Relaxin related liabilities 5,534 -- Accrued process development expenses 1,127 1,389 Accrued payroll and related expenses 2,118 1,797 Other accrued liabilities 2,055 3,228 Notes payable and capital lease obligations -- 787 Current portion of deferred revenue 332 132 --------- --------- Total current liabilities 15,099 12,448 Deferred revenue 560 659 Stockholders' equity: Preferred stock -- -- Common stock and additional paid-in capital 161,816 159,242 Deferred compensation (7) (21) Accumulated deficit (109,196) (92,756) Accumulated other comprehensive income 5,073 6,141 --------- --------- Total stockholders' equity 57,686 72,606 --------- --------- Total liabilities and stockholders' equity $ 73,345 $ 85,713 ========= =========
See accompanying notes to condensed consolidated financial statements. -3- CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Product 7,650 $ 5,657 $ 21,882 $ 15,118 Royalty 425 -- 548 -- Contract and other 123 1,430 1,789 16,094 -------- -------- -------- -------- Total revenues 8,198 7,087 24,219 31,212 -------- -------- -------- -------- Operating costs and expenses: Cost of sales 700 719 2,408 2,979 Research and development 4,460 5,828 14,433 15,956 Selling, general and administrative 8,761 6,765 26,071 18,330 Acquired in-process research and development -- -- 1,080 -- Charge for Relaxin program -- -- 5,976 -- -------- -------- -------- -------- Total operating costs and expenses 13,921 13,312 49,968 37,265 -------- -------- -------- -------- Loss from operations (5,723) (6,225) (25,749) (6,053) Interest and other income 491 659 3,022 1,305 Gain on sale of investments -- 4 122 707 Gain on sale of Ridaura product line -- -- 8,055 -- Interest and other expense (186) (38) (1,890) (207) -------- -------- -------- -------- Loss before cumulative effect of change in accounting principle $ (5,418) $ (5,600) $(16,440) $ (4,248) Cumulative effect of change in accounting principle -- -- -- (5,192) -------- -------- -------- -------- Net loss $ (5,418) $ (5,600) $(16,440) $ (9,440) ======== ======== ======== ======== Basic and diluted loss per share: Loss per share before cumulative effect of change in accounting principle $ (0.18) $ (0.19) $ (0.55) $ (0.15) Cumulative effect of change in accounting principle -- -- -- $ (0.19) -------- -------- -------- -------- Net loss per share $ (0.18) $ (0.19) $ (0.55) $ (0.34) ======== ======== ======== ======== Shares used to calculate loss per share 29,920 29,507 29,801 28,032
See accompanying notes to condensed consolidated financial statements. -4- CONNETICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ---------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net loss $(16,440) $ (9,440) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,339 548 Gain on sale of investment (122) (707) Gain on sale of Ridaura product line (8,055) -- Stock compensation expense 1,554 1,384 In-process research and development 1,080 -- Amortization of deferred compensation 14 14 Loss on foreign exchange forward contract 555 -- Changes in assets and liabilities, excluding effects of acquisition -- -- Accounts receivable (8) (123) Current and other assets (779) (20) Accounts payable (1,348) (3,015) Other current liabilities 1,843 (207) Deferred revenue 101 5,126 -------- -------- Net cash used in operating activities (20,266) (6,440) -------- -------- Cash flows from investing activities: Purchases of short-term investments (40,439) (13,522) Sales and maturities of short-term investments 26,289 14,368 Purchases of property and equipment (762) (620) Proceeds from sale of Ridaura product line 8,979 -- Acquisition of a business, net of cash acquired (16,611) -- -------- -------- Net cash provided by (used in) investing activities (22,544) 226 -------- -------- Cash flows from financing activities: Payment of notes payable (750) (2,453) Payments on obligations under capital leases and capital loans (37) (203) Proceeds from issuance of common stock, net of issuance costs 1,020 21,828 -------- -------- Net cash provided by financing activities 233 19,172 Effect of foreign currency exchange rates on cash and cash equivalents (3) -- -------- -------- Net change in cash and cash equivalents (42,580) 12,958 Cash and cash equivalents at beginning of period 58,577 8,460 -------- -------- Cash and cash equivalents at end of period $ 15,997 $ 21,418 ======== ======== Supplementary information: Interest paid $ 27 $ 207 Financing activity: Issuance of common stock as payment on accrued liabilities -- $ 888
See accompanying notes to condensed consolidated financial statements. -5- CONNETICS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION AND POLICIES We have prepared the accompanying unaudited condensed consolidated financial statements of Connetics Corporation ("Connetics") in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. Certain prior year balances have been reclassified for comparative purposes. These condensed, consolidated financial statements and notes should be read in conjunction with audited financial statements and notes to those financial statements for the year ended December 31, 2000 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of Connetics and its wholly-owned subsidiary, Soltec Research Pty Ltd. ("Soltec"). All significant intercompany accounts and transactions are eliminated in consolidation. Revenue Recognition Product Sales and Royalty Revenue. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, generally upon shipment, the price is fixed or determinable, and collectibility is reasonably assured. We recognize product revenue net of allowances for estimated returns, rebates, and chargebacks. We are obligated to accept from customers the return of pharmaceuticals that have reached their expiration date. To date we have not experienced significant returns of expired product. Royalties from licensees are based on third-party sales and are recognized in the quarter in which the royalty payment is either received from the licensee or may be reasonably estimated, which is typically one quarter following the related sale of the licensee. Contract revenue. We record contract revenue for research and development as it is earned based on the performance requirements of the contract. We recognize non-refundable contract fees for which no further performance obligation exists, and for which Connetics has no continuing involvement, on the earlier of when the payments are received or when collection is assured. We recognize revenue from non-refundable upfront license fees under collaborative agreements ratably over the period in which we have continuing development obligations when, -6- at the time the agreement is executed, there remains significant risk due to the incomplete stage of the product's development. Revenue associated with substantial "at risk" performance milestones, as defined in the respective agreements, is recognized based upon the achievement of the milestones. Royalty expense directly related to product sales is classified in cost of sales. Foreign Currency Translation The functional currency of Connetics' Australian subsidiary is the local currency. The translation of the Australian currency into U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Foreign currency translation adjustments are recorded in comprehensive income (loss). Goodwill and Purchased Intangible Assets Goodwill and purchased intangibles are amortized on a straight-line basis over 10 year lives (See note 4). We periodically perform reviews to determine if the carrying value of long-term assets is impaired. The reviews look for the existence of facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. No such impairment has been indicated to date. If in the future, management determines the existence of impairment indicators, we would use undiscounted cash flows to initially determine whether impairment should be recognized. If necessary, we would perform subsequent calculation to measure the amount of impairment loss based on the excess of the carrying value over the fair value of the impaired assets. If quoted market prices for the assets are not available, the fair value would be calculated using the present value of estimated expected future cash flows or other appropriate valuation methodologies. The cash flow calculation would be based on management's best estimates, using appropriate assumptions and projections at the time. Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 133 ("SFAS 133"): As of January 1, 2001, Connetics adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." As a result of the adoption of SFAS 133, we recognize derivative financial instruments in our financial statements at their fair value, regardless of the purpose or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in stockholders' equity as a component of comprehensive income (loss) depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Connetics entered into a foreign exchange forward contract related to our acquisition of Soltec. That contract was entered into in relation to a business combination and does not qualify as a hedge under SFAS 133. The purpose of the contract was to lock in to the purchase price paid for Soltec. As of the closing date, April 20, 2001, we incurred a loss of $0.6 million on this -7- contract. The foreign exchange forward contract was terminated on the closing date of the acquisition of Soltec. Statement of Financial Accounting Standards No. 141 ("SFAS 141"): In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations. SFAS 141 establishes new standards for accounting and reporting for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This statement was adopted effective July 1, 2001. The adoption of SFAS 141 had no impact on our financial position or results of operations. Statement of Financial Accounting Standards No. 142 ("SFAS 142"): In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which establishes new standards for goodwill and other intangible assets, including the elimination of goodwill amortization, to be replaced with periodic evaluation of goodwill for impairment. SFAS 142 is effective for fiscal years ending after December 15, 2001, but any goodwill and intangible assets resulting from a business combination after July 1, 2001 will be accounted for under SFAS 142. Goodwill and intangible assets from business combination before July 1, 2001 will continue to be amortized prior to the adoption of SFAS 142. Connetics will adopt SFAS 142 on January 1, 2002. Upon the adoption of SFAS 142, we are required to evaluate our existing goodwill and intangibles assets from business combinations completed before July 1, 2001 and make any necessary reclassifications in order to comply with the new criteria in SFAS 141 for recognition of intangible assets. At September 30, 2001, Connetics has goodwill and intangible assets of $14.0 million subject to SFAS 141 and SFAS 142. Amortization expense for goodwill and intangible assets amounted to $0.4 million and $0.7 million for the three and nine month periods ended September 30, 2001. Due to the extensive efforts needed to comply with the adoption of SFAS 142, it is not practical to reasonably estimate the impact of adoption of theses statements on our financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as a cumulative effect of a change in accounting principle. Statement of Financial Accounting Standards No. 144 ("SFAS 144"): In October 2001, the FASB issued the Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the disposal of long-lived assets. SFAS 144 becomes effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Connetics is currently evaluating the potential impact, if any, the adoption of FAS 144 will have its financial position and results of operation. 2. NET INCOME (LOSS) PER SHARE We compute basic net income (loss) per common share using the weighted average number of shares outstanding during the period. We compute diluted net income per share using the weighted average of common and diluted equivalent stock options and warrants outstanding during the period. We excluded all stock option and warrants from the calculation of diluted loss per common share for the three and nine month periods ended September 30, 2001 and September 30, 2000 because these securities are anti-dilutive during these periods. The following table sets forth the computations for basic and diluted earnings per share. -8-
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- (In thousand, except per share amounts) 2001 2000 2001 2000 -------- -------- -------- -------- Numerator for basic and diluted earnings per share -- Net income (loss) $ (5,418) $ (5,600) $(16,440) $ (9,440) Denominator for basic and diluted earnings per share 29,920 29,507 29,801 28,032 -------- -------- -------- -------- Basic and diluted loss per share $ (0.18) $ (0.19) $ (0.55) $ (0.34) ======== ======== ======== ========
3. COMPREHENSIVE INCOME (LOSS) During the three and nine month periods ended September 30, 2001, total comprehensive loss amounted to $5.1 million and $17.5 million, respectively, compared to a comprehensive income of $7.8 million and $47.0 million for the comparable periods in 2000. The components of comprehensive income (loss) for the three and nine month periods ended September 30, 2001 and September 30, 2000 are as follows:
Three months ended Nine months ended September 30, September 30, ---------------------- ----------------------- (In thousands) 2001 2000 2001 2000 ------- -------- -------- -------- Net income (loss) $(5,418) $ (5,600) $(16,440) $ (9,440) Cumulative translation adjustment (2) -- (3) -- Unrealized gain (loss) on securities 348 13,398 (1,064) 56,436 ------- -------- -------- -------- Comprehensive income (loss) $(5,072) $ 7,798 $(17,507) $ 46,996 ======= ======== ======== ========
4. ACQUISITION OF SOLTEC In April 2001, Connetics completed its acquisition of Soltec, a division of Australia-based F.H. Faulding & Co Limited. Connetics' two marketed dermatology products and current product development programs are based on technology developed by Soltec. Soltec has been developing innovative delivery systems for new dermatology products for over 10 years, and has leveraged its broad range of drug delivery technologies by entering into license agreements with dermatology companies around the world. Those license agreements bear royalties payable to Soltec for currently marketed products, as well as potential future royalties for products under development. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Since April 19, 2001, Soltec's results of operations have been included in the Connetics' consolidated statements of operations. The fair value of the intangible assets was determined based upon an independent valuation using a combination of methods, including an income approach for the in-process research and development and existing technology, a cost approach for the assembled workforce and the royalty savings approach for the patents and core technology. -9- Connetics purchased all of the shares of Soltec's capital stock for a purchase price of approximately $16.9 million. The purchase price was allocated, based on an independent valuation, to existing technology of $6.8 million, goodwill of $6.4 million, tangible net assets assumed of $1.3 million, patents and core technology of $1.2 million, acquired in-process research and development of $1.1 million, and assembled workforce of $0.1 million. The value of the acquired in-process technology was computed using a discounted cash flow analysis with a discount rate of 20% on the anticipated income stream and the expected completion stage of the related product revenues. The acquired in-process research and development programs are in early stages of development, have not reached technological feasibility, and have no foreseeable alternative future uses. The value of the existing technology was computed using a discounted cash flow analysis with a discount rate of 15%. The discounted cash flow analysis was based on management's forecast of future revenues, cost of revenues and operating expenses related to the products and technologies purchased from Soltec. Amortization of the acquired intangibles and goodwill associated with this acquisition totaled $0.4 million and $0.7 million for the three and nine months ended September 30, 2001. The following table presents unaudited pro forma results of operation taking the transaction into account. The pro forma results are not necessarily indicative of what actually would have occurred if the transaction had been in effect for the entire periods presented, are not intended to be a projection of future results, and do not reflect any cost savings that might be achieved from the combined operations.
Nine months ended September 30, ----------------------- 2001 2000 -------- -------- (Unaudited) Pro forma revenue $ 26,144 $ 35,084 ======== ======== Pro forma loss before cumulative effect of change in accounting principle $(14,193) $ (2,570) Cumulative effect of change in accounting principle -- $ (5,192) -------- -------- Pro forma net loss $(14,193) $ (7,762) ======== ======== BASIC AND DILUTED PRO FORMA EARNINGS PER SHARE: Pro forma loss before cumulative effect of change in accounting principle $ (0.48) $ (0.09) Cumulative effect of change in accounting principle -- $ (0.19) -------- -------- Pro forma net loss per share $ (0.48) $ (0.28) ======== ========
The pro forma loss amounts above exclude the charge for in-process research and development because of its non-recurring nature. 5. REDUCTION IN RELAXIN PROGRAM In May 2001, Connetics announced its decision to pursue a license partner or other strategic alternative for its relaxin program. As a result, we have reduced our investment in the development of relaxin in favor of focusing our resources on expanding our dermatology business. During the second quarter, we eliminated 27 positions related to relaxin. We took a one-time charge of approximately $6.0 million in the second quarter of 2001, which represents -10- $0.5 million accrued in connection with the reduction in workforce as well as $5.5 million for the wind down of relaxin development contracts. Of the amounts accrued in the second quarter, $5.5 million remains accrued as of September 30, 2001. Boehringer Ingelheim, or BIA, manufactures relaxin for us for clinical uses under a long-term contract. In July 2000, in anticipation of successful results in our relaxin clinical trial for scleroderma, we submitted a purchase order to BIA for product to be used for commercial supply. The purchase order was for a price to be negotiated. We have been in discussions with BIA since the beginning of 2001 regarding whether any additional monies are owed under the contract in view of the failure of the clinical trial. In July 2001, following our May 2001 announcement about downsizing the relaxin program, BIA notified us that BIA believes we are in breach of the relaxin manufacturing agreement and that BIA intends to terminate the agreement and seek remedies if we do not remedy the alleged breach. We disagree with BIA's allegation that we have breached the contract. Nevertheless, consistent with other reserves taken in connection with the downsizing of the relaxin program, we have recorded a reserve for our potential exposure in the dispute with BIA. There can be no guarantee, however, that the actual resolution of this dispute will not result in charges in excess of the reserve we have recorded. 6. SALE OF RIDAURA In April 2001, Connetics sold its rights to Ridaura(R) including inventory and identified liabilities to Prometheus Laboratories Inc. for $9.0 million in cash plus a royalty on annual sales in excess of $4.0 million for the next five years. Ridaura(R) is a prescription pharmaceutical product for the treatment of rheumatoid arthritis. We accrued approximately $0.9 million for transaction related costs and contractual liabilities incurred as of the date of the sale. After recognizing the above amounts, we recorded a gain of $8.1 million on this transaction during the second quarter of 2001. 7. LICENSE OF LIQUIPATCH(TM) TECHNOLOGY In June 2001, Connetics announced a global licensing agreement between Soltec and a major international healthcare company for Soltec's innovative multi-polymer gel delivery system ("Liquipatch"). The agreement follows successful pilot development work and gives the licensee exclusive global right to use the Liquipatch technology in a field in dermatology, particularly for the delivery of a topical over-the-counter product. The licensee will be responsible for all development costs, and will be obligated to pay license fees, milestone payments, and royalties on future product sales. As of September 30, 2001, there was no financial statement impact as a result of this agreement. 8. LICENSING AGREEMENT WITH MIPHARM In September 2001, Connetics and Soltec entered into a product licensing agreement with Mipharm S.p.A. ("Mipharm"), based in Milan, Italy. The licensing agreement grants Mipharm commercial rights in Italy for OLUX(TM), (a topical foam formulation of clobetasol propianate), permethrin foam, and Hexifoam(TM), a hand disinfectant. Connetics and Soltec received upfront license fees, and are entitled to milestone payments and royalties on future product sales. Connetics and Soltec retain marketing and manufacturing rights for the rest of Europe. Mipharm will be responsible for the costs and activities of obtaining the required product marketing approvals in the European Union for OLUX(TM). Connetics recognized $50,000 of revenue related to this agreement in the quarter ended September 30, 2001. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This MD&A should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2000, and with the unaudited condensed consolidated financial statements and notes to financial statements included in this report and in the report on Forms 10-Q for the quarters ended March 31, 2001 and June 30, 2001, respectively. Except for historical information, the discussion in this report contains forward-looking statements that involve risks and uncertainties. When used in this report, the words "anticipate," "believe," "estimate," "will," "intend" and "expect" and similar expressions identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, these plans, intentions, or expectations may not be achieved. Some of the factors that, in our view, could cause actual results to differ are discussed under the caption "Factors That May Affect Future Results, Financial Condition and the Market Price of Securities" and in our Annual Report on Form 10-K. Our historical operating results are not necessarily indicative of the results to be expected in any future period. OVERVIEW We currently market two pharmaceutical products, OLUX(TM) Foam (clobetasol propionate), 0.05% for the treatment of moderate to severe scalp dermatoses, and Luxiq(R) (betamethasone valerate) Foam, 0.12%, for the treatment of mild to moderate scalp dermatoses. We launched OLUX on November 6, 2000. Our commercial business is focused on the dermatology marketplace, which is characterized by a large patient population that is served by relatively small, and therefore more accessible, groups of treating physicians. Our two dermatology products have clinically proven therapeutic advantages and we provide quality customer service to physicians through our experienced sales and marketing staff. In April 2001, we completed the acquisition of Soltec for approximately $16.9 million. $1.1 million of the purchase price was allocated, based on an independent valuation, to in-process research and development, with the balance to the tangible assets of Soltec, existing technology and goodwill. As we are now focusing on our dermatology business, in April 2001 we sold our rights to Ridaura(R) including inventory to Prometheus Laboratories Inc. for $9.0 million in cash plus a royalty on annual sales in excess of $4.0 million for the next five years. Ridaura(R) is a prescription pharmaceutical product for the treatment of rheumatoid arthritis. In addition to our commercial business, we hold the rights to a biotechnology product that has the potential to treat multiple diseases, a recombinant form of a natural hormone called relaxin. Relaxin reduces the hardening, or fibrosis, of skin and organ tissue, dilates existing blood vessels and stimulates new blood vessel growth. On May 23, 2001, we announced our decision to reduce our investment in the development of relaxin and to search for licensing opportunities or other strategic alternatives for the product. We eliminated 27 positions related to relaxin. The one-time charge in the second quarter of 2001 represents amounts accrued in connection with the reduction in workforce as well as a wind down of relaxin development contracts. For additional information, see "Risks Related to Our Products" for a discussion of the relationship with Boehringer Ingelheim. -12- RESULTS OF OPERATIONS REVENUES
Three Months Ended Nine months Ended September 30, September 30, ------------------- -------------------- Revenues (In thousands) 2001 2000 2001 2000 ------ ------- ------- ------- Product: Luxiq(R) $3,500 2,856 $10,795 $ 7,704 OLUX(TM) 4,100 -- 9,022 -- Ridaura -- 2,801 2,015 5,516 Actimmune -- -- -- 1,898 Soltec Product Revenue 50 -- 50 -- ------ ------- ------- ------- Total product revenues 7,650 5,657 21,882 15,118 Contract and royalty: Medeva (formerly Celltech) -- 1,125 756 8,377 Suntory Ltd. -- 47 -- 139 F.H. Faulding & Co., Ltd. 20 (5) 59 20 Paladin Labs, Inc. 13 213 40 690 InterMune -- -- -- 1,500 Immune Response Corp. -- 50 -- 150 Mipharm 50 -- 50 -- Other contract 40 -- 113 -- Royalty 425 -- 548 -- ------ ------- ------- ------- Total contract & royalty revenues 548 1,430 1,566 10,876 Sale of InterMune Revenue Rights -- -- 771 5,218 ------ ------- ------- ------- Total revenues $8,198 $ 7,087 $24,219 $31,212 ====== ======= ======= =======
Our product revenues for the three and nine month periods ended September 30, 2001, were $7.7 million and $21.9 million, respectively, compared to $5.7 million and $15.1 million for the three and nine months ended September 30, 2000. The increase in total product revenues for the three and nine months ended September 30, 2001 was due to continued sales growth of Luxiq and OLUX, which we began marketing in April 1999 and November 2000, respectively, offset by lower sales of Ridaura(R) and Actimmune. As part of the June 27, 2000 agreement with InterMune, we did not record Actimmune sales beginning with the second quarter of 2000. As part of the April 30, 2001 sale agreement to Prometheus we did not record Ridaura sales beginning with May 2001. Contract and royalty revenues for the three and nine month periods ended September 30, 2001 were $0.5 million and $1.6 million, compared to $1.4 million and $10.9 million for the three and nine months ended September 30, 2000. The decrease in total contract and royalty revenue for the nine month period ended September 30, 2001, is mainly due to the receipt of a one-time license payment, a milestone payment of $5.0 million from a former collaborative partner for relaxin, and $1.5 million paid by InterMune for Actimmune rights, all in the first quarter of 2000. We had no royalty revenue in 2000. We expect contract revenues to fluctuate significantly depending on our remaining partners achieving milestones under existing agreements, and on new business opportunities. InterMune purchased our commercial rights and revenue to Actimmune on June 27, 2000. As part of the transaction, InterMune paid $5.2 million in 2000 which included the prepayment of a $1.0 million obligation owed in 2002. In March 2001 InterMune made a final payment on this -13- arrangement to Connetics in the amount $0.9 million which has been offset by related product rebates and chargebacks of $0.1 million. Our cost of sales for 2001 includes the costs of Luxiq, OLUX and Ridaura, royalty payments on these products based on a percentage of our product revenues, and product freight and distribution costs from our distributor. We recorded cost of sales of $0.7 million and $2.4 million, respectively, for the three and nine months ended September 30, 2001, compared to $0.7 million and $3.0 million, respectively, for the three and nine months ended September 30, 2000. The cost of sales for the first nine months of 2001 decreased compared to the first nine months of 2000 primarily because in 2001 we did not recognize Actimmune revenue and its associated cost of sales under the revenue rights agreement, and did not recognize Ridaura revenue and its associated cost of sales following the sale of Ridaura in April 2001. RESEARCH AND DEVELOPMENT Research and development expenses were $4.5 million and $14.4 million for the three and nine month periods ended September 30, 2001, compared to $5.8 and $16.0 million for the comparable periods in 2000. The decrease in expenses for the three months ended September 30, 2001 was due to decreased relaxin development activity compared to the prior year. We expect research and development expenses to remain consistent over the next few quarters. In May 2001, we announced our decision to pursue a license partner or other strategic alternative for its relaxin program. As a result, we have reduced our investment in the development of relaxin in favor of focusing our resources on expanding our dermatology business. The reduction in expenses related to relaxin clinical work, manufacturing and overhead will be offset by the increase in expenditures for dermatology research, development and marketing. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $8.8 million and $26.1 million for the three and nine months ended September 30, 2001, compared to $6.8 million and $18.3 million for the comparable periods in 2000. The increase in expenses was due to increased headcount and increased market research and sales promotions costs related to the OLUX launch and the launch of OLUX and Luxiq 50 gram units, a one-time non-cash compensation charge, as well as the amortization of intangibles associated with the acquisition of Soltec. We expect selling, general and administrative expenses to remain consistent or be slightly higher for the remainder of the year due to the launch of the OLUX(TM) and Luxiq(R) 50 gram units during the fourth quarter of 2001. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT We recorded a charge of $1.1 million for acquired in-process research and development associated with the acquisition of Soltec, during the three month period ended June 30, 2001. Acquired in-process research and development consists of several projects which involve the use of novel technologies to improve the delivery of drugs. Several of these projects are being developed in connection with other companies who own rights to the drugs. We may earn milestone and other fees under these arrangements and, if the drugs are successfully developed, will be entitled to royalties based on net sales. The projects are in various stages of development -14- and are subject to substantial risks. We currently estimate that completion of the first projects will occur in the period from 2001 to 2002 and we expect to incur research and development expenses of up to $1.4 million, assuming all drugs are successfully developed (before considering any research funding from our partners). The value of the in-process research and development was determined by an independent valuation firm using a discounted cash flow analysis with a rate of 20%. In addition, the stage of completion of each project was considered in determining the value. There is no assurance that any of the projects will meet either technological or commercial success. The products under development have no foreseeable alternative future uses. The estimates used in valuing in-process research and development were based on assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Our assumption may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the results projected for purposes of determining the fair value of the acquired in-process research and development. CHARGE FOR RELAXIN PROGRAM In the second quarter of this year we recorded a one-time charge of $6.0 million related to the relaxin program following our May 2001 decision to strategically reduce the program. The charge included amounts related to severance and costs associated with winding down contracts. INTEREST INCOME (EXPENSE) Interest and other income were $0.5 million and $3.0 million for the three and nine month periods ended September 30, 2001, compared with $0.7 million and $1.3 million for the comparable periods in 2000. The decrease in interest income during the three month period ended September 30, 2001 was due to lower interest rates during this period compared to the same period in 2000. The overall increase in year to date interest income was due to higher cash and short-term investment balances for the first nine months of the year compared to the same period in 2000. The increase in interest and other expense for the nine months ended September 30, 2001 compared to the same period in 2000 was primarily the result of a net loss of $0.6 million on the foreign exchange forward contract that was entered into in February 2001 in connection with the Soltec acquisition. NET LOSS We expect to incur losses for the remainder of 2001 and the foreseeable future. These losses are expected to fluctuate from period to period based on timing of product revenues, sales and marketing expenses, clinical material purchases, clinical trial expenses, and possible acquisitions of new products and technologies. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through proceeds from equity financings, collaborative arrangements with corporate partners and bank loans. At September 30, 2001, cash, cash equivalents and short-term investments totaled $50.8 million compared to $80.2 million at December 31, 2000. Our investments are held in a variety of interest-bearing instruments including high-grade corporate bonds, commercial paper and money market accounts. -15- Cash flows from operating activities. Cash used in operations for the nine month period ended September 30, 2001 and 2000, was $20.3 million and $6.4 million, respectively. Net loss of $16.4 million for the first nine months of 2001 was affected by non-cash charges of $1.3 million of depreciation and amortization expense and $0.6 million in other expense related to the Soltec foreign exchange forward contract, a one time in-process research and development charge of $1.1 million related to the Soltec acquisition, a one-time $6.0 million charge related to the reduction in the relaxin program, and non-cash compensation charges in the amount of $1.6 million, partially offset by the $8.1 million gain on the sale of Ridaura(R). Cash flows from investing activities. Investing activities used $22.5 million in cash during the nine month period ended September 30, 2001, due in part to sales of $26.3 million of short-term investments offset by $40.4 million of short term investment purchases, as well as the acquisition of Soltec in the amount of $16.6 million (net of cash acquired), which is partially offset by the proceeds from the sale of Ridaura in the amount of $9.0 million. Cash flows from financing activities. Cash provided by financing activities of $0.2 million for the nine months ended September 30, 2001 included a $0.8 million bank loan payment in the first quarter, offset by $1.0 million in proceeds from issuance of common stock. Working Capital. Working capital decreased by $29.6 million to $41.4 million at September 30, 2001 from $71.0 million at December 31, 2000. The decrease in working capital was due to use of our cash in operations, payment of debt obligations, and the acquisition of Soltec, which was partially offset by the sale of Ridaura. We believe our existing cash, cash equivalents and short-term investments generated from product sales and collaborative arrangements with corporate partners, will be sufficient to fund our operating expenses, debt obligations and capital requirements through at least the next 12 months. FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE OF SECURITIES Please also read Item 1 in our 2000 Annual Report on Form 10-K where we have described our business and the challenges and risks we may face in the future. Our results of operation have varied widely in the past, and they could continue to vary significantly from quarter to quarter due to a number of factors, including those listed below. Any shortfall in revenues would have an immediate impact on our earnings (loss) per share, which could adversely affect the market price of our common stock. Our operating expenses, which include sales and marketing, research and development and general and administrative expenses, are based on our expectations of future revenues and are relatively fixed in the short term. Accordingly, if revenues fall below our expectations, we will not be able to reduce our spending rapidly in response to such a shortfall. Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our results of operations are not a good indication of our future performance. -16- RISKS RELATED TO OUR BUSINESS If we do not sustain profitability, stockholders may lose their investment. Except for fiscal year 2000, we have lost money every year since our inception. We had net losses of $27.3 million in 1999 and net income of $27.0 million in 2000. If we exclude a gain of $43.0 million on sales of stock we held in InterMune, and the associated income tax, our net loss for 2000 would have been $15.0 million. We had a net loss of $16.4 million for the nine months ended September 30, 2001. Our accumulated deficit was $109.2 million at September 30, 2001. We may incur additional losses during the next few years. If we do not eventually achieve and maintain profitability, our stock price may decline. If we do not obtain the capital necessary to fund our operations, we will be unable to develop or market our products. We currently believe that our available cash resources will be sufficient to fund our operating and working capital requirements for at least the next 12 months. If in the future our product revenue does not continue to grow or we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development of our other products. If we fail to protect our proprietary rights, competitors may be able to use our technologies, which would weaken our competitive position, reduce our revenues and increase our costs. Our commercial success depends in part on our ability and the ability of our licensors to protect our technology and processes. The foam technology used in our Luxiq(R) and OLUX(TM) products is covered by one issued patent. We are pursuing several U. S. and foreign patent applications, although we cannot be sure that any of these patents will ever be issued. We and Soltec also have acquired rights under certain patents and patent applications in connection with our licenses to distribute products and from the assignment of rights to patents and patent applications from certain of our consultants and officers. These patents and patent applications may be subject to claims of rights by third parties. If there are conflicting claims to the same patent or patent application, we may not prevail and, even if we do have some rights in a patent or application, those rights may not be sufficient for the marketing and distribution of products covered by the patent or application. The patents and applications in which we have an interest may be challenged as to their validity or enforceability. Challenges may result in potentially significant harm to our business. The cost of responding to these challenges and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, could be substantial whether or not we are successful. Such litigation also could require a substantial commitment of management's time. A judgment adverse to us in any patent interference, litigation or other proceeding arising in connection with these patent applications could materially harm our business. The ownership of a patent or an interest in a patent does not always provide significant protection. Others may independently develop similar technologies or design around the patented aspects of our technology. We only conduct patent searches to determine whether our products infringe upon any existing patents, when we think such searches are appropriate. If we are -17- unsuccessful in any challenge to the marketing and sale of our products or technologies, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease marketing the challenged products, or to modify our products to avoid infringing upon those rights. Under these circumstances, we may not be able to obtain a license to such intellectual property on favorable terms, if at all. We may not succeed in any attempt to redesign our products or processes to avoid infringement. Our current product revenue does not cover the cost of fully developing and commercializing our product candidates. Product revenue from sales of our marketed products does not currently cover the full cost of developing products in our pipeline. We also generate revenue by licensing our products to third parties for specific territories and indications. Our reliance on licensing arrangements with third parties carries several risks, including the possibilities that: o a product development contract may expire or a relationship may be terminated, and we will not be able to attract a satisfactory alternative corporate partner within a reasonable time; o we may be contractually bound to terms that, in the future, are not commercially favorable to us; and o royalties generated from licensing arrangements may be insignificant. If any of these risks occurs, we may not be able to successfully develop our products. If we do not successfully partner or commercialize relaxin, we will lose fundamental intellectual property rights to the product. Licenses with Genentech, Inc. and The Howard Florey Institute of Experimental Physiology and Medicine require us to use our best efforts to commercialize relaxin. If we fail to successfully commercialize relaxin, our rights under these licenses may revert to Genentech and the Florey Institute. The termination of these agreements and subsequent reversion of rights could prevent us from leveraging our additional patents and know-how by securing a partnership arrangement for the relaxin program. We rely on our employees and consultants to keep our trade secrets confidential. We rely on trade secrets and unpatented proprietary know-how and continuing technological innovation in developing and manufacturing our products. We require each of our and Soltec's employees, consultants and advisors to enter into confidentiality agreements prohibiting them from taking our proprietary information and technology or from using or disclosing proprietary information to third parties except in specified circumstances. The agreements also provide that all inventions conceived by an employee, consultant or advisor, to the extent appropriate for the services provided during the course of the relationship, shall be our exclusive property, other than inventions unrelated to us and developed entirely on the individual's own time. Nevertheless, these agreements may not provide meaningful protection of our trade secrets and proprietary know-how if they are used or disclosed. Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain -18- access to our trade secrets or know-how. In addition, others may independently develop similar or equivalent trade secrets or know-how. Our use of hazardous materials exposes us to the risk of environmental liabilities, and we may incur substantial additional costs to comply with environmental laws. Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive materials. We are subject to laws and regulations governing the use, storage, handling and disposal of these materials and certain waste products. In the event of accidental contamination or injury from these materials, we could be liable for any damages that result and any liability could exceed our resources. We may also be required to incur significant costs to comply with environmental laws and regulations as our research activities increase. RISKS RELATED TO OUR PRODUCTS Manufacturing difficulties could delay commercialization of our products or future revenues from product sales. We depend on third parties to manufacture our products, and each product is manufactured by a sole source manufacturer. Currently, Miza Pharmaceuticals is our sole source manufacturer for Luxiq and OLUX. All of our contractors must comply with the applicable FDA good manufacturing practice regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before they can be used in commercial manufacturing of our products. If our sole source manufacturer cannot provide us with our product requirements in a timely and cost-effective manner, if the product they are able to supply cannot meet commercial requirements for shelf life, or if they are not able to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements, our sales of marketed products could be reduced and we could suffer delays in the progress of clinical trials for products under development. We do not have control over our third-party manufacturer's compliance with these regulations and standards. In addition, any commercial dispute with any of our sole source suppliers could result in delays in the manufacture of product, and affect our ability to commercialize our products. If we are unable to contract with third parties to manufacture and distribute our products in sufficient quantities, on a timely basis, or at an acceptable cost, we may be unable to meet demand for our products and may lose potential revenues. We have no manufacturing or distribution facilities for any of our products. Instead, we contract with third parties to manufacture our products for us. We have manufacturing agreements with the following companies: o Miza Pharmaceuticals, a U.K. corporation, for Luxiq and OLUX; and o Boehringer Ingelheim Austria GmbH for relaxin. Boehringer Ingelheim, or BIA, manufactures relaxin for us for clinical uses under a long-term contract. In July 2000, in anticipation of successful results in our relaxin clinical trial for scleroderma, we submitted a purchase order to BIA for product to be used for commercial supply. -19- The purchase order was for a price to be negotiated. We have been in discussions with BIA since the beginning of 2001 regarding whether any additional monies are owed under the contract in view of the failure of the clinical trial. In July 2001, following our May 2001 announcement about downsizing the relaxin program, BIA notified us that BIA believes we are in breach of the relaxin manufacturing agreement and that BIA intends to terminate the agreement and seek remedies if we do not remedy the alleged breach. We disagree with BIA's allegation that we have breached the contract. Nevertheless, consistent with other reserves taken in connection with the Company's downsizing of the relaxin program and this dispute with BIA, we have recorded a reserve for our estimate of our potential exposure in the dispute with BIA. There can be no guarantee, however, that the actual resolution of this dispute will not result in charges in excess of the reserve we have recorded. Typically, these manufacturing contracts are short-term. We are dependent upon renewing agreements with our existing manufacturers or finding replacement manufacturers to satisfy our requirements. As a result, we cannot be certain that manufacturing sources will continue to be available or that we can continue to out-source the manufacturing of our products on reasonable or acceptable terms. Any loss of a manufacturer or any difficulties which could arise in the manufacturing process could significantly affect our inventories and supply of products available for sale. If third parties are unable or unwilling to produce our products in sufficient quantities, with appropriate quality, and under commercially reasonable terms, it could have a negative effect on our sales margins and our market share, as well as our overall business and financial results. If we are unable to supply sufficient amounts of our products on a timely basis, our market share could decrease and, correspondingly, our profitability could decrease. If our contract manufacturers fail to comply with current Good Manufacturing Practice, or cGMP regulations, we may be unable to meet demand for our products and may lose potential revenue. The FDA requires that all manufacturers used by pharmaceutical companies comply with the FDA's regulations, including those cGMP regulations applicable to manufacturing processes. The cGMP validation of a new facility and the approval of that manufacturer for a new drug product may take a year or more before manufacture can begin at the facility. Delays in obtaining FDA validation of a replacement manufacturing facility could cause an interruption in the supply of our products. Although we have business interruption insurance covering the loss of income for up to $8.0 million, which may mitigate the harm to our business from the interruption of the manufacturing of products caused by certain events, the loss of a manufacturer could still have a negative effect on our sales, margins and market share, as well as our overall business and financial results. If our supply of finished products is interrupted, our ability to maintain our inventory levels could suffer. We try to maintain inventory levels that are no greater than necessary to meet our current projections. Any interruption in the supply of finished products could hinder our ability to timely distribute finished products. If we are unable to obtain adequate product supplies to satisfy our customers' orders, we may lose those orders and our customers may cancel other orders and stock and sell competing products. This in turn could cause a loss of our market share and negatively affect our revenues. -20- We cannot be certain that supply interruptions will not occur or that our inventory will always be adequate. Numerous factors could cause interruptions in the supply of our finished products including shortages in raw material required by our manufacturers, changes in our sources for manufacturing, our failure to timely locate and obtain replacement manufacturers as needed and conditions effecting the cost and availability of raw materials. If we do not obtain and maintain governmental approvals for our products, we cannot sell these products for their intended uses. Pharmaceutical companies are subject to heavy regulation by a number of national, state and local agencies. Of particular importance is the FDA in the United States. It has jurisdiction over all of our business and administers requirements covering testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. Failure to comply with applicable regulatory requirements could, among other things, result in fines; suspensions of regulatory approvals of products; product recalls; delays in product distribution, marketing and sale; and civil or criminal sanctions. The process of obtaining and maintaining regulatory approvals for pharmaceutical and biological drug products, and obtaining and maintaining regulatory approvals to market these products for new indications, is lengthy, expensive and uncertain. The manufacturing and marketing of drugs are subject to continuing FDA and foreign regulatory review, and later discovery of previously unknown problems with a product, manufacturing process or facility may result in restrictions, including withdrawal of the product from the market. Our products receive FDA review regarding their safety and effectiveness. However, the FDA is permitted to revisit and change its prior determinations and we cannot be sure that the FDA will not change its position with regard to the safety or effectiveness of our products. If the FDA's position changes, we may be required to change our labeling or formulations, or cease to manufacture and market the challenged products. Even before any formal regulatory action, we could voluntarily decide to cease distribution and sale or recall any of our products if concerns about the safety or effectiveness develop. To market our products in countries outside of the United States, we and our partners must obtain similar approvals from foreign regulatory bodies. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval, and approval by the FDA does not ensure approval by the regulatory authorities of any other country. The process of obtaining these approvals is time consuming and requires the expenditure of substantial resources. In recent years, various legislative proposals have been offered in Congress and in some state legislatures that include major changes in the health care system. These proposals have included price or patient reimbursement constraints on medicines and restrictions on access to certain products. We cannot predict the outcome of such initiatives, and it is difficult to predict the future impact of the broad and expanding legislative and regulatory requirements affecting us. We may spend a significant amount of money to obtain FDA and other regulatory approvals, which may never be granted. The process of obtaining FDA and other regulatory approvals is lengthy and expensive. To obtain approval, we must show in preclinical and clinical trials that our products are safe and effective, and the marketing and manufacturing of pharmaceutical products are subject to rigorous -21- testing procedures. The FDA approval processes require substantial time and effort, the FDA continues to modify product development guidelines, and the FDA may not grant approval on a timely basis or at all. Clinical trial data can be the subject of differing interpretation, and the FDA has substantial discretion in the approval process. The FDA may not interpret our clinical data the way we do. The FDA may also require additional clinical data to support approval. The FDA can take between one and two years to review new drug applications and biologics license applications, or longer if significant questions arise during the review process. We may not be able to obtain FDA approval to conduct clinical trials or to manufacture and market any of the products we develop, acquire or license. Moreover, the costs to obtain approvals could be considerable and the failure to obtain or delays in obtaining an approval could have a significant negative effect on our business performance and financial results. Even if we obtain approval from the FDA, the FDA is authorized to impose post-marketing requirements such as: o testing and surveillance to monitor the product and its continued compliance with regulatory requirements; o submitting products for inspection and, if any inspection reveals that the product is not in compliance, the prohibition of the sale of all products from the same lot; o suspending manufacturing; o recalling products; and o withdrawing marketing clearance. In its regulation of advertising, the FDA from time to time issues correspondence to pharmaceutical companies alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising practices, and the receipt of correspondence from the FDA alleging these practices can result in the following: o incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA's requirements; o changes in the methods of marketing and selling products; o taking FDA-mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotion; and o disruption in the distribution of products and loss of sales until compliance with the FDA's position is obtained. If Luxiq and OLUX do not achieve or sustain market acceptance, our revenues will not increase and may not cover our operating expenses. Our future revenues will depend upon dermatologist and patient acceptance of Luxiq and OLUX. Factors that could affect acceptance of Luxiq and OLUX include: o satisfaction with existing alternative therapies; -22- o the effectiveness of our sales and marketing efforts; o undesirable and unforeseeable side effects; and o the cost of the product as compared with alternative therapies. Since we have had approval to sell Luxiq for less than three years, and we only began selling OLUX in November 2000, we cannot predict the potential long-term patient acceptance of either product. We rely on third parties to conduct clinical trials for our product candidates, and those third parties may not perform satisfactorily. We do not have the ability to independently conduct clinical studies, and we rely on third parties to perform this function. If these third parties do not perform satisfactorily, we may not be able to locate acceptable replacements or enter into favorable agreements with them, if at all. If we are unable to rely on clinical data collected by others, we could be required to repeat clinical trials, which could significantly delay commercialization and require significantly greater capital. If we are unable to develop new products, our expenses may increase without any immediate return on the investment. We currently have a variety of new products in various stages of research and development and are working on possible improvements, extensions and reformulations of some existing products. These research and development activities, as well as the clinical testing and regulatory approval process, which must be completed before commercial quantities of these developments can be sold, will require significant commitments of personnel and financial resources. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue generation from those products. Regardless of whether they are ever released to the market, the expense of such processes will have already been incurred. We reevaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology. There can be no certainty that any product we are researching or developing will ever be successfully released to the market. If we fail to take a product or technology from the development stage to market on a timely basis, we may incur significant expenses without a near-term financial return. If we do not successfully integrate new products, we may not be able to sustain revenue growth and we may not be able to compete effectively. When we acquire or develop new products and product lines, we must be able to integrate those products and product lines into our systems for marketing, sales and distribution. If these products or product lines are not integrated successfully, the potential for growth is limited. The new products we acquire or develop could have channels of distribution, competition, price limitations or marketing acceptance different from our current products. As a result, we do not know whether we will be able to compete effectively and obtain market acceptance in any new product categories. After acquiring or developing a new product, we may need to significantly increase our sales force and incur additional marketing, distribution and other operational -23- expenses. These additional expenses could negatively affect our gross margins and operating results. In addition, many of these expenses could be incurred prior to the actual distribution of new products. Because of this timing, if the new products are not accepted by the market or if they are not competitive with similar products distributed by others, the ultimate success of the acquisition or development could be substantially diminished. RISKS RELATED TO OUR INDUSTRY We face intense competition, which may limit our commercial opportunities and our ability to become profitable. The pharmaceutical industry is highly competitive. Competition in our industry occurs on a variety of fronts, including developing and bringing new products to market before others, developing new technologies to improve existing products, developing new products to provide the same benefits as existing products at less cost and developing new products to provide benefits superior to those of existing products. Most of our competitors are large, well-established companies in the fields of pharmaceuticals and health care. Many of these companies have substantially greater financial, technical and human resources than we have to devote to marketing, sales, research and development and acquisitions. Some of these competitors have more collective experience than we do in undertaking preclinical testing and human clinical trials of new pharmaceutical products and obtaining regulatory approvals for therapeutic products. As a result, they have a greater ability to undertake more extensive research and development and sales and marketing programs. It is possible that our competitors may develop new or improved products to treat the same conditions as our products treat. Our commercial opportunities will be reduced or eliminated if our competitors develop and market products that are more effective, have fewer or less severe adverse side effects or are less expensive than our products. These competitors also may develop products that make our current or future products obsolete. Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins. Physicians may not adopt our products over competing products, and our products may not offer an economically feasible alternative to existing modes of therapy. Our products compete with generic pharmaceuticals, which claim to offer equivalent benefit at a lower cost. In some cases, insurers and other health care payment organizations try to encourage the use of these less expensive generic brands through their prescription benefits coverages and reimbursement policies. These organizations may make the generic alternative more attractive to the patient by providing different amounts of reimbursement so that the net cost of the generic product to the patient is less than the net cost of our prescription brand product. Aggressive pricing policies by our generic product competitors and the prescription benefits policies of insurers could cause us to lose market share or force us to reduce our margins in response. If third party payors will not provide coverage or reimburse patients for the use of our products, our revenues and profitability will suffer. Our products' commercial success is substantially dependent on whether third-party reimbursement is available for the use of our products by hospitals, clinics and doctors. Medicare, -24- Medicaid, health maintenance organizations and other third-party payors may not authorize or otherwise budget for the reimbursement of our products. In addition, they may not view our products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our products to be marketed on a competitive basis. Likewise, legislative proposals to reform health care or reduce government programs could result in lower prices for or rejection of our products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenues to decline. If managed care organizations and other third-party reimbursement policies do not cover our products, we may not increase our market share and our revenues and profitability will suffer. Our operating results and business success depends in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities (such as Medicaid), private health insurers and managed care organizations. Over 70% of the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to them and the pharmacy benefit managers that serve many of these organizations has become important to our business. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generics are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. We cannot be certain that the reimbursement policies of these entities will be adequate for our products to compete on a price basis. If our products are not included within an adequate number of formularies or adequate reimbursement levels are not provided, or if those policies increasingly favor generic products, our market share and gross margins could be negatively affected, as could our overall business and financial condition. If product liability lawsuits are brought against us, we may incur substantial costs. Our industry faces an inherent risk of product liability claims from allegations that our products resulted in adverse effects to the patient or others. These risks exist even with respect to those products that are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA. Our insurance may not provide adequate coverage against potential product liability claims or losses. We also cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all. Even if we are ultimately successful in product liability litigation, the litigation would consume substantial amounts of our financial and managerial resources, and might create adverse publicity, all of which would impair our ability to generate sales. If we were found liable for any product liability claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could severely damage our business, financial condition and profitability. -25- RISKS RELATED TO OUR STOCK Our stock price is volatile and the value of your investment in our stock could decline in value. The market prices for securities of specialty pharmaceutical companies like our company have been and are likely to continue to be highly volatile. As a result, investors in these companies often buy at very high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the stock holdings of these investors. In addition, the volatility could result in securities class action litigation. Any litigation would likely result in substantial costs, and divert our management's attention and resources. Our charter documents and Delaware law contain provisions that could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders. Our certificate of incorporation authorizes our board of directors to issue undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of the preferred stock without further vote or action by our stockholders. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock. We also have a stockholder rights plan, which entitles existing stockholders to rights, including the right to purchase shares of preferred stock, in the event of an acquisition of 15% or more of our outstanding common stock, or an unsolicited tender offer for such shares. The existence of the rights plan could delay, prevent, or make more difficult a merger or tender offer or proxy contest involving us. Other provisions of Delaware law and of our charter documents, including a provision eliminating the ability of stockholders to take actions by written consent, could also delay or make difficult a merger, tender offer or proxy contest involving us. Further, our stock option and purchase plans generally provide for the assumption of such plans or substitution of an equivalent option of a successor corporation or, alternatively, at the discretion of the board of directors, exercise of some or all of the option stock, including non-vested shares, or acceleration of vesting of shares issued pursuant to stock grants, upon a change of control or similar event. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the reported market risks since December 31, 2000 except for the foreign currency exchange risk related to the foreign currency exchange contract Connetics entered into during the quarter ended March 31, 2001. The contract was cancelled in April 2001 in conjunction with the acquisition of Soltec. -26- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. -------- 10.1* Amended and Restated Manufacturing and Supply Agreement dated September 19, 2001, by and between Connetics and Miza Pharmaceuticals (UK) Limited 10.2 Industrial Building Lease dated December 16, 1999, between Connetics and West Bayshore Associates 10.3 Assignment and Assumption of Lease between Connetics and Respond.com, Inc., dated August 21, 2001 10.4 Agreement dated August 21, 2001, between Connetics and Respond.com, Inc. 10.5 Sublease Agreements dated August 21, 2001, between Connetics and Respond.com, Inc., with respect to 3290 and 3294 West Bayshore Road, Palo Alto, California
* Certain confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission (b) Reports on Form 8-K. None -27- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONNETICS CORPORATION By: /s/ JOHN L. HIGGINS ------------------------- John L. Higgins Exec. Vice President, Finance and Administration and Chief Financial Officer Date: November 14, 2001 -28- INDEX TO EXHIBITS
Exhibit Number Description - -------------- ----------- 10.1* Amended and Restated Manufacturing and Supply Agreement dated September 19, 2001, by and between Connetics and Miza Pharmaceuticals (UK) Limited 10.2 Industrial Building Lease dated December 16, 1999, between Connetics and West Bayshore Associates 10.3 Assignment and Assumption of Lease between Connetics and Respond.com, Inc., dated August 21, 2001 10.4 Agreement dated August 21, 2001, between Connetics and Respond.com, Inc. 10.5 Sublease Agreements dated August 21, 2001, between Connetics and Respond.com, Inc., with respect to 3290 and 3294 West Bayshore Road, Palo Alto, California
* Certain confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission -29- EX-10.1 3 f75747ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 AMENDED AND RESTATED MANUFACTURING AND SUPPLY AGREEMENT This Amended and Restated Manufacturing and Supply Agreement is entered into effective as of September 19, 2001, by and between Miza Pharmaceuticals (UK) Limited, a company organized under the laws of England and Wales ("Miza"), and Connetics Corporation, a Delaware corporation ("Connetics"). Miza and Connetics are each referred to as a "Party" to this Agreement, and collectively as the "Parties." BACKGROUND A. Connetics, under its former name Connective Therapeutics, Inc., and CCL Pharmaceuticals, a division of CCL Industries Limited, a limited company organized under the laws of England and Wales ("CCL"), are parties to a Supply Agreement dated 01 June 1996, as amended February 1998 and 27 March 1998 (the "Original Agreement"). B. With respect to the business arrangement pursuant to the Original Agreement, Miza is the successor in interest to CCL. C. Effective April 20, 2001, Connetics acquired Soltec Research Pty Ltd. ("Soltec"), which was the licensor of the products that were the subject of the Original Agreement. D. Connetics desires to use Miza's facilities, resources and expertise to manufacture the Products, as defined below, and Miza desires to act as a contract manufacturer of the Product(s) agreed to by both Parties in accordance with the terms and conditions set forth in this Agreement; E. Miza and Connetics wish to amend and expand the scope of the Original Agreement on the terms and conditions set forth in this Agreement, for the consideration set forth in this Agreement. NOW, THEREFORE, in consideration of the above premises and the mutual covenants set forth below, Miza and Connetics agree as follows: AGREEMENT ARTICLE 1 DEFINITIONS For the purposes of this Agreement, the following capitalized terms shall have the following meanings: "AFFILIATE" means any corporation or other business entity controlled by, controlling or under common control with a party hereto. For this purpose "control" shall mean direct or indirect Page 1 beneficial ownership of fifty percent (50%) or more of the voting stock, or a fifty percent (50%) or more interest in the income of, such corporation or other business entity. "BATCH" shall have the meaning set forth in the Quality Agreement. "CERTIFICATE OF ANALYSIS" means a summary of the quality control testing, as described in the Product Specifications, performed by Miza for Finished Product supplied under this Agreement. "CHANGE" shall have the meaning set forth in the Quality Agreement. "cGMPs" means the current Good Manufacturing Practices of the FDA. "COMMERCIALLY REASONABLE EFFORTS" means the effort by Miza or Connetics to deploy, in light of prevailing circumstances and taking into account obligations and commitments to third parties, sufficient resources, capital equipment, material and labor as might reasonably be expected to achieve in a commercially appropriate time-scale, the benefits which are reasonably anticipated to accrue to Miza and Connetics from the commercial exploitation of the Products, and if the Commercially Reasonable Efforts are to be directed to a specific goal, then the achievement of that goal. "CONFIDENTIAL INFORMATION" shall have the meaning set forth in SECTION 7.3 of this Agreement. "CONNETICS REPRESENTATIVE" means the person designated by Connetics who shall be primarily resident on site at Miza's facility. As of the date of this Agreement, [*] is designated as the Connetics Representative. "DATE OF MANUFACTURE" shall have the meaning set forth in the Quality Agreement. "DEVELOPMENT AGREEMENT" means any separate agreement entered into by the Parties with respect to a potential Product that is not yet ready to be manufactured on a commercial scale, including the requirements surrounding production of units of Product and Placebo appropriately labeled for use in Connetics' clinical trials (in amounts to be specified by Connetics, as required). Each such Development Agreement shall, when executed, be appended to this Agreement as an EXHIBIT D. "DMF" means the Drug Master File for a Product, as filed by Miza with the FDA. "FDA" means the Food and Drug Administration of the United States of America. "FINISHED PRODUCT" shall have the meaning set forth in the Quality Agreement. "IND" means an Investigational New Drug Application for a Product, as filed by Connetics with the FDA. "INITIAL TERM" shall have the meaning set forth in SECTION 10.1. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 2 "LABELING" means the primary container label, secondary packaging, package insert, shelf pack and shipper label specific to a finished Product manufactured in accordance with cGMPs and Connetics' instructions. "LOSSES" shall have the meaning set forth in SECTION 11.1. "MANUFACTURING STANDARDS" means the specifications for manufacturing, packaging, labeling and storing the Products set forth in the Product Specifications, the master batch record, cGMPs, MSDSs, and all other applicable U.S. laws and regulations. "MSDS" means material safety data sheet(s). "NDA" means a New Drug Application for a Product, as filed by Connetics with, and approved by the FDA. "PLACEBO" means a Product adjusted to be formulated without the active ingredient. "PRODUCT SPECIFICATIONS" means the specifications provided by Connetics for the manufacture of any Product. "PRODUCT(S)" means the products described on EXHIBIT A to this Agreement, as it may be properly amended from time to time by agreement of the Parties, and which is incorporated by this reference as though fully set forth in this paragraph. "QUALITY AGREEMENT" means the Agreement set forth as EXHIBIT C to this Agreement and incorporated by this reference as though fully set forth in this Agreement. "REGULATORY AUTHORITY" means the FDA or any equivalent or additional governmental or regulatory agencies having jurisdiction with respect to Miza, Miza's facilities, or the Products. "UNIQUE MATERIALS" shall have the meaning set forth in SECTION 3.12 of this Agreement. ARTICLE 2 PRODUCT SPECIFICATIONS AND MANUFACTURE 2.1 Manufacture of Products. During the term of this Agreement, and subject to the terms and conditions of this Agreement, Miza shall formulate, fill and package the Products in accordance with their respective Product Specifications, according to the terms of this Agreement and the Quality Agreement, as they may be amended from time to time. 2.2 Conformance to Product Specifications. Products (and jointly approved for the purposes of this section, the Placebo) shall conform to the Product Specifications, the terms of the Quality Agreement, and all specifications provided in Connetics' IND or NDA. Notwithstanding the foregoing, if Connetics accepts Product in accordance with the provisions of this Agreement and the Quality Agreement, this SECTION 2.2 shall be deemed to have been satisfied. Page 3 2.3 Labeling. Miza will label and package Product in finished form, pursuant to a firm purchase order accepted by Miza as described in SECTION 3.4, provided, however, that Connetics shall be responsible for the origination of artwork and text, as well as written final approval before manufacture, of the Labeling. 2.4 Raw Materials. Miza shall have the sole responsibility to source all raw materials used in manufacture of the Products, including all quality control responsibility for such raw materials. 2.5 Batch Testing; Certificate of Authenticity. Miza shall test, or cause to be tested, in accordance with the Product Specifications, each batch of Product manufactured pursuant to this Agreement before delivery to Connetics. Prior to each shipment of Product, Miza shall provide to Connetics a Certificate of Analysis attesting to the quality of each batch contained within the shipment, including review and approval by the appropriate quality control unit of all batch production and control records. Miza shall maintain and provide Connetics with such documentation as may be required for compliance with FDA and other applicable regulations. 2.6 Good Manufacturing Practice. Miza shall manufacture, store and prepare all Products for shipping in accordance with cGMPs, and the equivalent manufacturing requirements of the European Regulatory Authorities, as applicable, in an FDA inspected and ISO9000 certified facility, currently envisioned to be Miza's facility in Runcorn, U.K. Miza may not change manufacturing of Products to an alternate facility without first obtaining Connetics' written approval, including the approvals required pursuant to the Quality Agreement, such approval not to be unreasonably withheld. 2.7 DMF. To the extent required, Miza shall maintain a DMF or like filing, suitable for Miza's manufacture of Products, with the applicable regulatory agencies (including FDA) and shall ensure that its "active status" is maintained. Miza shall use Commercially Reasonable Efforts to timely accomplish, and bear the costs of, preparing for regulatory inspection, approval and associated filings required for the manufacture of Connetics' Products. Connetics shall directly pay or reimburse Miza for any fees and payments to such regulatory agencies required for such inspection, approval and associated filings (e.g., any FDA inspection fee); it is understood that Connetics is not responsible for any additional fees and payments related to the general operation of Miza's business or facilities. Miza will provide letter(s) granting Connetics and its designees the right of cross-reference to the DMF. Miza reserves the right to cancel such letter(s) in case of termination of this Agreement. 2.8 Inspections. Connetics has the right at any time during the term of this Agreement, upon reasonable prior notice and during reasonable business hours and without disruption to Miza's business, to inspect Miza's facility, and to make FDA-type inspections at its plant to satisfy itself that Miza manufactures and documents the Product according to current cGMPs, consistent with FDA standards and requirements. Such inspections may only be made by individuals reasonably acceptable to Miza. The provisions of this SECTION 2.8 Page 4 are subject to the confidentiality provisions of ARTICLE 7. Connetics shall be responsible for its costs of travel and accommodation for such inspections. [Intentionally Left Blank] Page 5 2.9 Changes to Product Specifications. (a) If Connetics desires any material change to the Product Specifications or manufacturing process, Connetics shall deliver, [*] prior to the expected date of implementation, written notice to Miza specifying such change desired by Connetics, and Miza shall acknowledge in writing any such notice within [*] days after Miza's receipt thereof; provided, however, that the Product Specifications or process shall not be supplemented, modified or amended in any respect without the prior written agreement of the Parties. Miza will use Commercially Reasonable Efforts to implement changes within [*] after Miza's acknowledgement of such notice. If Connetics requests a change to a Product Specification, including the manufacturing process, and Miza agrees that such change is feasible, such change shall be incorporated within the Product Specification pursuant to a written amendment to this Agreement. Connetics shall be responsible for obtaining any required FDA approval prior to implementation of such a change at Connetics' cost. (b) Miza will communicate to Connetics in a timely manner any change in the Product Specification, including the manufacturing process, initiated by Miza, and will obtain Connetics' written approval by way of written amendment of this Agreement incorporating such change within the Product Specification prior to implementation of the change. No such change may be instituted except in compliance with this Agreement and the Quality Agreement. Connetics shall have the option of obtaining, or having Miza obtain any required FDA approval or other regulatory approval prior to implementation of such a change. Miza may provide additional services in conjunction with the manufacture of Products, such as additional formulation, process development or stability testing, at the request of Connetics and pursuant to Connetics' purchase order, and all data and results from such additional services shall be owned by Connetics and protected as confidential under this Agreement. 2.10 Connetics Representative at Miza. Connetics may, at Connetics' expense, place a company representative on-site at Miza's manufacturing facility during the term of this Agreement. Subject to the following sentence, such representative shall have full access to all operations, documents, and records that specifically pertain to the manufacture of the Products. The Connetics Representative shall accept Miza's procedures regulating external customer relationships (including GMP training, guarantee of confidentiality, and health procedures), and shall not materially disrupt Miza's operations. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 6 ARTICLE 3 PLANNING AND SUPPLY 3.1 Production. Miza will produce Products to meet the mutually agreed upon forecasts, subject to the provisions of this ARTICLE 3. Miza will keep Connetics reasonably informed of all scheduled production activity for the Products. 3.2 Termination of Obligation. Miza's obligation to supply Product to Connetics shall terminate pursuant to the provisions of ARTICLE 10 below. 3.3 Forecasts. Connetics shall provide Miza with an annual forecast for budgeting and production planning purposes. Connetics shall also deliver to Miza a monthly update during the first calendar week of each month. Each monthly update shall include a [*] setting forth Connetics' required quantities and delivery dates for each Product, together with a summary of changes from the previous update. Forecasts shall include the amounts of each Product to be manufactured and supplied by Miza and the expected timing for the delivery of each shipment during the forecast period. The Parties shall discuss each of the forecasts and shall mutually agree in good faith on the appropriateness of each forecast versus anticipated demand for Product. 3.4 Purchase Orders. Connetics will place written purchase orders directly or through its designated representatives with Miza approximately [*] prior to requested shipment date, including the following details: number of units, requested shipping date, shipping instructions and Connetics' order reference number including the price calculated according to this Agreement. Each Purchase Order issued pursuant to this Agreement shall be governed by the terms and conditions of this Agreement, and shall override any conflicting provisions in any purchase order and any invoice or packing slip generated by Miza with respect to the details set forth in this SECTION 3.4. 3.5 Receipt and Acceptance by Miza. Miza shall promptly acknowledge its receipt of purchase orders and inform Connetics of the anticipated dates of manufacture and delivery of each Product presentation to Connetics. Miza shall respond in writing as to its acceptance of each firm purchase order [*]. Once a specified quantity, form and delivery date terms have been agreed to by the Parties in any purchase order placed pursuant to this SECTION 3.5, the purchase order may not be canceled by either Party except as provided in SECTION 3.10 or in SECTION 3.11 below. 3.6 Shipment; Delays. Miza shall use Commercially Reasonable Efforts to ship Product to Connetics by the delivery date specified in the accepted purchase order. If Miza believes there will be a significant delay in shipment of Finished Product beyond the delivery dates specified in any accepted purchase order, Miza shall promptly inform Connetics of such expected delay and shall use Commercially Reasonable Efforts to minimize the delay. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 7 3.7 Change Orders. The time of delivery and quantities specified in a purchase order accepted by Miza pursuant to SECTION 3.5 above shall be binding upon the Parties and may not be changed or canceled, except as provided in SECTIONS 3.9 AND 3.10 below. 3.8 Increased Demand. Miza will use Commercially Reasonable Efforts to accommodate Connetics' requests for units in excess of those reserved for Connetics and set forth in EXHIBIT B to this Agreement; provided, however, that it shall not be a breach of this Agreement if Miza, despite its Commercially Reasonable Efforts, is unable to supply quantities of Product to Connetics in excess of [*] of the annual forecast supplied pursuant to SECTION 3.3 for that year. 3.9 Postponement of Manufacturing; Penalties. (a) By Connetics. Connetics may postpone a purchase order for production in accordance with the provisions in this Section. Connetics may postpone each purchase order one time. In the event of postponement pursuant to this SECTION 3.9, Miza shall use Commercially Reasonable Efforts to reschedule the postponed order to a date agreeable to both Parties. Regardless of the amount of notice, if Connetics does not reschedule the Date of Manufacture to a date within [*] of the originally scheduled date, the Purchase Order shall be deemed cancelled, and Connetics shall incur the penalties, if any, pursuant to SECTION 3.10. (b) By Miza. (i) Miza shall use Commercially Reasonable Efforts to meet the terms of a purchase order that it accepts, taking into account mutually agreed upon forecasts under SECTION 3.3, available plant capacity and timing of its production. (ii) If Miza fails to meet the deadlines specified in a purchase order that it has accepted, or specified in its acceptance of the purchase order, and the failure is caused by the negligence or willful misconduct of Miza, then Connetics may require Miza to supply the undelivered Product at the earliest possible future date [*] unless otherwise agreed by Connetics, or Connetics may at its option cancel such portion of the order without penalty. 3.10 Cancellation of Purchase Orders; Penalties. Connetics may cancel a purchase order for production in accordance with the provisions in this Section. The charge for cancellation shall be determined according to the following schedule: (a) If Connetics gives at least [*] notice prior to the manufacturing date assigned by Miza pursuant to SECTION 3.5, there shall be no penalty for cancellation. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 8 (b) If Connetics gives [*], Miza may invoice Connetics for, and Connetics shall be required to pay to Miza an amount equal to [*] of the amount owed under the purchase order, calculated in accordance with EXHIBIT B; provided, however, that Miza must use Commercially Reasonable Efforts to reallocate the suite to manufacture another product on the originally scheduled date, and no charge shall be assessed to Connetics if such efforts are successful. (c) If Connetics gives [*] Miza may invoice Connetics for, and Connetics shall be required to pay to Miza an amount equal to [*] of the amount owed under the purchase order, calculated in accordance with EXHIBIT B; provided, however, that Miza must use Commercially Reasonable Efforts to reallocate the suite to manufacture another product on the originally scheduled date, and no charge shall be assessed to Connetics if such efforts are successful. (d) If Connetics gives [*] of cancellation, Miza may invoice Connetics for, and Connetics shall be required to pay, an amount equal to [*] of the amount owed under the purchase order, calculated in accordance with EXHIBIT B. 3.11 Shipment; Inspection; Rejection (a) Shipment of Product. Miza shall ship, or cause to be shipped at Connetics' expense, the Product to Connetics or such destination(s) as Connetics may designate in writing. Delivery of Product to a common carrier authorized by Connetics shall constitute delivery to Connetics, and risk of loss shall pass to Connetics at that time. Miza agrees to provide support to assist Connetics to pursue any Product related claims it may have against carriers, provided that Connetics shall reimburse Miza for any out-of-pocket expenses Miza may incur in providing such support. All invoices and other shipping documents shall be sent by first class mail or by fax to Connetics' address for notices under this Agreement, directed to the attention of Controller. (b) Non-Conforming Product. Connetics may reject any batch of Product that does not conform to the Manufacturing Standards, subject to the terms of this Section and the Quality Agreement. Within ten (10) business days after Miza's internal release of Product, Connetics shall inspect the Product and notify Miza whether it will accept or reject the Product. No inspection under this Section shall relieve Miza of its obligations and warranties under this Agreement. If Connetics rejects all or any part of any shipment of Product, the procedures to be followed are: (i) Connetics shall submit to Miza in writing any claim that Product does not conform with the Product Specifications or cGMPs, accompanied by a report of Connetics' analysis (which analysis - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 9 shall be conducted in good faith) and a sample of the Product at issue, explaining in reasonable detail the basis on which the allegedly nonconforming Product does not meet the Product Specifications. Once nonconformance is confirmed and fault is determined to belong with Miza pursuant to the provisions of this Section 3.11(b), Connetics shall not be obligated to pay for such nonconforming shipment of Product. Only those tests listed in the Product Specifications may be used to demonstrate nonconformance of Product. (ii) Miza shall conduct its own analysis of the sample in good faith within thirty (30) days after the receipt by Miza of the report and sample from Connetics, and provide the results to Connetics. (A) If after Miza's own analysis of the sample Miza agrees with the claim of nonconformity, Connetics shall promptly inform Miza if Connetics wishes to have Miza replace the nonconforming Product with conforming Product. If Connetics wishes to receive such replacement Product, Miza shall provide such replacement as soon as reasonably practicable thereafter, in which case Connetics shall be obligated to pay only for such replacement Product. Connetics shall not be obligated to pay for the nonconforming Product, and Miza shall: (1) credit Connetics for the amount paid by Connetics to Miza for the nonconforming Product if Connetics has already paid for such nonconforming Product or (2) cancel its invoice to Connetics for such nonconforming Product if Connetics has not yet paid for such nonconforming Product, and Connetics shall not be obligated to pay such canceled invoiced amount. (B) If, after its own analysis, Miza does not agree with the claim of nonconformity or determines that Connetics is responsible for the nonconformity, such Product shall be tested for conformance with the applicable Product Specifications by an independent third party testing laboratory mutually acceptable to both parties. The independent analysis shall be binding on both Parties solely for the purpose of determining whether such Product may be rightfully rejected. (iii) After a final determination that the Product shipment is nonconforming, and if Miza is responsible for the nonconformity, Connetics shall return or destroy it at Miza's request and cost in the most cost effective and environmentally safe and appropriate Page 10 manner available, consistent with federal, state and local laws and regulations. (iv) If conforming Product supplied under this Agreement becomes nonconforming or unsuitable at no fault of Miza, Connetics will remain obligated to pay Miza for such Product. At Miza's request, Connetics shall return such unsuitable Product to Miza. Otherwise, Connetics shall destroy it in the most environmentally safe and appropriate manner available, consistent with federal, state and local laws and regulations. (c) Notwithstanding the other provisions of this SECTION 3.11, Connetics shall have no right to reject any Product that fails to conform with the Manufacturing Standards if the nonconformance is attributable to (i) events outside of Miza's control that occurred after delivery to a common carrier, or (ii) processes, procedures or Product components specified or approved in writing by Connetics in the Product Specifications or otherwise, provided that Miza followed or used such processes, procedures and Product components materially in accordance with the Product Specifications. 3.12 Unique Materials. Connetics shall reimburse Miza for its actual costs expended for the purchase of "Unique Materials" (i.e., certain raw materials, artwork, printed cans, labels, cartons and special valves) purchased by Miza expressly to meet its performance obligations under this Agreement in reliance upon a firm Purchase Order pursuant to SECTION 3.4 and which later are made obsolete, or to the extent that such Unique Materials remain on hand at the expiration of this Agreement as provided under SECTION 10.1. For purposes of this Section, material is obsolete if it cannot be incorporated into the Product due to changes mandated by a Regulatory Authority, changes directed by Connetics, or Connetics-mandated cancellation or postponement. Once material becomes obsolete, Miza may invoice Connetics for the acquisition costs of such obsolete material from time to time, which invoices shall identify the material in question and shall be accompanied by a reasonably detailed statement of the cause of such obsolescence and a certification that Miza has disposed of such materials in accordance with the terms of this Agreement. 3.13 Risk of Loss. Risk of loss of Product shall be with Miza until delivery of Product to a common carrier pursuant to SECTION 3.11 of this Agreement. Notwithstanding the forgoing, Miza shall not be liable for loss of Product caused by an event of force majeure or Connetics' negligence or willful misconduct. 3.14 Insurance. Miza shall at its own expense obtain and maintain workers' compensation and comprehensive general liability insurance with respect to performance under this Agreement, in amounts reasonably determined by Miza, but in no event less than [*]. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 11 ARTICLE 4 PRICE AND PAYMENT TERMS 4.1 Price for Connetics' Products. Connetics shall pay Miza for Products in amounts to be agreed for each Product and for each size or formulation. Effective as of the date first written above, the agreed upon price for each Product shall be set forth in the document attached as EXHIBIT B to this Agreement, which Exhibit may be amended from time to time by the mutual written agreement of the Parties as described in SECTION 4.5, below. 4.2 Invoices. Miza shall submit to Connetics an invoice five (5) days after Miza's internal release of Product. Connetics shall make payment of each invoice within 45 days after receipt by Connetics. If within thirty (30) days after the delivery of Product and the accompanying Certificate of Analysis to Connetics, Connetics demonstrates non-conformance under SECTION 3.11 and Miza agrees with such finding, Connetics shall not be obligated to pay for such non-conforming shipment. 4.3 Most Favored Vendor. Miza agrees that the price charged to Connetics at all times during the term of this Agreement shall be Miza's lowest price for equivalent quantities and lead times, to the extent offered to third parties in the same marketplace. 4.4 Currency. Amounts due to Miza under this Agreement are payable in U.S. Dollars. 4.5 Annual Performance and Price Reviews. The Parties agree to review Miza's performance on each anniversary of this Agreement to determine whether Miza has complied with its obligations under this Agreement, and to renew and renegotiate the pricing under this Agreement as appropriate. If the Parties agree to any changes in the Pricing, a new EXHIBIT B shall be prepared and made a part of this Agreement by a written amendment to this Agreement. ARTICLE 5 WARRANTIES 5.1 Quality. Each shipment of Product under this Agreement shall have been manufactured in accordance with U.S. cGMPs in a duly licensed facility and shall have been subject to a quality control inspection by Connetics in accordance with the Product Specifications and with Connetics' then current quality control standards and systems. Miza shall number each Product shipment with a vendor lot number that is traceable to raw materials and/or components used to manufacture such Product. 5.2 Representations and Warranties. (a) Miza warrants that Product delivered to Connetics pursuant to this Agreement shall, at the time of delivery: Page 12 (i) have been manufactured, filled, packaged, stored and shipped in accordance with all applicable laws, rules, regulations or requirements; (ii) have been manufactured, filled, packaged and stored in accordance with, and will conform to, the Product Specifications; (iii) will be free from defects in material, manufacturing and workmanship for the shelf life of the Product as set forth in the Product Specifications; and (iv) not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act (the "Act") as amended, or within the meaning of any applicable state or municipal law in which the definitions of adulteration and misbranding are substantially the same as those contained in the Act, as the Act and such laws are constituted and effective at the time of delivery. (b) Licensing. Miza represents and warrants that it has obtained and will maintain on a current basis and will comply with all licenses, permits and approvals of applicable governmental agencies as may be required to manufacture, test and store the Product pursuant to this Agreement and perform its other obligations under this Agreement. Miza shall be responsible for obtaining and maintaining licenses and permits for manufacture, testing and storage of the Product and ensuring that its facilities used in the manufacture of the Product meet cGMPs in all respects. (c) Compliance with Laws. Miza represents and warrants that it shall comply with all federal, state, local and foreign laws, regulations and other requirements applicable to the manufacture, testing and storage of the Product and the performance of Miza's obligations under this Agreement. Miza shall have sole responsibility for adopting and enforcing safety procedures for the handling and manufacture of the Product at its facilities and the proper handling and proper disposal of waste relating to the Product. 5.3 Limitations; Indemnification. (a) Limitations on Warranty. The warranty furnished in SECTION 5.2(B) shall not apply to defects caused by accident or willful damage, abuse, misuse, neglect, improper testing, handling, storage or use after delivery by Miza of the Product in question to Connetics. (b) No Implied Representations; Warranties or Conditions. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER MIZA NOR CONNETICS MAKES ANY REPRESENTATIONS OR WARRANTIES AND THERE ARE NO CONDITIONS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO PRODUCT Page 13 SUPPLIED UNDER THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATIONS, WARRANTIES OR CONDITIONS WITH RESPECT TO NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF SUCH PRODUCT, OR ARISING FROM A COURSE OF DEALING OR USAGE OF TRADE PRACTICE. (c) Limitation of Liability. EXCEPT FOR ANY LOSS, LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO THE DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO ARTICLE 7 OR AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY TO THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. [*]. ARTICLE 6 TECHNOLOGY TRANSFER 6.1 Without derogating from Miza's rights under this Agreement, Miza shall assist Connetics in qualifying a second source for Product, providing technical assistance and documentation as necessary, including such manufacturing technology and know-how so as to permit another entity to manufacture Product, and Miza agrees to cooperate with Connetics to facilitate the technology transfer. 6.2 Connetics agrees to reimburse Miza for Miza's expenses in providing the assistance required in SECTION 6.1 for any second source other than an Affiliate of Miza. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 14 ARTICLE 7 CONFIDENTIALITY 7.1 Confidentiality. (a) Confidential Information. The Parties acknowledge that by reason of their relationship to each other under this Agreement, each will have access to certain information and materials concerning the other's business, plans, trade secrets, customers (including, but not limited to, customer lists), technology, and/or products that is confidential and of substantial value to that Party, which value would be impaired if such information were disclosed to Third Parties ("CONFIDENTIAL INFORMATION"). Each Party agrees that it will not use in any way other than expressly authorized or contemplated under this Agreement, nor disclose to any third party, any such Confidential Information revealed to it by the other Party (except that Confidential Information may be disclosed, as required for the purposes of this Agreement, to any Regulatory Authority, an Affiliate, assignee, distributor, consultant or third party contractor or research and development organization under similar written obligations of non-disclosure and non-use), and will take every reasonable precaution to protect the confidentiality of such information and with no less restrictive precautions than it takes to protect its own confidential information. If Confidential Information is required to be disclosed in response to a valid order by a court, Regulatory Authority or other government body of competent jurisdiction, or if otherwise required to be disclosed by law, or if necessary to establish the rights of either Party under this Agreement, the receiving Party shall use Commercially Reasonable Efforts to provide the disclosing Party with advance notice of such required disclosure to give the disclosing Party sufficient time to seek a protective order or other protective measures, if any are available, for such Confidential Information. (b) Exceptions. For purposes of this Agreement, information shall be deemed Confidential Information if such information, by its nature or due to the context within which it is disclosed, is obviously intended by the disclosing Party to be kept confidential even if not identified as such in writing or with legends or other markings. The person disclosing Confidential Information shall endeavor to confirm verbally disclosed Information as "CONFIDENTIAL" in writing, given the understanding that failure to do so does not constitute a designation of non-confidentiality, particularly when the confidential nature is apparent from context and subject matter. Upon request by either Party, the other Party will advise whether or not it considers any particular information or materials to be Confidential Information. Confidential Information does not include information, technical data or know-how that: (i) is or becomes publicly available through no fault of the receiving Party or its individual employees, agents or members amounting to a breach of this Agreement; Page 15 (ii) is lawfully obtained on a non-confidential basis by the receiving Party from a third party who is not obligated to retain such information in confidence; (iii) the receiving Party can demonstrate, by competent evidence, was known to it or any of its Affiliates from a source other than the disclosing Party or any of its Affiliates prior to the disclosure under this Agreement; (iv) the receiving Party can demonstrate by its written records is independently developed by employees of the receiving Party or an Affiliate of the receiving Party, which employees were neither privy to nor had access to the Confidential Information and which is developed without use in any way of the Confidential Information; (v) must be disclosed to governmental agencies, provided that: (A) this exception shall only apply to disclosure to such agencies, and not to any other person or entity; and (B) the disclosing Party shall (1) provide the other Party with prompt notice (including copies of all written requests or demands) of any proposed disclosure to any governmental agency, with an explanation of the Confidential Information of the other Party to be disclosed; and (2) cooperate in any lawful effort by the other Party to prevent, limit or restrict disclosure of its Confidential Information to such government agency. 7.2 Remedy. If either Party breaches any of its obligations with respect to this ARTICLE 7, or if such a breach is likely to occur, the other Party shall be entitled to seek equitable relief, including specific performance or an injunction, in addition to any other rights or remedies, including money damages, provided by law, without posting a bond. 7.3 Agreement Terms. Subject to SECTION 15.2 and the exclusions set forth in SECTION 7.1(B), the Parties shall treat the terms and conditions of this Agreement as Confidential Information; provided, however, after written notification to the other Party, each Party may disclose the existence of this Agreement and the material terms and conditions of this Agreement under circumstances that reasonably ensure the confidentiality thereof to: (a) any government or regulatory authorities, including without limitation the United States Security and Exchange Commission pursuant to applicable law (excluding, to the extent legally permitted, disclosure of financial terms in any publicly available versions of information so disclosed), (b) its legal representatives, advisors and prospective investors, and (c) to Connetics' licensors to the extent required for compliance with Connetics' obligations under third party licenses. 7.4 Return of Confidential Information. Within ten (10) days following the termination of any agreement between the Parties with respect to the subject matter the receiving Party agrees to promptly return all tangible items relating to the Confidential Information, Page 16 including all written material, photographs, models, compounds, compositions and the like made available or supplied by the disclosing Party to receiving Party, and all copies thereof, upon the request of the disclosing Party, except such records as may be required to be kept for FDA or other government regulatory compliance. Recipient further agrees to identify those persons to whom the Confidential Information that is the subject of this Agreement was disclosed upon request of the disclosing Party. 7.5 Inside Information. Miza understands that Confidential Information may constitute "inside information" of Connetics for securities purposes and agrees to refrain from any unlawful disclosure, trading or other improper use of such information. ARTICLE 8 ASSIGNMENT 8.1 Assumption of CCL Obligations. Miza expressly assumes all obligations of CCL under the Original Agreement up to the date of this Agreement. 8.2 Assignment by Miza. Miza shall have no right or authority to assign the Agreement or any portion of the Agreement, to sublet or subcontract in whole or in part, or otherwise delegate its performance under this Agreement, without Connetics' prior written consent, which consent shall not unreasonably be withheld. Notwithstanding the foregoing, nothing in this Agreement shall prohibit Miza from assigning this Agreement to any Affiliate of Miza that may from time to time own or operate the facility at Runcorn, England. No such assignment shall relieve Miza of primary liability for the performance of its obligations under this Agreement. 8.3 Assignment by Connetics. Connetics may assign this Agreement, provided prior reasonable written notice has been given to Miza. Miza agrees that if this Agreement is assigned to any third party or Affiliate, all the terms and conditions of this Agreement shall obtain between such third party or Affiliate and Miza with the same force and effect as if said Agreement had been made with such third party or Affiliate in the first instance, provided that no such assignment shall relieve Connetics of primary liability for the due performance of this Agreement. ARTICLE 9 FORCE MAJEURE Neither Party shall be considered in default of performance of its obligations under this Agreement, except any obligation under this Agreement to make payments when due, to the extent that performance of such obligations is delayed by contingencies or causes beyond the reasonable control and not caused by the negligence or willful misconduct of such Party, including but not limited to strike, fire, flood, earthquake, windstorm, governmental acts or orders or restrictions, or force majeure, to the extent that the failure to perform is beyond the reasonable control of the nonperforming Party, if the Party affected shall give prompt written notice of any such cause to the other Party. The Party giving such notice shall thereupon be Page 17 excused from such of its obligations under this Agreement for the period of time that it is so disabled. ARTICLE 10 TERM AND TERMINATION 10.1 Term. Subject to the rights to terminate sooner under this Article 10, this Agreement shall expire on [*] (the "Initial Term"), after which this Agreement may be renewed for successive periods of one or more calendar year(s) each, any such agreement to renew to be confirmed in writing by the Parties. At the end of the Initial Term, this Agreement shall automatically renew for successive one-year periods under the same terms and conditions set forth under this Agreement (or such other terms agreed in writing by the Parties) until terminated in writing in accordance with the provisions of this Agreement. 10.2 Termination for Material Breach. Either Party may terminate this Agreement upon written notice if the other Party has breached any of its material obligations under this Agreement, and (a) such breach has not been cured within 60 days after written notice of the breach, or (b) if a plan, reasonably acceptable to the non-breaching Party, is not implemented to cure as soon as practicable after notice of the breach 10.3 Termination upon Insolvency. Either Party may, in addition to any other remedies available to it by law or in equity, terminate this Agreement immediately by written notice to the other Party upon (i) the filing by the other Party of a voluntary petition in bankruptcy or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition or readjustment of its debts or any other relief under any bankruptcy, insolvency, reorganization or other similar act or law of any jurisdiction now or hereafter in effect, (ii) the filing against such other Party of an involuntary petition in bankruptcy which is not dismissed within 60 days, (iii) the appointment of a receiver or trustee of any of such other Party's property if such appointment is not vacated within 60 days, (iv) the adjudication of such other Party as insolvent, or (v) the assignment of such other Party's property for the benefit of its creditors. 10.4 Termination for Force Majeure. Either Party may terminate this Agreement upon thirty (30) days written prior notice in the event of the other Party's inability to substantially perform its obligations under this Agreement for more than one hundred eighty (180) days due to an event of force majeure as described in SECTION 9.1. 10.5 Termination without Cause. Either Party may terminate this Agreement upon twelve (12) months' written notice. 10.6 Accrued Liabilities. The termination of this Agreement for any reason shall not discharge either Party's liability for obligations incurred under this Agreement and amounts unpaid at the time of such termination. Connetics shall be liable to pay Miza for any Product, work in progress and materials purchased by Miza to fulfill its obligations under this - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 18 Agreement, provided however that Miza shall make all Commercially Reasonable Efforts to mitigate its damages under such circumstances. 10.7 Return and Disposition of Property. Upon the termination of this Agreement for any reason, each Party shall return to the other Party or its designee all of such other Party's property, including, but not limited to, all proprietary information, in its possession. To the extent required by law or to comply with such Party's continuing obligations under this Agreement, each Party may keep a single copy of tangible property belonging to the other Party. Miza shall dispose of all bulk active ingredients, raw materials, containers, and Labeling not necessary to complete work in progress at Connetics' expense in accordance with Connetics' reasonable instructions. ARTICLE 11 INDEMNIFICATION 11.1 Indemnification by Miza. Miza shall indemnify Connetics, its Affiliates and their respective directors, officers, employees and agents, and defend and save each of them harmless, from and against any and all suits, losses, actions, demands, investigations, claims, damages, liabilities, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) (collectively, "LOSSES") brought by third parties arising from or occurring as a result of: (a) a nonconformity of Product with the warranties under SECTIONS 5.1 and 5.2 except for any damages attributable to the negligence of Connetics, its employees or agents; (b) Miza's failure to comply with the Product Specifications; (c) any willful act or omission or negligence of Miza or its employees, agents or other contractors in the manufacturing and testing of the Product; or (d) Miza's failure to comply with the Act and the regulations under the Act in the production of Product. (e) any breach (or alleged breach) by Miza of its representations, warranties, or material obligations under this Agreement; (f) the manufacture or the storage of the Product prior to the date of shipment of Product to Connetics by Miza or its Affiliates, all except to the extent caused by the negligence or willful misconduct of Connetics or its officers, agents, employees, Affiliates, sublicensees or customers. 11.2 Indemnification by Connetics. Connetics shall indemnify Miza, its Affiliates and their respective directors, officers, employees and agents, and defend and save each of them Page 19 harmless, from and against any and all Losses brought by third parties arising from or occurring as a result of: (a) failure by Connetics to comply with the Food Drug and Cosmetic Act and the regulations under the Act; (b) the handling or other use of the Product including by end users; (c) any willful act or omission or negligence of Connetics or its employees, agents or other contractors (d) any breach (or alleged breach) by Connetics of its representations, warranties, or material obligations under this Agreement; (e) the manufacture by Connetics or third parties contracted by Connetics, or the storage of Product after the date of shipment of Product to Connetics by Miza or its Affiliates, all except to the extent caused by the negligence or willful misconduct of Miza or its officers, agents, employees, Affiliates, sublicensees or customers. 11.3 Process. If either Party expects to seek indemnification from the other pursuant to the provisions of this ARTICLE 11, it shall promptly give notice to the indemnifying Party of any such Claim. The indemnifying Party shall have the right to control the defense of such Claim and the indemnified Party shall cooperate with the indemnifying Party in the defense of such Claim. No settlement or compromise of any Claim shall be binding on a Party hereto without its prior written consent. 11.4 Patent Indemnification. Connetics shall indemnify and hold Miza and its employees, servants and agents harmless from and against any and all claims, demands, actions, suits, losses, damages, costs, expenses (including reasonable attorney's fees), and liabilities which Miza may incur, suffer or be required to pay by reason of any patent infringement suit brought against Miza because of Miza's manufacture of Product to the extent that the alleged infringement arose out of or related to Miza's use of processes, compounds or other products the rights to which are claimed to be owned by Connetics. ARTICLE 12 AUDIT RIGHTS; INSPECTIONS 12.1 Inspections. Connetics, upon its own discretion and at its own cost and expense, is entitled during ordinary business hours and at dates acceptable to Miza to inspect or to have inspected, Miza's plant and procedures used for manufacture and storage of the Products. Such inspections shall not materially disrupt Miza's business for other customers. Page 20 12.2 Books and Records. Miza agrees to maintain and cause its Affiliates to maintain complete and accurate books and records of account so as to enable Connetics to verify amounts due and payable under this Agreement. In particular, Miza shall preserve and maintain all such records and accounts required for audit for a period of four (4) years after the calendar quarter for which the record applies. 12.3 Audit of Miza's Records. During the term of this Agreement, Connetics shall have the right upon four (4) weeks notice to Miza to have an independent certified public accountant, selected by Connetics and reasonably acceptable to Miza, audit Miza's records relating specifically to the Products during normal business hours; provided, however, that such audit shall not take place more frequently than once a year and shall not cover records for more than the preceding four (4) years. 12.4 Government Inspection. Miza agrees to advise Connetics by telephone and facsimile immediately of any proposed or announced visit or inspection, and as soon as possible but in any case within twenty-four (24) hours of any unannounced visit or inspection, by any Regulatory Authority of any facilities used by Miza in the performance of its obligations under this Agreement. Miza shall provide Connetics with a reasonable description of each such visit or inspection promptly (but in no event later than five [5] calendar days) thereafter, and with copies of any letters, reports or other documents (including Form 483's) issued by any such authorities that relate to the Products, or such facilities, processes or procedures. Connetics may review Miza's responses to any such reports and communications, and if practicable, and, insofar as timely received, Connetics' reasonable views and requests shall be taken into account prior to submission of such reports and communications to the relevant Regulatory Authority. ARTICLE 13 DISPUTES 13.1 Arbitration. If the Parties' are unable to settle amicably any claim, dispute, controversy or difference arising out of or in relation to or in connection with this Agreement or for breach of this Agreement through consultation and negotiation in good faith and a spirit of mutual cooperation, then the dispute shall be resolved through binding arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In any arbitration pursuant to this section, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members, one being appointed by each Party and the third being appointed by mutual agreement of the two arbitrators appointed by the parties. The place of arbitration shall be [*]. 13.2 UN Convention Not Applicable. The Parties expressly disclaim application to this Agreement of the United Nations Convention on Contracts for the International Sale of Goods, and agree that it shall not govern or apply to this Agreement or its performance or construction. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 21 13.3 Governing Law. This Agreement shall be governed, controlled, interpreted and defined by and under the laws of [*] and the United States without regard to that body of law known as conflicts of law; provided that issues relating to the validity and enforceability of patents shall be governed by the laws of the jurisdiction by which such patent was granted. ARTICLE 14 NOTICES Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail, return receipt requested; by facsimile; by internationally recognized courier; or by personal delivery, in each case addressed to the other Party at the address below or at such other address for which such Party gives notice under this Agreement. Connetics Corporation Attn: President and Chief Executive Officer 3400 West Bayshore Road Palo Alto, California 94303 U.S.A. If to Miza, at: Miza Pharmaceuticals (UK) Limited 6 Seymour Court, Manor Park Runcorn, Cheshire, UK WA7 1SY Attn: President and CEO Such notice shall be deemed to have been given when delivered or, if delivery is not accomplished by some fault of the addressee, when tendered. Either Party may change its address for notice by delivering a written notice of the new address in accordance with this Article. ARTICLE 15 NATURE OF RELATIONSHIP 15.1 No Agency; Independent Contractor. Each Party is and shall be considered to be an independent contractor of the other Party. Neither Party shall be the legal agent of the other for any purpose whatsoever and neither Party has any right or authority to make or underwrite any promise, warranty or representation, to execute any contract or otherwise to assume any obligation or responsibility in the name of or on behalf of the other Party. Neither Party shall be bound by or liable to any third persons for any act or for any obligation or debt incurred by the other toward such third party, except to the extent specifically agreed to in writing by the Party so to be bound. - ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 22 15.2 Public Statements. The Parties shall endeavor to provide courtesy copies of any public announcements concerning the relationship created by this Agreement. Neither Party shall make any representations concerning the other without the prior consent from the other Party. Notwithstanding the foregoing, each Party consents to references to it in reports or documents or other disclosures sent to stockholders or filed with or submitted to any governmental authority or stock exchange. Except for such disclosure as is required by applicable law and/or stock exchange regulation, neither Party shall make any announcement, news release, public statement, publication or presentation relating to the existence of this Agreement or the arrangements referred to in this Agreement without first notifying the other Party. ARTICLE 16 ADDITIONAL PROVISIONS 16.1 Headings. Article and section headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 16.2 Partial Invalidity. If any provision of this Agreement is held to be invalid, illegal, or unenforceable by a court of competent jurisdiction, then: (a) such provision will be deemed amended to conform to applicable laws of such jurisdiction so as to be valid and enforceable, or, if it cannot be so amended without materially altering the intention of the parties, it will be stricken; (b) the validity, legality and enforceability of such provision will not in any way be affected or impaired thereby in any other jurisdiction; and (c) the remaining provisions of this Agreement will remain in full force and effect. 16.3 Survival. The covenants and agreements set forth in ARTICLES 7, 11 AND 13 shall survive any termination or expiration of this Agreement and remain in full force and effect regardless of the cause of termination. 16.4 Entire Agreement. This Agreement, including the attached Exhibits, constitutes the entire agreement of the Parties with respect to the subject matter, and supersedes all prior or contemporaneous understandings or agreements, whether written or oral, between Connetics and Miza with respect to such subject matter. In particular, (a) this Agreement specifically supercedes and replaces the Original Agreement in its entirety, and (b) in the event of conflict between this Agreement and the terms and conditions of any purchase order or other form generated in performance of this Agreement, then the terms and conditions of this Agreement shall control, and (c) in the event of conflict between this Agreement and the Quality Agreement (as it may be amended from time to time), the terms of this Agreement shall govern all aspects of the relationship between the Parties except that the Quality Agreement shall govern with respect to quality matters. 16.5 Waivers. No waiver of any term or condition of this Agreement shall be valid or binding on either Party unless agreed in writing by the Party to be charged. The failure of either Party to enforce at any time, or for any period of time, any provision of Page 23 this Agreement, or the failure to require at any time performance by the other Party of any provision of this Agreement, shall in no way be construed to be a present or future waiver of such provisions or of the right of such Party thereafter to enforce that provision or other provisions of this Agreement. 16.6 Assignment, Binding Effect. Neither Party shall assign this Agreement, by operation of law or otherwise, except to an Affiliate of such Party, without the prior written consent of the other Party, which consent shall not be unreasonably withheld, and any such attempted assignment without such consent shall be void. No assignment shall be effective until the assignee shall have unconditionally assumed in writing all of the assignor's obligations under this Agreement and a written notice of such assignment is given to all the other Parties. When duly assigned in accordance with the foregoing, this Agreement shall be binding upon and inure to the benefit of the assignee. 16.7 Amendment. No amendment or modification of this Agreement shall be valid or binding upon the Parties unless made in writing and signed by the duly authorized representatives of both Parties. 16.8 Taxes. Miza and Connetics shall cooperate in seeking and/or applying for all available waivers, exclusions, exemptions, rebates and the like with respect to potential taxes (e.g., VAT) on the Products. 16.9 Conflicting Terms and Conditions. All sales under this Agreement shall be subject to the provisions of this Agreement (including, without limitation, the Product Specifications) and shall not be subject to the terms and conditions contained on any purchase order of Connetics or confirmation of Miza, except insofar as any such purchase order or confirmation establishes: (a) the quantity and form of any Product ordered; (b) the shipment date; (c) the shipment routes and destinations; or (d) the carrier. 16.10 Binding Effect and Assignment. Each Party agrees that its rights and obligations under this Agreement may not be transferred or assigned directly or indirectly, except as follows: (a) either Party may transfer or assign this Agreement to an Affiliate of such Party which agrees in writing to undertake the obligations under this Agreement, (b) either Party may transfer or assign this Agreement in connection with the sale of all or substantially all of the assigning Party's related business, and (c) either Party may transfer or assign this Agreement to a non-Affiliate Third Party with the prior written consent of the other Party, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall be binding upon and inure to, the benefit of the Parties, their successors and assigns. Any attempted assignment contrary to the provisions of this SECTION 16.10 shall be deemed ineffective, and either Party shall have the right to terminate this Agreement, with the effect described in SECTION 10.2. Page 24 16.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their respective duly authorized officers as of the date first written above. Connetics Corporation Miza Pharmaceuticals (UK) Limited By: /s/ By: /s/ ------------------------------ ---------------------------------- Title: President & CEO Title: President & CEO -------------------------- ------------------------------ By: /s/ --------------------------------- Title: Executive Vice President Worldwide Business Development Page 25 LIST OF EXHIBITS EXHIBIT A PRODUCTS EXHIBIT B PRICING EXHIBIT C QUALITY AGREEMENT EXHIBIT D FORM OF DEVELOPMENT AGREEMENTS EXHIBIT A PRODUCTS
MARKETED NAME NDC CODE SIZE Luxiq 63032-021-00 100 gram can Olux 63032-031-00 100 gram can Luxiq 63032-021-50 50 gram can Olux 63032-031-50 50 gram can
EXHIBIT B Pricing
MARKETED NAME SIZE PRICE PER UNIT* Luxiq 100 gram can [*] Olux 100 gram can [*] Luxiq 50 gram can [*] Olux 50 gram can [*]
- ------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EXHIBIT C QUALITY AGREEMENT Quality and Technical Agreement between Connetics Corporation and Miza Pharmaceuticals (UK) Limited, dated July 26, 2001 EX-10.2 4 f75747ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 INDUSTRIAL BUILDING LEASE 3294 WEST BAYSHORE, PALO ALTO, CALIFORNIA TABLE OF CONTENTS PARTIES.................................................................................... 1 PREMISES................................................................................... 1 TERM....................................................................................... 1 HOLDOVER................................................................................... 2 RENT....................................................................................... 2 LATE CHARGES............................................................................... 3 SECURITY DEPOSIT........................................................................... 4 USE OF PREMISES............................................................................ 4 COMPLIANCE WITH LAW........................................................................ 5 ALTERATIONS AND ADDITIONS.................................................................. 6 LIENS...................................................................................... 7 REPAIRS AND MAINTENANCE.................................................................... 7 ASSIGNMENT AND SUBLETTING.................................................................. 8 HOLD HARMLESS.............................................................................. 11 RELEASE FROM LIABILITY/WAIVER OF SUBROGATION............................................... 12 INSURANCE.................................................................................. 13 SERVICES AND UTILITIES..................................................................... 13 PERSONAL PROPERTY TAXES.................................................................... 14 RULES AND REGULATIONS...................................................................... 14 ENTRY BY LANDLORD.......................................................................... 14 DESTRUCTION/RECONSTRUCTION................................................................. 14 DEFAULT.................................................................................... 16 REMEDIES................................................................................... 17 EMINENT DOMAIN............................................................................. 18 ESTOPPEL CERTIFICATE....................................................................... 18 SUBORDINATION/NONDISTURBANCE .............................................................. 18 PARKING.................................................................................... 19 AUTHORITY.................................................................................. 19 GENERAL PROVISIONS......................................................................... 20 BROKERS.................................................................................... 22 NONRECOURSE OBLIGATIONS.................................................................... 22 RIGHT OF FIRST OFFER TO LEASE ADJACENT PREMISES............................................ 22 LIST OF EXHIBITS........................................................................... 23
INDUSTRIAL BUILDING LEASE PARTIES 1. THIS LEASE, dated for reference purposes only, December 16, 1999, is made by and between West Bayshore Associates, a general partnership, Sigrid S. Banks, Frank Lee Crist, Jr., Allen W. Koering and George O. McKee (herein collectively "Landlord") and Respond.com, Inc., a Delaware corporation (herein "Tenant"). PREMISES 2. Landlord leases to Tenant and Tenant hires from Landlord for the term, at the rental and upon the conditions in this Industrial Building Lease (herein "Lease") a portion of the real property commonly known as 3290 West Bayshore Avenue, Palo Alto, Santa Clara County, California as shown on Exhibit A, attached hereto, and incorporated herein by this reference. The Premises consists of approximately Twenty Eight Thousand Nine Hundred Sixty Eight (28,968) rentable square feet in a building which contains approximately Forty Two Thousand Four Hundred Thirty Two (42,432) rentable square feet. Tenant shall also have the non exclusive right to use the walkways and parking lot adjacent to the building, and the land on which they are situated. It is further understood and agreed that the area set forth in this Paragraph 2 is approximate only and that neither party shall have a claim against the other for any variance between the actual area and that set forth above. TERM 3. (a) The term of the Lease shall be a period of sixty (60) months (plus the partial month, if any, immediately following the Commencement Date defined below) and expiring (unless sooner terminated as provided herein) at midnight on the last day of the sixtieth (60th) full calendar month thereafter, herein called the "lease term" or "term". (b) The Commencement Date shall be three (3) months after the Early Possession Date defined below. (c) Landlord shall deliver the Premises to Tenant on January 1, 2000 (the "Early Possession Date") with the Landlord work items described in Section 13 (a) completed. Notwithstanding said Early Possession Date, if for any reason beyond Landlord's control, Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, but in such case Tenant shall not be obligated to pay rent until the Commencement Date; provided however, that if Landlord shall not have delivered possession of the Premises by April 1, 2000, Tenant may, at Tenant's option, by written notice to Landlord within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder. (d) Landlord shall permit Tenant to occupy the Premises or a portion thereof on the Early Possession Date for the purpose of installing Tenant's improvements, fixtures, furniture and equipment, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the commencement or termination dates set forth above. No Base Rent shall be due from Tenant, however, commencing on the date of commencement of Tenant's construction of its tenant improvements, Tenant shall pay to Landlord or directly to the utility service providers, the cost of the utilities utilized in the Premises. 1 (e) Landlord shall give Tenant five (5) days prior written notice of the date on which Landlord intends to deliver possession of the Premises and Tenant shall deliver to Landlord the insurance certificates required by Paragraph 17 hereof prior to taking possession of the Premises. 4. Intentionally omitted. HOLDOVER 5. (a) Holding over after the expiration of the term of this Lease, or any oral extension thereof, with the consent of Landlord, shall be a tenancy from month to month, and the rentals and additional rentals upon the covenants, conditions, limitations, and agreements are subject to the exceptions and reservations contained in this Lease. The rental rate is to be the same rate last charged hereunder. (b) If Tenant remains in possession without Landlord's consent after termination of the Lease, by lapse of time or otherwise, Tenant shall pay Landlord for each day of such retention one-fifteenth (1/15th) of the amount of the monthly rental for the last month prior to such termination and Tenant shall also pay all costs, expenses and damages sustained by Landlord by reason of such retention, including, without limitation, claims made by a succeeding tenant resulting from Tenant's failure to surrender the Premises. RENT 6. (a) Tenant agrees to pay Landlord as Base Rent for the Premises during the term of this Lease, the following sums per month:
Months Base Rent/Month - ------ --------------- 01-12 (and partial month, if any) $86,904.00/28,968=$300
During the next twelve (12) month period of the term hereof, as well as for each subsequent twelve (12) month period of the term hereof, the monthly Base Rent shall be adjusted ("CPI Adjustment") as herein provided. The CPI for December, 1999 shall be utilized for purposes of calculating the increase in the monthly Base Rent for the twelve (12) month period beginning on the first day of the thirteenth (13th) full calendar month of the term and each twelve month period thereafter. The monthly Base Rent for the twelve (12) month period beginning on the first day of the thirteenth (13th) full calendar month of the term shall be the same as the first twelve (12) months of the term hereof, PLUS the percentage of increase in the CPI as hereinafter set forth. The CPI shall be the Consumer Price Index for all Urban Consumers (All Items) for San Francisco-Oakland San Jose, California. The monthly Base Rent shall be increased by the same percentage increase as the percentage increase in the CPI from December, 1999 to December of the year prior to the adjustment date. In no event, however, shall the monthly Base Rent be increased more than 7% nor less than 4% from year to year. When the annual adjusted monthly Base Rent is determined, Landlord shall give Tenant written notice to that effect indicating how the adjusted monthly Base Rent was computed. Pending receipt of such notice from the Landlord as to the new monthly Base Rent, Tenant shall continue to pay the monthly Base Rent in effect during the preceding twelve (12) month period. The Base Rent for the first month of the term shall be payable on execution of this lease. All other rents shall be payable in advance and due on the first day of each and every month of the term of this Lease. 2 Rent for any period which is for less than one (1) month shall be a prorated portion of the monthly installment stated herein, based upon a thirty (30) day month. Said rental shall be paid, without prior notice or demand and without deduction or offset, except as otherwise provided herein, in lawful money of the United States of America at 800 El Camino Real, Suite 175, Menlo Park, California 94025 or at such other place as Landlord may from time to time designate in writing. (b) As additional rent, Tenant shall pay to Landlord all real property taxes and assessments (general and special), in lieu real property taxes, rent taxes, gross receipt taxes (whether assessed against Landlord or assessed against Tenant and collected by Landlord, or both) attributable to the Premises. Such taxes shall be pro-rated if the commencement and termination dates of this Lease do not correspond to the tax year. As additional rent, Tenant shall pay to Landlord the cost of the insurance policy or policies referred to in Paragraph 17(b) attributable to the Premises, pro-rated if the commencement and termination dates of this Lease do not correspond to the periods covered by such policy or policies. The above additional rents shall be due and payable fifteen (15) business days after Landlord has furnished Tenant with a photocopy of the tax bill or premium notice, as the case may be, but in no event earlier than fifteen (15) calendar days prior to delinquency. Landlord will furnish Tenant such photocopies promptly upon receipt of the tax bill or premium notice, as the case may be. Any sums not paid on or before such due date shall bear interest as the highest rate allowed by law or the penalties that are imposed by the taxing authorities for delinquent payments, whichever is greater. Additionally, if Tenant fails to pay such additional rent on or before the due dates described above, Landlord reserves the right to require Tenant to pay the delinquent payment and future payments of these additional rents by cashier's checks or other certified funds. As further additional rent Tenant shall reimburse Landlord for the cost of maintenance of the landscaping on a monthly basis. Other maintenance provided for the Premises by Landlord, including, but not limited to, the parking lot sweeping and maintenance shall be billed to Tenant on a monthly basis as such expenses are incurred by Landlord and Tenant shall pay such additional rent to Landlord with its Base Rent. Tenant shall pay to Landlord as additional rent, such amounts expended by Landlord for parking lot paving, sealing and striping as billed by Landlord to Tenant when such work is actually completed, which work shall be carried out by Landlord from time to time as necessary, but not more often than every three years. Such work shall also be done prior to the commencement date of this Lease (at no cost to Tenant). It is understood that this is a "Triple Net" lease and all direct expenses, including a management fee equal to 2% of the Base Rent, incurred in connection with the operation of the Premises shall be charged to Tenant as additional rent. It is agreed that any taxes, insurance, and maintenance expenses for the building of which the Premises are a part shall be allocated on the basis of rentable square feet and that Tenant's prorata share of such expenses is 68.27%. Landlord reserves the right to reallocate any item of the maintenance expenses on a equitable basis should Tenant or any other tenant of the building cause such expense to be disproportionate to Tenant's or any other tenant's prorata share of the rentable square feet. LATE CHARGES 7. Tenant agrees that all Base Rent not received by Landlord 3 within five (5) calendar days of the due date shall be considered delinquent and agrees to pay a late charge equal to ten percent (10%) of the delinquent payment within five (5) business days after receipt of written notice of non receipt of payment. Rent mailed and bearing a U. S. Postal Service postmark of the third (3rd) of a month shall not be considered delinquent no matter when received. Additionally, any delinquent payments not paid within thirty (30) days of the original due date shall bear interest at the lower of the maximum rate then allowed by law or two points over the reference rate (prime rate) charged by the San Francisco Main Branch of the Bank of America. SECURITY DEPOSIT 8. (a) Tenant shall deposit with Landlord the total sum of Three Hundred Four Thousand Nine Hundred Ninety Six and 16/100 Dollars ($304,996.16) on execution of this Lease. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any reasonable amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to any interest on said deposit. As additional security, Tenant shall deliver to the Landlord on execution of this Lease an irrevocable Letter of Credit issued by a reputable financial institution reasonably satisfactory to Landlord in the amount of Nine Hundred Fourteen Thousand Nine Hundred Eighty Eight and 49/100 Dollars ($914,988.49). So long as Tenant is not then in default and has not been in material default during the previous twelve (12) months, has its stock publicly traded, has positive net operating income determined in accordance with generally accepted accounted principals for six (6) consecutive quarters, and its net worth computed in accordance with generally accepted accounting principles has exceeded $30,000,000.00 for six (6) consecutive quarters, said letter of credit may be cancelled. Additionally, said letter of credit may be reduced by One Hundred One Thousand Six Hundred Sixty Five and 39/100 Dollars ($101,665.39) at the end of every month during the last twelve (12) month period of the term of this Lease provided that Tenant is not then in default and has not been in material default during the previous twelve (12) months. (b) If Landlord's interest in this Lease is terminated, Landlord shall transfer said deposit to Landlord's successor in interest and Landlord's successor shall agree in writing to be bound by the terms of this Lease. USE OF PREMISES 9. (a) Tenant shall use the Premises for general office use and other legally related uses and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. (b) Tenant shall not knowingly do or permit anything to 4 be done in or about the Premises nor bring or keep anything therein which will: (i) increase the existing rate of or affect any fire or other insurance upon the building or any of its contents unless Tenant agrees to pay such increased rate, or (ii) cause cancellation of any insurance policy covering said building or any part thereof or any of its contents. Tenant shall not knowingly use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not knowingly commit or suffer to be committed any waste in or upon the Premises. Tenant shall not place any loads upon the floors, walls, or roof which endanger the structure or place any harmful liquids or other toxic waste in the drainage system of the Premises or in any other place in on or about the Premises. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building, except as approved by the City of Palo Alto. COMPLIANCE WITH LAW 10. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, and governmental rules, regulations or requirements, pertaining to the specific use of the Premises by Tenant, including, but not limited to, those relating to the protection of the environment and storage and disposal of toxic materials, now in force or which may hereafter be in force except that Tenant shall not be required to make structural changes unrelated to or affected by Tenant's improvements or acts. In the event any alterations made by Tenant, when combined with alterations made by others in the building in which the Premises are located, triggers a requirement to upgrade the building to comply with new flood control ordinances and codes, Tenant shall be responsible for the costs of such upgrades in the same proportion as the value of Tenant's permits bears to the total value of all permits issued by the City of Palo Alto for all the alterations which trigger the requirement up to a maximum of Forty Five Thousand Dollars ($45,000.00). Except as set forth herein, Landlord shall be responsible for all costs and expenses necessary to comply with all laws, statutes, ordinances, and governmental rules, regulations or requirements where the need for such compliance was not caused by Tenant's specific use of the Premises or Tenant's acts in connection with the Premises. Notwithstanding the above, Landlord shall not be responsible for any costs or expenses necessary to comply with the Americans with Disabilities Act other than as the same relates to the parking lot, landscaping areas, walkways, driveways, sidewalks, and other areas of the Premises outside of the building in which the Premises are located. Except as set forth above, Tenant shall be responsible for compliance with the Americans with Disabilities Act, including, but not limited to, all exterior doors. Tenant shall also comply with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises, excluding structural changes not required or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as 5 between the Landlord and Tenant. ALTERATIONS AND ADDITIONS 11. (a) Landlord shall provide to Tenant an allowance of Seven Hundred Twenty Four Thousand Two Hundred and no/100 Dollars ($724,200.00) for Tenant's initial tenant improvements. Tenant shall be responsible for the design, permits, and cost of construction of its tenant improvements, including all governmental permits and approvals, including any flood proofing measures as may be required, subject to the provision set forth above in Paragraph 10. Landlord and Tenant shall agree on said tenant improvements prior to obtaining estimates or bids. If the estimated cost of the work approved by Landlord exceeds the allowance, Tenant shall pay the excess amount to the contractor on a prorata basis as the costs are incurred. For example if, the estimated costs are 1-1/2 times the allowance, Tenant shall pay 1/3rd of each billing and Landlord shall pay 2/3rds of each billing out of the allowance. Tenant shall not make or allow any further alterations, additions or improvements of or to the Premises without Landlord's prior written consent, which consent shall not unreasonably be withheld or delayed. Landlord's consent shall not be required for any non structural tenant improvements costing less than Twenty Five Thousand Dollars ($25,000.00). Any equipment installed by Tenant, other than normally roof mounted equipment, shall be contained within the building. Any such alterations, additions or improvements, including, but not limited to, wall covering, paneling and built-in cabinet work, but excepting movable furniture, and trade fixtures, shall become a part of the realty, shall belong to Landlord and shall be surrendered with the Premises at expiration or termination of the Lease. If Landlord consents to any such alterations, additions or improvements by Tenant, they shall be made by Tenant at Tenant's sole cost and expense, and any contractor or person selected by Tenant to perform the work shall first be approved of, in writing, by Landlord, which approval shall not be unreasonably withheld. Landlord further reserves the right to require all plans for structural improvements and alterations to be reasonably approved by its structural engineer. No such work shall be allowed to commence until three (3) days have elapsed from the date of Landlord's consent. One Hundred Eighty (180) days prior to the termination of this Lease, Tenant shall provide to Landlord a complete and accurate set of "As Built" tenant improvement drawings showing any material alterations and additions made by Tenant, including, but not limited to floor plan drawings, HVAC drawings, electrical drawings, sprinkler system drawings, and plumbing system drawings. Upon expiration, or sooner termination, of the term hereof, Tenant shall, upon written demand by Landlord given at least one hundred twenty (120) days prior to the end of the term, promptly remove any alterations, additions or improvements made by Tenant and designated by Landlord to be removed at the time Landlord gave its written consent to the installation of such alterations, additions or improvements. If no such consent was required, Landlord shall have the right to direct Tenant to remove same provided Landlord gives written notice to Tenant within the above the above time period. Such removal and repair of any damage to the Premises caused by such removal shall be at Tenant's sole cost and expense. (b) Tenant shall not place or permit to be placed in, upon, or about the Premises any signs not approved by the City of Palo Alto or other governing authority. Tenant shall not place, or permit to be placed, upon the Premises, any signs, advertisements or notices without the written consent of Landlord first had and obtained. Landlord agrees to allow Tenant to place one sign on the building, subject, however, to Landlord's approval, which approval shall not be unreasonably withheld or delayed. Any sign so placed on the Premises shall be placed upon the understanding and agreement that Tenant shall remove same at the termination of the tenancy created herein and repair any damage or injury to the Premises 6 caused thereby, and if not so removed by Tenant then Landlord may have the same so removed at Tenant's expense. Tenant shall have the right to use the lower portion of the existing or new monument sign(s) at its own expense, subject to approval by the City of Palo Alto or other governing authority. LIENS 12. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. In the event a mechanic's lien is recorded against the Premises and is not removed within ten (10) business days after Landlord gives written notice to Tenant to cause the removal of same, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half (1-1/2) times the estimated cost of any improvements, additions, or alterations by Tenant, to insure Landlord against liability for mechanic's and materialmen's liens and to insure completion of the work if the estimated cost exceeds Twenty Five Thousand Dollars ($25,000.00). Landlord shall also have the right to post and maintain on the Premises such notices of nonresponsibility as may be required by law to protect Landlord's rights herein. REPAIRS AND MAINTENANCE 13. (a) Landlord shall reroof the building, add five (5) exterior windows, replace one (1) roll-up door with a glass storefront, paint the exterior of the building, add awnings, refurbish the landscaping, and provide a new HVAC system for the Premises prior to the commencement of this Lease at Landlord's sole cost and expense. Landlord's responsibility for the HVAC system is limited to that portion of the system from the roof up (structural support units and utility hook ups) and Tenant is responsible for that portion of the system from the roof down (distribution and zoning). Said HVAC system shall have sufficient capacity for general office space typical of an R & D building. Any excess capacity required by Tenant for special uses such as a computer room shall be the responsibility of Tenant. Additionally as set forth in Paragraph 6 (b), Landlord shall repave, seal, and stripe the parking lot at Landlord's expense prior to the commencement date of this Lease. Landlord shall also deliver the Premises to Tenant at the commencement of this Lease with all building systems, including, but not limited to electrical, plumbing, and exterior lighting systems, but excluding the restrooms (which are being delivered in their "As-Is" condition), in good working condition. Landlord shall assign to Tenant any and all warranties given to Landlord related to any new construction Landlord provides and any mechanical, electrical, plumbing, HVAC, and roof warranties it may have. Except as to the work which Landlord is required to perform pursuant to Section 13 (b) below and elsewhere in this Lease, during the Term of this Lease Tenant shall at Tenant's sole cost and expense, keep the Premises and every part thereof including, but not limited to, exterior painting, roof covering (unless it is not feasible to repair the existing roof covering and a new roof covering is required and Tenant has not penetrated the roof causing the damage requiring replacement) the glazing, plumbing, and electrical systems in good condition and repair, unless caused by a casualty required to be insured pursuant to Paragraph 17 hereof or by any inherent defects. Tenant further agrees to maintain the Premises and make minor repairs thereto in conformance with any reasonable requirements of any institutional lender of Landlord. Should Tenant at any time during the term of this Lease or any renewal or extension of the term fail to maintain the Premises or make any repairs or replacements as required herein after reasonable written notice to Tenant, Landlord may, at its option, enter the Premises and perform such maintenance or make such repairs or replacements for the 7 account of Tenant. Any sums expended by Landlord in so doing, together with interest thereon at the highest rate allowed by law from the date expended by Landlord until the date repaid by Tenant, shall be due and payable by Tenant to Landlord within fifteen (15) business days after demand of Landlord. Tenant shall upon the expiration or sooner termination of this Lease surrender the Premises to the Landlord in good condition, damage from causes beyond the reasonable control of the Tenant and normal wear and tear excepted. Unless specifically provided herein or in an addendum to this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the building in which the Premises are located except as specifically herein set forth. (b) As set forth in Paragraph 6(b), Landlord shall cause the roof, landscaping, and parking lot to be maintained and Tenant shall reimburse Landlord as provided therein. Additionally, notwithstanding the above provisions of Paragraph 13(a), Landlord shall maintain the structural integrity of the building, including, without limitation, the foundation, exterior walls, and roof (except as provided in Paragraph 13(a)) in which the Premises are located, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs to the extent not covered by insurance. Landlord will replace the roof covering if repairs to said covering are no longer economically feasible in the judgment of roofing experts provided that Tenant has not penetrated the roof causing the replacement or done any other acts causing such necessary replacement. Tenant shall give Landlord written notice of any required repairs or maintenance. Landlord shall not be liable for any failure to repair or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice. Except as provided in Paragraph 22 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements to any portion of the building or the Premises or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense or terminate this Lease under any law, statute or ordinance now or hereafter in effect for Landlord's failure to maintain the Premises, provided Landlord commences or arranges for commencement of the required repairs or maintenance within five (5) business days of receipt of Tenant's written notice; provided, however, that Tenant may make emergency repairs if necessary to prevent a disruption in Tenant's business or imminent danger to its employees property. In no event shall Tenant's costs of such repairs or maintenance be deducted or offset from any amounts due from Tenant to Landlord unless Landlord fails to make such repairs for an unreasonable period of time following written notice. Landlord shall reimburse Tenant for the reasonable costs of such repairs or maintenance within fifteen (15) days after receipt of copies of invoices for same. ASSIGNMENT AND SUBLETTING 14. (a) Tenant shall not, voluntarily or by operation of law, assign, or transfer Tenant's interest under this Lease or in the Premises nor sublease all or any part of the Premises or allow any other person or entity (except Tenant's employees, agents and invitees) to occupy or use all or any part of the Premises without the prior written consent of Landlord. Landlord's consent shall not be unreasonably withheld or delayed. Landlord shall respond in writing ten (10) business days after receipt of the last information required under subparagraph 14(d). Without in any way limiting Landlord's right to refuse to give consent under this Paragraph 14, 8 Landlord's refusal to give consent shall not be deemed unreasonably withheld if: (i) The character, reputation and financial responsibility of the proposed new Tenant is not reasonably satisfactory in Landlord's judgment. In connection with any such assignment Tenant shall deliver to Landlord certified financial statements of Tenant and the new proposed tenant showing their then financial condition as required hereunder. (ii) The character and reputation of the proposed sub-tenant is not reasonably satisfactory in Landlord's judgment. (iii) The proposed new tenant or sub-tenant fails to agree in writing to assume and be bound by all the terms and provisions of this Lease. (b) Additionally, as a condition to Landlord's consent to an assignment or subletting it is hereby agreed that there shall be paid to Landlord the following: To the extent any rental or other payments under such sublease or assignment exceed the Base Rental payments payable under the terms of this Lease, after Tenant has recovered any assignment or subleasing commissions, and other costs of assigning or subleasing, and tenant improvement costs related to such assignment or subletting (with all of such commissions and costs being amortized of the length of the sublease or remainder of the lease term, as appropriate), 75% of such excess shall be paid to Landlord as such rental or other rental payments under such sublease or assignment become due and payable under the terms of the assignment or subletting. (c) If Tenant hereunder is a corporation or at any time becomes a corporation which, under the then current laws of the State of California, is not deemed a public corporation, or is an unincorporated association or partnership, the transfer, or assignment directly or indirectly of any stock or interest in such corporation, association or partnership in the aggregate in excess of forty-nine percent (49%) during the term hereof shall be deemed an assignment within the meaning and provisions of Paragraph 14. Notwithstanding the above, the issuance of stock in connection with venture capital financing or the transfer of stock between and among venture capitalists shall not be deemed such an assignment. Tenant shall immediately report in writing any such transfer or assignment of any stock or interest to Landlord. (d) In the event Tenant proposes to transfer, assign, or sublet any of Tenant's interests herein or enter into any license or concession agreement or effectuate any change of ownership, Tenant shall thirty (30) days prior to the proposed transaction supply to Landlord the following in writing: (i) The name and address of the proposed assignee, transferee, or sub-lessee. (ii) All details as to the proposed assignment, subletting or change of ownership including without limitation all of the terms and conditions thereof including all sums or considerations to be paid. (iii) A financial statement certified by an officer dated within thirty (30) days of the date of notification of the proposed transferee, assignee, sub-lessee, or the person or persons or entities which will be involved in the proposed or change of ownership. Tenant shall also submit to Landlord with the above information a fee of One Thousand ($1,000.00) Dollars or 5% of the current 9 monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease (which 5% shall not exceed $5,000.00), whichever is greater, as consideration for Landlord's considering and processing said request. Within ten (10) days of any assignment or sub-lease Tenant shall deliver to Landlord true, correct and complete copies of all agreements, assignments, subleases and material documents pertaining thereto, including any sales agreements. Anything contained in this Paragraph 14 to the contrary notwithstanding, no transfer, assignment, sub-letting of any of Tenant's interests herein shall be effective unless all of the above provisions are complied with within the time limits provided. (e) Notwithstanding any other provision contained in this Lease, in the event Tenant desires to assign this Lease or sublet the entire Premises, Landlord shall have the right, exercisable in Landlord's sole discretion by written notice to Tenant within ten (10) days after receipt of Tenant's written notice and the information described in subparagraph 14(d) above, to terminate this Lease as of the date Tenant proposes to have its assignment or subletting be effective and enter into a new lease with a third party, including, but not limited to, Tenant's proposed assignee or sub-lessee, without any liability to Tenant. On such termination, this Lease shall be null and void as of the termination date set forth in Landlord's notice or as of the date Tenant actually surrenders possession of the Premises to Landlord, whichever is later; provided however, each party shall be liable to the other for any liabilities accrued up to the later of the above dates. Landlord acknowledges that Tenant will not occupy the entire Premises on the Commencement Date and therefore agrees that the provisions of this subparagraph 14. (e) shall not apply to any initial subletting of space within the Premises that Tenant has not previously occupied itself. (f) Any additional documentation reasonably required by Landlord shall be prepared and executed by Tenant and its assignee or sub-lessee or transferee as part of the assignment or sub-letting or transfer before it shall be effected. (g) Anything contained herein to the contrary notwithstanding, regardless of whether or not Landlord's consent is required, no sub-letting or assignment or transfer of any of Tenant's interests hereunder shall be deemed to release Tenant or any guarantor from any liability under the terms of this Lease, nor, after any such consent shall Landlord's failure to give Tenant or guarantor notice of default under any of the terms and conditions of this Lease release Tenant or guarantor from any liability hereunder. A consent to one assignment, subletting, occupation or use shall not be deemed a consent to any subsequent assignment, subletting, occupation or use. Any such purported assignment, subletting, or permission to occupy or use without such consent from Landlord shall be void and shall, at the option of Landlord, constitute a default under this Lease. (h) Anything contained herein to the contrary notwithstanding, Tenant shall have the right to assign this Lease in its entirety or to sublease all or any portions of the Premises without the consent of Landlord to: (a) any entity resulting from a merger or consolidation with Tenant, or (b) any subsidiary or affiliate of Tenant, or (c) any entity which acquires substantially all of the assets of Tenant; provided the new entity has a net worth equal to or greater than Tenant and the new entity's use in one that is allowable pursuant to the provisions of this Lease ("Permitted Corporate Transfers"). 10 HOLD HARMLESS 15. (a) Tenant shall indemnify Landlord against and hold Landlord and Landlord's property harmless from any and all liability, claims, loss, damages, or expense, including reasonable counsel fees and costs, arising by reason of the death or injury of any person, including Tenant or any person who is an employee, agent, or customer of Tenant, or by reason of damage to or destruction of any property, including property owned by Tenant or any person who is an employee, agent, or customer of Tenant, caused or allegedly caused by: (i) Any cause whatsoever while such person or property is in or on said Premises; (ii) Some condition of said Premises for which Tenant is responsible or for which Landlord is responsible and Landlord has not been given notice thereof and reasonable time to correct; (iii) Some act or omission on said Premises of Tenant or any person in or on said Premises with the permission of Tenant; (iv) Any matter connected with Tenant's occupation and use of said Premises; or (v) Tenant's use, storage, or disposal of hazardous wastes, toxic substances, or related materials ("hazardous materials") on or about the Premises. Hazardous materials shall include, but not be limited to, substances defined as "hazardous substances", "hazardous materials", or "toxic substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; the Hazardous Materials Transportation Act; the Resource Conservation and Recovery Act; and those substances defined as "hazardous wastes" in Section 25117 of the California Health and Safety Code; in the regulations adopted and publications promulgated pursuant to such laws; and in the Hazardous Material Storage Ordinance of the City of Palo Alto, if any, as amended. Tenant's indemnity with respect to hazardous materials shall include, without limitation: (i) any damage, liability, fine, penalty, punitive damages, cost or expenses arising from or out of any claim, action, suit or proceeding for personal injury (including, without limitation, sickness, disease or death), tangible property damage, nuisance, pollution, contamination, leak, spill, release or other effect on the environment; and (ii) the cost of any required or necessary investigation, repair clean-up, or treatment of the Premises and/or the Property, and the preparation and implementation of any closure, disposal, remedial or other required action in connection with the Premises and/or the Property. The indemnity of Tenant provided above shall survive the expiration or earlier termination of this Lease but shall not apply to any damage: (1) covered by insurance; (2) caused by a defect in the Premises; (3) caused by the willful misconduct, negligence or omission of Landlord, its agents or employees; or (4) caused by a breach of this Lease by Landlord. (b) Tenant hereby assumes all risk of damage to property or injury to persons in or upon the Premises, from any cause other than the following: (1) the willful misconduct, negligence or omission of Landlord, its agents or employees; (2) defects in the 11 Premises; and (3) a breach of this Lease by Landlord and Tenant hereby waives all claims in respect thereof against Landlord. Landlord and its agents shall not be liable for any damage to property entrusted to employees of the building, nor for loss or damage to any property by theft or otherwise, nor from any injury to or damage to persons or property resulting from any cause whatsoever, unless caused by or due to the following: (1) the willful misconduct, negligence or omission of Landlord, its agents or employees; (2) defects in the Premises; and (3) a breach of this Lease by Landlord. (c) If any action or proceeding is brought against Landlord by reason of any claim for which Tenant has an obligation to indemnify Landlord as set forth above, Tenant shall defend Landlord therein at Tenant's expense by counsel reasonably satisfactory to Landlord. (d) Landlord and its agents and employees shall not be liable for interference with the light or other incorporeal hereditaments, or loss of business by Tenant unless the same is caused by the gross negligence or willful misconduct of Landlord, its agents, or employees. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the buildings or of alleged defects in the building, fixtures or equipment, provided that Tenant has actual knowledge of such matters. (e) To the best knowledge of Landlord, as of the date of this Lease there are no hazardous materials on, in, under or about the Premises or the property on which the Premises are located (the "Property"). Except with respect to hazardous materials released on or under the Premises or Property by Tenant or adjacent or nearby landowners, tenants, or occupants, Landlord shall indemnify, defend with counsel reasonably satisfactory to Tenant, protect and hold Tenant harmless from and against any and all liabilities, claims, losses, damages, or expense, including reasonable counsel fees and costs, arising out of, or based upon: (i) the presence of any hazardous materials on, under, in or about the Premises or the Property, unless such hazardous materials are released onto the Premises or Property by Tenant or, after the date of this Lease, by adjacent or nearby landowners, tenants, or occupants; or (ii) the violation or alleged violation by Landlord of any laws, regulations, orders, or permits relating to the use, generation, manufacture, installation, release, discharge, storage or disposal of hazardous materials on, under, in or about the Premises or the Property. This indemnity shall include, without limitation: (i) any damage, liability, fine, penalty, punitive damages, cost or expenses arising from or out of any claim, action, suit or proceeding for personal injury (including, without limitation, sickness, disease or death), tangible property damage, nuisance, pollution, contamination, leak, spill, release or other effect on the environment; and (ii) the cost of any required or necessary investigation, repair clean-up, or treatment of the Premises and/or the Property, and the preparation and implementation of any closure, disposal, remedial or other required action in connection with the Premises and/or the Property, except for hazardous materials released on the Premises or the Property by Tenant. Landlord shall also indemnify Tenant and hold Tenant harmless from any and all liability, claims, loss, damages, or expense, including reasonable counsel fees and costs, arising by reason of the gross negligence of Landlord, its agents, or employees, a material breach of Landlord's obligations under this Lease, and Landlord's breach of any representation and/or warranty contained herein. Landlord's indemnity obligations hereunder shall survive the expiration or earlier termination of this Lease. RELEASE FROM LIABILITY/WAIVER OF SUBROGATION 16. Landlord and Tenant hereby mutually waive their respective 12 rights of recovery against each other for any loss of the type required by this Lease to be insured against. Landlord and Tenant hereby agree to obtain any special endorsements (including waivers of subrogation) required by their insurance carriers in order to effectuate the foregoing mutual release. INSURANCE 17. (a) Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against claims occurring in, on or about the Premises and all areas appurtenant thereto. The limit of said insurance shall not, however, limit the liability of Tenant hereunder. Tenant may carry said insurance under a blanket policy, providing however, said insurance by Tenant shall name Landlord as an additional insured. If Tenant fails to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, but at the expense of Tenant. Tenant shall deliver to Landlord prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amount of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancelable or subject to reduction of coverage except after fifteen (15) days prior written notice to Landlord. The minimum acceptable amount of comprehensive liability insurance is $3,000,000 per accident, and property damage in an amount of not less than $1,000,000.00 per occurrence. The above stated minimum levels of coverage are subject to amendment by Landlord upon ninety (90) days written notice should the economic conditions, in the discretion of Landlord, warrant adjustment thereof. Tenant may, at its own expense, also insure or self insure its inventory, fixtures, equipment, furniture, and its own tenant improvements installed after the initial tenant improvements. Tenant acknowledges that Landlord shall have no responsibility for insuring such items. (b) Landlord shall carry and maintain, during the entire term, including extensions hereof, fire and all risk insurance insuring the Premises and the initial tenant improvements for their full replacement cost. Said insurance policy or policies shall cover at least the following risks: fire, smoke damage, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, malicious mischief, vandalism, aircraft, earthquake (if available at commercially reasonable rates) and sprinkler leakage. Except for earthquake coverage, the maximum deductible shall be Five Thousand Dollars ($5,000.00). The deductible on any earthquake coverage shall not exceed 10% of the face amount of the earthquake coverage. Additionally, such policy or policies shall have a loss of rents (12 months) endorsement; provided however, if any institutional lender of Landlord allows a lower amount, said coverage may be reduced to such lower amount. Tenant shall pay to Landlord as additional rent, its prorata share of the cost of such policy or policies pursuant to Paragraph 6(b). Any loss payable under such insurance shall be payable to Landlord and any Lender holding an encumbrance on the Premises. The proceeds from any such policy or policies for damages to the Premises shall be used for the repair of the Premises except as set forth in Paragraph 22. (c) Insurance required under this Paragraph 17 shall be in companies rated A, Class VII or better in "Best's Insurance Guide". SERVICES AND UTILITIES 18. (a) Tenant shall provide and pay for its own utilities, janitorial services, trash removal and all other material and services it desires in connection with its occupation and use of the Premises. Tenant acknowledges that it understands that Landlord is not obligated to provide services, materials or supplies, including 13 but not limited to janitorial services or maintenance services, except as otherwise provided herein, to Tenant. (b) Tenant shall not connect with electric current except through approved electrical outlets in the Premises or such additional electrical outlets as may be installed as part of Tenant's improvements by a licensed electrical contractor in conformance with the then applicable building codes, any apparatus or device, for the purpose of using electric current. PERSONAL PROPERTY TAXES 19. Tenant shall pay before delinquency, all taxes levied or assessed and which become payable during the term hereof upon all Tenant's leasehold improvements, equipment, furniture, fixtures and personal property located in the Premises, except that which has been paid for by Landlord and is the standard of the building. If any of the Tenant's leasehold improvements, equipment, furniture, fixtures and personal property are assessed and taxed with the building, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. RULES AND REGULATIONS 20. Landlord shall have the right to promulgate any reasonable rules or regulations for the use and occupation of the Premises so long as they are uniform for all buildings that are part of the project in which the Premises are located and are not in conflict with the terms and provisions of this Lease. ENTRY BY LANDLORD 21. (a) Landlord reserves the right, subject to Tenant's security procedures, to enter the Premises at any time to inspect the Premises, to submit the Premises to prospective purchasers or tenants, to post notice of non-responsibility, and to alter, improve, maintain or repair the Premises that Landlord deems necessary or desirable, all without abatement of rent. Except in the cases of emergencies and to post notices of nonresponsibility, Landlord shall give telephone notice twenty four (24) hours in advance, unless Tenant waives such notice, prior to entering the Premises. Landlord may erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, but shall not block the entrance to the Premises nor interfere with Tenant's business or parking, except as reasonably required for the particular activity by Landlord. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, interference with quiet enjoyment, or other damage arising out of Landlord's entry on the Premises as provided in this paragraph, except damage, if any, resulting from the willful misconduct or negligence of Landlord or its authorized representatives. (b) In an emergency, Landlord shall have the right to use any means which Landlord deems reasonably necessary to obtain entry to the Premises without liability to Tenant, except for any failure to exercise due care for Tenant's property. Any such entry to the Premises by Landlord shall not be construed or deemed to be forcible or unlawful entry into or a detainer of the Premises or an eviction of Tenant from the Premises or any portion thereof. DESTRUCTION/RECONSTRUCTION 22. (a) If ten percent (10%) or less of the Premises is damaged by a peril not required to be insured pursuant to Paragraph 17 (b), Landlord shall promptly and diligently proceed to repair and 14 restore the same to substantially the same condition as existed prior to such damage or destruction; provided, however, that should such damage be caused by the willful act, negligent act or omission of any duty with respect to the same by Tenant, its agents, servants, employees or invitees, Tenant, and not Landlord, shall be so obligated to repair and restore. If the Premises are damaged by a peril not required to be insured pursuant to the provisions of Paragraph 17 (b) rendering more than ten percent (10%) of the Premises unusable for the conduct of Tenant's business, Landlord may, upon written notice, given to Tenant within thirty (30) days after the occurrence of such damage, elect to terminate this Lease (the effective date of such termination shall be as mutually agreed upon and if the parties fail to agree on such a date, the effective termination date shall be the date of the casualty); provided, however, Tenant may, within thirty (30) days after receipt of such notice, elect to make any required repairs and/or restoration, in which event this Lease shall remain in full force and effect, and Tenant shall thereafter diligently proceed with such repairs and/or restoration. (b) If the Premises are damaged or destroyed by fire or other peril required to be insured pursuant to Paragraph 17 (b), Landlord shall promptly and diligently proceed to repair and restore the same to substantially the same condition as existed prior to such damage or destruction; provided, however, that Landlord shall not be obligated to repair and restore until either the insurer acknowledges that the loss is covered by insurance and sufficient proceeds of such insurance (plus the applicable deductible which Landlord shall contribute) are available to Landlord to pay the costs (including a reasonable allowance for contractor's profit and overhead not to exceed ten percent (10%) of the repairs and/or restoration) or the Tenant agrees to pay such costs to Landlord. If the existing laws do not permit the restoration, either party can terminate this Lease immediately by giving notice to the other party. If the cost of restoration exceeds the amount of insurance proceeds (plus the applicable deductible), and Tenant has not agreed to pay the cost of repairs and/or restoration to Landlord, either party can elect to terminate this Lease by giving notice to the other within fifteen (15) days after determining that the restoration cost will exceed the insurance proceeds (plus the applicable deductible). In the case of destruction to the Premises, if Landlord elects to terminate this Lease, Tenant, within fifteen (15) days after receiving Landlord's notice to terminate, may agree to pay to Landlord the difference between the amount of insurance proceeds (plus the applicable deductible which Landlord shall pay) and the cost of restoration in which case Landlord shall restore the Premises. Landlord shall give Tenant satisfactory evidence that all sums contributed by Tenant as provided in this paragraph 22 have been expended by Landlord in paying the cost of restoration. If Landlord elects to terminate this Lease and Tenant does not elect to contribute toward the cost of restoration as provided herein, this Lease shall terminate, and all of the proceeds of the insurance shall be paid to Landlord; provided, however, that in the event such proceeds shall include any amounts paid for damage to or destruction of property belonging to Tenant, Landlord shall within ten (10) days of receipt, pay over such amounts to Tenant in the following manner: Out of the gross proceeds paid by insurance to Landlord, Landlord shall retain an amount equivalent to the current replacement value of the building and improvements owned by Landlord; after Landlord has been so paid from the insurance proceeds, if there remains a balance of such insurance proceeds which represent payment for damages to or destruction of improvements added by Tenant after the date of Tenant's occupancy of the Premises, then, to the extent of any remaining balance of the insurance proceeds and to the extent of Tenant's direct costs of 15 making such added improvements, Landlord shall be obligated to pay over to Tenant such remaining insurance proceeds. During any such repairs or restoration described in this Paragraph 22, rent shall abate from the date of the casualty in proportion to the area of the Premises rendered unusable by such damage or destruction; provided, however, that Landlord shall have no liability by reason of injury to or interference with Tenant's business or property arising from the making of any repairs, alterations, or improvements in or to any portion of the Premises or in or to fixtures, appurtenances and equipment therein; and further provided, that if the damage was caused by the willful act or gross negligence of Tenant, its agents or employees, there shall be no such abatement of rent unless covered by the loss of rents provisions of the insurance policy Landlord is required to carry and maintain pursuant to the provisions of Paragraph 17 (b). If the Premises are destroyed or substantially damaged within one year of the end of this Lease term or extensions thereof, or if Landlord cannot restore the Premises within One Hundred Twenty (120) days from the date of the damage or destruction, Landlord or Tenant shall each have the option to cancel the Lease effective as of the date of the damage or destruction or such later date as the electing party sets forth in its written notice of cancellation, and all insurance proceeds on the real property shall be paid to Landlord. In the event Tenant shall have paid all or a portion of the costs of any repairs or restorations for which Landlord subsequently receives insurance proceeds, then to the extent that such insurance proceeds and Tenant's payments exceed Landlord's cost of repair and/or restoration, Landlord shall reimburse Tenant to the extent of Tenant's payments. (c) Landlord shall not be required to repair any damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor coverings, partitions, or any other property installed in the Premises by Tenant. DEFAULT 23. Occurrence of any of the following events shall constitute a default and breach of this Lease by Tenant. (a) The abandonment of the Premises by Tenant without giving prior written notice to Landlord and providing adequate security for the Premises. (b) The failure by Tenant to make any payment of rent or any other payment required of Tenant hereunder, as and when due, if such failure continues for three (3) days after written notice thereof by Landlord to Tenant. (c) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease other than described in Paragraph 23(b) above, where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided however, that if Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors or the filing by or against Tenant of a petition to have Tenant adjudged bankrupt, or a petition, or reorganization or arrangement under any law relating to bankruptcy (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of 16 Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. (e) The failure of Tenant or any employee or agent of Tenant to occupy the Premises for ten (10) consecutive business days unless Tenant gives prior written notice to Landlord, provides a security service for the Premises and keeps all utility systems for the Premises functioning and in good operation. REMEDIES 24. Landlord shall have the following remedies if Tenant commits a default. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law. (a) Landlord may continue this Lease in full force and effect, as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect rent when due. During the period Tenant is in default, Landlord may enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, reasonable broker's commissions and expenses of remodeling the Premises required by the reletting. Reletting may be for a period shorter or longer than the remaining term of the Lease. Tenant shall pay to Landlord the rent due under this Lease as and when due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this Paragraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate Tenant's right to possession of the Premises. If Tenant obtains Landlord's consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability. Landlord's consent to a proposed assignment or subletting shall not be unreasonably withheld. (b) Landlord may terminate Tenant's right to possession of the Premises at any time. No act by Landlord other than giving written notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord has the right to recover from Tenant: (i) The worth, at the time of the award of the unpaid rent that had been earned at the time of termination of this Lease; (ii) The worth, at the time of the award of the amount by which the unpaid rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; (iii) The worth, at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (iv) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in 17 the ordinary course of things would be likely to result therefrom. "The worth, at the time of the award", as used in (i) and (ii) of this subparagraph, is to be computed by allowing interest at the maximum rate allowed by law. "The worth, at the time of the award", as referred to in (iii) of this subparagraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). EMINENT DOMAIN 25. If more than twenty-five percent (25%) of the building which is part the Premises, or twenty-five percent (25%) of the parking spaces and Landlord does not provide suitable replacement parking spaces within a reasonable distance from the building, is taken or appropriated by any public or quasi-public authority under powers of eminent domain, either party hereto shall have the right at its option, to terminate this Lease effective as of the date of taking. If less than twenty-five percent (25%) building or twenty-five percent (25%) of the parking spaces, is taken (or neither party elects to terminate as above provided if more than twenty-five percent (25%) of the building a twenty five percent (25%) of the parking spaces is taken), the Lease shall continue, and the rental thereafter to be paid shall continue, but the rental thereafter to be paid shall be equitably reduced. Whether or not the Lease is terminated by reason of any such taking or appropriation, Landlord shall be entitled to the entire award and compensation for the taking which is paid or made by the public or quasi-public agency, and Tenant shall have no claim against said award; except for amounts paid directly to Tenant for its moving expenses, interruption to its business or damage to personal property or trade fixtures. A voluntary sale by Landlord to any public body or agency having the power of eminent domain, either under threat of condemnation or while the condemnation proceedings are pending shall be deemed to be a taking under the power of eminent domain for the purposes of this Paragraph. ESTOPPEL CERTIFICATE 26. Either party shall at any time and from time to time, upon not less than ten (10) business days prior written notice from the other, execute, acknowledge, and deliver to the other party a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modifications and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to the party's knowledge, any uncured defaults on the part of the other party hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser, encumbrancer, assignee, or subtenant of all or any portion of the Premises or any purchaser of Tenant's assets. SUBORDINATION/NONDISTURBANCE 27. Tenant agrees upon request of Landlord and the holder of any deed of trust affecting the Premises to subordinate this Lease and its rights hereunder to the lien of any mortgage, deed of trust or other encumbrance, together with any conditions, renewals, extensions, or replacements thereof, now or hereafter placed, charged or enforced against the Landlord's interest in this Lease and the leasehold estate thereby created, the Premises or the land, building or improvements included therein, and deliver (but without cost to Tenant) at any time and from time to time upon demand by Landlord such documents as may be required to effectuate such 18 subordination; provided, however, that Tenant shall not be required to effectuate such subordination, nor shall Landlord be authorized to effect such subordination on behalf of Tenant, unless the mortgagee or trustee named in such mortgage, deed of trust or other encumbrance shall first agree in writing, for the benefit of Tenant, that so long as Tenant is not in default under any of the provisions, covenants or conditions of this Lease on the part of Tenant to be kept and performed, that neither this Lease nor any of the rights of Tenant hereunder shall be terminated or modified or be subject to termination or modification, nor shall Tenant's possession of the Premises be disturbed or interfered with, by any trustee's sale or by an action or proceeding to foreclose said mortgage, deed of trust or other encumbrance. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord covering the Premises, the Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. In the event that the mortgagee or beneficiary of any such mortgage or deed of trust elects to have this Lease prior to its mortgage or deed of trust, then and in such event upon such mortgagee or beneficiary giving written notice to Tenant to that effect, this Lease shall be deemed prior to such mortgage or deed of trust whether this Lease is dated or recorded prior to or subsequent to the date of recordation of such mortgage or deed of trust. Landlord agrees to obtain for Tenant within 30 days after full execution of this Lease with a non-disturbance agreement from any and all lenders holding a mortgage, Deed of Trust, or other encumbrance on the Premises. Said non-disturbance agreement shall be reasonably acceptable to Tenant and contain the same provisions described above. PARKING 28. Tenant shall have the right to use the parking facilities provided by Landlord in common with other tenants of the building in which the Premises are located subject to any recorded easements. Landlord shall have no obligation to police the use of the parking facilities, however. Tenant acknowledges that the parking facilities are shared with the occupants of the building adjacent to the Premises. Landlord reserves the right to allocate and/or reserve parking spaces for all tenants and agrees that Tenant shall be entitled to the use of at least 4 parking spaces for each 1000 square feet of rentable space. AUTHORITY 29. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms except as it may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws or by other laws affecting creditors' or lessors' rights generally and except as to the availability of equitable relief. Partnership Authority. If Tenant is a partnership, each individual executing this Lease on behalf of said partnership represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said partnership and that this Lease is binding upon said partnership and its partners in accordance with its terms. 19 GENERAL PROVISIONS 30. General Provisions. (a) Clauses, plats and riders, if any, signed by the Landlord and the Tenant and endorsed on or affixed to this Lease are a part hereof. (b) The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other terms, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of the acceptance of such rent. (c) All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by the Landlord to the Tenant shall be sufficient if delivered in person or sent by United States Mail, certified or registered, postage prepaid, addressed to the Tenant at the Premises or to such other place as Tenant may from time to time designate in a written notice to the Landlord. All notices and demands by the Tenant to the Landlord shall be sufficient if delivered in person, by receipted courier service, or sent by United States Mail, postage prepaid, addressed to the Landlord at 800 El Camino Real, Suite 175, Menlo Park, California 94025 or to such other person or place as the Landlord may from time to time designate in a notice to the Tenant. Any such notice is effective at the time of delivery or if mailed, two (2) business days after mailing. (d) If there be more than one Tenant, the obligations hereunder imposed upon Tenants shall be joint and several. (e) The paragraph titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (f) Time is of the essence of this Lease and each of its provisions in which performance is a factor. (g) The time in which any act provided by this Lease is to be done is computed by excluding the first day and including the last, unless the last day is a Saturday, Sunday, or holiday, and then it is also excluded. The term "holiday" shall mean all holidays specified in Sections 6700 and 6701 of the Government Code. (h) The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (i) Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the prior written consent of the other party. (j) Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. (k) This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in 20 this Lease. No prior agreements or understandings pertaining to any such matters shall be effective for any purpose. No provision of this Lease shall be amended or added except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (l) If either party shall be delayed or prevented from the performance of any act required by this Lease by reason of acts of God, strikes, lockouts, labor troubles, inability to procure materials, restrictive governmental laws, or regulations or other cause, without fault and beyond the reasonable control of the party obligated (financial inability excepted), performance of such act shall be excused for the period of the delay; and the period for the performance of any such act shall be extended for a period equivalent for the period of such delay, provided, however, nothing in this section shall excuse Tenant from the prompt payment of any rental or other charge required of Tenant except as may be expressly provided elsewhere in this Lease. (m) In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorney's fees. (n) In the event of any sale of the building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale if the purchaser, at such sale or any subsequent sale of the Premises shall have assumed and agreed in writing to carry out all of the covenants and obligations of the Landlord under this Lease. (o) Tenant shall not use the name of the building or of the development in which the building is situated for any purpose other than as an address of the business to be conducted by the Tenant in the Premises. (p) Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (q) No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (r) This Lease shall be governed by the laws of the State of California. (s) Tenant shall not conduct any auction, on or at the Premises or building without Landlord's prior written consent. (t) Nothing contained in this Lease shall be deemed or construed by the parties or by any third person to create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, and neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties shall be deemed to create any relationship between Landlord and Tenant other than the relationship of Landlord and Tenant. (u) (i) The language in all parts of this Lease shall in all cases be simply construed according to its fair meaning and not strictly for or against Landlord or Tenant. Unless otherwise provided in this Lease, or unless the context otherwise requires, 21 the following definitions and rules of construction shall apply to this Lease. (ii) In this Lease the neuter gender includes the feminine and masculine, and the singular number includes the plural, and the word "person" includes corporation, partnership, firm, or association wherever the context so requires. (iii) "Shall", "will", and "agrees" are mandatory, "may" is permissive. (iv) All references to the Term of this Lease or the Lease Term shall include any extensions of such Term. (v) Parties shall include the Landlord and Tenant named in this Lease. (vi) As used herein, the word "sublessee" shall mean and include, in addition to a sublessee and subtenant, a licensee, concessionaire, or other occupant or user of any portion of the leased Premises or buildings or improvements thereon. (vii) Whenever the written consent of a party is required under any provision of this Lease, such consent shall not be unreasonably withheld or unduly delayed. BROKERS 31. Each party warrants to the other that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease other than Cornish & Carey Commercial (who represents Landlord and Tenant) and Renault & Handley (who represents Landlord) and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and hold the other harmless from any cost, expense, or liability for any compensation, commissions, or charges claimed by any other broker or agent who alleges he is owed a compensation through it. Landlord agrees to pay any commissions owed to the above named brokers and shall hold Tenant harmless from any cost, expense, or liability therefor. NONRECOURSE OBLIGATIONS 32. It is expressly agreed by Tenant that all obligations of Landlord accruing under this Lease (except for Landlord's obligations with respect to the Security Deposit) shall not constitute personal obligations of Landlord or of any other persons or entities constituting Landlord and Tenant shall not seek recourse against any such entities, persons, or any of their assets for satisfaction of any liabilities with respect to this Lease. In the event Tenant obtains a judgment against Landlord resulting from any default or claim arising under this Lease, such judgment may only be satisfied from Landlord's interest in this Lease and the Premises, and no other real, personal, or mixed property of Landlord or of any other persons or entities comprising Landlord, wherever situated, shall be subject to levy to satisfy such judgment. RIGHT OF FIRST OFFER TO LEASE ADJACENT PREMISES 33. Provided that Tenant is not in material default hereunder and shall have made all previous rental payments in a timely manner (no more than one (1) in each calendar year being delinquent), should the adjacent space of approximately Thirteen Thousand Four Hundred sixty Four (13,464) rentable square feet in the same building in which the Premises are located become available for lease either due to the fact that the tenant of that space, Connetics Corporation, 22 did not elect to renew its term or, if it had elected to renew its term, said renewal term expired, or, the lease with said tenant is terminated in any manner, Tenant shall have a right of first offer to lease said space. Landlord shall give Tenant written notice of the availability of said space together with the proposed Base Rent and other terms. Tenant shall have fifteen (15) days from receipt of Landlord's notice to give written notice that it desires to rent said space on the terms and conditions contained in Landlord's written notice. Should Tenant fail to so notify Landlord, Landlord shall be free to proceed to lease the Premises to a third party on such terms and conditions as may be negotiated, without regard to the terms and conditions offered to Tenant. Tenant's right of first offer shall only apply to the first time said space becomes available. The right of first offer granted to Tenant herein is personal, and Tenant shall have no right to assign or transfer the right of first offer either separately from or together with a transfer of Tenant's interest in this Lease other than in connection with a Permitted Corporate Transfer. LIST OF EXHIBITS 34. The following is a complete list of the documents attached hereto and made a part of this Lease:
EXHIBIT DESCRIPTION A Floor Plan
The parties hereto have executed this Lease and on the dates specified immediately adjacent to their respective signatures. LANDLORD: West Bayshore Associates, a general partnership By /s/ [SIGNATURE ILLEGIBLE] Date 12/16/99 ------------------------------ -------------------------------- /s/ SIGRID S. BANKS - --------------------------------- Sigrid S. Banks /s/ FRANK LEE CRIST, JR. - --------------------------------- Frank Lee Crist, Jr. /s/ ALLEN W. KOERING - --------------------------------- Allen W. Koering /s/ GEORGE O. MCKEE - --------------------------------- George O. McKee TENANT: Respond.com, Inc., a Delaware corporation By /s/ [SIGNATURE ILLEGIBLE] Date 12/16/99 -------------------------------- -------------------------------- Title By Date -------------------------------- -------------------------------- Title 23 EX-10.3 5 f75747ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 Assignment and Assumption of Lease This Assignment and Assumption of Lease ("Assignment") is made this 21st day of August, 2001 by and between Respond.com, Inc., a Delaware corporation ("Assignor"), and Connetics Corporation, a Delaware corporation ("Assignee"). RECITALS A. Assignor is tenant under that certain Industrial Building Lease dated December 16, 1999, by and between West Bayshore Associates, a general partnership, Sigrid S. Banks, Frank Lee Crist, Jr., Allen W. Koering, and George O. McKee (collectively, "Landlord"), and Assignor (as modified from time to time, the "Lease"), respecting certain premises (the "Premises") within the building located at 3290 West Bayshore Avenue, Palo Alto, California, a true copy of which, together with any and all addenda and amendments, is attached hereto as Exhibit A and made a part hereof; B. Assignor now desires to assign the Lease to Assignee and Assignee desires to assume Assignor's obligations under the Lease; AGREEMENT Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Assignor and Assignee agree as follows: 1. Effective Date of Assignment. Upon the mutual execution of this Assignment ("Effective Date"), Assignor shall give possession of the Premises to Assignee. Assignor and Assignee hereby acknowledge and agree that upon the Effective Date, Assignor shall be entitled to remain in a portion of the Premises pursuant to that certain Sublease dated as of the date hereof by and between Assignee, as sublandlord, and Assignor, as sublessee ("3290 Sublease") attached as Exhibit B hereto and a made a part hereof, upon the terms and conditions of the 3290 Sublease. 2. Assignment of Lease. Assignor does hereby assign and transfer to Assignee all of Assignor's right, title, and interest in and to the Lease and the Premises. Assignor hereby agrees to indemnify Assignee against and hold Assignee harmless from any and all cost, liability, loss, damage or expense, including, without limitation, attorneys' fees, arising out of Assignor's breach of the Lease prior to the Effective Date. 3. Assumption of Obligations. Assignee does hereby accept this assignment and, for the benefit of Assignor and Landlord, 1 expressly assumes and agrees to keep, perform, and fulfill all the terms, covenants, conditions, and obligations, required to be kept, performed, and fulfilled by Assignor as tenant under the Lease, including the making of all payments due to or payable on behalf of Landlord under the Lease when due and payable. Assignee hereby agrees to indemnify Assignor and hold Assignor harmless from any and all cost, liability, loss, damage or expense, including, without limitation, attorneys' fees, arising out of or relating to events occurring after the Effective Date and rising out of Assignee's obligations as tenant under the Lease or Assignee's breach of the Lease. If Assignee breaches its obligations under the Lease and Assignor (i) pays rent to Landlord, and/or (ii) fulfills any of Assignee's other obligations in order to prevent Assignee from being in default, Assignee immediately shall reimburse Assignor for the amount of rent or costs expended by Assignor together with interest on those sums at the highest rate allowed by law. 4. Security Deposit. The parties acknowledge that Landlord currently holds a security deposit in the amount of $304,996.16 in cash and $914,988.49 in the form of a letter of credit (collectively, the "Security Deposit") pursuant to the terms of the Lease. Assignee hereby agrees to deliver to Landlord prior to the Effective Date a replacement letter of credit in such amount and form as agreed to by and between Assignee and Landlord, which shall replace the letter of credit currently held by Landlord under the Lease. Upon (i) approval and acceptance by Landlord of the replacement letter of credit, and (ii) return of the original letter of credit currently held by Landlord to Assignor, Assignor shall release all claims to the Security Deposit, which thereafter will be held by Landlord for the benefit of Assignee, subject to the provisions of the Lease. It is expressly agreed by the parties hereto that return of the letter of credit currently held by Landlord to Assignor as specified in this Section 4 shall be a condition precedent to the effectiveness of this Assignment and of Assignor's obligations hereunder. 5. Access to Server Room. Pursuant to that certain Sublease dated as of the date hereof by and between Assignee, as sublessor, and Assignor, as sublessee ("3294 Sublease") attached as Exhibit C hereto and made a part hereof, Assignor will be subleasing a portion of the premises located at 3294 West Bayshore Avenue, Palo Alto ("3294 Premises"), which premises are located adjacent to the Premises, all upon the terms and conditions of the 3294 Sublease. A portion of the Premises is comprised of Assignor's IT data center as shown as cross-hatched on Exhibit D attached hereto and a made a part hereof ("Assignor's Server Room"). During the term of the 3294 Sublease, Assignee hereby grants to Assignor the sole right of occupancy and use of Assignor's Server Room, without obligation to pay rent or other compensation therefor. Access to Assignor's 2 Server Room shall be from the 3294 Premises and via the electrical room identified on Exhibit D, and Assignor shall have the right to secure the doorways to Assignor's Server Room to prevent entry to the same from the Premises. Assignor and Assignee hereby agree that each shall indemnify, defend, protect and hold the other harmless from and against any and all claims or liability for any injury or damage to any person or property, including any reasonable attorneys' fees, occurring in, on or about Assignor's Server Room to the extent such injury or damages is caused by its, or its employees', agents' or contractors' negligence or willful misconduct. 6. Right of First Offer. The parties hereby acknowledge and agree that it is the express intent of each party hereto that this Assignment also assign to Assignee the right of first offer granted to Assignor pursuant to Section 33 of the Lease, subject only to the consent of the Landlord to the same. 7. Brokers. Each party to this Assignment warrants and represents to the other that such party has not retained any real estate broker, finder or other person whose services would form the basis for a claim for any commission or fee in connection with this Assignment or the transactions contemplated thereby. Each party agrees to save, defend, indemnify and hold the other party free and harmless from any breach of its warranty and representation as set forth in the preceding sentence, including the other party's attorney's fees. 8. Contingency. Notwithstanding anything to the contrary herein, this Assignment is contingent upon the consent of the Landlord as evidenced by the execution by Landlord of the Consent set forth below. 9. Amendment of Lease. Landlord and Assignee shall not amend the Lease without Assignor's written consent. Any amendment of the Lease in violation of this provision shall not be binding upon Assignor. 10. Successors and Assigns. This Assignment shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 11. Counterparts. This Assignment may be executed in multiple counterparts, each of which shall be deemed an original. 12. Attorneys' Fees. If there is any legal or arbitration action or proceeding between the parties to enforce any provision of this Assignment or to protect or establish any right or remedy of any of the parties, the unsuccessful party to such action or proceeding will pay to the prevailing party all costs and expenses, 3 including reasonable attorneys' fees incurred by such prevailing party in such action or proceeding and in any appearance in connection therewith, and if such prevailing party recovers a judgment in any action, proceeding or appeal, such costs, expenses and attorneys' fees will be determined by the court or arbitration panel handling the proceeding and will be included in and as a part of such judgment. 13. Notices. Any notices or other communications required or permitted under this Assignment will be in writing and either served personally or sent by prepaid, first-class mail, return receipt requested, or by overnight courier, and addressed to the other party at the addresses set forth below. Either party may change its address by notifying the other party of the change in address. 14. Use. Assignor and Assignee hereby agree that upon the Effective Date, subject to the consent of the Landlord, Section 9(a) of the Lease shall be amended to provide that Tenant shall additionally have the right to use the Premises for biotech research and development, including the use of wet laboratories. 4 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above written. ASSIGNOR: Respond.com, Inc. a Delaware corporation By: ------------------------------ Name: ---------------------------- Its: ----------------------------- Address: --------------------------------- --------------------------------- --------------------------------- ASSIGNEE: Connetics Corporation, a Delaware corporation By: ------------------------------ Name: ---------------------------- Its: ----------------------------- Address: --------------------------------- --------------------------------- --------------------------------- 5 EXHIBIT A MASTER LEASE [TO BE ATTACHED] 6 EXHIBIT B 3290 SUBLEASE [TO BE ATTACHED] 7 EXHIBIT C 3294 SUBLEASE [TO BE ATTACHED] 8 EXHIBIT D ASSIGNOR'S SERVER ROOM [TO BE ATTACHED] 9 Consent of Landlord The undersigned is the Landlord in the Lease described in the above Assignment and hereby consents to the foregoing assignment of all right, title and interest of Assignor under the Lease. Landlord hereby agrees as follows: (a) Landlord will concurrently send to Assignor any notice of default that Landlord sends to Assignee. (b) If Assignee is in default under the Lease, before Landlord can exercise any of the rights available to Landlord because of such default, Assignor shall have the right for (i) three (3) business days after the period expires for curing rent defaults, and (ii) five (5) business days after the period expires for curing nonrent defaults. (c) Landlord hereby expressly consents to the assignment of the right of first offer pursuant to Section 33 of the Lease to Assignee. (d) Landlord hereby expressly consents to the replacement of Assignor's irrevocable Letter of Credit which forms a part of the Security Deposit under the Lease by an irrevocable letter of credit from Assignee naming the Landlord as beneficiary on terms as agreed between the Landlord and Assignee. (e) Landlord hereby acknowledges and agrees to the amendment to Section 9(a) of the Lease, pursuant to Section 14 of the Assignment. [signatures appear on next page] 10 Date: August ___, 2001 Landlord: West Bayshore Associates, a general partnership By: ------------------------------ Name: ---------------------------- Its: ----------------------------- --------------------------------- Sigrid S. Banks --------------------------------- Frank Lee Crist, Jr. --------------------------------- Allen W. Koering --------------------------------- George O. McKee 11 EX-10.4 6 f75747ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 THIS AGREEMENT ("Agreement") is dated as of August 21, 2001, by and between CONNETICS CORPORATION, a Delaware corporation, whose address for notice purposes is 3290 West Bayshore Road, Palo Alto, California 94303 (herein "CONNETICS"), and RESPOND.COM, INC., a Delaware corporation, whose address for notice purposes is 3294 West Bayshore Road, Palo Alto, California 94303 (herein "RESPOND.COM"). Connetics and Respond.com are sometimes referred to individually in this Agreement as a "Party", and collectively as the "Parties". RECITALS A. Respond.com, as assignor, and Connetics, as assignee, have entered into that certain Assignment and Assumption of Lease dated as of the date hereof (the "Assignment"), a copy of which is attached hereto as Exhibit A and made a part hereof, with respect to those certain premises located at 3290 West Bayshore Road, Palo Alto, CA 94303, as more fully described in the Assignment (the "3290 Premises"). B. Connetics, as sublessor, and Respond.com, as sublessee, have also entered into that certain Sublease dated as of the date hereof (the "3290 Sublease") with respect to a portion of the 3290 Premises, a copy of which is attached as Exhibit B hereto and made a part hereof. C. Connetics, as sublessor, and Respond.com, as sublessee, have also entered into that certain Sublease dated as of the date hereof (the "3294 Sublease"), a copy of which is attached as Exhibit C hereto and made a part hereof, with respect to a portion of the premises located at 3294 West Bayshore Avenue, Palo Alto, California, which premises are located adjacent to the 3290 Premises. D. The Parties have agreed to terms supplemental to the Assignment, the 3290 Sublease and the 3294 Sublease, as set forth herein. The Parties agree that the Assignment, the 3290 Sublease, the 3294 Sublease and the Non-Disclosure Agreement referenced in Section 6 hereof constitute the entire agreement between the Parties with regard to the real property located at 3290 and 3294 West Bayshore Avenue, Palo Alto, California. THEREFORE, the Parties agree as follows: 1. PREMIUM Throughout the term of the 3294 Sublease, Respond.com shall pay to Connetics an additional sum ("Premium") as follows: (i) $14,914.75 per month from the Commencement Date of the 3294 Sublease until April 30, 2002, and (ii) $15,914.75 per month from May 1, 2002 until January 31, 2003. The Premium shall be payable on the same date as the monthly rental specified in the 3294 Sublease, and prorated for any partial month as specified in Section 3 of the 3294 Sublease. Upon the termination or earlier expiration of the 3294 Sublease, Respond.com shall have no further obligation to pay any portion of the Premium. In the event that Respond.com assigns the 3294 Sublease (which assignment shall be subject to the terms and conditions set forth in the 3294 Sublease), Connetics shall have the right to condition its consent to the assignment to an agreement by the potential assignee to also assume Respond.com's obligations under this Agreement. 2. FURNITURE TO BE TRANSFERRED TO RESPOND.COM On or before the Commencement Date of the 3294 Sublease, Connetics and Respond.com shall enter into a bill of sale with respect to the furniture to be transferred from Connetics to Respond.com, the form of which is attached hereto as Exhibit D and made a part hereof. 3. FURNITURE TO BE TRANSFERRED TO CONNETICS Upon the Effective Date of the Assignment, Connetics and Respond.com shall enter into a bill of sale with respect to the furniture to be transferred from Respond.com to Connetics, the form of which is attached hereto as Exhibit E and made a part hereof. 4. ASSIGNMENT Either Party may assign its respective interest under this Agreement by obtaining the prior written consent of the other Party, which consent shall not be unreasonably withheld. Any such assignment will not release the assigning Party of any and all liability accruing to that Party prior to the effective date of such assignment. 5. TERMINATION 5.1 TERMINATION BY RESPOND.COM Respond.com is entitled by written notice to Connetics to terminate this Agreement upon the happening of any of the following events: (i) the termination of the 3294 Sublease; (ii) the failure of Connetics to rectify any material breach or non-observance of any of the terms and conditions contained in this Agreement within thirty (30) days after Respond.com gives written notice to Connetics specifying such breach or non-observance and requiring that it be rectified; (iii) a petition or other application being presented or resolution being passed for the winding up, liquidation or dissolution of Connetics; 2 (iv) the appointment of a receiver or receiver and manager or official manager or agent of a creditor of Connetics; (v) Connetics ceasing to carry on business or stopping or wrongfully suspending payment of any of its creditors or stating an intention to do so. 5.2 TERMINATION BY CONNETICS Connetics is entitled by written notice to Respond.com to terminate this Agreement upon the happening of any of the following events: (i) the termination of the 3294 Sublease; (ii) the failure of Respond.com to rectify any material breach or non-observance of any of the terms and conditions contained in this Agreement within thirty (30) days after Connetics gives written notice to Respond.com specifying such breach or non-observance and requiring it to be rectified; (iii) a petition or other application being presented or resolution being passed for the winding up, liquidation or dissolution of Respond.com or notice of intention to propose such a resolution being given or the entry of Respond.com into a scheme of arrangement or compromise with any of its creditors; (iv) the appointment of a receiver or receiver and manager or official manager or agent of a creditor of Respond.com; (v) Respond.com ceasing to carry on business or stopping or wrongfully suspending payment of any of its creditors or stating an intention to do so. 16. CONFIDENTIALITY The Parties acknowledge that the terms of this Agreement and all discussions and correspondence in connection therewith is confidential and the terms of this Agreement and such discussions and correspondence shall not in any way be disclosed to any third party except in connection with a proposed assignment of this Agreement or with the prior written consent of the non-disclosing Party and each Party will take every reasonable precaution to protect the confidentiality of such information and with no less restrictive precautions than it takes to protect its own confidential information. The parties acknowledge and agree to continue to abide by the terms of a Mutual Nondisclosure Agreement entered into between the Parties on June 29, 2001, a copy of which is attached as Exhibit F hereto, and agree that the terms hereof are not in any way intended to amend, supersede or circumvent the terms of said agreement. 3 7. NOTICES Any notices or demands which may or are required to be given by either Party to the other hereunder shall be in writing. All notices and demands shall be sufficient if delivered in person, by receipted courier service, or sent by United States Mail, postage pre-paid. Any such notice is effective at the time of delivery or of mailed, two (2) business days after mailing. For purposes of this Agreement, the Parties' contact information is as follows: (a) If to Connetics, then to: Christopher T. Holman Director, Facilities and Production Planning Connetics Corporation 3294 West Bayshore RD. Palo Alto, CA 94303 Tel: 650-843-2807 Fax: 650-843-2898 (b) If to Respond.com, to: Respond.com, Inc. 3290 West Bayshore Road Palo Alto, CA 94303 Tel: 650-461-1000 Fax: 650-461-1892 Attn: Chief Executive Officer With a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Tel: 650-493-9300 Fax: 650-493-6811 Attn: Stephen Bochner 8. SEVERANCE If any provision of this Agreement is held to be invalid, illegal or unenforceable by a court of competent jurisdiction, then: (a) such provision will be deemed amended to conform to applicable laws of such jurisdiction so as to be valid and enforceable, or, if it cannot be so amended without materially altering the intention of the Parties, it will be stricken; (b) the remaining provisions of this Agreement will remain in full force and effect. 9. WAIVER 4 No term or condition of this Agreement is considered waived unless reduced to writing and duly executed by an officer of the waiving Party. 10. PROPER LAW This Agreement is governed by the laws of the State of California and any disputes hereunder shall be subject to the exclusive jurisdiction of the State of California. 11. ENTIRE AGREEMENT This Agreement sets forth the entire agreement of the Parties with regard to the subject matter herein and, except as otherwise stated herein, supersedes all other agreements between the Parties relating to the subject matter hereof. 5 IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the date first specified above. CONNETICS CORPORATION, Respond.com, Inc., a Delaware corporation a Delaware corporation ________________________________ By: ___________________________ John L. Higgins Executive Vice President, Finance & Name: __________________________ Administration, CFO Its: ___________________________ 6 EXHIBIT A ASSIGNMENT 7 EXHIBIT B 3290 SUBLEASE 8 EXHIBIT C 3294 SUBLEASE 9 EXHIBIT D BILL OF SALE (CONNETICS FURNITURE) For the sum of One Dollar ($1) representing good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Connetics Corporation ("Seller") hereby bargains, sells, assigns, transfers and delivers to Respond.com, Inc. ("Purchaser") all of Seller's right, title and interest in and to the property described on the attached Exhibit A (the "Property"). Seller hereby represents and warrants to Purchaser that (a) Seller is the absolute owner of the Property, (b) the Property is free and clear of all liens, charges and encumbrances and (c) Seller has full right, power and authority to sell the Property and to execute and deliver this Bill of Sale. Seller will defend, indemnify, and hold Purchaser harmless from all claims or causes of action alleging claims to the contrary. The Property is delivered and sold in its present condition "AS IS," and ALL WARRANTIES OF QUALITY, FITNESS AND MERCHANTABLITY ARE HEREBY EXCLUDED. TO HAVE AND TO HOLD all and singular the Property unto Purchaser, its successors, heirs, executors, administrators and assigns to their own proper use and benefit, forever. IN WITNESS WHEREOF, this Bill of Sale has been executed as of __________, 2001. SELLER: Connetics Corporation, a Delaware Corporation By: -------------------------------------- Name: John Higgins Its: Chief Financial Officer PURCHASER: Respond.com, Inc., a Delaware Corporation By: -------------------------------------- Name: Dana C. Stalder Its: Chief Financial Officer 10 EXHIBIT A ASSETS TRANSFERRED FROM CONNETICS CORPORATION TO RESPOND.COM, INC.
COUNT DESCRIPTION - ----- ----------- 11 8' X 8' blue cubicles (Includes walls, desktops, 19 double sectioned overhead cabinets, taks lights, 10 three drawer pedstal, 14 two drawer pedistals.) 3 8" X 12" blue cubicles (Includes walls, desktops, 3 double sectioned overhead cabinets, 3 single sectioned cabinets, taks lights, 3 three drawer pedstal, 2 two drawer pedistals.) 1 Credenza 1 48" X 12" Table (Conference Room Table) 18 Gray United Conference Room Chairs 28 Purple Side Chairs 23 Plum Side Chaairs 19 Blackberry Side Chairs 6 30" X 60" Lunch room tables 26 Gray 7' X 9" cubicles (Includes walls, desktops, 11 double sectioned overhead cabinets, 28 single overhead cabinets, taks lights, 23 three drawer pedstal, 23 two drawer pedistals, & 15 metal shelves.) 1 48" Round table 2 3' X 8' table 1 29" X 8' table
11 8 36" Round Tables 60 Gray United Swivel Ergo chairs 27 Gray United Sled based Chairs 4 Dark Gray Office Master Swivel Ergo Chairs 1 Gray Chair 2 Red Stool Chair 1 Black stool Chair 3 Green Swivel Office Master Ergo chairs 1 Teal Swivel Office master Ergo chairs 1 United Swivel Ergo Chairs 13 Stylex Swivel ergo Chairs (Mixed colors) 8 Stylex Sled Based Chairs (Mixed Colors) Hard Wall Offices ( Includes 28 two drawer pedistals, 27 three drawer pedistals, 6 metal shelves, 15 wall mounted task boards, 43 overhead cabinets, desktops & frames, tasklights) 2 Refrigerators 3 Printer Stands 1 Printer Table 1 Phone Stand 1 TV Cabinet 1 3' X 8' Table 2 Large open shelves 1 Printer Stand
12 1 Mail sorting Shelves 1 Workstation 2 refrigerators 3 printer stands 1 printer table 1 phone stand 1 TV cabinet 1 3 x 8 table 2 large open shelving 1 printer stand 1 mail sorting shelves 1 workstation from storage room All attached white boards
13 EXHIBIT E BILL OF SALE (RESPOND.COM FURNITURE) For the sum of One Dollar ($1) representing good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Respond.com, Inc. ("Seller") hereby bargains, sells, assigns, transfers and delivers to Connetics Corporation ("Purchaser") all of Seller's right, title and interest in and to the property described on the attached Exhibit A (the "Property"). Seller hereby represents and warrants to Purchaser that (a) Seller is the absolute owner of the Property, (b) the Property is free and clear of all liens, charges and encumbrances and (c) Seller has full right, power and authority to sell the Property and to execute and deliver this Bill of Sale. Seller will defend, indemnify, and hold Purchaser harmless from all claims or causes of action alleging claims to the contrary. The Property is delivered and sold in its present condition "AS IS," and ALL WARRANTIES OF QUALITY, FITNESS AND MERCHANTABLITY ARE HEREBY EXCLUDED. TO HAVE AND TO HOLD all and singular the Property unto Purchaser, its successors, heirs, executors, administrators and assigns to their own proper use and benefit, forever. IN WITNESS WHEREOF, this Bill of Sale has been executed as of __________, 2001. SELLER: Respond.com, Inc., a Delaware Corporation By: ------------------------------------------ Name: Dana C. Stalder Its: Chief Financial Officer PURCHASER: Connetics Corporation, a Delaware Corporation By: ------------------------------------------ Name: John Higgins Its: Chief Financial Officer 14 EXHIBIT A TO BILL OF SALE ASSETS TRANSFERRED FROM RESPOND.COM, INC. TO CONNETICS CORPORATION
COUNT DESCRIPTION - ----- ----------- 49 Desk Chairs - Blue 2 48" Round Conference Tables 1 10" Oval Conference Table 2 Whiteboards 28 Hon Pagoda Stack Chairs 8 Chrome Shelving 3 Printer Stands 2 Grey Tables 25 Keyboard Trays 145 Cubes 1 Cubes (partial) 114 Desk Chairs - Green 2 48" Round Conference Table 1 Oval Conference Table (72x42x29) 18 Boardroom Chairs 4 Cabinet-Storage 6 Counters Kitchen 5 Lunchroom Tables 10 Lunchroom Chairs 1 Prizmatic Rect. Table w/110v (Board Room) 1 Office desk and File Cabinet 4 Leather Chairs 1 Refrigerator - Black 1 DSS Satellite Dish
15 EXHIBIT F MUTUAL NONDISCLOSURE AGREEMENT [TO BE ATTACHED] 16 EX-10.5 7 f75747ex10-5.txt EXHIBIT 10.5 EXHIBIT 10.5 SUBLEASE (3290 West Bayshore Avenue) This sublease ("Sublease") is executed this 21st day of August, 2001, by and between Connetics Corporation, a Delaware corporation (the "Sublessor"), and Respond.com, Inc., a Delaware corporation (the "Sublessee"). RECITALS A. West Bayshore Associates, a general partnership, Sigrid S. Banks, Frank Lee Crist, Jr., Allen W. Koering and George O. McKee, as landlord (collectively, "Lessor"), and Sublessee, as tenant, executed a lease dated November 20, 1998 (the "Master Lease") with respect to approximately 28,968 rentable square feet of the building located at 3290 West Bayshore Avenue, Palo Alto, California, as such premises are more fully described in the Master Lease ("Master Premises") which is attached as Exhibit A hereto and made a part hereof; B. Pursuant to that certain Assignment of Lease dated as of the date hereof by and between Sublessee, as assignor, and Sublessor, as assignee (the "Assignment") attached as Exhibit B hereto and made a part hereof, Sublessor is the successor in interest to Sublessee's interest as tenant under the Master Lease; C. Pursuant to that certain Sublease dated as of the date hereof by and between Sublessor, as sublessor, and Sublessee, as sublessee, (the "3294 Sublease") attached as Exhibit C hereto and made a part hereof, Sublessee will be subleasing from Sublessor a portion of the premises located at 3294 West Bayshore Avenue, Palo Alto (the "3294 Premises"), which premises are adjacent to the Master Premises, all upon the terms and conditions set forth in the 3294 Sublease; D. Sublessor desires to sublease to Sublessee a portion of the Master Premises, and Sublessee desires to lease a portion of the Master Premises from Sublessor, subject to the terms and conditions of this Sublease; and, E. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Master Lease. THEREFORE, Sublessor and Sublessee agree as follows: LEASING AND DESCRIPTION OF PROPERTY 1. Subject to the terms, conditions, and covenants set forth in this Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, approximately 21,000 square feet of the Master Premises, as shown as cross-hatched on Exhibit D attached hereto and made a part hereof (the "Subleased Premises"). TERM 1 2. The term of this Sublease shall commence on the Effective Date (as defined in Section 1 of the Assignment) (the "Commencement Date"), and shall terminate on the later to occur of (i) October 22, 2001 or (ii) the Commencement Date of the 3294 Sublease. Notwithstanding any provision of this Sublease to the contrary, if Sublessor has not delivered the 3294 Premises to Sublessee by December 1, 2001 for any reason, then Sublessee shall have the right to terminate this Sublease and upon receipt of such notice this Sublease shall terminate and Sublessor shall promptly thereafter return to Sublessee all sums previously paid or deposited by Sublessee hereunder. RENT 3. Sublessee shall pay to Sublessor as rent for the Subleased Premises a rental of Ninety One Thousand Six Hundred Eighty Three and 72/100 dollars ($91,683.72) per month payable in advance on the first day of each calendar month during the term, commencing on the Commencement Date. Rent shall be paid to Sublessor at 3290 West Bayshore, Palo Alto, CA, or at any other place designated in writing by Sublessor. The installment rent payable for any portion of a calendar month shall be a pro rata portion of the installment payable for a full calendar month. Sublessee agrees that the payable monthly rental amount does not include any liability of Sublessor for Sublessee's prorated share of real property taxes and assessments (general and special), insurance, maintenance, Landlord management fee and such other costs and fees which are the responsibility of the Sublessor under Section 6(b) of the Master Lease, which amounts are invoiced separately by Lessor. Notwithstanding the foregoing, from and after October 22, 2001, the rent hereunder shall be reduced to Twenty Seven Thousand Six Hundred Ninety Eight and 81/100 dollars ($27,698.81) per month. SECURITY DEPOSIT 4. Sublessee has previously deposited with Sublessor the total sum of Three Hundred Four Thousand Nine Hundred Ninety Six and 16/100 dollars ($304,996.16) as a security deposit (the "Security Deposit"). If Sublessee defaults with respect to any provision of this Sublease, including, but not limited to, the provisions relating to rent, Sublessor may (but shall not be required to) use or apply all or any part of the Security Deposit for the payment of rent or any other sum in default hereunder. If any portion of the Security Deposit is so used or applied, Sublessee shall, within (5) days after written demand therefore, deposit cash with Sublessor in an amount sufficient to restore the Security Deposit to its original amount. Upon the Commencement Date of the 3294 Sublease, the Security Deposit, or so much thereof which has not been used or applied by Sublessor pursuant to this Section 4, shall be deemed to be the security deposit required under the 3294 Sublease and shall be held by Sublessor pursuant to the terms and conditions of the 3294 Sublease. Notwithstanding the 2 foregoing, if this Sublease terminates or expires prior to the Commencement Date of the 3294 Sublease, or if the 3294 Sublease is terminated prior to the Commencement Date thereof, then the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned to Sublessee promptly following the expiration or earlier termination of this Sublease, not to exceed ten (10) days after such termination or expiration. ACCESS BY SUBLESSOR 5. During the term hereof, Sublessor shall restrict its access to and from that portion of the Master Premises which is not the Subleased Premises (the "Sublessor's Premises") to the two (2) entrances located on the north side of the building, as depicted on Exhibit D. During the construction of the contemplated tenant improvements Sublessor intends to make within Sublessor's Premises (the "Tenant Improvements"), only Authorized Personnel of Sublessor shall have access to the Sublessor's Premises. "Authorized Personnel" as used in this Section 5 shall mean those employees, contractors, agents and suppliers of Sublessor who have been approved in writing by Sublessee and require access in order to complete the Tenant Improvements. The parties hereby acknowledge and agree that although the Subleased Premises will not be separately demised from Sublessor's Premises by a permanent interior wall, Sublessor will be installing a physical barrier between such premises as specified below, and each party hereto hereby agrees to prevent its employees, agents, assigns and contractors from entering into the premises of the other. In addition, the parties hereby agree as follows: (i) Prior to the commencement of any physical work associated with the Tenant Improvements, Sublessor shall install, to the satisfaction of Sublessee, physical barriers between the Sublessor's Premises and the Subleased Premises which shall designate the respective boundaries of each in the approximate locations shown on Exhibit D, and which shall minimize noise, dust and any disruption to Sublessee's operations; (ii) Prior to commencing any physical work associated with the Tenant Improvements which could result in dust infiltration in the ventilation system and areas outside the Sublessor's Premises, Sublessor shall install, to the satisfaction of the Sublessee, dust filters and other required barriers to minimize dust infiltration into the ventilation system and areas outside the Sublessor's Premises; (iii) Sublessor shall provide not less than seventy two (72) hours' written notice of any work that could impact the ordinary course of business for Sublessee including, but not limited to, power outages, parking restrictions, painting or chemical fumes and high audible construction. Such work which is 3 determined by Sublessee to have a material impact on Sublessee's business operations will be scheduled on evenings and weekends; (iv) Sublessor and its Authorized Personnel shall have no right to use the kitchen or restroom facilities within the Subleased Premises during the term hereof. Sublessor shall provide its own temporary restroom and sanitary facilities during the term hereof. Sublessor hereby agrees that it shall indemnify, defend, protect and hold harmless Sublessee from and against any and all claims or liability for any injury or damage to any person or property, including any reasonable attorneys' fees, occurring in, on or about the Subleased Premises or the Sublessor's Premises to the extent such injury or damages is caused by its, or its employees', agents' or contractors' negligence or willful misconduct QUIET ENJOYMENT 6. Sublessor covenants that Sublessee shall be entitled to quiet enjoyment of the Subleased Premises, provided that Sublessee complies with the terms of this Sublease. CONDITION OF PREMISES 7. Sublessee agrees that Sublessee's act of taking possession will be an acknowledgment that the Subleased Premises are in a tenantable condition. Sublessee shall maintain the Subleased Premises in accordance with the terms and conditions of the Master Lease, as incorporated below. Notwithstanding the foregoing, it is hereby acknowledged and agreed that Sublessee shall have no obligation to remove any portion of the tenant improvements, alterations or additions within the Subleased Premises upon the expiration or earlier termination of this Sublease, it being expressly understood and agreed that Sublessor has assumed all of Sublessee's rights and obligations as tenant under the Master Lease, pursuant to the terms of the Assignment. Sublessee shall have the right to leave all such tenant improvements, alterations and additions in their current "as is" condition upon the expiration or earlier termination of this Sublease; provided, however, that Sublessee shall remove the single exterior sign which is currently located on the exterior of the building near the main entrance. APPLICABILITY OF MASTER LEASE 8. Except as otherwise provided in this Sublease, all of the terms and provisions of the Master Lease are incorporated into and made a part of this Sublease, and the rights and obligations under the Master Lease are hereby imposed upon the parties hereto with respect 4 to the Subleased Premises, the Sublessor being substituted for the Lessor or Landlord in the Master Lease and the Sublessee being substituted for the Tenant in the Master Lease and the Subleased Premises being substituted for the Premises in the Master Lease; provided, however, that the term "Landlord" in the following sections of the Master Lease shall mean (i) Lessor, not Sublessor: 11, 12, 13, 17(b), 21, 22, 25, and 32; and (ii) both Lessor and Sublessor: 15, 16, and 31. Notwithstanding the foregoing, the following sections of the Master Lease are not incorporated herein: 8 and 33. In the event of any conflict between the terms of this Sublease and the Master Lease, the terms and conditions of this Sublease shall control. SUBLESSEE'S RIGHTS REGARDING CONTINUING POSSESSION 9. Sublessee shall have the right at any time, at Sublessor's expense, to take any action required to be taken, but not timely taken, by Sublessor, that may be necessary to prevent a default under the terms of the Master Lease. Nothing contained in this sublease shall be construed so as to deprive Sublessee of Sublessee's right to surrender or otherwise terminate this Sublease as provided by law. OBLIGATIONS OF SUBLESSOR 10. Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of Sublessor. Sublessor also agrees to pay all rentals and taxes as provided for in the Master Lease in accordance with its terms, and to comply with or perform all obligations under the Master Lease that Sublessee has not assumed under this Sublease. Further, Sublessor agrees not to modify or surrender the Master Lease without the prior written consent of Sublessee, which Sublessee may withhold in its sole discretion. Any modification or surrender made without that consent shall be null and void and shall have no effect on the rights of Sublessee under this Sublease. Except as otherwise set forth herein, Sublessor does not assume the obligations required to be kept or performed by the Lessor under the Master Lease. INSURANCE 11. Sublessee shall maintain during the term hereof commercial general liability insurance in the amount of not less than $1,000,000 per occurrence and $2,000,000 in the annual aggregate. Sublessee shall provide Sublessor with a certificate of insurance prior to the Commencement Date. If any such insurance is significantly reduced or terminated prior to the term hereof, Sublessee shall immediately notify Sublessor of the same. Such insurance shall name Sublessor as an additional insured. Any policy carried by either party hereto affecting the Master Premises, Subleased Premises the contents of the same or the operations therein, shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the 5 occurrence of injury or loss, if the same are obtainable without unreasonable cost. TERMINATION OF MASTER LEASE/NON-DISTURBANCE 12. In the event this Sublease terminates prior to the termination of the term hereof for any reason other than as a result of an event of default by Sublessee hereunder, then the Sublease shall continue in full force and effect, at Sublessee's option, as a direct lease between Lessor and Sublessee upon all the terms, covenants and conditions of this Sublease and Lessor shall recognize Sublessee's right to possession of the Subleased Premises as provided for in the Sublease and shall not disturb Sublessee's right to possession so long as an event of default does not exist in the performance of Sublessee's obligations under the Sublease. ATTORNEY'S FEES 13. If any action or other proceeding arising out of this Sublease is commenced by either party to this Sublease concerning the Subleased Premises, then as between Sublessor and Sublessee, the prevailing party shall be entitled to receive from the other party, in addition to any other relief that may be granted, the reasonable attorney's fees, costs, and expenses incurred in the action or other proceeding by the prevailing party. CONFIDENTIALITY 14. The parties hereto acknowledge that the terms of this Sublease are confidential and the parties hereby agree that the terms hereof as well as any and all discussions and negotiations related to the occupation of the Subleased Premises by Sublessee shall remain confidential and shall not be disclosed without the prior written consent of Sublessee. COUNTERPARTS 15. This Sublease may be signed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one agreement. 6 IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first specified above. SUBLESSOR: Connetics Corporation, a Delaware corporation By: /s/ JOHN L. HIGGINS ------------------------------------- Name: John L. Higgins ----------------------------------- Its: CFO ------------------------------------ SUBLESSEE: Respond.com, Inc., a Delaware corporation By: /s/ DANA STALDER ------------------------------------- Name: Dana Stalder ----------------------------------- Its: CFO ------------------------------------ 7 SUBLEASE (3294 West Bayshore Avenue) This sublease ("Sublease") is executed this 21st day of August, 2001, by and between Connetics Corporation, a Delaware corporation (the "Sublessor"), and Respond.com, Inc., a Delaware corporation (the "Sublessee"). RECITALS A. West Bayshore Associates, a general partnership, Sigrid S. Banks, Frank Lee Crist, Jr., Allen W. Koering and George O. McKee, as lessor (collectively, "Lessor"), and Sublessor, as lessee, executed a lease dated November 20, 1998 (the "Master Lease"); B. By the terms of the Master Lease, approximately 13,464 rentable square feet of the building located at 3294 West Bayshore Avenue, Palo Alto, California, as such premises are more fully described in the Master Lease ("Master Premises") attached as Exhibit A hereto and a made a part hereof, was leased to Sublessor for a term of thirty seven (37) months, commencing on January 1, 1999, and ending on January 31, 2002, subject to earlier termination as provided in the Master Lease; C. The term of the Master Lease has been extended in accordance with Section 4 of the Master Lease for one (1) additional year such that the current expiration date is January 31, 2003, as such extension has been acknowledged by Lessor in the letter dated August 10, 2001, and attached as Exhibit B hereto and made a part hereof; D. Pursuant to the terms of that certain Sublease dated as of the date hereof by and between Sublessor, as sublessor, and Sublessee, as sublessee (the "3290 Sublease") attached as Exhibit C hereto and made a part hereof, Sublessee will be subleasing a portion of the premises located at 3290 West Bayshore Avenue, Palo Alto ("3290 Premises"), which premises are adjacent to the Master Premises, upon the terms and conditions of the 3290 Sublease. E. Sublessor desires to sublease to Sublessee a portion of the Master Premises, and Sublessee desires to lease a portion of the Master Premises from Sublessor; and, F. Capitalized terms used but not defined herein shall have the meaning ascribed to them in the Master Lease. THEREFORE, Sublessor and Sublessee agree as follows: LEASING AND DESCRIPTION OF PROPERTY 1. Subject to the terms, conditions, and covenants set forth in this Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, approximately 13,200 square 1 fee of the Master Premises as shown on Exhibit D attached hereto and made a part hereof (the "Subleased Premises"). TERM 2. The term of this Sublease shall commence on the later of (i) October 22, 2001, (ii) the date Sublessor delivers possession of the Subleased Premises to Sublessee, or (iii) the date of Lessor's written consent to this Sublease ("Commencement Date"), and shall end upon the expiration of the term of the Master Lease, as extended. Notwithstanding any other provision of this Sublease to the contrary, if the Commencement Date has not occurred by December 1, 2001 for any reason, then Sublessee may terminate this Sublease by providing written notice thereof to Sublessor, and upon Sublessor's receipt of such notice, this Sublease shall terminate, and Sublessor shall promptly return to Sublessee all sums previously paid or deposited by Sublessee. RENT 3. Sublessee shall pay to Sublessor as rent for the Subleased Premises a rental of Twenty Seven Thousand Six Hundred Ninety Eight and 81/100 dollars ($27,698.81) per month payable in advance on the first day of each calendar month during the term, commencing on the Commencement Date. Rent shall be paid to Sublessor at 3290 West Bayshore, Palo Alto, CA, or at any other place designated in writing by Sublessor. The installment rent payable for any portion of a calendar month shall be a pro rata portion of the installment payable for a full calendar month. The amount of rental shall be subject to annual CPI increases as set forth in Section 6(a) of the Master Lease. Sublessee shall also pay its prorated share of real property taxes and assessments (general and special), insurance, maintenance, Landlord management fee and such other costs and fees set forth in Section 6(b) of the Master Lease. SECURITY DEPOSIT 4. (a) Pursuant to the 3290 Sublease, Sublessee has previously deposited with Sublessor the total sum of Three Hundred Four Thousand Nine Hundred Ninety Six and 16/100 dollars ($304,996.16) as a security deposit. Upon the Commencement Date, the security deposit held under the 3290 Sublease shall be deemed to be the security deposit under this Sublease (the "Security Deposit"). If any portion of the security deposit held under the 3290 Sublease has been used or applied by Sublessor in accordance with Section 4 of the 3290 Sublease, and Sublessee has not replenished such security deposit to the full amount required thereunder prior to the Commencement Date of this Sublease, then Sublessee agrees to deposit with Sublessor such additional sums as may be required such that the total Security Deposit held hereunder is $304,996.16. During the term hereof, if Sublessee defaults with respect to any provision of this Sublease, including, but not limited to, the provisions relating to rent, Sublessee may (but shall not be required to) use or apply all or any part of this security deposit for the payment of rent or any other sum 2 in default. If any portion of said deposit is so used or applied, Sublessee shall, within (5) days after written demand therefore, deposit cash with Sublessor in an amount sufficient to restore the security deposit to its original amount. Upon the expiration or earlier termination of this Sublease, the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned to Sublessee promptly, and, in any event, not to exceed ten (10) days after such expiration or termination. (b) Notwithstanding the foregoing, the Security Deposit shall be reduced by Thirty Six Thousand Six Hundred Twenty Eight and 17/100 dollars ($36,628.17) each month during the last six (6) months of the term hereof, so long as Sublessee is not then in default hereunder, and has not been in default beyond any applicable notice and cure period during the six (6) month period immediately preceding such reduction. Each monthly reduction in the Security Deposit shall be applied or paid in the following order: (i) towards the monthly base rental next owing hereunder, and (ii) towards any other sums due from Sublessee to Sublessor. USE OF PREMISES AND ACCESS TO SERVER ROOM 5. (a) Sublessee shall use the Subleased Premises for the purposes set forth in the Master Lease and for no other purpose. The Subleased Premises do not include Sublessor's IT server facilities as shown as cross-hatched on Exhibit D ("Server Room"). During the term hereof, authorized personnel of Sublessor (not to exceed a total of six at any given time) shall have the right to access the Server Room through the Subleased Premises. "Authorized personnel" as used herein shall mean those employees of Sublessor the names of whom have been provided in writing to Sublessee, and who have been approved in writing by Sublessee. Sublessor shall not substitute any authorized personnel without the prior written approval of Sublessee. Any access through the Subleased Premises as provided herein shall be during normal business hours and Sublessee shall have the right to accompany any such authorized personnel through the Subleased Premises to the Server Room. Sublessor hereby agrees that it shall indemnify, defend, protect and hold harmless Sublessee from and against any and all claims or liability for any injury or damage to any person or property, including any reasonable attorneys' fees, occurring in, on or about the Subleased Premises or the Server Room to the extent such injury or damages is caused by its, or its employees', agents' or contractors' negligence or willful misconduct. (b) For purposes of this Section 5, the terms "Disclosing Party" and "Receiving Party" shall mean either Sublessor or Sublessee, as applicable. All information disclosed by the Disclosing Party to the Receiving Party during the term of this Sublease shall be deemed to be "Proprietary Information." In particular, Proprietary Information shall be deemed to include any trade secret, information, prices, technique, algorithm, computer 3 program (source and object codes), design, drawing, formula or test data, relating to any research project, work in process, future development, engineering, manufacturing, marketing, servicing, financing or personnel matter relating to the Disclosing Party, its present or future products, sales, suppliers, clients, customers, employees, investors or business, whether in oral, written, graphic or electronic form. The term "Proprietary Information" as used in this Section 5 shall not be deemed to include information which the Receiving Party can demonstrate by competent written proof: (a) is now, or hereafter becomes, through no act or failure to act on the part of the Receiving Party, generally known or available; (b) is known by the Receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the Receiving Party by a third party, as a matter of right and without restriction on disclosure; or (d) is the subject of a written permission to disclose provided by the Disclosing Party. The Receiving Party shall maintain all Proprietary Information in trust and confidence and shall not disclose any Proprietary Information to any third party or use any Proprietary Information for any unauthorized purpose. The Receiving Party shall not use Proprietary Information for any purpose or in any manner which would constitute a violation of any laws or regulations, including without limitation the export control laws of the United States. No rights or licenses to trademarks, inventions, copyrights or patents are implied or granted hereunder. The Receiving Party shall advise its employees who might have access to Proprietary Information of the confidential nature thereof and agrees that its employees shall be bound by the terms of this Section 5. The Receiving Party agrees to indemnify the Disclosing Party for any loss or damage suffered as a result of any breach by the Receiving Party of the terms of this Section 5, including any reasonable fees incurred by the Disclosing Party in the collection of such indemnity. QUIET ENJOYMENT 6. Sublessor covenants that Sublessee shall be entitled to quiet enjoyment of the Subleased Premises, provided that Sublessee complies with the terms of this Sublease. CONDITION OF PREMISES 7 Sublessee agrees that Sublessee's act of taking possession will be an acknowledgment that the Subleased Premises are in a tenantable condition. Sublessee shall maintain the Subleased Premises in accordance with the terms and conditions of the Master Lease, as incorporated below, provided, however, that Sublessee shall have the right to surrender the Subleased Premises in the current "as is" condition upon the expiration or earlier termination of this Sublease, and shall have no obligation to remove any portion of the tenant improvements, alterations or other additions made to the Subleased Premises by any party other than Sublessee. APPLICABILITY OF MASTER LEASE 4 8. Except as otherwise provided in this Sublease, all of the terms and provisions of the Master Lease are incorporated into and made a part of this Sublease, and the rights and obligations under the Master Lease are hereby imposed upon the parties hereto with respect to the Subleased Premises, the Sublessor being substituted for the Lessor or Landlord in the Master Lease and the Sublessee being substituted for the Tenant in the Master Lease and the Subleased Premises being substituted for the Premises in the Master Lease; provided, however, that the term "Landlord" in the following sections of the Master Lease shall mean (i) Lessor, not Sublessor: 11, 12, 13, 17(b), 21, 22, 25, and 32; and (ii) both Lessor and Sublessor: 15, 16, and 31. Notwithstanding the foregoing, the following sections of the Master Lease are not incorporated herein: 8 and 33. In the event of any conflict between the terms of this Sublease and the Master Lease, the terms and conditions of this Sublease shall control. SUBLESSEE'S RIGHTS REGARDING CONTINUING POSSESSION 9. Sublessee shall have the right at any time, at Sublessor's expense, to take any action required to be taken, but not timely taken, by Sublessor, that may be necessary to prevent a default under the terms of the Master Lease. If Sublessor is provided with the right, under the terms of the Master Lease, to terminate the Master Lease before the expiration of its term, Sublessee rather than Sublessor shall have the right to make that decision. Nothing contained in this sublease shall be construed so as to deprive Sublessee of Sublessee's right to surrender or otherwise terminate this Sublease as provided by law. OBLIGATIONS OF SUBLESSOR 10. Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of Sublessor. Sublessor also agrees to pay all rentals and taxes as provided for in the Master Lease in accordance with its terms, and to comply with or perform all obligations under the Master Lease that Sublessee has not assumed under this Sublease. Further, Sublessor agrees not to modify or surrender the Master Lease without the prior written consent of Sublessee, which Sublessee may withhold in its sole discretion. Any modification or surrender made without that consent shall be null and void and shall have no effect on the rights of Sublessee under this Sublease. Except as otherwise set forth herein, Sublessor does not assume the obligations required to be kept or performed by the Lessor under the Master Lease. EARLY OCCUPANCY, INSURANCE 11. (a) Sublessee shall have the right to occupy the Subleased Premises for a period of five (5) business days prior to the Commencement Date, without any obligation to pay any rental or other sums specified hereunder, for the purpose of installing its data 5 lines, telecommunications lines, and other cabling. Sublessee shall use commercially reasonable efforts to minimize any disruption of Sublessor's business operations during such installation. (b) Sublessee shall maintain during the term hereof commercial general liability insurance in the amount of not less than $1,000,000 per occurrence and $2,000,000 in the annual aggregate. Sublessee shall provide Sublessor with a certificate of insurance prior to the Commencement Date. If any such insurance is significantly reduced or terminated prior to the term hereof, Sublessee shall immediately notify Sublessor of the same. Such insurance shall name Sublessor as an additional insured. Any policy carried by either party hereto affecting the Master Premises, Subleased Premises the contents of the same or the operations therein, shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the occurrence of injury or loss, if the same are obtainable without unreasonable cost. TERMINATION OF MASTER LEASE/NON-DISTURBANCE 12. In the event this Sublease terminates prior to the termination of the term hereof for any reason other than as a result of an event of default by Sublessee hereunder, then the Sublease shall continue in full force and effect, at Sublessee's option, as a direct lease between Lessor and Sublessee upon all the terms, covenants and conditions of this Sublease and Lessor shall recognize Sublessee's right to possession of the Subleased Premises as provided for in the Sublease and shall not disturb Sublessee's right to possession so long as an event of default does not exist in the performance of Sublessee's obligations under the Sublease. ATTORNEY'S FEES 13. If any action or other proceeding arising out of this Sublease is commenced by either party to this Sublease concerning the Subleased Premises, then as between Sublessor and Sublessee, the prevailing party shall be entitled to receive from the other party, in addition to any other relief that may be granted, the reasonable attorney's fees, costs, and expenses incurred in the action or other proceeding by the prevailing party. CONFIDENTIALITY 14. The parties hereto acknowledge that the terms of this Sublease are confidential and the parties hereby agree that the terms hereof as well as any and all discussions and negotiations related to the occupation of the Subleased Premises by Sublessee shall remain confidential and shall not be disclosed without the prior written 6 consent of Sublessee. COUNTERPARTS 15. This Sublease may be signed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one agreement. 7 IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first specified above. SUBLESSOR: Connetics Corporation, a Delaware corporation By: /s/ JOHN L. HIGGINS ------------------------------------- Name: John L. Higgins ----------------------------------- Its: CFO ------------------------------------ SUBLESSEE: Respond.com, Inc., a Delaware corporation By: /s/ DANA STALDER ------------------------------------- Name: Dana Stalder ----------------------------------- Its: CFO ------------------------------------ 8 -----END PRIVACY-ENHANCED MESSAGE-----