Document:

QuickLinks
 -- Click here to rapidly navigate through this document
   Exhibit 10.17  

LOAN AND SECURITY AGREEMENT  

        THIS LOAN AND SECURITY AGREEMENT NO. 5251 (this
"Agreement") is entered into as of June 30, 2006, by and between LIGHTHOUSE CAPITAL PARTNERS V,
L.P. ("Lender") and ANACOR PHARMACEUTICALS, INC., a Delaware corporation
("Borrower") and sets forth the terms and conditions upon which Lender will lend and Borrower will repay money. In consideration of the mutual covenants
herein contained, the parties agree as follows: 

1.    DEFINITIONS AND CONSTRUCTION  

        1.1    Definitions.    Initially capitalized terms used and not
otherwise defined herein are defined in the California Uniform Commercial Code ("UCC"). 

        "ACH" means the Automated Clearing House electronic funds transfer system. 

        "Advance" means a Loan advanced by Lender to Borrower hereunder. 

        "Basic Rate" means a variable per annum rate of interest equal to the Index plus the
Interest Margin which shall be subject to adjustment as provided in the Loan Agreement. On and after the Loan Commencement Date the Basic Rate shall be fixed and not subject to any further
adjustments. 

        "Borrower's Books" means all of Borrower's books and records, including records concerning Collateral, Borrower's assets, liabilities,
business operations or financial condition, on any media, and the equipment containing such information. 

        "Collateral" means: (i) all property in which Lender now has or hereafter obtains a
security interest or which is listed on any UCC-1 naming Borrower as Debtor in any capacity and Lender or an affiliate of Lender as Secured Party including  Exhibit A attached hereto; and
(ii) all products and proceeds of the foregoing, including
proceeds of insurance and proceeds of proceeds. 

        "Commitment" means $8,000,000, such Commitment availability subject to Borrower closing a Preferred Stock Financing and the issuance of a
Warrant to Lender as set forth in Section 6.8 hereof. 

        "Commitment Fee" means $10,000. 

        "Commitment Termination Date" means the earliest to occur of (i)
(a) October 1, 2006, if Borrower has not drawn at least $2,500,000 by such date, or (b) April 1, 2007; (ii) any Default or
Event of Default, (iii) for any Advances, the date at which any 2 of the persons currently serving as either Chief Executive Officer, Chief Financial
Officer or a Senior Vice-President of the Borrower cease to be involved in the management of Borrower; or (iv) the date on which any 2 of Rho Venture Partners; Venrock Partners;
Aberdare Ventures or Care Capital cease to have a representative on Borrower's Board of Directors. 

        "Control Agreement" means an agreement substantially in the form of Exhibit I or
otherwise acceptable to Lender. 

        "Default" means any event that with the passing of time or the giving of notice or both would become an Event of Default. 

        "Default Rate" means the lesser of 18% per annum or the highest rate permitted by applicable law. 

        "Disclosure Schedule" means the schedule attached as Schedule 1 hereto. 

        "Event of Default" is defined in Section 8. 

        "Funding Date" means any date on which an Advance is made to or on account of Borrower hereunder. 

1

 

        "Indebtedness" means (i) all indebtedness for borrowed money or the deferred purchase of
property or services, (ii) all obligations evidenced by notes, bonds, debentures or similar instruments,  (iii) all capital lease obligations, and
(iv) all contingent obligations, including guaranties and
obligations of reimbursement or respecting letters of credit. 

        "Incumbency Certificate" means the document in the form of Exhibit E. 

        "Index" means the prevailing variable Prime Rate of annual interest as quoted from time to time in the western edition of the Wall Street
Journal. 

        "Interest Margin" means 2% per annum. 

        "Lender's Expenses" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, modification, administration, or enforcement of the Loan or Loan Documents, or the exercise or preservation of any rights or remedies by Lender, whether or not suit is
brought; provided, however, that Lender's Expenses for the preparation and negotiation of the initial set of Loan Documents shall not exceed $10,000.
Lender will apply deposits received before the date hereof, if any, towards Lender's Expenses. 

        "Lien" means any lien, security interest, pledge, bailment, lease, mortgage, hypothecation, conditional sales and title retention
agreement, charge, claim, or other encumbrance. 

        "Loan" means all of the Advances, however evidenced, and all other amounts due or to become due hereunder. 

        "Loan Commencement Date" means January 1, 2008. 

        "Loan Documents" means, collectively, this Agreement, the Warrant, the Notes and all other documents, instruments and agreements entered
into between Borrower and Lender in connection with the Loan, all as amended or extended from time to time. 

        "Negative Pledge Agreement" means an agreement in the form of Exhibit H. 

        "Note" means a Secured Promissory Note in the form of Exhibit B. 

        "Notice of Borrowing" means the form attached as Exhibit D. 

        "Obligations" means all Loans, debt, principal, interest, fees, charges, Lender's Expenses and other amounts, obligations, covenants, and
duties owing by Borrower to Lender of any kind or description (whether pursuant to the Loan Documents or otherwise (with the exception of the Warrant), and whether or not for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any of the same obtained by Lender by assignment or otherwise, and all
amounts Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. 

        "Permitted Indebtedness" means: (i) the Loan;  (ii) unsecured trade debt incurred in the ordinary course of Borrower's
business; (iii) Indebtedness
secured by clause (ii) of Permitted Liens; and (iv)Subordinated Debt. 

        "Permitted Liens" means: (i) Liens in favor of Lender;  (ii) Liens disclosed in the Disclosure Schedule; (iii) Liens for taxes, fees, assessments or other
governmental charges or levies not delinquent or being contested in good faith by appropriate proceedings, that do not jeopardize Lender's interest in any Collateral; and  (iv) Liens to secure payment of
worker's compensation, employment insurance, old age pensions or other social security obligations of Borrower on which
Borrower is current and are in the ordinary course of its business; provided none of the same diminish or impair Lender's rights and remedies respecting the Collateral. 

2

 

        "Preferred Stock Financing" means Borrower's Series D Preferred Stock financing with gross proceeds to Borrower of at least
$5,000,000 and at a pre-money valuation not to exceed $86,000,000. 

        "Regulated Substance" means any substance, material or waste the use, generation, handling, storage, treatment or disposal of which is
regulated by any local or state government authority, including any of the same designated by any authority as hazardous, genetic, cloning, fetal, or embryonic. 

        "Responsible Officer" means each person as authorized by the board of directors of Borrower as set forth on the Incumbency Certificate. 

        "Subordinated Debt" means Indebtedness of Borrower, lead by its existing investors in an amount not to exceed $5,000,000 that is
subordinated in both security and right of payment to the Obligations on terms and conditions satisfactory to Lender as evidenced by a subordination agreement between Lender and the provider(s) of
such Subordinated Debt. 

        "Term" means the period from and after the date hereof until the full, final and indefeasible payment and performance of all Obligations. 

        "Warrant" means the Warrant in favor of Lender and its affiliates to purchase securities of Borrower substantially in the form of  Exhibit C to be issued in
accordance with Section 6.8 hereof. 

        1.2    Interpretation.    References to "Articles," "Sections,"
"Exhibits," and "Schedules" are to articles, sections, exhibits and schedules herein and hereto unless otherwise indicated. "Hereof," "herein" and "hereunder" refer to this Agreement as a whole.
"Including" is not limiting. All accounting and financial computations shall be computed in accordance with generally accepted accounting principles consistently applied
("GAAP"). "Or" is not necessarily exclusive. All interest computation shall be based on a 360-day year and actual days elapsed. 

2.    THE LOANS  

        2.1    Commitment.    Subject to the terms hereof, Lender will make
Advances to Borrower up to the principal amount of the Commitment, on or before the Commitment Termination Date. Notwithstanding anything in the Loan Documents to the contrary, Lender's obligation to
make any Advances or to lend the undisbursed portion of the Commitment shall terminate on the Commitment Termination Date. Repaid principal of the Advances may not be re-borrowed. 

        2.2    The Advances.    A Note setting forth the specific terms of
repayment will evidence each Advance. No Advance will be made for less than $500,000, unless less than $500,000 remains available under the
Commitment for borrowing. Absence of a Note evidencing any portion of the Loan shall not impair Borrower's obligation to repay it to Lender. 

        2.3    Terms of Payment, Repayment.    

        (a)    Repayment.    Borrower shall repay the principal and pay
interest on each Advance on the terms set forth in the applicable Note. Amounts not paid when due hereunder or under the Note shall bear interest at the Default Rate. If a court of competent
jurisdiction determines that Lender has received payments that, if interest, would exceed the maximum lawfully permitted, Lender will instead apply such money to fees and expenses and then to early
prepayment of principal. 

        (b)    ACH.    All payments due to Lender must be, at Lender's option,
paid to Lender in cash or through ACH. Borrower shall execute and deliver the ACH Authorization Form substantially in the form of Exhibit G. If
the ACH payment arrangement is terminated for any reason, Borrower shall make all payments due to Lender at Lender's address specified in  Section 11. 

3

 

        (c)    Default Rate.    While an Event of Default has occurred and is
continuing, interest on the Loan shall be increased to the Default Rate. Lender's failure to charge or accrue interest at the Default Rate during the existence of a Default shall not be deemed a
waiver by Lender of its right or claim thereto. 

        (d)    Date.    Whenever any payment due under the Loan Documents is
due on a day other than a business day, such payment shall be made on the next succeeding business day, and such extension of time shall be included in the computation of interest or fees, as the case
may be. 

        2.4    Fees.    Borrower shall pay to Lender the following: 

        (a)    Commitment Fee.    The Commitment Fee, which has been
previously paid by Borrower, and shall be applied by Lender to Lender's Expenses and other Obligations. 

        (b)    Late Fee.    On demand, a late charge on any sums due hereunder
that are not paid when due, in an amount equal to 2% of the past due amount, payable on demand. 

        (c)    Lender's Expenses.    When requested, all Lender's Expenses.
Lender's Expenses not paid when due shall bear interest as principal at the Default Rate. 

3.    CONDITIONS OF ADVANCES; PROCEDURE FOR REQUESTING ADVANCES  

        3.1    Conditions Precedent to any and all Advances.    The obligation
of Lender to make any Advances is subject to each and every of the following conditions precedent in form and substance satisfactory to Lender in its sole discretion:  (i) this Agreement, a Note
evidencing the Advance, the Warrant, and all other UCC financing statements, and other documents required or as
specified herein have been duly authorized, executed and delivered; (ii) no Default or Event of Default has occurred and is continuing;  (iii) delivery of a
Notice of Borrowing with respect to the proposed Advance; (iv) Lender's security
interests in the Collateral are valid and first priority, except for Permitted Liens; (v) Borrower shall have opened a new account
#14994-19632 with Bank of America and Lender shall have received a signed Control Agreement for such account and any other new accounts with said institution; and  (vi) all such other items as Lender may
reasonably deem necessary or appropriate have been delivered or satisfied. The extension of an Advance prior to
the receipt by Lender of any of the foregoing shall not constitute a waiver by Lender of Borrower's obligation to deliver such item. 

        3.2    Procedure for Making Advances.    For any Advance, Borrower
shall provide Lender an irrevocable Notice of Borrowing at least 10 business days prior to the desired Funding Date and Lender shall only be required to make Advances hereunder based upon written
requests which comply with the terms and exhibits of this Loan Agreement (as the same may be amended from time to time), and which are submitted and signed by a Responsible Officer. Borrower shall
execute and deliver to Lender a Note and such other documents and instruments as Lender may reasonably require for each Advance made. 

4.    CREATION OF SECURITY INTEREST  

        4.1    Grant of Security Interest.    Borrower grants to Lender a
valid, first priority, continuing security interest in all present and future Collateral in order to secure prompt, full, faithful and timely payment and performance of all Obligations. 

        4.2    Inspections.    While any Obligations remain outstanding,
Lender shall have the right upon reasonable prior notice to inspect Borrower's Books, including computer files, and to make copies, and to test, inspect and appraise the Collateral, in order to verify
any matter relating to Borrower or the Collateral. 

4

 

        4.3    Authorization to File Financing Statements.    Borrower
irrevocably authorizes Lender at any time and from time to time to file in any jurisdiction any financing statements and amendments that: (i) name
Collateral as collateral thereunder, regardless of whether any particular Collateral falls within the scope of the UCC; (ii) contain any other
information required by the UCC for sufficiency or filing office acceptance, including organization identification numbers; and (iii) contain such
language as Lender determines helpful in protecting or preserving rights against third parties. Borrower ratifies any such filings made prior to the date hereof. 

5.    REPRESENTATIONS AND WARRANTIES  

        Borrower represents, warrants and covenants as follows: 

        5.1    Due Organization and Qualification.    Borrower is a
corporation duly formed, existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be so qualified or in which the Collateral is located, except for states other than California and Delaware as to which any
failure so to qualify would not reasonably be expected to have a material adverse effect on Borrower or any of the Collateral. 

        5.2    Authority.    Borrower has all corporate power and authority,
and has taken all actions, and has obtained all third party consents necessary to execute, deliver, and perform the Loan Documents. 

        5.3    Disclosure Schedule.    All information on the Disclosure
Schedule is true, correct and complete. 

        5.4    Authorization; Enforceability.    The execution and delivery
hereof, the granting of the security interest in the Collateral, the incurring of the Obligations, the execution and delivery of all Loan Documents and the consummation of the transactions herein and
therein contemplated have been duly authorized by all necessary action by Borrower. The Loan Documents constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their
terms, except as enforceability may be limited by bankruptcy or similar laws relating to enforcement of creditors' rights generally. 

        5.5    Name and Location.    Borrower has not done business under any
name other than that specified on the signature page hereof or as set forth on the Disclosure Schedule. The chief executive office, principal place of business, and the place where Borrower maintains
its records concerning the Collateral is set forth in Section 11. The Collateral is presently located at the address(es) set forth in  Section 11
and on the Disclosure Schedule. 

        5.6    Litigation.    All actions or proceedings pending or threatened
by or against Borrower before any court or administrative agency are set forth on the Disclosure Schedule.

        5.7    Financial Statements.    All financial statements fairly
represent the financial condition of the Borrower. All statements respecting Collateral that have been or may hereafter be delivered by Borrower to Lender are true, complete and correct in all
material respects for the periods indicated. 

        5.8    Solvency.    Borrower is solvent and able to pay its debts
(including trade debts) as they come due. 

        5.9    Taxes.    Borrower has filed and will file all required tax
returns, and has paid and will pay all taxes it owes other than where the failure to comply would not reasonably be expected to have an adverse effect on Borrower. 

        5.10    Rights; Title to Assets.    Borrower possesses and owns all
necessary assets, rights, trademarks, trade names, copyrights, patents, patent rights, franchises and licenses which it needs to conduct its business as now operated or proposed to be operated.
Borrower has good title to its assets, free and clear of any Liens, except for Permitted Liens. 

5

 

        5.11    Full Disclosure.    No written representation, warranty or
other statement made by Borrower in any Loan Document, certificate or statement furnished to Lender contains any untrue statement of a material fact or omits to state a material fact necessary in
order to make the statements contained in such certificates or statements not misleading. 

        5.12    Regulated Substances.    To its knowledge, Borrower complies
and will comply with all laws respecting Regulated Substances in all material respects. 

        5.13    Reaffirmation.    Each Notice of Borrowing will constitute  (i) a warranty and representation
in favor of Lender that there does not exist any Default and (ii)
subject to any amended Disclosure Schedule delivered to Lender or any other written disclosure required to be sent to Lender pursuant to the terms hereof, a reaffirmation as of the date thereof of all
of the representations and warranties contained in this Agreement and the Loan Documents, provided, however, and notwithstanding any provision in this
Agreement to the contrary, if any such amended Disclosure Schedule contains any matter which could reasonably be expected to have a material adverse effect on Borrower or the Collateral, Lender's
obligation to make Advances to Borrower hereunder shall be suspended during the pendency of any such material adverse effect condition. 

6.    AFFIRMATIVE COVENANTS  

        Borrower covenants and agrees that it shall do all of the following: 

        6.1    Good Standing and Compliance.    Borrower shall maintain all
governmental licenses, rights and agreements necessary for its operations or business and comply in all material respects with all statutes, laws, ordinances and government rules and regulations to
which it is subject. 

        6.2    Financial Statements, Reports, Certificates.    Borrower shall
deliver to Lender: (i) as soon as prepared, and no later than 30 days after the end of each calendar month, a balance sheet, income statement and
cash flow statement covering Borrower's operations during such period; (ii) as soon as prepared, but no later than 180 days after the end of the
fiscal year, audited financial statements prepared in accordance with GAAP, together with an opinion that such financial statements fairly present Borrower's financial condition by an independent
public accounting firm reasonably acceptable to Lender; (iii)promptly upon notice thereof, a report of any legal or administrative action pending or
threatened against Borrower which is likely to result in liability to Borrower in excess of $50,000; and (iv) such other financial information as Lender
may reasonably request from time to time. Financial statements delivered pursuant to subsections (i) and  (ii) above shall be accompanied by a certificate
signed by a Responsible Officer (each an "Officer's
Certificate") in the form of Exhibit F.  

        6.3    Notice of Defaults.    Reasonably
promptly after discovering any Default or Event of Default, deliver an Officer's Certificate setting forth the facts relating to or giving rise thereto, and the Borrower's proposed action with respect
thereto. 

        6.4    Use; Maintenance.    Borrower, at its expense, shall  (i) maintain the Collateral in good
condition, reasonable wear and tear excepted, and will comply in all material respects with all laws, rules and
regulations regarding use and operation of the Collateral and (ii) repair or replace any lost or damaged Collateral, other than Collateral that is
obsolete or worthless at the time of loss or damage or that Borrower determines in good faith is not necessary or useful in the conduct of its business. 

        6.5    Insurance.    Borrower, at its own expense, shall maintain
insurance in amounts and coverages reasonably satisfactory to Lender. Each insurance policy shall: (i) name Lender loss payee or additional insured, as
appropriate, (ii)provide for insurer's waiver of its right of subrogation against Lender and Borrower,  (iii) provide that such insurance shall not be
invalidated by any action of, or breach of warranty by, Borrower and waive set-off,
counterclaim or offset against Lender, (iv) be primary without a right of contribution of Lender's insurance, if any, or any obligation on the part of
Lender to pay 

6

 

premiums
of Borrower, and (v) require the insurer to give Lender at least 30 days prior written notice of cancellation. Borrower shall furnish
all certificates of insurance required by Lender. 

        6.6    Loss Proceeds.    So long as no Event of Default has occurred
and is continuing, any proceeds of insurance on or condemnation of Collateral shall, at Borrower's election and so long as Lender's security interest in such proceeds remains first priority, be used
either to repair or replace such Collateral or otherwise applied to the purchase or acquisition of property useful to Borrower's business. 

        6.7    Further Assurances.    At any time and from time to time,
Borrower shall execute and deliver such further instruments and take such further action as Lender may reasonably request to effect the intent and purposes hereof, to perfect and continue perfected
and of first priority Lender's security interests in the Collateral, and to effect and maintain ACH payment arrangements. 

        6.8    Preferred Stock Financing.    Borrower shall provide Lender
with evidence reasonably satisfactory to Lender of the closing of the Preferred Stock Financing. Within 10 days of the closing of the Preferred Stock Financing, Borrower shall issue Lender a
Warrant to purchase such number of shares of preferred stock as sold in such Preferred Stock Financing initially equal to $260,000 divided by the price per share paid by investors in such Preferred
Stock Financing. The purchase price per share of preferred stock purchasable under the Warrant shall be the price per share paid by the investors in the Preferred Stock Financing. The number of shares
purchasable under the Warrant shall be subject to increase based on Advances made under the Commitment as set forth in the Warrant. 

7.    NEGATIVE COVENANTS  

        Borrower will not do any of the following: 

        7.1    Location of Collateral.    Change its chief executive office or
principal place of business or remove, except in the ordinary course of Borrower's business, the Collateral or Borrower's Books from the premises listed in  Section 11 without giving 30 days
prior written notice to Lender. 

        7.2    Extraordinary Transactions.    Enter into any transaction not
in the ordinary course of Borrower's business as presently conducted or as proposed to be conducted in Borrower's business plan, including the sale, lease, license or other disposition of its assets,
other than (i) sales of inventory in the ordinary course of Borrower's business; and (ii) licenses of
Borrower's intellectual property assets (a) entered into in the ordinary course of Borrower's business as presently conducted or (b) as proposed to be conducted in Borrower's business
plan, including, for example, licenses of intellectual property rights related to AN0128 or AN2690. The parties hereto agree that strategic partnerships that do not involve a transfer of a material
portion of Borrower's assets shall be deemed to be in the "ordinary course of business" for purposes of this Agreement. 

        7.3    Restructure.    Make any material change in Borrower's
financial structure or business operations (other than through the sale of preferred stock to equity investors); or suspend operation of Borrower's business. 

        7.4    Liens.    Create, incur, assume or suffer to exist any Lien of
any kind with respect to any of its property, whether now owned or hereafter acquired, except for Permitted Liens. 

        7.5    Indebtedness.    Create, incur, assume or suffer to exist any
Indebtedness, other than Permitted Indebtedness. 

        7.6    Distributions.    Pay any dividends or distributions, or
redeem or purchase, any capital stock, except for repurchases of capital stock from departing employees or directors, under repurchase agreements approved by the Borrower's Board of Directors. 

        7.7    Transactions with Affiliates.    Directly or indirectly enter
into any transaction with any affiliate which is on terms less favorable to Borrower than would be obtained in an arm's length 

7

 

transaction
with a non-affiliated entity; provided, any such transaction shall not be a breach of this  Section 7.7 if approved by a disinterested majority of the
Borrower's Board of Directors. 

        7.8    Compliance.    (i) Become an "investment company" under the
Investment Company Act of 1940 or extend credit to purchase or carry margin stock; (ii) fail to meet the minimum funding requirements of ERISA;  (iii)
permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; (iv) fail to
comply with the Federal Fair Labor Standards Act; or (v) violate any other material law or material regulation, in each case unless such event, failure
or violation would not have a material adverse effect on Borrower or the Collateral. 

        7.9    UCC Effectiveness.    Change its name, jurisdiction of
organization, or take any other action that could render Lender's financing statements misleading under the UCC, without giving Lender 30 days advance written notice. 

        7.10    Deposit and Securities Accounts.    Maintain any deposit
accounts or accounts holding securities owned by Borrower except accounts in which Lender has obtained a perfected first priority security interest. Notwithstanding the foregoing, Lender shall not
have a perfected security interest in Borrower's accounts #0117120009 and # W89-080560 with Bank of America and Bank of America Securities, respectively, listed on the Disclosure Schedule,  provided, however, Borrower shall close such accounts within 120 days from the date hereof. 

8.    EVENTS OF DEFAULT  

        Any one or more of the following shall constitute an Event of Default by Borrower hereunder: 

        8.1    Payment.    Borrower fails to pay when due and payable in
accordance with the Loan Documents any portion of the Obligations, or cancels an ACH payment or transfer Lender has initiated in conformity with the terms hereof provided,
however, that an Event of Default shall not occur on account of a failure to pay due solely to an administrative or operational error if Borrower had the funds to make the
payment when due and makes the payment the business day following Borrower's knowledge of such failure to pay. 

        8.2    Certain Covenant Defaults.    Borrower fails to perform any
obligation under Section 6.5 or 6.6, or violates any of the covenants contained in  Section 7.

        8.3    Other Covenant Defaults.    Borrower fails or neglects to
perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the other Loan Documents, or in any other present or future agreement
between Borrower and Lender and has failed to cure such failure within 15 days after its occurrence. 

        8.4    Attachment.    Any material portion of Borrower's assets is
attached, seized, subjected to a government levy, lien, writ or distress warrant, or comes into the possession of any trustee or receiver and the same is not returned, removed, waived, stayed,
discharged or rescinded within 10 days. 

        8.5    Other Agreements.    There is a default in any agreement to
which Borrower is a party resulting in a right by a third party, whether or not exercised, to accelerate the maturity of any Indebtedness, in an
amount greater than $100,000; provided that in the event Borrower in good faith disputes whether a default has occurred under such agreement and has
adequate reserves, there shall not be an Event of Default under this Section until the earlier of actual exercise by the third party of such right to accelerate or 30 days after such default. 

        8.6    Judgments.    One or more judgments for an aggregate of at
least $100,000 is rendered against Borrower and remains unsatisfied and unstayed for more than 30 days. 

8

 

        8.7    Injunction.    Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct any material part of its business affairs, or if a judgment or other claim becomes a Lien upon any material portion of Borrower's assets. 

        8.8    Misrepresentation.    Any representation, statement, or report
made to Lender by Borrower was false or misleading when made in any material respect. 

        8.9    Enforceability.    Lender's ability to enforce its rights
against Borrower or any Collateral is impaired in any material respect, or Borrower asserts that any Loan Document is not a legal, valid and binding obligation of Borrower enforceable in accordance
with its terms. 

        8.10    Involuntary Bankruptcy.    An involuntary bankruptcy case
remains undismissed or unstayed for 30 days or, if earlier, an order granting the relief sought is entered. 

        8.11    Voluntary Bankruptcy or Insolvency.    Borrower commences a
voluntary case under applicable bankruptcy or insolvency law, consents to the entry of an order for relief in an involuntary case under any such law, or consents or is subject to the appointment of or
taking possession by a receiver, liquidator, assignee, trustee, custodian or other similar official of Borrower or any substantial part of its property, or makes an assignment for the benefit of
creditors, or fails generally or admits in writing to its inability to pay its debts as they become due, or takes any corporate action in furtherance of any of the foregoing. 

        8.12    Merger, Sale or Change of Control.    The occurrence of  (i) a merger of Borrower with another
entity (whether or not the Borrower is the "surviving entity") whereby the shareholders of Borrower immediately
prior to such merger own less than 50% of the outstanding voting securities of Borrower immediately after such merger; (ii) the sale (in one or a series
of related transactions) of all or substantially all of Borrower's assets; or (iii) any transaction (or series of related transactions) other
than a transaction that is a bona fide equity financing with the primary purpose of raising capital for Borrower, whereby the shareholders of Borrower immediately prior to such transaction(s) own less
than 50% of the outstanding voting securities of Borrower immediately after such transaction(s), and in each case such acquirer or resulting entity (including, Borrower, if Borrower is the resulting
or surviving entity) fails to either: (a) pay off the Obligations in cash at the closing of the acquisition, merger or sale or  (b) provide an unconditional,
 unlimited guaranty or reaffirmation of the Obligations in form and substance reasonably satisfactory to Lender and is of a
credit quality acceptable to Lender. 

9.    LENDER'S RIGHTS AND REMEDIES  

        9.1    Rights and Remedies.    Upon the occurrence and continuance of
any Event of Default, Lender may, at its election, without notice of election and without demand, do any one or more of the following, all of which are authorized by Borrower:  (i) accelerate and declare
the Loan and all Obligations immediately due and payable; (ii) make such
payments and do such acts as Lender considers necessary or reasonable to protect its security interest in the Collateral, with such amounts becoming Obligations bearing interest at the Default Rate;  (iii) exercise any and all other rights and remedies available under the UCC or otherwise; (iv) require
Borrower to assemble the Collateral at such places as Lender may designate; (v) enter premises where any Collateral is located, take, maintain
possession of, or render unusable the Collateral or any part of it; (vi) without notice to Borrower, set off and recoup against any portion of the
Obligations; (vii) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral, in connection
with which Borrower hereby grants Lender a license to use without charge Borrower's premises, labels, name, trademarks, and other property necessary to complete, advertise, and sell any Collateral;
and (viii) sell the Collateral at one or more public or private sales. 

        9.2    Power of Attorney in Respect of the Collateral.    Borrower
hereby irrevocably appoints Lender (which appointment is coupled with an interest) its true and lawful attorney in fact with full 

9

 

power
of substitution, for it and in its name to, upon and during the continuation of an Event of Default: (i) ask, demand, collect, receive, sue for,
compound and give acquittance for any and all Collateral with full power to settle, adjust or compromise any claim, (ii) receive payment of and endorse
the name of Borrower on any items of Collateral, (iii) make all demands, consents and waivers, or take any other action with respect to, the Collateral,  (iv) file any claim or take any other action, in Lender's or Borrower's name, which Lender may reasonably deem appropriate to protect its rights in the
Collateral, or (v) otherwise act with respect to the Collateral as though Lender were its outright owner. 

        9.3    Charges.    If Borrower fails to pay any amounts required
hereunder to be paid by Borrower to any third party, Lender may at its option pay any part thereof and any amounts so paid including Lender's
Expenses incurred shall become Obligations, immediately due and payable, bearing interest at the Default Rate, and secured by the Collateral. Any such payments by Lender shall not constitute an
agreement to make similar payments or a waiver of any Event of Default. 

        9.4    Remedies Cumulative.    Lender's rights and remedies under the
Loan Documents and all other agreements with Borrower shall be cumulative. Lender shall have all other rights and remedies as provided under the UCC, by law, or in equity. No exercise by Lender of one
right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or
acquiescence. 

        9.5    Application of Collateral Proceeds.    Lender will apply
proceeds of sale, to the extent actually received in cash, in the manner and order it determines in its sole discretion, and as prescribed by applicable law. 

10.    WAIVERS; INDEMNIFICATION  

        10.1    Waivers.    Without limiting the generality of the other
waivers made by Borrower herein, to the maximum extent permitted under applicable law, Borrower hereby irrevocably waives all of the following: (i) any
right to assert against Lender as a defense, counterclaim, set-off or crossclaim, any defense (legal or equitable), set-off,
counterclaim, crossclaim and/or other claim (a) which Borrower may now or at any time hereafter have against any party liable to Lender in any way or manner, or (b) arising directly or
indirectly from the present or future lack of perfection, sufficiency, validity and/or enforceability of any Loan Document, or any security interest;  (ii) presentment, demand and notice of presentment,
dishonor, notice of intent to accelerate, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all accounts, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable and
hereby ratifies and confirms whatever Lender may do in this regard; (iii) the benefit of all marshalling, valuation, appraisal and exemption laws;  (iv) the
right, if any, to require Lender to (a) proceed against any person liable for any of the Obligations as a condition to or before
proceeding hereunder; or (b) foreclose upon, sell or otherwise realize upon or collect or apply any other property, real or personal, securing any of the Obligations, as a condition to, or
before proceeding hereunder; (v) any demand for possession before the commencement of any suit or action to recover possession of Collateral; and  (vi) any
requirement that Lender retain possession and not dispose of Collateral until after trial or final judgment.
 

        10.2    Lender's Liability for Collateral.    Subject to the
applicable provisions of the UCC, Lender shall not in any way or manner be liable or responsible for: (i) the safekeeping of any Collateral;  (ii) any loss
or damage thereto occurring or arising in any manner or fashion from any cause; (iii) any
diminution in the value thereof; or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person or entity
whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. Lender will have no responsibility for taking any steps to preserve rights against any parties
respecting any Collateral. Lender's powers hereunder are conferred 

10

 

solely
to protect its interest in the Collateral and do not impose any duty to exercise any such powers. None of Lender or any of its officers, directors, employees, agents or counsel will be liable
for any action lawfully taken or omitted to be taken hereunder or in connection herewith (excepting gross negligence or willful misconduct), nor under any circumstances have any liability to Borrower
for lost profits or other special, indirect, punitive, or consequential damages. Lender retains any documents delivered by Borrower only for its purposes and for such period as Lender, at its sole
discretion, may determine necessary, after which time Lender may destroy such records without notice to or consent from Borrower. 

        10.3    Indemnification.    Borrower shall, on an after tax basis,
defend, indemnify, and hold Lender and each of its officers, directors, employees, counsel, partners, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses or disbursements (including Lender's Expenses and reasonable attorney's fees and the allocated cost of in-house counsel) of any kind or nature whatsoever with respect to
the execution, delivery, enforcement, performance and administration of this Agreement and any other Loan Documents, or the transactions contemplated hereby and thereby, with respect to noncompliance
with laws or regulations respecting Regulated Substances, government secrecy or technology export, or any Lien not created by Lender or right of another against any Collateral, even if the Collateral
is foreclosed upon or sold pursuant hereto, and with respect to any investigation, litigation or proceeding before any agency, court or other governmental authority relating to this Agreement or the
Advances or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified
Liabilities"); provided, that Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. The obligations in this Section shall survive the Term. At the election of any Indemnified Person,
Borrower shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person, at the sole cost and expense of Borrower. All amounts owing under this Section shall be paid
within 30 days after written demand. 

11.    NOTICES  

        All notices shall be in writing and personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by confirmed facsimile, at the
respective addresses set forth below: 

	If to Borrower:	 	If to Lender:
	

Anacor Pharmaceuticals, Inc.

1060 E. Meadow Circle

Palo Alto, California 94303

Attention: Chief Financial Officer

FAX: (650) 739-0139	
 	

Lighthouse Capital Partners V, LP

500 Drake's Landing Road

Greenbrae, California 94904

Attention: Contract Administrator

FAX: (415) 925-3387

12.    GENERAL PROVISIONS  

        12.1    Successors and Assigns.    This Agreement shall bind and inure
to the benefit of the parties' respective successors and permitted assigns. Borrower may not assign any rights hereunder without Lender's prior written consent, which consent may be granted or
withheld in Lender's reasonable sole discretion. Lender shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participations in all or any part of
any Loan Document. 

        12.2    Time of Essence.    Time is of the essence for the performance
of all Obligations. 

        12.3    Severability of Provisions.    Each provision hereof shall be
severable from every other provision in determining its legal enforceability. 

11

 

        12.4    Entire Agreement.    This Agreement and each of the other Loan
Documents dated as of the date hereof, taken together, constitute and contain the entire agreement between Borrower and Lender with
respect to their subject matter and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral. This Agreement
is the result of negotiations between and has been reviewed by the Borrower and Lender as of the date hereof and their respective counsel; accordingly,
this Agreement shall be deemed to be the product of the parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. This Agreement may only be modified with the
written consent of Lender. Any waiver or consent with respect to any provision of the Loan Documents shall be effective only in the specific instance and for the specific purpose for which it was
given. No notice to or demand on Borrower in any one case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. 

        12.5    Reliance by Lender.    All covenants, agreements,
representations and warranties made herein by Borrower shall, notwithstanding any investigation by Lender, be deemed to be material to and to have been relied upon by Lender. 

        12.6    No Set-Offs by Borrower.    All sums payable by
Borrower pursuant to this Agreement or any of the other Loan Documents shall be payable without notice or demand and shall be payable in United States Dollars without set-off or reduction
of any manner whatsoever. 

        12.7    Counterparts.    This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same original instrument. 

        12.8    Survival.    All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. 

        12.9    No Original Issue Discount.    Borrower and Lender acknowledge
and agree that the Warrant is part of an investment unit within the meaning of Section 1273(c)(2) of the Internal Revenue Code, which includes the Loan. Borrower and Lender further agree as
between them, that the fair market value of the Warrant is $100 and that, pursuant to Treas. Reg. § 1.1273-2(h), $100 of the issue price of the investment unit will be
allocable to the Warrant and the balance shall be allocable to the Loans. Borrower and Lender agree to prepare their federal income tax returns in a manner consistent with the foregoing and, pursuant
to Treas. Reg. § 1.1273, the original issue discount on the Loan shall be considered to be zero. 

        12.10    Relationship of Parties.    The relationship between Borrower
and Lender is, and at all times shall remain, solely that of a borrower and lender. Lender is not a partner or joint venturer of Borrower; nor shall Lender under any circumstances be deemed to be in a
relationship of confidence or trust or have a fiduciary relationship with Borrower or any of its affiliates, or to owe any fiduciary duty to Borrower or any of its affiliates. Lender does not
undertake or assume any responsibility or duty to Borrower or any of its affiliates to select, review, inspect, supervise, pass judgment upon or otherwise inform any of them of any matter in
connection with its or their property, the Loans, any Collateral or
the operations of Borrower or any of its affiliates. Borrower and each of its affiliates shall rely entirely on their own judgment with respect to such matters, and any review, inspection,
supervision, exercise of judgment or supply of information undertaken or assumed by Lender in connection with such matters is solely for the protection of Lender and neither Borrower nor any affiliate
is entitled to rely thereon. 

        12.11    Confidentiality.    Lender and Borrower agree that, except
with the prior written permission of the other party, the parties shall at all times hold in confidence and trust and not use or disclose any confidential information provided or learned by such party
in connections with it's rights under the Loan Documents. Notwithstanding the foregoing, the parties may disclose any confidential information 

12

 

of
the other party provided to or learned by such party in connection with such rights to the minimum extent necessary (i) in connection with the
enforcement of this Agreement or rights under this Agreement or the Loan Documents; (ii) as required by any court or other governmental body,  provided that
such party provides the other party with prompt notice of such court order or requirement to enable the party to seek a protective order
or otherwise to prevent or restrict such disclosure; (iii) to legal counsel or such party; (iv) to
comply with applicable law; or (v) with respect to financial information concerning the Borrower, to Lender's limited and general partners in accordance
with Lender's customary investment reporting practices. 

        12.12    Choice of Law and Venue; Jury Trial
Waiver.    THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND LENDER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF THE STATE AND FEDERAL COURTS LOCATED IN THE CITY AND COUNTY OF SAN FRANCISCO,
STATE OF CALIFORNIA. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY
ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. 

	
ANACOR PHARMACEUTICALS, INC.	
 	

LIGHTHOUSE CAPITAL PARTNERS V, L.P.
	

 	
 	

 	
 	

BY:	
 	

LIGHTHOUSE MANAGEMENT PARTNERS V, L.L.C., its general partner
	

By:	
 	

/s/ LUCY DAY
	
 	

By:	
 	

/s/ THOMAS CONNEELY

	

Name:	
 	

Lucy O. Day
	
 	

Name:	
 	

Thomas Conneely

	

Title:	
 	

CFO
	
 	

Title:	
 	

Vice President

13

 

	Exhibit A	 	Collateral Description
	Exhibit B	 	Form of Note
	Exhibit C	 	Form of Preferred Stock Warrant
	Exhibit D	 	Form of Notice of Borrowing
	Exhibit E	 	Form of Incumbency Certificate
	Exhibit F	 	Form of Officers Certificate
	Exhibit G	 	ACH Authorization
	Exhibit H	 	Form of Negative Pledge Agreement
	Exhibit I	 	Control Agreement

14

  

 
 

EXHIBIT A    
    
    COLLATERAL    
    

        This FINANCING STATEMENT and SECURITY AGREEMENT covers all of Debtor's interests in all of the following types or items of property, wherever located and whether
now owned or hereafter acquired, and Debtor hereby grants Secured Party a security interest therein as collateral for the payment and performance of all present and future indebtedness, liabilities,
guarantees and obligations of Debtor to Secured Party, howsoever arising. Debtor agrees that said security interest may be enforced by Secured Party in accordance with the terms of all security and
other agreements between Secured Party and Debtor, the California Uniform Commercial Code, or both, and that this document shall be fully effective as a security agreement, even if there is no other
security or other agreement between Secured Party or Debtor: 

        All
assets of the Debtor; all personal property of Debtor; 

        All
"accounts", "general intangibles", "chattel paper", "contract rights", "documents", "instruments", "deposit accounts", "inventory", "farm products", "fixtures" and "equipment", as
such terms are defined in Division 9 of the California Uniform Commercial Code in effect on the date hereof; 

        All
general intangibles of every kind, including without limitation, federal, state and local tax refunds and claims of all kinds; all rights as a licensee or any kind; all customer
lists, telephone numbers, and purchase orders, and all rights to purchase, lease sell, or otherwise acquire or deal with real or personal property and all rights relating thereto; 

        All
returned and repossessed goods and all rights as a seller of goods; all collateral securing any of the foregoing; all deposit accounts, special and general, whether on deposit with
Secured Party or others; 

        All
life and other insurance policies, claims in contract, tort or otherwise, and all judgments now or hereafter arising therefrom; 

        All
right, title and interest of Debtor, and all of Debtor's rights, remedies, security and liens, in, to and in respect of all accounts and other collateral, including, without
limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, and all guarantees and other contracts of
suretyship with respect to any accounts and other collateral, and all deposits and other security for any accounts and other collateral, and all credit and other insurance; 

        All
notes, drafts, letters of credit, contract rights, and things in action; all drawings, specifications, blueprints and catalogs; and all raw materials, work in process, materials used
or consumed in Debtor's business, goods, finished goods, returned goods and all other goods and inventory of whatsoever kind or nature, any and all wrapping, packaging, advertising and shipping
materials, and all documents relating thereto, and all labels and other devices, names and marks affixed or to be affixed thereto for purposes of selling or identifying the same or the seller or
manufacturer thereof; 

        All
inventory, raw materials and work in progress wherever located; all present and future claims against any supplier of any of the foregoing, including claims for defective goods or
overpayments to or undershipments by suppliers; all proceeds arising from the lease or rental of any of the foregoing; INVENTORY RETURNED BY DEBTOR TO ITS SUPPLIERS SHALL REMAIN SUBJECT TO SECURED
PARTY'S SECURITY INTEREST; 

        All
equipment and fixtures, NONE OF WHICH THE DEBTOR IS AUTHORIZED TO SELL, LEASE OR OTHERWISE DISPOSE OF WITHOUT THE WRITTEN CONSENT OF SECURED PARTY, including without limitation all
machinery, machine tools, motors, controls, parts, vehicles, 

1

 

workstations,
tools, dies, jigs, furniture, furnishings and fixtures; and all attachments, accessories, accessions and property now or hereafter affixed to or used in connection with any of the
foregoing, and all substitutions and replacements for any of the foregoing; all warranty and other claims against any vendor or lessor of any of the foregoing; 

        All
investment property; 

        All
books, records, ledger cards, computer data and programs and other property and general intangibles at any time evidencing or relating to any or all of the foregoing; and 

        All
cash and non-cash products and proceeds of any of the foregoing, in whatever form, including proceeds in the form of inventory, equipment or any other form of personal
property,
including proceeds of proceeds and proceeds of insurance, and all claims by Debtor against third parties for loss or damage to, or destruction of, or otherwise relating to, any or all of the
foregoing. 

        NOTICE—PURSUANT
TO AN AGREEMENT BETWEEN DEBTOR AND SECURED PARTY, DEBTOR HAS AGREED NOT TO FURTHER ENCUMBER THE COLLATERAL DESCRIBED HEREIN, THE FURTHER ENCUMBERING OF WHICH
MAY CONSTITUTE THE TORTIOUS INTERFERENCE WITH SECURED PARTY'S RIGHTS BY SUCH ENCUMBRANCER. IN THE EVENT THAT ANY ENTITY IS GRANTED A SECURITY INTEREST IN DEBTOR'S ACCOUNTS, CHATTEL PAPER, GENERAL
INTANGIBLES OR OTHER ASSETS CONTRARY TO THE ABOVE, THE SECURED PARTY ASSERTS A CLAIM TO ANY PROCEEDS THEREOF RECEIVED BY SUCH ENTITY. 

        Notwithstanding
any of the foregoing, this Financing Statement and Security Agreement does not cover any of Debtor's interests in, and the Collateral shall not under any circumstance
include, and no security interest is granted in, Debtor's Intellectual Property, including, without limitation, any and all property of the Debtor that is subject to, listed in or otherwise described
in the Negative Pledge Agreement dated June 30, 2006 between the Secured Party and the Debtor. "Intellectual Property" means, collectively, all
rights, priorities and privileges of the Debtor relating to intellectual property, in any medium, of any kind or nature whatsoever, now or hereafter owned or acquired or received by Debtor, or in
which Debtor now holds or hereafter acquires or receives any right or interest, whether arising under United States, multinational or foreign laws or otherwise, and shall include, in any event, all
copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, trade secrets, internet domain names (including any right related to the registration thereof), proprietary or
confidential information, mask works, sources object or other programming codes, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge,
know-how, software, data base, data, skill, expertise, recipe, experience, process, models, drawings, materials or records. Notwithstanding the foregoing, Intellectual Property as defined
above does not include accounts, accounts receivable, royalties, licensing fees, contract rights, proceeds, or other revenue obtained or owed from or on account of the licensing or other exploitation
of Intellectual Property, 

2

 

none
of which are excluded, and all of which are included as collateral in the security interest granted by Debtor to Secured Party. 

	"DEBTOR"	 	"SECURED PARTY"
	
ANACOR PHARMACEUTICALS, INC.,	
 	
LIGHTHOUSE CAPITAL PARTNERS V, L.P.
	a Delaware corporation	 	BY:	 	LIGHTHOUSE MANAGEMENT PARTNERS V, L.L.C.,

its general partner
	By:	 	 
	 	 	 	 
	Name:	 	 
	 	By:	 	 

	Title:	 	 
	 	Name:	 	 

	 	 	 	 	Title:	 	 

3

  

 
 

EXHIBIT B    
    

[                        ]

 
 

SECURED PROMISSORY NOTE    
    

        THIS SECURED PROMISSORY NOTE (this "Note") is made
                        , 200    , by ANACOR PHARMACEUTICALS, INC. ("Borrower") in favor of
LIGHTHOUSE CAPITAL PARTNERS V, L.P. (collectively with its assigns, "Lender"). Initially capitalized
terms used and not otherwise defined herein are defined in that certain Loan and Security Agreement No. 5251 between Borrower and Lender dated June 30, 2006 (the
"Loan Agreement"). 

        FOR VALUE RECEIVED, Borrower promises to pay in lawful money of the United States, to the order of Lender, at 500 Drake's Landing Road,
Greenbrae, California 94904, or such other place as Lender may from time to time designate ("Lender's Office"), the principal sum of
$                        
(the "Advance"), including interest on the unpaid balance and all other amounts due or to become due hereunder according to the terms hereof and of the Loan Agreement. 

        "Basic Rate" means a variable per annum rate of interest equal to the Index plus the
Interest Margin which shall be subject to adjustment as provided in the Loan Agreement. On and after the Loan Commencement Date, the Basic Rate shall be fixed and not subject to any further
adjustments. 

        "Final Payment" means 9.5% of the Advance. 

        "Index" means the prevailing variable Prime Rate of annual interest as quoted from time to time in the western edition of the Wall Street
Journal. 

        "Interest Margin" means 2% per annum. 

        "Loan Commencement Date" means January 1, 2008. 

        "Maturity Date" means the last day of the Repayment Period, or if earlier, the date of prepayment under the Note. 

        "Payment Date" means the first day of each calendar month. 

        "Prepayment Fee" means (i) 3% of the outstanding principal amount being prepaid if such
prepayment is made in calendar year 2006 or 2007; (ii) 2% of the outstanding principal amount being prepaid if such prepayment is made in calendar year
2008, or (iii) 1% of the outstanding principal amount being prepaid if such prepayment is made in calendar year 2009 or thereafter. 

        "Repayment Period" means the period beginning on the Loan Commencement Date and continuing for 30 calendar months. 

        1.    Repayment.    Borrower shall pay principal and interest due
hereunder from the Funding Date, until this Note is paid in full, on each Payment Date pursuant to the terms of the Loan Agreement and this Note. Prior to the Loan Commencement Date, Borrower shall
pay to Lender, monthly in advance on each Payment Date, interest calculated using the Basic Rate prevailing on the first business day of such calendar month. Beginning on the Loan Commencement Date
and on each Payment Date thereafter during the Repayment Period, Borrower shall make equal installments of principal and interest in advance, calculated at the Basic Rate. On the Maturity Date,
Borrower shall pay, in addition to all unpaid principal and interest outstanding hereunder, the Final Payment. 

        2.    Interest.    Interest not paid when due will, to the maximum
extent permitted under applicable law, become part of principal, at Lender's option, and thereafter bear like interest as principal. All interest computation shall be based on a 360-day
year and actual days elapsed. All Obligations not paid when due shall bear interest at the Default Rate unless waived in writing by Lender. All amounts paid 

1

 

hereunder
will be applied to the Obligations in Lender's discretion and as provided in the Loan Agreement. 

        3.    Voluntary Prepayment.    Borrower may prepay the Note if and
only if Borrower pays to Lender (i) the outstanding principal amount of this Note and any unpaid accrued interest;  (ii) the Final Payment; (iii) the Prepayment Fee; and  (iv) all other sums, if any, that shall have become due and payable hereunder with respect to this Note. 

        4.    Collateral.    This Note is secured by the Collateral. 

        5.    Waivers.    Borrower, and all guarantors and endorsers of this
Note, regardless of the time, order or place of signing, hereby waive notice, demand, presentment, protest, and notices of every kind, presentment for the purpose of accelerating maturity, diligence
in collection, and, to the fullest extent permitted by law, all rights to plead any statute of limitations as a defense to any action on this Note. 

        6.    Choice of Law; Venue.    THIS NOTE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF BORROWER AND LENDER HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION AND VENUE OF THE STATE AND FEDERAL COURTS LOCATED IN THE CITY AND COUNTY OF SAN FRANCISCO, STATE OF CALIFORNIA. BORROWER AND LENDER EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE. EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER
ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  

        7.    Miscellaneous.    THIS
NOTE MAY BE MODIFIED ONLY BY A WRITING SIGNED BY BORROWER AND LENDER. Each provision hereof is severable from every other provision hereof and of the Loan Agreement when
determining its legal enforceability. Sections and subsections are titled for convenience, and not for construction. "Hereof," "herein," "hereunder," and similar words refer to this Note in its
entirety. "Or" is not necessarily exclusive. "Including" is not limiting. The terms and conditions hereof inure to the benefit of and are binding upon the parties' respective permitted successors and
assigns. This Note is subject to all the terms and conditions of the Loan Agreement. 

        IN WITNESS WHEREOF, Borrower has caused this Note to be executed by a duly authorized officer as of the day and year first above written. 

	

 	
 	
ANACOR PHARMACEUTICALS, INC.
	

 	
 	

By:	
 	

 

	

 	
 	

Name:	
 	

 

	

 	
 	

Title:	
 	

 

2

  

 
 

EXHIBIT D    
    
    NOTICE OF BORROWING    
    

                    ,            

Lighthouse
Capital Partners V, L.P.

500 Drake's Landing Road

Greenbrae, CA 94904-3011 

        Ladies
and Gentlemen: 

        Reference
is made to the Loan and Security Agreement No. 5251 dated as of June 30, 2006 (as it has been and may be amended from time to time, the
"Loan Agreement," initially capitalized terms used herein as defined therein), between LIGHTHOUSE CAPITAL PARTNERS V,
L.P. and ANACOR PHARMACEUTICALS, INC. (the "Company") 

        The
undersigned is the President and CEO of the Company, and hereby irrevocably requests an Advance under the Loan Agreement, and in that connection certifies as follows: 

        1.     The
amount of the proposed Advance is $                        . The business day of the proposed Advance
is                        . 

        2.     The
Loan Commencement Date for this Advance shall be January 1, 2008. 

        3.     As
of this date, no Event of Default, or event which with notice or the passage of time would constitute an Event of Default, has occurred and is continuing, or will
result from the making of the proposed Advance, and the representations and warranties of the Company contained in Section 5 of the Loan
Agreement are true and correct in all material respects, except as set forth in the Disclosure Schedule and any updates thereto delivered on or before the date hereof. 

        4.     No
event that could reasonably be expected to have a material adverse effect on the ability of Borrower to fulfill its obligations under the Loan Agreement has occurred
since the date of the most recent financial statements, submitted to you by the Company. 

        The
Company agrees to notify you promptly before the funding of the Advance if any of the matters to which I have certified above shall not be true and correct on the Funding Date. 

	

 	
 	

Very truly yours,
	

 	
 	
ANACOR PHARMACEUTICALS, INC.
	

 	
 	

By:	
 	

 

	

 	
 	

Name:	
 	

Lucy O. Day

	

 	
 	

Title:	
 	

CFO

1

  

 
 

EXHIBIT E    
    
    INCUMBENCY CERTIFICATE    
    

        The undersigned, Lucy O. Day, hereby certifies that: 

        1.     He/She is the duly elected and acting Chief Financial Officer of ANACOR
PHARMACEUTICALS, INC., a Delaware corporation (the "Company"). 

        2.     That on the date hereof, each person listed below holds the office in the Company indicated opposite his or her name and
that the signature appearing thereon is the genuine signature of each such person: 

	NAME
	 	OFFICE
	 	SIGNATURE

	David Perry	 	Chief Executive Officer	 	 

	

Lucy O. Day	
 	

Chief Financial Officer	
 	

 

        3.     Attached hereto as Exhibit A is a true and correct copy of the
Certificate of Incorporation of the Company, as amended, as in effect as of the date hereof. 

        4.     Attached hereto as Exhibit B is a true and correct copy of the
Bylaws of the Company, as amended, as in effect as of the date hereof. 

        5.     Attached hereto as Exhibit C is a copy of the resolutions of the
Board of Directors of the Company authorizing and approving the Company's execution, delivery and performance of a loan facility with Lighthouse Capital Partners V, L.P. 

        IN
WITNESS WHEREOF, the undersigned has executed this Incumbency Certificate on June    , 2006. 

	

 	
 	

 	
 	

 
	

 	
 	
ANACOR PHARMACEUTICALS, INC.
	

 	
 	

By:	
 	

 

	

 	
 	

Name:	
 	

Lucy O. Day

	

 	
 	

Title:	
 	

Chief Financial Officer

        I,
the Chief Executive Officer of the Company, do hereby certify that Lucy Day is the duly qualified, elected and acting Chief Financial Officer of the Company and that the above
signature is his or her genuine signature. 

        IN
WITNESS WHEREOF, the undersigned has executed and delivered this Incumbency Certificate on June    , 2006. 

	

 	
 	

 	
 	

 
	

 	
 	
ANACOR PHARMACEUTICALS, INC.
	

 	
 	

By:	
 	

 

	

 	
 	

Name:	
 	

David Perry

	

 	
 	

Title:	
 	

Chief Executive Officer

1

  

 
 

EXHIBIT F    
    
    OFFICER'S CERTIFICATE    
    

        The undersigned, to induce LIGHTHOUSE CAPITAL PARTNERS V, L.P.
("Lender"), to extend or continue financial accommodations to ANACOR PHARMACEUTICALS, INC., a
Delaware corporation (the "Borrower") pursuant to the terms of that certain Loan and Security Agreement dated June 30, 2006 (the
"Loan Agreement"), hereby certifies that on the date hereof: 

	1.
	I am the duly elected and acting Chief Financial Officer of Borrower.

	2.
	I am a Responsible Officer as that term is defined in the Loan Agreement.

	3.
	The information submitted herewith is in fact what it purports to be.

	4.
	The information delivered herewith is true, correct and complete.

	5.
	Borrower is currently able to meet its obligations as they come due.

	6.
	I understand that Lender is relying upon the truthfulness, accuracy and completeness hereof in connection with the Loan Agreement.

	7.
	I will advise you if it comes to my attention that, as of the date hereof, the information submitted herewith was not in fact true,
correct and complete. 

        IN
WITNESS WHEREOF, the undersigned has executed this Officer's Certificate on                        . 

	

 	
 	
ANACOR PHARMACEUTICALS, INC.
	

 	
 	

By:	
 	

 

	

 	
 	

Name:	
 	

Lucy O. Day

	

 	
 	

Title:	
 	

CFO

1

  

 
 

EXHIBIT G    
    
    AUTHORIZATION FOR AUTOMATIC PAYMENT    
    

        The undersigned ANACOR PHARMACEUTICALS, INC. ("Borrower")
authorizes LIGHTHOUSE CAPITAL PARTNERS V, L.P. and any and all affiliated funds (collectively, "Lender")
and the bank / financial institution ("Bank") named below to initiate variable debit and/or credit entries to Borrower's deposit, checking or
savings accounts as designated below and to cause funds transfers to an account of Lender as payment of any and all amounts due under the Loan and Security Agreement between Borrower and Lender dated
June 30, 2006 (the "Loan Agreement"). 

        1.     Lender is hereby authorized to initiate variable debit and/or credit transactions and resulting funds transfers in
Borrower's designated accounts with respect to amounts calculated by Lender to be due and owing to Lender by Borrower periodically under the Loan Agreement. Borrower consents to all such debit and/or
credit transactions and resulting funds transfers and hereby authorizes Lender to take all such actions as may be required by Bank with respect to such transactions. Borrower acknowledges and agrees
that such credit and/or debit entries may be made in amounts due under the Loan Agreement in order to cause timely payments as required by the terms of the Loan Agreement. 

        2.     Borrower hereby authorizes Lender to release to Bank all information concerning Borrower that may be necessary or
desirable for Bank to investigate or recover any erroneous funds transfers that may occur. 

        3.     Borrower acknowledges and agrees that all such debit and/or credit transactions and funds transfers are intended to be
made through an Automated Clearing House system and in compliance with the NACHA Rules and in compliance with Bank's security procedures. 

        4.     Borrower represents and warrants that the account information set forth below is accurate and complete and that each of
the account(s) set forth below is a business account maintained in Borrower's name and for Borrower's account. 

        This
Consent shall be effective as of June 30, 2006 and shall remain in effect until the Loan Agreement has been terminated. Any cancellation by Borrower of this consent shall
(i) be made in writing and (ii) delivered to Bank and Lender in such time as to afford Bank and Lender a reasonable opportunity to act on said cancellation. 

	Bank of America

	(Name of Borrower's Bank)
	

530 Lytton Avenue,	
 	

Palo Alto,	
 	

CA	
 	

94301
	

	(Address of Bank)	 	(City)	 	(State)	 	(Zip Code)
	

Bank Routing Number	
 	

 	
 	

 	
 	

 
	

	 	 	(between these symbols "/:" ":/" on bottom left of check)
	

Account Number:	
 	

 	
 	

(checking)	
 	

 
	 	 	
	 	 

Copy of a voided check is attached to this form  

	Borrower Name:	 	ANACOR PHARMACEUTICALS, INC.	 	 
	

Borrower Address:	
 	

1060 E. Meadow Circle	
 	

 
	 	 	Palo Alto, CA 94303	 	 
	Authorized by:	 	 
	 	 
	 	 	Its: CFO
	 	 

1

  

 
 

EXHIBIT H    
    
    NEGATIVE PLEDGE AGREEMENT    
    

        THIS NEGATIVE PLEDGE AGREEMENT is made as of June 30, 2006, by and between ANACOR
PHARMACEUTICALS, INC. ("Borrower") and LIGHTHOUSE CAPITAL PARTNERS V,
L.P. ("Lender"). 

        In
consideration of the Loan and Security Agreement between the parties of proximate date herewith (the "Loan Agreement"), Borrower agrees
as follows: 

        Except
as otherwise permitted in the Loan Agreement, Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's
intellectual property, including, without limitation, the following: 

        (a)   Any and all copyright rights, copyright applications, copyright registration and like protection in each work or
authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held
(collectively, the "Copyrights"); 

        (b)   Any and all trade secrets, and any and all intellectual property rights in computer software and computer software
products now or hereafter existing, created, acquired or held; 

        (c)   Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; 

        (d)   All patents, patent applications and like protections, including, without limitation, improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the same, including, without limitation, the patents and patent applications (collectively, the
"Patents"); 

        (e)   Any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same
and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks (collectively, the
"Trademarks"); 

        (f)    Any and all claims for damages by way of past, present and future infringements of any of the rights included above, with
the right, but not the obligation, to sue for an collect such damages for said use or infringement of the intellectual property rights identified above; 

        (g)   Any and all licenses or other rights to use any of the Copyrights, Patents or Trademarks and all license fees and
royalties arising from such use to the extent permitted by such license or rights 

        (h)   Any and all amendments, extensions, renewals and extensions of any of the Copyrights, Patents or Trademarks; and 

        (i)    Any and all proceeds and products of the foregoing, including, without limitation, all payments under insurance or any
indemnity or warranty payable in respect of any of the foregoing. 

        Notwithstanding
the foregoing, nothing herein shall be deemed to prevent or prohibit Borrower from licensing its intellectual property to third parties in the ordinary course of business
or as set forth in Section 7.2 of the Loan Agreement. 

        It
shall be an Event of Default under the Loan Agreement if there is a breach of any term of this Negative Pledge Agreement.    Borrower agrees to properly execute all
documents reasonably required by Lender in order to fulfill the intent and purposes hereof. 

	ANACOR PHARMACEUTICALS, INC.	 	LIGHTHOUSE CAPITAL PARTNERS V, L.P.
	

By:	
 	

 
	
 	

By:	
 	
LIGHTHOUSE MANAGEMENT PARTNERS V, L.L.C., its general partner
	

Name:	
 	

Lucy O. Day
	
 	

By:	
 	

 

	

Title:	
 	

CFO
	
 	

Name:	
 	

 

	 	 	 	 	Title:	 	 

1

  

 
 

EXHIBIT I    
    
    CONTROL AGREEMENT    
    

[In
form and substance acceptable to Lender in its reasonable discretion] 

1

 
 

Schedule 1    
    
    Disclosure Schedule    
    
    Deposit and Securities Accounts    
    

	 
	 	Account Information:
	 	Contact Information for

Account:

	Account Number 1 (ACH Account)	 	Bank Name:

Address:

City, State, Zip:

Phone:

Fax:

Type of Account:

Account number:	 	Bank of America

530 Lytton Avenue

Palo Alto, CA 94301

650-853-4460

877-207-2708

Checking and Sweep	 	Contact Name:

Phone:

Fax:

E-mail:
	

Account Number 2

(To be closed within 120 days of the date of the Agreement)	
 	

Bank Name:

Address:

City, State, Zip:

Phone:

Fax:

Type of Account:

Account number:	
 	

530 Lytton Avenue

Palo Alto, CA 94301

888-852-5000 x512

Checking	
 	

Contact Name:

Phone:

Fax:

E-mail:
	

Account Number 3

(To be closed within 120 days of the date of the Agreement)	
 	

Bank Name:

Address:

City, State, Zip:

Phone:

Fax:

Type of Account:

Account number:	
 	

Bank of America Investment Services

530 Lytton Avenue

Palo Alto, CA 94301

650-853-4458

650-726-7983

Investment	
 	

Contact Name:

Phone:

Fax:

E-mail:

PERMITTED LIENS  

	EXISTING LIENS	 	None	 	 

SUBSIDIARIES  

None 

PRIOR NAMES  

Anamax, Inc. 

LITIGATION AND ADMINISTRATIVE PROCEEDINGS  

None 

BUSINESS PREMISES  

[TO BE PROVIDED BY BORROWER—indicate street address and landlord contact information] 

	 
	 	Each Location Address where Lighthouse

Capital Partners has financed assets:
	 	Landlord/Property Management Information:

	Current

Headquarters

(Location 1)	 	Contact Name:

Address:

City, State, Zip:

Phone:

Fax:	 	Lucy Day

1060 E. Meadow Circle

Palo Alto, CA 94303

(650) 739-0700

(650) 739-0139	 	Contact Name:

Company Name:

Address:

City, State, Zip:

Phone:

Fax:	 	

W.F. Batton Management Company

1000 C Commercial Street

San Carlos, CA 94070

(650) 591-8860

(650) 591-2650
	

Location 2	
 	

Contact Name:

Company Name:

Address:

City, State, Zip:

Phone:

Fax:	
 	

 	
 	

Contact Name:

Company Name:

Address:

City, State, Zip:

Phone:

Fax:	
 	

 
	

Location 3	
 	

Contact Name:

Company Name:

Address:

City, State, Zip:

Phone:

Fax:	
 	

 	
 	

Contact Name:

Company Name:

Address:

City, State, Zip:

Phone:

Fax:	
 	

 

QuickLinks

EXHIBIT A COLLATERAL

EXHIBIT B

SECURED PROMISSORY NOTE

EXHIBIT D NOTICE OF BORROWING

EXHIBIT E INCUMBENCY CERTIFICATE

EXHIBIT F OFFICER'S CERTIFICATE

EXHIBIT G AUTHORIZATION FOR AUTOMATIC PAYMENT

EXHIBIT H NEGATIVE PLEDGE AGREEMENT

EXHIBIT I CONTROL AGREEMENT

Schedule 1 Disclosure Schedule Deposit and Securities AccountsExhibit 10.20

 

LEASE

 

OF

 

1020 EAST
MEADOW CIRCLE

 

PALO ALTO,
CALIFORNIA

 

 

BY AND
BETWEEN

 

CALIFORNIA
PACIFIC COMMERCIAL CORPORATION,

 

A
CALIFORNIA CORPORATION, LANDLORD

 

AND

 

ANACOR
PHARMACEUTICALS, INC.

 

A DELAWARE
CORPORATION, TENANT

 

 

L E A S E

 

This Lease, dated October 5, 2007, is made
and entered into by and between CALIFORNIA PACIFIC COMMERCIAL CORPORATION, a
California corporation (“Landlord”), and ANACOR PHARMACEUTICALS, INC., a
Delaware corporation (“Tenant”).

 

Landlord and Tenant agree as follows:

 

1.             Premises.

 

1.1.          Description. Landlord hereby leases to
Tenant and Tenant hereby leases from Landlord for the term, at the rental, and
upon all of the other terms, covenants and conditions set forth herein, the
real property commonly referred to as 1020 East Meadow Circle, City of Palo
Alto, County of Santa Clara, State of California, and more particularly
described in Exhibit A attached hereto and
incorporated herein by reference (the “Premises”). The Premises are improved
with a one story building containing approximately 36,960 rentable square feet
of floor space (the “Building”). The foregoing statement regarding size is an
approximation which the parties agree is reasonable and the rental based
thereon is not subject to revision in the event that the actual size differs
from the approximation. The portion of the Premises not covered by the Building
is hereafter called the “Common Area.”

 

1.2.          Condition. In the event that within
ninety (90) days following Landlord’s delivery of possession of the Premises,
it is determined that any of the mechanical or utility systems serving the
Premises existing upon such delivery of possession were not in good working
condition as of such delivery of possession (without regard to Tenant’s
subsequent misuse thereof or Tenant’s subsequent alterations, additions or
improvements to the Premises), then Landlord shall promptly take such action as
is required to cause such mechanical and utility systems to be in good working
condition. In the event that within one (1) year following Landlord’s delivery
of possession of the Premises, it is determined that roof of the Building was
in need of maintenance and repair as of the date of delivery of possession,
then Landlord shall promptly take such action as is required to cause the roof
to be in good working condition. Landlord shall provide Tenant with copies of
any and all closure plans and reports issued by the Fire Department of the City
of Palo Alto or any other governmental or quasi-governmental authority relating
to the use by prior tenant of the Premises upon receipt of the same from the
prior tenant of the Premises and the June 10, 2005 closure letter issued to
Clonetech. Subject to the foregoing provisions
regarding the condition of 

 

2

 

the Premises as of the delivery of possession, Tenant hereby
acknowledges: (i) that it is familiar with and has had the opportunity to
investigate the condition of the Premises (including but not limited to the
mechanical, electrical and fire sprinkler systems, security, environmental
aspects, compliance with “Applicable Law”, as defined in paragraph 5.2), the
present and future suitability of the Premises for Tenant’s intended use, (ii)
that Tenant has made such investigation as it deems necessary with reference to
such matters and assumes all responsibility therefor, and without in any manner
derogating from Tenant’s obligations set forth herein including, without
limitation, those relating to maintenance and repair, Tenant accepts the Premises,
including all fixtures, furnishings and equipment, in its present condition,
state of repair and operating order and in its present “AS IS” condition (other
than as provided above), and (iii) that neither Landlord, nor any of Landlord’s
agents, has made any oral or written representations or warranties with respect
to said matters.

 

1.3.          Tenant Improvements. Tenant shall
construct all of its initial tenant improvements (the “Initial Tenant
Improvements”) in accordance with the work letter attached as Exhibit B (the “Work Letter”). Landlord shall provide Tenant
with a Three Hundred Sixty Nine Thousand Six Hundred Dollars ($369,600) tenant
improvement allowance on the terms set forth in the Work Letter.

 

2.             Term and Delivery of Possession.

 

2.1.          Term. The term of this Lease shall be
for a period of approximately one hundred twenty (120) months, commencing on
the “Commencement Date” (as defined in paragraph 2.2 below) and terminating on
March 31, 2018 (the “Termination Date”).

 

2.2.          Delivery
of Possession; Commencement Date. Landlord shall deliver possession of the
Premises to Tenant on April 1, 2008. If for any reason Landlord cannot deliver
possession of the Premises to Tenant by April 1, 2008, 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, or extend the term
hereof, but in such case, Tenant shall not, except as otherwise provided
herein, be obligated to pay rent or perform any other obligation of Tenant
under the terms of this Lease until Landlord delivers possession of the
Premises to Tenant. Notwithstanding anything to the contrary contained herein,
if Landlord has not delivered the Premises to Tenant on or before July 1, 2008,
Tenant shall have the right thereafter to terminate this Lease, and upon such
termination, Landlord shall return all sums theretofore deposited by Tenant
with Landlord, and neither party shall have any further liability to the other.
The date that Landlord delivers 

 

3

 

possession of the Premises to Tenant is sometimes referred to herein as
the “Commencement Date”; provided, however, that if Landlord delivers
possession of the Premises to Tenant prior to April 1, 2008 pursuant to
paragraph 2.3 below, the “Commencement Date” shall be April 1, 2008.

 

2.3.          Early Entry. The parties acknowledge
that the tenancy of the existing tenant of the Premises expires as of March 31,
2008. In the event that the existing tenant vacates the Premises early,
Landlord shall deliver possession of the Premises to Tenant for the purpose of
constructing its tenant improvements and otherwise preparing the Premises for
its intended use. Tenant’s possession and use of the Premises prior to April 1,
2008 shall be subject to all of the terms and provisions hereof, except for the
obligation to pay Base Rent and Additional Rent(other than utilities), which
obligation shall commence on the Commencement Date; provided, however, that
Tenant shall pay any utility costs arising as a result of or in connection with
Tenant’s possession of the Premises prior to the Commencement Date.

 

3.             Rent.

 

3.1.          Base Rent. Tenant shall pay to
Landlord during the term of this Lease monthly base rent (the “Base Rent”), in
installments and in the manner provided in paragraph 3.3 below as follows:

 

	
  Month

  	
   

  	
  Base Rent Per Month

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Months 1 - 2

  	
   

  	
  $

  	
  0.00

  	
   

  
	
  Months 3 - 12

  	
   

  	
  $

  	
  105,336.00

  	
   

  
	
  Months 13 - 24

  	
   

  	
  $

  	
  108,759.42

  	
   

  
	
  Months 25 - 36

  	
   

  	
  $

  	
  112,294.10

  	
   

  
	
  Months 37 - 48

  	
   

  	
  $

  	
  115,943.66

  	
   

  
	
  Months 49 - 60

  	
   

  	
  $

  	
  119,711.83

  	
   

  
	
  Months 61 - 72

  	
   

  	
  $

  	
  123,602.46

  	
   

  
	
  Months 73 - 84

  	
   

  	
  $

  	
  127,619.54

  	
   

  
	
  Months 85 - 96

  	
   

  	
  $

  	
  131,767.18

  	
   

  
	
  Months 97 - 108

  	
   

  	
  $

  	
  136,049.61

  	
   

  
	
  Months 108 - Termination Date

  	
   

  	
  $

  	
  140,471.22

  	
   

  

 

3.2.          Additional Rent.

 

(a)           For purposes of this Lease, “Operating Expenses”
shall mean all costs of owning, managing, operating, maintaining, repairing,
replacing and restoring the Premises, including all costs, expenditures, fees
and charges for the 

 

4

 

following:
(i) supplying, operating, managing, maintaining, repairing, replacing and
restoring utilities, services and related Building systems (including HVAC),
sewers, storm drains, pest control, mandatory recycling programs and trash
removal (to the extent not paid directly by Tenant pursuant to this Lease, and
provided, that the cost of capital repairs and improvements shall be amortized
as provided in (vii) below); provided, however, that nothing contained in this
subpart (i) shall be construed to make Landlord responsible for
maintaining, repairing and/or replacing elements of the Premises that are not
part of Landlord’s obligations under paragraph 7.2 of this Lease;
(ii) maintaining, repairing, restoring and replacing the Common Area
(including landscaped areas, sidewalks, walkways, driveways, and the parking
areas, including resurfacing, repainting, restriping and cleaning the same),
the Building’s exterior walls, and the roof of the Building, including the roof
membrane (provided, however, that the cost of capital replacements and
improvements shall be amortized as provided in (vii) below);
(iii) compensation (including salaries, wages, employment taxes, fringe
benefits and other payroll expenses of employees) for persons who perform
duties in connection with the operation, management, maintenance, repair and
improvement of the Premises, such compensation to be appropriately allocated
for persons who also perform duties unrelated to the Premises;
(iv) premiums for property (including coverage for earthquake and flood if
carried by Landlord, to the extent permitted in paragraph 12.3 below),
liability, rental income and other insurance relating to the Premises, and
expenditures for deductible amounts paid under such insurance (other than
deductible amounts in excess of $100,000 for any earthquake coverage);
(v) licenses, permits, certificates and inspections; (vi) complying
with the requirements of any Applicable Laws (with any capital improvements
amortized as provided in (vii) below); (vii) amortization of capital
improvements to or replacements of the Building or Premises, with interest on
the unamortized balance at the rate paid by Landlord on funds borrowed to
finance such capital improvements or replacements (or, if Landlord finances
such improvements out of Landlord’s funds without borrowing, the rate that
Landlord would have paid to borrow such funds, as reasonably determined by
Landlord), over the useful life of such improvements or replacements, as
reasonably determined by Landlord; provided, however, that Landlord shall not be required to
amortize the cost if (A) if the total amount of such amortization for a
particular capital improvement or replacement is less than $20,000, Landlord shall be entitled to
accelerate the amortization of the capital improvements and/or replacements in
question and include in Operating Expenses the total cost of such capital
improvement or replacement, or (B) the capital improvements are required as a
result of the specific and unique use of the Premises by Tenant (as compared
with uses by tenants in general), a change in use or alterations or
modifications to the Premises by Tenant; (viii) property management fees
in an amount equal to two percent 

 

5

 

(2.0%) of the annual Base Rent payable by Tenant;
(ix) [intentionally deleted]; (x) accounting, legal and other
professional services incurred in connection with the operation of the Premises
and the calculation of Operating Expenses and Real Property Taxes; (xi) contesting
the validity or applicability of any Applicable Laws or Real Property Taxes
that may affect the Premises, to the extent such action results in a decrease
in Real Property Taxes; (xii) supplies, materials, tools and rental
equipment; (xiii) [intentionally deleted]; (xiv) the cost of Real Property
Taxes; and (xv) any other cost, expenditure, fee or charge, whether or not
hereinbefore described, but without duplication, which in accordance with
generally accepted accounting principles would be considered an operating
expense of managing, operating, maintaining or repairing the Premises.

 

(b)           Notwithstanding paragraph 3.2(a), “Operating
Expenses” shall not include (i) ground rent payments; (ii) interest
and principal payments, loan fees and other carrying costs on loans, capital
leases or indebtedness of Landlord, financing costs and amortization of funds
borrowed by Landlord, whether secured or unsecured; (iii) depreciation;
(iv) costs, fines or penalties incurred due to the violation of any Law by
Landlord and/or its employees, agents or contractors or due to Landlord’s gross
negligence or willful misconduct; (v) salaries, wages, benefits and other
compensation paid to officers or employees of Landlord above the grade of
building manager or who are not assigned in whole or in part to the operation,
management, maintenance or repair of the Premises; (vi) general
organizational, administrative and overhead costs relating to maintaining
Landlord’s existence, either as a corporation, partnership or other entity,
including general corporate, legal and accounting expenses incurred in
connection therewith; (vii) costs and expenses, including legal fees,
incurred in connection with negotiations or disputes with employees,
consultants, management agents, leasing agents, service providers, purchasers
or mortgagees of the Building or the Premises; (viii) tax penalties, fines
or interest incurred as a result of Landlord’s failure, inability or
unwillingness to pay and/or to file any tax or informational returns when due,
or from Landlord’s failure to make any tax payment required to be made by
Landlord before delinquency (other than to the extent any such failure to pay
and/or to file, or to pay before delinquency, is due to Tenant’s failure to
timely pay Additional Rent); (ix) overhead and profit increment paid to
the Landlord or to subsidiaries or affiliates of Landlord for goods and/or
services in or to the Building or the Premises to the extent the same exceeds
the costs of such goods and/or services rendered by unaffiliated third parties
on a competitive basis; (x) costs arising from Landlord’s charitable or
political contributions; (xi) costs incurred in connection with a proposed
sale or refinancing of the Building or the Premises; (xii) income taxes 

 

6

 

measured by the net income of Landlord or the owner of any interest in
the Building or the Premises, franchise, capital stock, gift, estate or
inheritance taxes or any federal, state or local documentary transfer taxes
imposed in connection with recording a deed transferring an interest in the
Premises or any portion thereof or interest therein; (xiii) any expense to
the extent covered and actually paid by insurance; (xiv) advertising and
promotional expenditures; (xv) the cost of containing, removing, or otherwise
remediating any contamination of the Premises (including the underlying land
and ground water) by any toxic or hazardous materials (including, without
limitation, asbestos and “PCB’s”) where Tenant is not responsible for such
contamination under the terms of this Lease; and (xvi) costs for sculpture,
paintings, or other objects of art (and insurance thereon or extraordinary
security in connection therewith).

 

(c)           Tenant shall pay to Landlord an amount equal
to the cost of all of the Operating Expenses as additional rent (the “Additional
Rent”) as follows:  An amount shall be
estimated by Landlord prior to the beginning of each calendar year during the
term hereof of the annual Operating Expenses during each calendar year of the
term of the Lease and the same shall be payable monthly, in advance, on the
same day as the Base Rent is due hereunder. Landlord shall have the right to
adjust its estimate of such expenses from time to time upon written notice to
Tenant, based upon reasonably anticipated changes in the amount of such
expenses. Within one hundred twenty (120) days following the end of such
calendar year, Landlord shall deliver to Tenant a statement of actual Operating
Expenses for such year; provided, however, that Landlord’s failure to timely
deliver such statement shall not prevent Landlord from thereafter collecting
Additional Rent with respect to such Operating Expenses. If Tenant has overpaid
Operating Expenses, at Landlord’s option either Landlord shall pay to Tenant or
Tenant shall be entitled to a credit against the payment for Rent next coming
due under this Lease in the amount of such excess (except that any such
overpayment allocable to the final year of the term of the Lease shall be
refunded to Tenant following the satisfaction of all Tenant obligations under
this Lease), and if Tenant has underpaid the Operating Expenses, Tenant shall
pay any such deficiency to Landlord within thirty (30) days following receipt
of such statement. Landlord’s obligation to make such refund and Tenant’s
obligation to pay such deficiency, as applicable, shall survive the expiration
of the term or earlier termination of this Lease. Any failure of Landlord to
deliver the statement of Operating Expenses as provided herein shall not relieve
either party of their respective obligations under this paragraph. The
obligations of Tenant to pay any Additional Rent attributable to periods during
the term of the Lease and not previously paid by Tenant shall survive the
expiration or earlier termination of this Lease.

 

7

 

(d)           Tenant
and its duly authorized representatives shall have the right to audit and copy
the records of Landlord related to Operating Expenses with respect to any
calendar year within one hundred twenty (120) days following receipt of the
applicable statement of actual Operating Expenses for such calendar year, upon
not less than thirty (30) days’ prior written notice to Landlord, during normal
business hours at the business offices of Landlord’s property manager for the
Premises; provided that (1) Tenant shall not conduct more than one (1) such
audit in any calendar year, (2) Tenant shall keep such information in strict
confidence and shall use commercially reasonable efforts to cause any other
person or entity performing such audit or inspection to keep such information
in strict confidence, and (3) Tenant shall supply Landlord with a copy of the
final audit report within twenty (20) days following Tenant’s receipt of the
same. In the event Tenant in good faith disputes the accuracy of any statement
of actual Operating Expenses on the basis of any such audit, such dispute must
be alleged in reasonable detail in written notice to Landlord within thirty
(30) days following the delivery to Landlord of Tenant’s audit report. If
Tenant’s payments of Operating Expenses are determined by Landlord and Tenant
to have been overstated or understated for any calendar year, the parties shall
within thirty (30) days after determination of such overstatement or
understatement make such adjustment payment or refund as is applicable. Tenant
shall pay in a timely manner as required by this Lease any amounts stated as
due on each statement of actual Operating Expenses delivered by Landlord,
provided that such payment shall not waive any right to audit and/or dispute by
Tenant as set forth herein. Landlord shall retain its books and records
relating to each year’s Operating Expenses for a period of at least the period
during which an audit thereof hereunder may be conducted. Unless Tenant raises
any objections to a statement of Operating Expenses within the periods
specified therefore hereunder, such statement shall conclusively be deemed
correct absent manifest error and Tenant shall have no right thereafter to
dispute such Statement or any item therein or the computation of Additional
Rent based thereon.

 

3.3.          Manner of Payment. All amounts payable
or reimbursable by Tenant under this Lease, including late charges and
interest, shall constitute rent and shall be payable and recoverable as rent in
the manner provided in this Lease. Except as otherwise expressly provided
herein, Tenant shall pay to Landlord the rent, including the Base Rent and
Additional Rent calculated as set forth above, without deduction, offset or
abatement, and without prior notice or demand, in advance commencing on the
Commencement Date and thereafter on the first day of each calendar month of the
term of this Lease. Any sums payable to Landlord on Landlord’s demand under the
terms of this Lease, as opposed to regularly scheduled payments of Base Rent 

 

8

 

and Additional Rent, shall be due and payable within fifteen (15) days
after written notice from Landlord of the amount due. Rent shall be payable in
lawful money of the United States to Landlord at the address of Landlord set
forth in paragraph 23 below or to such other persons or at such other places as
Landlord may from time to time designate in writing. Tenant’s obligation to pay
rent for any partial month shall be prorated on the basis of a thirty (30) day
month.

 

3.4.          Late Payment Charge. Tenant hereby
acknowledges that late payment by Tenant to Landlord of rent and other sums due
hereunder will cause Landlord to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Landlord by the terms of any ground lease,
mortgage or trust deed covering the Premises. Accordingly, if any installment
of rent or any other sum due from Tenant shall not be received by Landlord or
Landlord’s designee within five (5) days after notice that such amount is
delinquent with respect to the first late payment in any calendar year and
thereafter within five (5) days after such amount shall be due, then, Tenant
shall pay to Landlord a late charge equal to five percent (5%) of such overdue
amount, plus interest at the annual rate of ten percent (10%) commencing as of
the date that the payment was due. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord in and of itself shall in no event constitute a waiver of Tenant’s
Default or Breach with respect to such overdue amount, nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder.

 

3.5.          Security Deposit.

 

(a)           Upon execution of this Lease, Tenant shall
deposit with Landlord in cash the sum of One Hundred Forty Thousand Four
Hundred Seventy One Dollars and 18/100 ($140,471.18) (the “Deposit”) as
security for the faithful performance by Tenant of all of its obligations
hereunder. If Tenant fails to pay Base Rent or any other sums due hereunder, or
otherwise commits a breach with respect to any non-monetary obligation of
Tenant under this Lease, Landlord may use, apply, or retain all or any portion
of the Deposit for the payment of any rent or other sum in default, or to
reimburse or compensate Landlord for any expenditure, loss or damage (including
attorneys’ fees) which Landlord may suffer or incur by reason thereof. If
Landlord so uses or applies all or any portion of the Deposit, Tenant shall,
within fifteen (15) days after written demand therefor, deposit with Landlord
an amount in cash sufficient to restore the Deposit to the full amount required
by this Lease. Landlord shall not be required to keep the Deposit 

 

9

 

separate from its general funds. If Landlord disposes of its interest
in the Premises, Landlord may deliver or credit the Deposit to Landlord’s
successor-in-interest, and Landlord thereupon shall be relieved of further
responsibility with respect to the Deposit. If Tenant performs all of Tenant’s
obligations hereunder, Landlord shall, at the expiration or earlier termination
of the term of this Lease and after Tenant has vacated the Premises, return to
Tenant (or, at Landlord’s option, to the last assignee, if any, of Tenant’s
interest herein), that portion of the security deposit not used or applied by
Landlord in accordance with the terms of this Lease. No part of the security
deposit shall be considered to be held in trust, to bear interest or other
increment for its use, or to be prepayment for any moneys to be paid by Tenant
under this Lease. Tenant hereby waives California Civil Code Section 1950.7 and
all other provisions of law now in force or that become in force after the date
of execution of this Lease, that provide that Landlord may claim from a
security deposit only those sums reasonably necessary to remedy defaults in the
payment of rent, to repair damage caused by Tenant, or to clean the Premises. Landlord
may, in addition, claim those sums reasonably necessary to compensate Landlord
for any loss or damage caused by the act or omission of Tenant in violation of
the terms of this Lease. Tenant may not assign (except in connection with an
assignment of this Lease permitted pursuant to paragraph 15) or encumber the
Deposit, and any attempt to do so shall be void and, in all events, not binding
upon Landlord.

 

(b)           Alternatively,
Tenant may, in lieu of a cash security deposit, deliver to Landlord a negotiable
standby letter of credit (the “Letter of Credit”) in form acceptable to
Landlord in Landlord’s discretion in the amount of the Deposit. The Letter of
Credit shall be held by Landlord as security to secure Tenant’s faithful
performance of Tenant’s obligations under this Lease. The Letter of Credit
shall be issued by a financial institution reasonably acceptable to Landlord
(the “Bank”). Landlord shall have the right to draw down an amount up to the
face amount of the Letter of Credit if any of the following shall have occurred
or be applicable:  (1) such amount
is due to Landlord under the terms and conditions of this Lease,  (2) Tenant has filed a voluntary petition
under the U. S. Bankruptcy Code or any state bankruptcy code (collectively, “Bankruptcy
Code”), (3) an involuntary petition has been filed against Tenant under
the Bankruptcy Code, or (4) the Bank has notified Landlord that the Letter
of Credit will not be renewed. If Tenant fails to pay Rent or otherwise
defaults with respect to any provision of this Lease and fails to cure any such
default within any applicable notice and cure period provided in this Lease,
Landlord may draw on the Letter of Credit for the payment of any rent or other
sum in default, or to reimburse or compensate Landlord for any expenditure,
loss or damage 

 

10

 

(including attorneys’ fees)
which Landlord may suffer or incur by reason thereof. The Letter of Credit
shall contain language allowing Landlord to draw upon the Letter of Credit upon
presentation to the issuer of the Letter of Credit of Landlord’s written
statement that Landlord is entitled to the funds represented by such Letter of
Credit in accordance with the terms hereof. If Landlord so uses or applies all
or any portion of the amount represented by the Letter of Credit, then Tenant
shall, within ten (10) days after written demand therefor, deliver a
replacement letter of credit in the amount drawn so that the total amounts
represented by the Letter of Credit and the replacement letter of credit equals
$140,471.18 and Tenant’s failure to do so shall be a material breach of this
Lease. The
Letter of Credit shall (a) be “callable” at sight, irrevocable and
unconditional, (b) be fully assignable by Landlord, its successors and assigns
and (c) permit partial draws and multiple presentations and drawings,
(d) have an expiration date that is sixty (60) days after the Termination
Date; (e) be nonrenewable by the Bank only after not less than sixty (60) days
prior written notice from the Bank to Landlord of such nonrenewal, and
(e) be otherwise subject to the Uniform Customs and Practices for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication #500. Tenant shall pay all expenses, points and/or fees
incurred by Tenant in obtaining, renewing and extending the Letter of Credit. No
later than thirty (30) days prior to the nonrenewal of the Letter of Credit or
any replacement thereof, Tenant shall deliver a new Letter of Credit meeting
the requirements of this paragraph 3.5(b). If Tenant fails to deliver a new
Letter of Credit as required herein, then Landlord shall have the right, at its
sole option, to draw upon and present the then existing Letter of Credit for
the entire amount available thereunder. Until such time as Tenant shall
thereafter deliver a new Letter of Credit in the form and substance required
hereunder, Landlord shall retain possession of the funds so drawn as a security
deposit to secure Tenant’s faithful obligations under this Lease. Any such
replacement Letter of Credit shall satisfy and be subject to the provisions
this paragraph 3.5(b) Should the Letter of Credit then in effect be revoked,
then Tenant shall deliver a replacement Letter of Credit in the form and
substance required hereunder. The unused portion of the Letter of Credit shall
be returned to Tenant within forty five (45) days following the expiration,
without renewal, of the term of this Lease and after Tenant has vacated the
Premises; provided, however, that if prior thereto a voluntary petition is
filed by Tenant, or an involuntary petition is filed against Tenant by any of
Tenant’s creditors, under the Bankruptcy Code, then Landlord shall not be
obligated to make such payment in the amount of the unused Letter of Credit
proceeds until either all preference issues relating to payments under this
Lease have been resolved in such bankruptcy or reorganization case or such
bankruptcy or reorganization case has been dismissed. The Letter of Credit will
be honored by the Bank 

 

11

 

regardless of whether Tenant
disputes Landlord’s right to draw upon the Letter of Credit. The Letter of
Credit shall also provide that Landlord, and its successors and assigns, may,
at any time and without notice to Tenant and without first obtaining Tenant’s
consent thereto, transfer (one or more times) all or any portion of its
interest in and to the Letter of Credit to another party, person or entity. In
the event of a transfer of Landlord’s interest in the Premises, Landlord shall
transfer the Letter of Credit, in whole or in part, to the transferee and
thereupon Landlord shall, without any further agreement between the parties, be
released by Tenant from all liability therefor, and it is agreed that the
provisions hereof shall apply to every transfer or assignment of the whole or
any portion of said Letter of Credit to a new landlord. In connection with any
such transfer of the Letter of Credit by Landlord, (i) Tenant shall, at Tenant’s
sole cost and expense, execute and submit to the Bank such applications,
documents and instruments as may be necessary to effectuate such transfer,
(ii)Tenant shall be responsible for paying the Bank’s transfer and processing
fees in connection therewith; and (iii) if requested by the issuer, Landlord
shall deliver the Letter of Credit to the issuer for transfer. The use, application or retention of the
Letter of Credit, or any portion thereof, by Landlord shall not prevent
Landlord from exercising any other right or remedy provided by this Lease or by
any applicable law, it being intended that Landlord shall not first be required
to proceed against the Letter of Credit, and shall not operate as a limitation
on any recovery to which Landlord may otherwise be entitled.

 

4.             Taxes.

 

4.1.          Tenant’s Personal Property. Tenant
shall pay directly to the charging authority as provided in paragraph 3.2 all
taxes assessed against and levied upon Tenant’s leasehold improvements, trade
fixtures, furnishings, equipment and all other personal property and
merchandise of Tenant situated in or about the Premises.

 

4.2.          Real Property Taxes.

 

(a)           Tenant shall pay to Landlord at least ten
(10) days prior to delinquency all Real Property Taxes (as hereinafter defined)
levied with respect to the Premises.

 

(b)           The term “Real Property Taxes” as used
herein shall mean (i) all taxes, assessments, levies and other charges of any
kind or nature whatsoever, general and special, foreseen and unforeseen
(including all installments of principal and interest required to pay for any
general or special assessments for public improvements, services or benefits
and any increases resulting from reassessments caused by any new construction
or change in valuation), now or hereafter imposed by 

 

12

 

any governmental or quasi-governmental authority or special district
having the direct or indirect power to tax or levy assessments, which are
levied or assessed against or with respect to or by reason of (a) the ownership,
value, possession or use of the Premises (as now constructed or as may at any
time hereafter be constructed, altered or otherwise changed) including, without
limitation, governmental charges, fees or assessments for transit or traffic
mitigation (including area-wide traffic improvement assessments and
transportation system management fees), housing, police, fire or other
governmental service or purported benefits to the Premises, including
assessments, taxes, fees, levies and charges imposed by governmental agencies
for such purposes as street, sidewalk, road, utility construction and
maintenance, refuse removal and for other governmental services, (b) the
fixtures, equipment and other real or personal property of Landlord that are an
integral part of the Premises or used in operation of the Premises, or (c) the
use of the Common Area, public utilities, or energy within the Premises; (ii)
all charges, levies or fees imposed by reason of environmental regulation or
other governmental control of the Premises unless the same are imposed as a
result of environmental contamination on or under the Premises for which Tenant
is not responsible under paragraph 6 below; (iii) any new excise, transaction,
sales, privilege, or other tax now or hereafter imposed upon Landlord as a
result of this Lease; and (iv) the reasonable cost of contesting by appropriate
proceedings the amount or validity of any taxes, assessments or charges
described above.

 

If at any time during the lease term the
taxation or assessment of the Premises prevailing as of the Commencement Date
shall be altered so that in lieu of or in addition to any Real Property Taxes
described above there shall be levied, assessed or imposed (whether by reason
of a change in the method of taxation or assessment, creation of a new tax or
charge or any other cause) an alternate, substitute or additional tax or charge
(i) on the value, use or occupancy of the Premises, (ii) on or measured by the
gross receipts, income or rentals from the Premises, or on Landlord’s business
of leasing the Premises, or (iii) computed in any manner with respect to the
operation of the Premises, then any such tax or charge, however designated,
shall be included within the meaning of the term “Real Property Taxes” for
purposes of this Lease.

 

Notwithstanding the foregoing, the term “Real
Property Taxes” shall not include estate, inheritance, transfer, gift or
franchise taxes of Landlord or the federal or state income tax imposed on
Landlord’s income from all sources.

 

(c)           Tenant’s liability to pay Real Property
Taxes shall be prorated on the basis of a 365-day year to account for any
fractional portion of a fiscal tax year included in the lease term at the
commencement or expiration of the term.

 

13

 

(d)           Tenant,
at its cost, shall have the right at any time to seek a reduction in or
otherwise contest any Real Property Taxes, by action or proceeding against the
entity with authority to assess or impose the same. Landlord shall not be
required to join in any proceeding or action brought by Tenant unless the
provisions of applicable regulations require that such proceeding or action be
brought by or in the name of Landlord, in which event Landlord shall join in
such proceeding or action or permit it to be brought in Landlord’s name,
provided that Tenant protect, indemnify, and hold Landlord free and harmless
from and against any liability, cost or expense in connection with or as a
result of such proceeding or contest. Landlord shall continue, during the
pendency of such proceeding or action, to pay the Real Property Taxes due in
accordance with this paragraph 4.  If Tenant is successful in such action
or proceeding, Tenant shall be entitled to receive any refund resulting from
such action or proceeding to the extent Tenant paid the Real Property Taxes
refunded.

 

5.             Use.

 

5.1.          Permitted Uses. The Premises shall be
used and occupied only for the following purposes: laboratory research and
development and general offices, assembly, manufacturing, and other lawful
purposes incidental thereto which are permitted by applicable zoning
ordinances, and for no other use or purpose without Landlord’s prior written
consent.

 

5.2.          Compliance
with Law. Tenant shall not use the Premises or suffer or permit anything to
be done in or about the Premises which will violate any law, statute, zoning
restriction, ordinance or governmental law, rule, regulation, permit or
requirement of duly constituted public authorities, covenants, easements and
restrictions of record, permits or the requirements of any applicable fire
insurance underwriting or rating bureau now or hereafter constituted relating
to the condition, use or occupancy of the Premises as may now or hereafter be
in effect, including, without limitation, (i) the law commonly known as “The
Americans With Disabilities Act” (“ADA”), (ii) subject to paragraph 5.4
below, laws pertaining to Hazardous Substances, industrial hygiene and
environmental conditions on, in, under or about the Premises (including soil
and groundwater conditions), including, but not limited to, the laws referenced
in paragraph 5.4(a) below; and (iii) subject to paragraph 5.4 below, laws
pertaining to the use, generation, manufacture, production, installation,
maintenance, removal, transportation, storage, spill or release of any
Hazardous Substances as hereinafter defined (individually, an “Applicable Law”
and collectively, the “Applicable Laws”). Tenant, at Tenant’s sole expense,
shall promptly comply with all Applicable Laws including, without limitation,
improvements undertaken by 

 

14

 

Tenant to the Premises or future Applicable Laws. Tenant shall, within
five (5) business days after receipt of Landlord’s written request, provide
Landlord with copies of all documents and information, including, but not
limited to, permits, registrations, applications, reports and certificates,
evidencing Tenant’s compliance with any Applicable Law specified by Landlord to
the extent that the same is available from governmental agencies to evidence
such compliance. Tenant shall promptly upon receipt or knowledge thereof,
notify Landlord in writing (with copies of any documents involved) of any
claim, notice, citation, warning, complaint or report asserting the failure of
the Premises or Tenant’s use thereof to comply with any Applicable Law.

 

5.3.          Restrictions on Use. Tenant shall not
use or permit the use of the Premises in any manner that will create waste on
the Premises or constitute a nuisance to, or disturb the quiet enjoyment of,
any occupant or user of any adjoining building. Tenant shall not do, bring,
keep or sell anything in or about the Premises that is prohibited by, or that
will cause a cancellation of, any insurance policy covering the Premises or any
part thereof. Tenant shall not use any apparatus, machinery or other equipment
in or about the Premises that may cause damaging noise or vibration or overload
existing electrical systems, or otherwise place any loads upon the floors,
walls or ceilings of the Premises in excess of their capacity or jeopardize the
structural integrity of the Building or any part thereof. Tenant shall not make
any penetrations of the roof or exterior of the Building without the prior
written approval of Landlord (with Tenant acknowledging that in connection with
any such approval Landlord will require that the roof penetrations must be
treated in a certain manner with materials and by a contractor all approved by
Landlord). No materials or articles of any nature shall be stored upon any
portion of the Common Area unless located within an enclosure approved by
Landlord. Tenant shall not cause or permit any toxic wastes or by-products or
other harmful chemicals to be discharged into the plumbing or sewage system of
the Building or onto the land underlying or adjacent to the Building unless
such discharge is permitted by governmental authorities (to the extent such
permission is required) and allowed under Applicable Laws.

 

5.4.          Hazardous Substances.

 

(a)           Definitions. The term “Hazardous Substance”
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials is or may be either: (i)
injurious or hazardous to the public health, safety or welfare, the environment
or the Premises, (ii) now or in the future 

 

15

 

regulated or monitored by any governmental authority, or (iii) a basis
for liability of Landlord to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall include, but
not be limited to, any product, substance, chemical, material or waste that
(i)  now or in the future is defined as a hazardous waste, hazardous
substance, hazardous material, pollutant or contaminant under any Applicable
Laws, including the Comprehensive Environmental Response Compensation and
Liability Act, 42 U.S.C. § 9601 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. § 6901 et seq., and Sections 25117 and 25316
of the California Health and Safety Code, or (ii) is toxic, explosive,
corrosive, flammable, radioactive, carcinogenic, dangerous or otherwise
hazardous, including gasoline, diesel fuel, petroleum hydrocarbons,
polychlorinated biphenyls (PCBs), asbestos, radon, methane, lead, microbial
matter (including mold), urea and formaldehyde foam insulation. The term “Reportable
Use” as used in this Lease shall mean: 
(i) the installation or use of any above or below ground storage
tank, and (ii) the generation, possession, storage, use, transportation or
disposal of a Hazardous Substance that requires a permit from, or with respect
to which a report, notice, registration or business plan is required to be
filed with, any governmental authority. Reportable Use shall also include any
Hazardous Substance brought on the Premises by Tenant or any person under
Tenant’s control for which a notice must be given to persons entering or
occupying the Premises or neighboring properties.

 

(b)           Use Requires Consent. Tenant shall
not cause or permit any Hazardous Substance to be brought upon, kept, used,
discharged, released or disposed of in or about the Premises by Tenant, its
agents, employees, contractors or invitees, without the prior written consent
of Landlord. Notwithstanding the foregoing, Tenant shall be permitted to use
reasonable quantities and the types of Hazardous Substances on the Premises
which are typical and customary in the normal course of Tenant’s business
permitted on the Premises, provided that:(i) Tenant shall comply with all
Applicable Laws in connection with such usage; (ii) Tenant shall dispose of all
such Hazardous Substances in the manner required by Applicable Laws and good
practices; and (iii) Tenant shall not engage in any activity in, on or about
the Premises which constitutes a Reportable Use of Hazardous Substances without
the express prior written consent of Landlord and compliance with all
Applicable Laws. Landlord hereby consents to the Reportable Use described on
Exhibit D provided that such uses are subject to all the terms and conditions
of those permits and of this paragraph 5. Tenant shall give Landlord notice of
any Reportable Use concurrently with Tenant’s periodic submission to the local
fire department or other governmental authority to which Tenant must report
such use. In addition, Landlord may (but without any obligation to do so)
condition its consent to the use or presence of any Hazardous 

 

16

 

Substance, activity or storage tank by Tenant upon Tenant’s giving
Landlord such additional assurances as Landlord, in its reasonable discretion,
deems necessary to protect itself, the public, the premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the premises and/or the deposit of an additional Deposit under
paragraph 3.5.

 

(c)           Landlord’s Rights. Subject to the provisions of
paragraph 19, Landlord shall have the right, but not the obligation, to enter
the Premises and conduct an inspection thereof, including invasive tests, at
any reasonable time (i) to confirm Tenant’s compliance with the provisions
of this paragraph 5.4, including but not limited to the compliance of the
Premises and the activities thereon with Applicable Laws, and (ii) to
perform Tenant’s obligations under this paragraph 5.4 if Tenant has failed to
do so after reasonable notice to Tenant. Landlord shall also have the right to
engage qualified Hazardous Substances consultants to inspect the Premises and
review Tenant’s compliance with the provisions of this paragraph 5.4, including
review of all permits, reports, plans, and other documents regarding the same. If
such inspection shows that Tenant has breached its obligations herein regarding
Hazardous Substances, Tenant shall pay to Landlord on demand the costs of
Landlord’s consultants’ fees and all costs reasonably incurred by Landlord in
performing Tenant’s obligations under this paragraph 5.4. Landlord shall use
reasonable efforts to minimize any interference with Tenant’s business caused
by Landlord’s entry into the Premises.

 

(d)           Duty to Inform. If Tenant has
knowledge or has reasonable cause to believe that a Hazardous Substance, or a
condition involving or resulting from same, has come to be located in, on,
under or about the Premises, other than as previously consented to by Landlord
or as permitted hereunder, Tenant shall promptly give written notice of such
fact to Landlord. Tenant shall also promptly give Landlord notice (and a copy,
if applicable) of any statement, report, notice, registration, application,
permit, business plan, license, claim, action, investigation or proceeding
received by Tenant from, any governmental authority or private party, or
otherwise known to Tenant, concerning the unlawful presence, spill, release,
discharge of, or exposure to, any Hazardous Substance in, on, or about the
Premises, including but not limited to all such documents as may relate to any
Reportable Uses on the Premises by Tenant. As of the Commencement Date, Tenant
shall provide Landlord with a complete list of all Hazardous Substances to be
stored, handled, used and/or disposed of at the Premises (including, without
limitation, as to common trade name, chemical name, components and concentration
and maximum quantity expected 

 

17

 

to be stored), excluding standard janitorial and office products. Tenant
shall update this list at reasonable intervals throughout the term of the Lease
so it remains current. Within fifteen (15) days following Tenant’s receipt of
Landlord’s request therefor from time to time during the term of the Lease,
Tenant shall deliver to Landlord a summary of such Hazardous Substances as are
actually then being stored, handled, used and/or disposed of at the Premises
(including, without limitation, as to common trade name, chemical name,
components and concentration and maximum quantity stored) in such form as may
be reasonably requested by Landlord.

 

(e)           Compliance. Tenant shall procure, maintain in effect and comply with
all conditions of all permits, licenses and other governmental and regulatory
approvals required for the use, storage or disposal of Hazardous Materials at
the Premises for which Tenant is responsible under this Lease. Tenant shall
handle, treat, deal with and manage in all respects all Hazardous Substances at
the Premises in complete conformity with all Applicable Laws and good industry
practices regarding management of such Hazardous Substances. Tenant shall at Tenant’s expense promptly take all actions required by any governmental agency or
entity in connection with or as a result of the presence of Hazardous
Substances at the Premises for which Tenant is responsible under this paragraph
5.4, including inspection, monitoring and testing, performing all cleanup,
removal and remediation work required with respect to those Hazardous
Substances, complying with all closure requirements and post-closure
monitoring, and filing all required reports or plans. All of the foregoing work
shall be performed in a good, safe and workmanlike manner by Tenant or its
consultants and contractors qualified and licensed to undertake such work and
in a manner that will not unreasonably interfere with Landlord’s operation,
leasing and sale of the Premises. Tenant shall deliver to Landlord concurrently
with delivery to any governmental agency, or promptly after receipt from any
such agency, copies of all permits, closure or remedial action plans; and all
material and relevant notices, and all other documents or communications
relating to Hazardous Materials at the Premises and/or compliance with
Applicable Laws regarding the same for which Tenant is responsible under this
Lease. Specifically, and not by way of
limitation, Tenant shall promptly submit to Landlord a copy of any regulatory
filing made to the Fire Department of the City of Palo Alto (“PAFD”) or any
other governmental or quasi-governmental agency with respect to Hazardous
Substances and prior to the expiration or earlier termination of this Lease,
Tenant shall obtain an environmental closure authorization from the PAFD is
accordance with a closure plan previously prepared by Tenant and any other
applicable requirements of the PAFD.

 

(f)            Indemnification by Tenant. Tenant
shall be responsible for and shall indemnify, protect, defend and hold 

 

18

 

Landlord, its officers, directors, agents, employees, lenders and their
respective successors and assigns, harmless from and against any and all
damages, losses, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and reasonable attorney’s and consultant’s fees arising out
of or involving Tenant’s failure to comply with all Applicable Laws with
respect to Hazardous Substances and/or any Hazardous Substance or storage tank
brought on the Premises by or for Tenant or under Tenant’s control (hereinafter
referred to as “Claims”) at any time during Tenant’s possession prior to or
during the term of this Lease, including, but not limited to, the effects of
any contamination or injury to person, property or the environment, and the
cost of investigation (including reasonable consultant’s and attorney’s fees
and testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved. All of Tenant’s and its assignee’s and
sublessee’s agents, employees, contractors, invitees, and guests shall be
deemed under Tenant’s control; provided, however that a person who is on the
Premises without the express or implied consent or permission of Tenant or
sublessees shall not be deemed under Tenant’s control. Tenant’s indemnity
obligations shall include (without limitation), and Tenant shall reimburse
Landlord for, the following: (i) losses in or reductions to rental income
resulting from Tenant’s use, storage, disposal of or failure to timely remove
Hazardous Substances;  in violation of
its obligations under this Lease; (ii) all costs of refitting or other
alternations to the Premises necessitated by Tenant’s use, storage, disposal of
or failure to timely remove Hazardous Substances including, without limitation,
alterations required to accommodate an alternate use of the Premises; (iii) any
diminution in the fair market and/or rental value of the Premises or any
portion thereof caused by Tenant’s use, storage, disposal of or failure to
timely remove Hazardous Substances; and (iv) costs incurred by Landlord in
performing Tenant’s obligations under this paragraph 5.4. Tenant agrees to
defend all Claims on behalf of Landlord with counsel reasonably acceptable to
Landlord, and to pay all fees, costs, damages, or expenses relating to or
arising out of any indemnifiable Claim including reasonable attorneys’ fees and
costs. Tenant shall further be responsible for and shall indemnify, defend, and
hold Landlord and its agents harmless from and against all Claims, including
reasonable attorneys’ fees and costs, arising out of or in connection with any
removal, clean-up, or restoration work which is required by any government
agency having jurisdiction and which arises from Tenant’s storage, use, or
disposal of Hazardous Substances on the Premises at any time prior to or during
the term of this Lease. No termination, cancellation or release agreement
entered into by Landlord and Tenant shall release Tenant from its obligations
under this Lease with respect to Hazardous Substances or storage tanks, unless
specifically so agreed by Landlord in writing at the time of such agreement.

 

(g)           No Lien. Tenant shall not suffer 

 

19

 

any lien to be recorded against the Premises as a consequence of any
Hazardous Substances for which Tenant is responsible under this paragraph 5.4,
including any so-called state or federal “super fund” lien related to the
remediation of any Hazardous Substances.

 

(h)           Remediation;  Surrender. Tenant
shall upon demand by Landlord, and at Tenant’s sole cost and expense, promptly
take all actions to remediate the Premises from the effects of any Hazardous
Substances for which Tenant is responsible under this paragraph 5.4. Such
remediation shall include, but not be limited to, the investigation of the
environmental condition of the Premises, the preparation of any feasibility
studies, reports or remedial Plans, and the performance of any clean up,
remediation, containment, monitoring or restoration work, whether on or off the
Premises. Tenant shall take all actions necessary to remediate the Premises
from the effects of such Hazardous Substances to a condition allowing
unrestricted use of the Premises, but in no event to a condition which is
better than the condition existing as of the Commencement Date, notwithstanding
any lesser standard of remediation allowable under Applicable Laws. Tenant
shall pay all costs in connection with such investigatory and remedial
activities, including but not limited to all power and utility costs, and any
and all taxes or fees that my be applicable to such activities. Tenant shall
promptly provide to Landlord copies of testing results and reports that are
generated in connection with the above activities and/or that are submitted to
any governmental entity. Promptly upon completion of such investigation and
remediation, Tenant shall permanently seal or cap all monitoring wells and test
holes in accordance with good engineering practices and compliance with
Applicable Laws, remove all associated equipment, and restore the Premises to
the condition as set forth above (but in no event to a condition which is
better than the condition existing as of the Commencement Date), which shall
include without limitation, the repair of any surface damage, including paving,
caused by such investigation or remediation. Tenant shall surrender the
Premises to Landlord, upon the expiration or earlier termination of the Lease,
free of Tenant’s Hazardous Substances for which Tenant is responsible under
this paragraph 5.4.

 

(i)            Survival. The provisions of this
paragraph 5.4 shall survive the expiration or earlier termination of this
Lease.

 

6.             Maintenance and Repairs.

 

6.1           Tenant’s
Obligations. Except for items which are the responsibility of Landlord
pursuant to paragraph 6.2 below and the other express provisions of this Lease,
Tenant shall, at Tenant’s sole cost and expense and at all times, keep the Building
and every part thereof and Tenant’s signs in good 

 

20

 

and safe order, condition and repair (and replace, if necessary),
whether or not such portion of the Building requiring repair, or the means of
repairing the same, are reasonably or readily accessible to Tenant, and whether
or not the need for such repairs occurs as a result of Tenant’s use, any prior
use, the elements or the age of such portion of the Building, including,
without limiting the generality of the foregoing, all equipment or facilities
within or outside the Building, such as the generator,  plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fixtures, walls, ceilings, floors, windows, doors, located in, on or
about the Building. Tenant, in keeping the Building in good order, condition
and repair, shall exercise and perform good maintenance practices. With respect
to such maintenance and repair, Tenant shall at its expense undertake and
provide the following during the term of this Lease:

 

(i)            a
heating, ventilating and air conditioning (“HVAC”) systems preventive
maintenance contract covering all HVAC systems servicing the Building, which
shall provide for and include, without limitation, maintenance, repair and
replacement of filters, condensers and other parts, oiling and lubricating of
machinery, parts replacement, adjustment of drive belts, oil changes, weather
proofing of all exposed HVAC equipment and ducts, and other preventive
maintenance. Tenant shall at its sole coat and expense: (A) have routine
maintenance performed at least every sixty (60) days by a company acceptable to
Landlord and in a form acceptable to Landlord and require the company
performing such maintenance to deliver Landlord with copies of the HVAC
maintenance reports, which reports shall be in form acceptable to Landlord,
concurrently with providing the same to Tenant; (B) require that Landlord be
delivered, at the same time that Tenant receives the same, copies of all other
reports obtained by Tenant with respect to the HVAC systems; and (C) promptly
upon receipt, provide Landlord with copies of all maintenance and repair
invoices received by Tenant with respect to the HVAC systems and evidence that
the same have been paid by Tenant; and (D) cause the HVAC systems to be
maintained, repaired and replaced in a first class manner;

 

(ii)           a
service contract for the washing of all exterior windows of the Building (both
interior and exterior surfaces) which provides for the periodic (no less than
two times per year) washing of all such windows; and

 

(iii)          a
fire sprinkler system, water flow and smoke alarm preventative maintenance and
testing contract covering all sprinkler and smoke alarm systems services in the
Building.

 

21

 

All repairs required to be made shall be made promptly with new
materials of like kind and quality.

 

The parties acknowledge that Landlord has a particular interest in
maintaining the HVAC system because of its value to Landlord’s ownership of the
Building. In addition to the other rights and remedies available to it,
Landlord may elect at any time to terminate Tenant’s right to be responsible  for the maintenance and repair of
the HVAC systems if Tenant  fails to
comply with the forgoing covenants, or, if in Landlord’s reasonable judgment,
Tenant has not repaired or maintained such in first class condition. If
Landlord undertakes the maintenance or repair of the HVAC systems, the cost to
Landlord shall be included in Paragraph 3.2 (a) Operating Expenses.

 

Tenant shall obtain Landlord’s prior written consent to any work
performed on or to the roof of the Building by or on behalf of Tenant.

 

Acknowledging that Landlord is responsible for providing maintenance of
the Common Area, Tenant shall use the parking and Common Area so that they are
in a neat and clean condition and in good appearance consistent with other
buildings in the area. Tenant shall not store anything nor place any storage
sheds or other structures in the Common Area. All trash shall be stored in
closed containers approved by the scavenger company and shall not overflow
those containers. Tenant shall use the parking lot only for parking and ingress
and egress of vehicles used by it, its employees and invitees, and for no other
purpose. No inoperable vehicles shall be left in the parking area.

 

6.2           Landlord’s Obligations. Subject to
Tenant’s obligations under paragraph 6.1, Landlord shall, at Tenant’s expense,
payable as Operating Expenses in accordance with paragraph 3.2, keep in good
condition, order and repair the Common Area and all elements therein, any plate
glass and skylights located on the exterior of the Building, the roof of the
Building (membrane and structure) (except that Tenant shall repair at Tenant’s
expense, and with Landlord’s approval as provided in paragraph 5.3, any damage
caused by Tenant’s activities on or to the roof, including, but not limited to,
the installation of air conditioning equipment and/or duct work, or other roof
penetrations, and improper flashing or caulking, and any damage to exposed air
conditioning equipment and duct work installed by or for Tenant), and the
structural slabs, columns and other structural elements of the Building
(including, without limitation, the painting or cleaning of the exterior walls
of the Building). Tenant shall promptly notify Landlord of the need for
Landlord to make any of repairs of which it becomes aware. Notwithstanding
anything to the contrary contained in this Lease, (i) Landlord shall not be
liable to Tenant for failure to make repairs as herein specifically required of
it unless Tenant has 

 

22

 

previously notified Landlord, in writing, of the need for such repairs
and Landlord has failed to commence and complete said repairs within a
reasonable time following receipt of Tenant’s written notification; and if
capital expenditures in excess of $1,000,000 are required during the term of
the Lease (or $200,000 during the last two (2) years of the term of the Lease),
Landlord may terminate this Lease upon nine (9) months prior written notice to
Tenant unless Tenant notifies Landlord in writing within ten (10) days after
receipt of Landlord’s termination notice that Tenant will pay the cost of such  expenditures. It
is the intention of the parties that the terms of this Lease govern the
respective obligations of the parties as to maintenance and repair of the
Premises. Tenant and Landlord expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Tenant the right to make repairs at the
expense of Landlord or to terminate this Lease by reason of, any needed repairs.
However, if Landlord fails to perform any of Landlord’s obligations under this
paragraph 6.2 within a reasonable period after receipt of written notice of the
need therefor from Tenant (or such shorter period as may be reasonably
appropriate in an “emergency situation”, as hereinafter defined), and such
failure results in either (i) a situation which materially and adversely
affects the operation of Tenant’s business from the Premises or (ii) an
emergency situation, then Tenant shall have the right, but not the obligation,
to promptly take such measures as are necessary to cure such situation (using
the Building-standard subcontractors for any work on the Building roof,
provided the applicable subcontractor is available at commercially reasonable
and competitive rates for comparably experienced subcontractors in the Palo
Alto area given the work to be performed, and if such subcontractors are not so
available, Tenant shall use for such work qualified, licensed contractors
reasonably experienced in performance of comparable work in comparable
buildings), and Landlord shall reimburse Tenant for the reasonable costs of
completing such cure. As used herein, an “emergency situation” shall mean a
situation where Landlord’s failure to perform has resulted in an imminent risk
of injury to persons or material property damage.

 

7.             Alterations.

 

7.1.          Landlord’s Consent Required. Tenant
shall not, without Landlord’s prior written consent, which shall not be
unreasonably withheld, delayed or conditioned, make any alterations,
improvements or additions or utility installations (collectively called “alterations”)
in, on or about the Premises, except for alterations which (i) in each case do
not exceed Twenty-Five Thousand Dollars ($25,000) in cost or Fifty Thousand
Dollars ($50,000) in cost in the aggregate in any calendar year; (ii) are to
the interior of the Building and do not affect the outside appearance of the
Building; (iii) are nonstructural and 

 

23

 

do not impair the structural integrity of the Building; and (iv) do not
adversely affect the proper functioning of the building systems or other
utilities, systems and services of the Building. Notwithstanding the forgoing,
in no event shall Tenant decrease the proportion of the Premises which
constitute laboratories. As used in this paragraph 7.1, the term “utility
installation” means power panels, wiring, conduits, air conditioning and
plumbing. If the estimated cost of the improvements exceeds $500,000, Landlord
may require Tenant to provide Landlord, at Tenant’s expense, a lien and
completion bond in an amount equal to the estimated cost of such alterations,
or other reasonable assurance to insure Landlord against any liability for
mechanic’s and materialmen’s liens and to insure completion of the work. Should
Tenant make any alterations which require Landlord’s prior written consent
without obtaining such prior written consent, Tenant shall upon demand by
Landlord promptly remove the same and restore the Premises to its original
condition before such alterations, all at Tenant’s expense.

 

7.2.          Plans and Permits. Any alterations
which Tenant shall desire to make in or about the Premises and which require
the prior written consent of Landlord shall be presented to Landlord in written
form, with proposed detailed plans and specifications therefor prepared at
Tenant’s sole expense. Landlord shall give its written approval or disapproval
thereof within ten (10) days after receipt by Landlord, which approval or
disapproval shall be reasonable. Any consent by Landlord thereto shall be
deemed conditioned upon Tenant’s acquisition of all permits required to make
such alteration from all appropriate governmental agencies, the furnishing of
copies thereof to Landlord prior to commencement of the work, and the
compliance by Tenant with all conditions of said permits in a prompt and expeditious
manner, all at Tenant’s sole expense. Upon completion of any such alteration
which requires Landlord’s consent and/or a permit, Tenant, at Tenant’s sole
cost, shall promptly deliver to Landlord “as-built” plans and specifications
therefor.

 

7.3.          Construction Work Done by Tenant. All
construction work required or permitted to be done by Tenant shall be performed
by a licensed contractor and subcontractors (with respect to work to the
Building HVAC, electrical and plumbing systems) approved by Landlord, which
approval shall not be unreasonably withheld, delayed or conditioned in a
reasonably prompt, diligent, and good and workmanlike manner and shall conform
in quality and design with the Premises existing as of the date of delivery of
possession to Tenant. All such construction work shall be performed in
compliance with all applicable statutes, ordinances, regulations, codes and
orders of governmental authorities and insurers of the Premises. Tenant or its
agents shall secure all licenses and permits necessary therefor and final
approval thereof upon completion. Work, once 

 

24

 

started, shall be diligently pursued through to completion in a good
and workmanlike manner, in accordance with the plans and specifications
approved by Landlord and in compliance with all Applicable Laws and insurance
requirements. In connection with alterations requiring Landlord’s consent
hereunder, no material changes shall be made to such plans and specifications
as approved without the prior approval of Landlord, which approval shall not be
unreasonably withheld, delayed or conditioned. Throughout the performance of
such alterations, Tenant, at its expense, shall carry, or cause to be carried
by Tenant’s contractor and its subcontractors, in addition to the insurance
described in paragraph 12, Workers’ Compensation insurance in statutory limits
and such other insurance as Landlord may reasonably require, with insurers
reasonably satisfactory to Landlord. Tenant shall furnish Landlord with
satisfactory evidence that such insurance is in effect at or before the
commencement of the alterations and, upon request, at reasonable intervals
thereafter until completion of the alterations.

 

7.4.          Title to Alterations. Unless Landlord
requires the removal thereof as set forth in paragraphs 7.1 or 7.5, any
alterations which may be made on or to the Premises, shall be and remain the
property of Tenant during the term of this Lease, and thereafter shall become
the property of Landlord at the expiration or sooner termination of the term of
this Lease. Without limiting the generality of the foregoing, all heating,
lighting, electrical (including all wiring, conduits, main and subpanels), air
conditioning, partitioning, drapery, and carpet installations made by Tenant,
regardless of how affixed to the Premises, together with all other alterations
that have become an integral part of the Premises, shall be and become the
property of Landlord at the expiration or sooner termination of the term of this
Lease, and shall not be deemed trade fixtures, and shall remain upon and be
surrendered with the Premises at the expiration or sooner termination of this
Lease. Notwithstanding the provisions of this paragraph 7.4, Tenant’s
furnishings, furniture partitions and panels, trade fixtures, machinery and
equipment, laboratory benches and laboratory equipment (but excluding fume
hoods installed as part of the initial tenant improvements in acccordance with
the Work Letter,  which fume hoods shall
remain on the Premises), other than that which is affixed to the Premises so
that it cannot be removed without material damage to the Premises, shall remain
the property of Tenant and may be removed by Tenant, provided Tenant at Tenant’s
expense immediately after removal repairs any damage to the Premises caused
thereby and, with respect to any fume hoods removed, removes any accessory
ducting, wiring or other improvements or alterations related thereto which
Landlord requests that Tenant remove.

 

7.5.          Removal
of Alterations. Other than the initial tenant improvements made in
acccordance with the Work 

 

25

 

Letter, Tenant shall remove any alterations that Tenant has made to the
Premises and restore the Premises as hereinafter provided unless Landlord
notifies Tenant otherwise prior to the expiration of the term of the Lease. If
Landlord does not give such notice, Tenant shall, at its sole expense, prior to
expiration of the lease term or within thirty (30) days after any sooner termination
thereof, remove such alterations, repair any damage occasioned thereby, and
restore the Premises to the condition existing as of the date such alteration
was made or, in the event of the removal of existing improvements without the
installation of any new improvements, as of the date such removal was
undertaken. The obligations of Tenant set forth in this paragraph shall survive
the termination of this Lease. The terms of this paragraph 7 shall apply to the
initial tenant improvements constructed by or on behalf of Tenant.

 

8.             Mechanics’ Liens. Tenant shall pay
when due all claims for labor or materials furnished to or for Tenant at or for
use in the Premises, which claims are or may be secured by any mechanic’s or
materialman’s lien against the Premises or any interest therein. Tenant shall
give Landlord notice of the date of commencement of any work in the Premises
not less than ten (10) days prior thereto, and Landlord shall have the right to
post notices of non-responsibility or similar notices in or on the Premises in
connection therewith. Tenant shall have the right to contest any such liens
filed in good faith, provided that if any such liens are filed and not removed
or bonded over within fifteen (15) days after notice from Landlord, Landlord
may, without waiving its rights and remedies based on such breach by Tenant and
without releasing Tenant from any obligations, cause such liens to be released
by any means it deems proper, including payment in satisfaction of the claim
giving rise to such lien. Tenant shall pay to Landlord upon demand any sum paid
by Landlord to remove such liens together with Landlord’s costs and attorneys’
fees and interest at the rate of ten percent (10%) per annum from the date of
payment.

 

9.             Utilities; Janitorial and Security
Services. Tenant shall pay when due directly to the charging authority all
charges for water, gas, electricity, telephone, janitorial service, refuse
pickup, and all other utilities and services supplied or furnished to the
Premises during the term of this Lease, together with any taxes thereon. In the
event of an interruption in or failure or inability to provide any services or
utilities to the Premises or Building for any reason (a “Service Failure”),
such Service Failure shall not, regardless of its duration, impose upon
Landlord any liability whatsoever (except to the extent an interruption is
caused by the Landlord’s gross negligence or willful misconduct and continues
for ten consecutive days after Landlord receives notice from Tenant of such
interruption), constitute an eviction of Tenant, 

 

26

 

constructive or otherwise, entitle Tenant to an abatement of rent or to
terminate this Lease or otherwise release Tenant from any of Tenant’s obligations
under this Lease. In no event shall Landlord be liable to Tenant for
interruption of Tenant’s business due to failure or interruption of any such
utilities or services, unless such interruption (i)is caused by the gross
negligence or willful misconduct of Landlord,(ii) continues for a period of
three (3) days after written notice by Tenant, (iii) Tenant has maintained its
generator in good condition and has resorted to it to remedy any problem,
and(iv) causes any damages to Tenant because of such circumstance are not
covered by Tenant’s insurance. Subject to the foregoing, Tenant hereby waives
any benefits of any applicable existing or future law, including the provisions
of California Civil Code Section 1932(1), permitting the termination of
this Lease due to such interruption, failure or inability. Tenant shall be
responsible for the janitorial service for the entire Building, and shall
maintain the Premises in clean condition. Landlord shall not be responsible for
providing security guards or other security protection for all or any portion
of the Premises, and Tenant may at its own expense provide or obtain such
security services as Tenant may desire to ensure the safety of the Premises.

 

10.           Indemnity. Tenant shall indemnify,
defend, protect and hold Landlord, its officers, directors, employees, agents,
lenders and their respective successors and assigns harmless from and against
any and all claims, loss of rents, damages, losses, expenses (including,
without limitation reasonable attorneys’ fees) or liabilities arising out of,
involving, or in connection with the use and/or occupancy of the Premises by
Tenant, any act or omission in or about the Premises by Tenant or any of its
agents, employees, contractors or invitees, or the Default by Tenant under this
Lease. In the event any action or proceeding shall be brought against Landlord
by reason of any of the foregoing matters, Tenant upon notice from Landlord
shall defend the same at Tenant’s expense by counsel reasonably satisfactory to
Landlord. The obligations of Tenant contained in this paragraph shall survive
the termination of this Lease. Notwithstanding the foregoing, the indemnity,
defense and hold harmless obligations of Tenant shall not apply to any claims,
loss of rents, damages, losses, expenses or liabilities to the extent caused by
the gross negligence or willful misconduct of Landlord or the breach by
Landlord of its obligations under this Lease.

 

11.           Waiver of Claims. Tenant hereby
waives any claims against Landlord, its officers, directors, employees, agents,
lenders and their respective successors and assigns for injury to Tenant’s
business or any loss of income therefrom or for damage to the goods, wares,
merchandise or other property of Tenant, or for injury or death of Tenant’s
agents, employees, invitees, or 

 

27

 

any other person in or about the Premises regardless of whether the
same results from conditions existing upon the Premises or from other sources
or places, except to the extent that such claims result from the gross
negligence or willful misconduct of Landlord.

 

12.           Insurance.

 

12.1.        Tenant’s Liability Insurance. Tenant
shall, at Tenant’s expense, obtain and keep in force during the term of this
Lease a policy of commercial general liability insurance insuring against
liability arising out of the condition, use, occupancy or maintenance of the
Premises. Such policy of insurance shall have a combined single limit for both
bodily injury and property damage in an amount not less than Five Million
Dollars ($5,000,000) per occurrence. No more often than every three (3) years,
Landlord may require Tenant to increase the amount of such coverage if, in
Landlord’s reasonable opinion, the amount of such coverage is no longer
adequate. The policy shall contain cross-liability or equivalent endorsements. Tenant’s
liability insurance policy or policies shall: 
(i) include premises and operations liability coverage, products
and completed operations liability coverage, broad form property damage
coverage including completed operations, blanket contractual liability
coverage, and personal and advertising injury coverage; (ii) provide that
the insurance company has the duty to defend all insureds under the policy;
(iii) provide that defense costs are paid in addition to and do not deplete any
of the policy limits; (iv) cover liabilities arising out of or incurred in
connection with Tenant’s use or occupancy of the Building and the other
portions of the Premises; and (v) extend coverage to cover liability for
the actions of Tenant’s representatives and invitees. Each policy of liability
insurance required by this paragraph shall: 
(i) contain a cross liability endorsement or separation of insureds
clause; (ii) provide that any waiver of subrogation rights or release
prior to a loss does not void coverage; and(iii) provide that it is
primary to and not contributing with, any policy of insurance carried by
Landlord covering the same loss. The insurance requirements set forth herein
are independent of Tenant’s indemnification and other obligations under this
Lease and shall not be construed to restrict, limit or modify such
indemnification or other obligations of Tenant under the Lease.

 

12.2.        Landlord’s Liability Insurance. Landlord
shall maintain a policy or policies of commercial general liability insurance
insuring Landlord (and such other persons as may be designated by Landlord)
against liability for personal injury, bodily injury or death, and damage to
property occurring or resulting from an occurrence in, on or about the Premises
with a combined single limit in such form and in such amounts and including
such coverages as Landlord deems appropriate, but in 

 

28

 

any event no less than that required to be maintained by Tenant. Such
policy may be a blanket policy also covering other properties owned by
Landlord.

 

12.3.        Property Insurance.

 

(a)           Landlord shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Premises, but excluding coverage of fixtures, machinery,
equipment, alterations and leasehold improvements of Tenant which are not
considered part of the real estate for insurance purposes, in the amount of the
full replacement value thereof, as the same may exist from time to time, or the
amount required by any lender (but in no event more than the commercially
reasonable and available insurance value thereof) providing protection against
all perils customarily included within the “all risk” or “special form”
classification of causes of loss, and, at Landlord’s option, flood, earthquake
and additional costs resulting from debris removal and the enforcement of any
ordinance or law regulating the reconstruction or replacement of any undamaged
sections of the Building required to be demolished or removed by reason of the
enforcement of any building, zoning, safety or land use laws as the result of a
covered cause of loss. In addition, Landlord shall obtain and keep in force,
during the term of this Lease, a policy of rental loss insurance commencing on
the date of loss and continuing for a period of at least one (1) year, with
proceeds payable to Landlord, which insurance may also cover all Real Property
Taxes, insurance premiums, and other sums payable by Tenant to Landlord
hereunder for said period. The insurance coverage may include sprinkler leakage
insurance if the Building contains fire sprinklers. Tenant shall have no
interest in or right to the proceeds of any such insurance carried by Landlord.

 

(b)           Tenant shall, at Tenant’s sole expense,
obtain and keep in force during the term of this Lease, a policy covering
causes of loss-special form insuring the fixtures, machinery, equipment,
alterations, personal property and leasehold improvements of Tenant which are
not considered part of the real estate for insurance purposes for the full
replacement value thereof, as the same may increase from time to time due to
inflation or otherwise. The proceeds from any of such policies shall be used for
the repair or replacement of such items so insured to the extent that the same
would become the property of Landlord upon the expiration or sooner termination
of this Lease. Tenant may carry such insurance under a blanket policy, provided
that such policy provides coverage equivalent to a separate policy. Landlord
shall be provided coverage under such insurance to the extent of its insurable
interest and, if requested by Landlord, both Landlord and Tenant shall sign all
documents reasonably necessary or proper in connection with the settlement of
any claim or loss under such insurance. Landlord shall have 

 

29

 

no obligation to carry insurance on any of Tenant’s personal or other
property.

 

12.4.        Payment. Tenant shall pay to Landlord
the premiums for the insurance obtained by Landlord pursuant to paragraphs 12.2
and 12.3(a). Landlord may obtain liability insurance and property insurance for
the Premises separately, or together with other buildings and improvements
under blanket policies of insurance. In the latter case, Tenant shall be liable
for only such portion of the premiums for such blanket policies as are
allocable to the Premises, as reasonably determined by the insurer or Landlord.
If the term of this Lease does not expire concurrently with the expiration of
the period covered by such insurance, Tenant’s liability for premiums shall be
prorated on an annual basis.

 

12.5. Insurance Policies. The insurance required to be obtained
by Tenant pursuant to paragraphs 12.1 and 12.3(b) shall:  (i) be primary insurance; (ii) name
Landlord, Landlord’s property manager and such other parties in interest as
Landlord may from time to time reasonably designate to Tenant in writing as an
additional insured by endorsement, with such endorsement to be on such form and
with such modifications as Landlord may require (with such additional insureds
being provided at least the same extent of coverage as is provided to Tenant
under such policies and all endorsements effecting such additional insured
status being at least as broad as additional insured endorsement form number
CG 2010 11 85 promulgated by the Insurance Services Office);
(iii) be maintained at Tenant’s sole cost and; (iv) be in a form reasonably
satisfactory to Landlord, which form may be a blanket policy; (v) be carried
with companies admitted to do business in California, rated by the latest
edition of the A.M. Best Insurance Guide as A-VIII or better (or such other
rating as may be required by any lender); and (vi) provide that the deductible
amount under such insurance shall not exceed $25,000. The policy or policies,
or duly executed certificates for them, shall be deposited with Landlord on or
prior to the date Tenant takes possession of the Premises. Each policy shall
provide for the carrier to provide at least thirty (30) days prior written
notice to Landlord of cancellation or non-renewal. At least thirty (30) days
prior to the expiration of any required insurance policy, Tenant shall furnish
Landlord with proof that a new policy has been issued, continuing in force the
insurance covered by the policy which is expiring. In addition, Tenant shall at
Landlord’s request provide to Landlord evidence that the insurance required to
be carried by Tenant pursuant to this Lease, including any endorsement
effecting the additional insured status, is in full force and effect and that
the premiums therefor have been paid when due. Tenant shall not do or permit to
be done anything which shall invalidate any of the insurance policies referred
to in paragraphs 12.1, 12.2, and 12.3.

 

30

 

12.6.        Waiver
of Subrogation. Tenant and Landlord each hereby waives any and all rights
of recovery against the other, or against the officers, directors, employees,
agents and representatives of the other, for loss of or damage to the property
of the waiving party or the property of others under its control regardless of
the cause (including negligence of the party benefiting from the waiver), where
such loss or damage is insured against under any insurance policy carried by
Landlord or Tenant and in force at the time of such loss or damage. Tenant and
Landlord shall, upon obtaining the policies of insurance required hereunder,
give notice to the insurance carrier or carriers that the foregoing mutual
waiver of subrogation is contained in this Lease. Landlord and Tenant shall
have their respective insurance companies waive any rights of subrogation that
such companies may have against Landlord or Tenant, as the case may be.

 

12.7.        No
Limitation of Liability. Landlord makes no representation that the limits of
liability specified to be carried by Tenant or Landlord under the terms of this
Lease are adequate to protect any party. If Tenant believes that the insurance
coverage required under this Lease is insufficient to adequately protect
Tenant, Tenant shall provide, at its own expense, such additional insurance as
Tenant deems adequate.

 

13.           Damage or Destruction.

 

13.1.        Partial
Damage-Insured. Subject to the provisions of paragraphs 13.2 and 13.3, if
the Premises or the Building, as the case may be, are damaged and such damage
was caused by an act or casualty covered under an insurance policy required to
be maintained pursuant to paragraph 12.3(a), Landlord shall cause such damage
to be repaired as soon as reasonably possible and this Lease shall continue in
full force and effect.

 

13.2.        Landlord’s
Right to Terminate. Landlord may elect to terminate this Lease following
damage by fire or other casualty, effective as of the date of the occurrence of
such damage, under the following circumstances: (i) if in Landlord’s reasonable
judgment the Building cannot be substantially repaired and restored under
Applicable Laws within six (6) months from the date of the casualty; (ii) if
adequate insurance proceeds are not for any reason (other than Landlord’s
failure to obtain coverages required pursuant to paragraph 12.3(a)), including,
without limitation, the casualty not being a casualty for which Landlord is
required to maintain insurance pursuant to paragraph 12.3(a) or a decision
made by any holder of any encumbrance covering any part of the Premises, not to
make available to Landlord from Landlord’s insurance policies (and/or from
Landlord’s funds made available for such purpose, in Landlord’s sole and
absolute discretion) an amount sufficient to cover all of the cost of the
required repairs (excluding the 

 

31

 

deductible under the policy);
(iii) if the Building is damaged or destroyed to the extent that, in the
reasonable judgment of Landlord, the cost to repair and restore the Building
would exceed fifty percent (50%) of the full replacement cost of the Building;
(iv) if the fire or other casualty occurs during the last one (1) year of the
term of the Lease and the damage to the Building is material; or (v) if the casualty
is caused by earthquake and the deductible amount payable under Landlord’s
earthquake insurance policy exceeds $100,000.

 

If any of the circumstances described in subparagraphs (i), (ii),
(iii) or (iv) of this paragraph 13.3 occur or arise, Landlord shall give Tenant
notice within sixty (60) days after the date of the casualty, specifying
whether Landlord elects to terminate this Lease as provided above or Landlord’s
estimate of the time required to complete Landlord’s repair obligations if more
than nine (9) months from the date of the casualty. In the event Landlord
elects to terminate this Lease, this Lease shall be terminated effective as of
the date of such casualty pursuant to such notice of termination by Landlord.

 

13.3.        Tenant’s Right to
Terminate. If (i) all or a substantial part of the Building is rendered
untenantable or inaccessible by damage from fire or other casualty, then Tenant
may elect to terminate this Lease if Landlord’s estimate of the time required
to complete Landlord’s repair obligations under this Lease is greater than nine
(9) months from the date of the casualty, or (ii) the fire or other casualty
occurs during the last one (1) year of the term of the Lease and the damage to
the Building is material; in each of such events, Tenant may terminate this
Lease by giving Landlord notice of Tenant’s election to terminate within
fifteen (15) days after Landlord’s notice to Tenant pursuant to
paragraph 13.2, in the case of an event described in clause (i) or within
thirty (30) days after an event described in clause (ii). If Tenant elects to
terminate this Lease, the Lease shall terminate effective as of the date of
such casualty.

 

13.4.        Abatement
of Rent. Notwithstanding anything to the contrary contained in paragraph 3
or elsewhere in this Lease, if the Premises are damaged such that they become
unusable or partially unusable by Tenant, the rent payable hereunder for the
period commencing on the occurrence of such damage and ending upon completion
of such repair or restoration shall be abated in proportion to the extent to
which Tenant’s use of the Premises is impaired; provided that nothing herein
shall be construed to preclude Landlord from being entitled to collect the full
amount of any rental loss insurance proceeds. Except for abatement of rent, if
any, Tenant shall have no claim against Landlord for any damage suffered by
reason of any such damage, destruction, repair or restoration, except as
explicitly provided herein.

 

32

 

13.5.        Tenant’s
Property. Landlord’s obligation to rebuild or restore shall not include
restoration of Tenant’s trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises.

 

13.6.        Notice
of Damage. Tenant shall notify Landlord within ten (10) days after the
occurrence thereof of any damage to all or any portion of the Premises. In no
event shall Landlord have any obligation to repair or restore the Premises
pursuant to this paragraph 13 until a reasonable period of time after Landlord
has reasonable period of time to collect insurance proceeds arising from such
damage (unless such damage is clearly not covered by insurance then in effect
covering the Premises), not to exceed one hundred and eighty (180) days.

 

13.7         Waiver
of Statutes. The terms of this Lease shall govern the effect of any damage
to or destruction of the Premises with respect to the termination of this Lease.
Landlord and Tenant hereby waive the provisions of California Civil Code
Sections 1932(2), 1933(4) and any other present or future statute to the extent
inconsistent herewith.

 

14.           Condemnation.

 

14.1.        Partial Taking. Subject to the
provisions of paragraph 14.2, if part of the Premises is taken for any public
or quasi-public use, under any statute or right of eminent domain (collectively
a “taking”), and a part of the Premises remains which is reasonably suitable
for Tenant’s continued occupancy for the uses permitted by this Lease, this
Lease shall, as to the part so taken, terminate as of the date the condemnor or
purchaser takes possession of the property being taken, and the rent payable
hereunder shall be reduced based upon the extent to which the partial taking
shall interfere with the business carried on by Tenant on the Premises. Landlord
shall, at its own cost and expense, make all necessary repairs or alterations
to the Premises in order to make the portion of the Premises not taken a
complete architectural unit; provided, however, that Landlord shall not be
required to repair or restore any injury or damage to the property of Tenant or
to make any repairs or restoration of any alterations, additions, fixtures or
improvements installed on the Premises by or at the expense of Tenant.

 

14.2.        Total Taking. If fifteen percent (15%)
or more of the floor area of the Building is taken, or more than twenty five
percent (25%) of the land area is taken, or such part thereof is taken so that
there does not remain a portion of the Premises suitable for Tenant’s continued
occupancy for the uses permitted hereunder, such taking shall be treated as a
total

 

33

 

taking and this Lease shall
terminate upon the date possession shall be taken by the condemning authority.

 

14.3.        Distribution of Award. If a part or all
of the Premises is taken, all compensation awarded upon such taking shall
belong to and be paid to Landlord, except that Tenant shall receive from the
award a sum attributable to Tenant’s improvements or alterations made to the
Premises by Tenant at Tenant’s expense which Tenant has the right to remove
from the Premises pursuant to the provisions of this Lease; or, if Tenant
elects to remove any such improvements or alterations made to the Premises at
Tenant’s expense, Tenant shall receive a sum for reasonable removal and
relocation costs not to exceed the market value of such improvements or
alterations on the date possession of the Premises is taken. Notwithstanding
the foregoing, Tenant shall have the right to seek a claim against the taking
authority for interruption of or damage to its business and loss of business
goodwill and moving expenses.

 

14.4.        Sale Under Threat of Condemnation. A
sale by Landlord to any authority having the power of eminent domain, either
under threat of condemnation or while condemnation proceedings are pending,
shall be deemed a taking under the power of eminent domain for purposes of this
paragraph 14.

 

14.5.        Waiver of Statutes. The terms of this
Lease shall govern the effect of any taking of the Premises. Landlord and
Tenant hereby waive the provisions of California Code of Civil Procedure
Section 1265.130 and any other present or future statute to the extent
inconsistent herewith.

 

15.           Assignment and Subletting.

 

15.1.        Landlord’s Consent Required. Tenant
shall not assign this Lease, or any interest therein, voluntarily or
involuntarily, and shall not sublet the Premises or any part thereof, or any
right or privilege appurtenant thereto, or suffer any other person to occupy or
use the Premises, or any portion thereof, without the prior written consent of
Landlord in each instance pursuant to the terms and conditions set forth below,
which consent shall not be unreasonably withheld, delayed or conditioned.

 

15.2.        Documentation. Prior to any assignment
or sublease which Tenant desires to make, Tenant shall provide to
Landlord:  (i) the name and address of
the proposed assignee or sublessee, (ii) true and complete copies of all
documents evidencing Tenant’s prospective agreement to assign or sublease,
(iii) such other information as may be reasonably requested by Landlord, and
(iv) a document signed by Tenant and the proposed assignee or sublessee
specifying to Landlord’s reasonable satisfaction all consideration to be
received by Tenant in

 

34

 

connection with such assignment
or sublease in the form of lump sum payments, installments of rent, or
otherwise. For purposes of this paragraph 15, the term “consideration” shall
include, without limitation, all monies or other consideration of any kind, if
such sums are related to Tenant’s interest in this Lease or in the Premises,
including but not limited to, bonus money, and payments (in excess of fair
market value thereof) for Tenant’s assets, fixtures, equipment or furniture
remaining in the Premises.

 

15.3.        Terms and Conditions. As a condition to
Landlord’s granting its consent to any assignment or sublease, Landlord may
require that (i) Tenant pay to Landlord, as and when received by Tenant,
one-half of the amount of any excess of such consideration to be received by
Tenant in connection with said assignment or subletting over and above the base
rent required to be paid by Tenant for the same month in which the
consideration is received (calculated on a per square foot basis if less than
all of the Premises is assigned or sublet); provided that Tenant shall first be
entitled to retain an amount of such excess consideration equal to Tenant’s
reasonable direct costs of the real estate brokerage commissions and attorney’s
fees incurred by Tenant in connection with such assignment or subletting and
the cost of tenant improvements and alterations made for the assignee or
sublessee and paid for by Tenant amortized on a straight line basis over the
remaining term of the Lease (or the term of the sublease in the case of a
sublease); and (ii) Tenant and the proposed assignee or sublessee demonstrate
to Landlord’s reasonable satisfaction that the assignee or sublessee proposes
to use the Premises for substantially the same use or a use which is otherwise
satisfactory to Landlord. Each assignment or sublease agreement to which
Landlord has consented shall be an instrument in writing in form reasonably
satisfactory to Landlord, and shall be executed by both Tenant and the assignee
or sublessee, as the case may be. Each such assignment or sublease agreement
shall recite as follows (collectively, the “Required Provisions”): (i) if a
sublease, that it is and shall be subject and subordinate to the provisions of
this Lease, (ii) the assignee or sublessee accepts such assignment or sublease
and agrees to perform all of the obligations of Tenant hereunder or those
applicable to the subleased Premises in the case of a sublease of a portion of
the Premises, (iii) the termination of this Lease shall, at Landlord’s sole
election, constitute a termination of every such assignment or sublease, (iv)
if a sublease, in the event of a Default by Tenant, at Landlord’s sole
election, the sublessee shall attorn to Landlord (in which event Landlord shall
undertake the obligations of Tenant under such sublease arising after the
exercise of such option; provided, however, that Landlord shall not be liable
for any prepaid rents or security deposit paid by such sublessee to Tenant or
for any prior defaults or breaches by Tenant), (v) if a sublease, any matter
requiring the consent of the Tenant under the sublease

 

35

 

shall also require the consent
of Landlord; and (vi) the terms of this paragraph 15 shall apply to any further
assignment or subletting of all of any part of the Premises by any future
assignee or sublessee. In the event Landlord shall consent to an assignment or
sublease, Tenant shall nonetheless remain liable for all obligations and
liabilities of Tenant under this Lease, including, but not limited to, the
payment of rent. The consent by Landlord to any assignment or sublease shall
not constitute a waiver of the provisions of this paragraph 15, including the
requirement of Landlord’s prior written consent, with respect to any subsequent
assignment or sublease. Tenant agrees to reimburse Landlord upon demand for
reasonable attorneys’ fees incurred by Landlord in connection with the
negotiation, review, and documentation of any such requested assignment or
subleasing, not to exceed $5,000.

 

15.4.        Corporate Transactions Constituting
Assignment.

 

(a)           Any dissolution, merger, reorganization,
transfer (either all at once or any time in the aggregate) of fifty percent
(50%) or more of the capital stock, partnership interests or membership
interests of Tenant (if Tenant is a corporation, partnership or limited
liability company, respectively), or sale (either all at once or in a series of
related sales) of all or substantially all of Tenant’s assets located in, on,
or about the Premises, shall be deemed an assignment. Notwithstanding the
foregoing. if Tenant is deemed to be a Reporting Company under the Securities
and Exchange Act of 1934, the sale of more than fifty (50%) per cent of Tenant’s
capital stock to a single entity or to related entities in a single transaction
or series of related transactions shall be deemed to be an assignment.

 

(b)           Notwithstanding the foregoing, Tenant may,
without Landlord’s prior written consent, without any participation by Landlord
in assignment and subletting proceeds, and without giving Landlord any
recapture rights, sublet the premises or assign this Lease to:  (i) an entity controlling, controlled by
or under common control with Tenant; (ii) a transferee which is the
resulting entity of a merger, consolidation or non-bankruptcy reorganization
with Tenant; or (iii) a purchaser of all or substantially all of Tenant’s
stock or assets. Tenant’s foregoing rights to assign or sublease this Lease
without Landlord’s prior written consent shall be subject to the following
conditions: (A) Tenant shall not be in uncured Default hereunder; (B) the
assignment or sublease agreement shall contain the Required Provisions; (C)
other than the requirement that Tenant obtain Landlord’s consent and share with
Landlord a portion of the assignment or sublease proceeds and Landlord’s
recapture right, all of the provisions of this paragraph 15 shall apply with
respect thereto (including, without limitation, that Tenant shall remain liable
for all obligations and liabilities of

 

36

 

Tenant under this Lease); (D)
Tenant shall provide at least thirty (30) days prior written notice to Landlord
of any such assignment or subletting and promptly supply Landlord with any
documents or information reasonably requested by Landlord regarding such
assignment or subletting or such assignee or sublessee (provided, however, that
in the event that Tenant can not legally deliver such 30 days notice, Tenant
shall deliver such notice at the earliest time that it can legally do so; and
(E) the entity to which the Lease is assigned or subleased has a net worth as
of the date of such assignment or sublease equal to at least the greater of the
net worth of Tenant as of the date of this Lease or as of the date immediately
preceding such assignment or sublease. Tenant and the proposed assignee or
sublessee shall provide such documentation as may be requested by Landlord to
demonstrate to Landlord’s reasonable satisfaction that the condition set forth
in (E) above has been satisfied. For the purposes of this Lease, the sale of
Tenant’s capital stock through any public offering shall not be deemed an
assignment, subletting, or other transfer of the Lease or the premises.

 

15.5         Recapture. In addition to Landlord’s
right of approval of any proposed assignment or sublease and without limiting
the other provisions of this paragraph 15, Landlord shall have the option, in
the event of any proposed Major Transfer to terminate the Lease. The term “Major
Transfer” as used in this Lease means an assignment or sublease which: (i) when
combined with all other assignments or subleases (other than those subject to
paragraph 15.4), means that more than one half of the rentable square feet in
the Building would be assigned or sublet; and (ii) either the proposed
assignment or sublease (including all options to extend) together with any
prior assignment or sublease (including all options to extend) as of the date
of the proposed assignment or sublease has a term of more than the lesser of
(x) three (3) years ; (y) one half of the remaining term of the Lease as of the
date of the commencement of such assignment or sublease; or (z) if the date of
the commencement of such assignment or sublease is during the last three (3) years
of the term of the Lease, one (1) year. If Tenant desires to determine prior to
identifying a particular transaction whether Landlord intends to exercise its
recapture right, Tenant shall give Landlord written notice of Tenant’s intent
to enter into a Major Transfer as of the date specified in such notice (the “Major
Transfer Date”), which date shall be not less than six (6) months and not more
than (9) months from the date of Landlord’s receipt of such notice. Tenant
shall not be required to have a particular assignment or sublease identified
before giving such notice; provided, however, that Tenant shall again comply
with the provisions of this paragraph 15.5 with respect a Major Transfer in the
event that: (i) Tenant does not enter into a Major Transfer by the Major
Transfer Date; or (ii) any assignment or sublease which is not a Major Transfer
when executed later becomes one by means of any extension, expansion

 

37

 

or otherwise (in which case
Tenant shall immediately give Landlord written notice of such occurrence). Landlord
shall exercise its option to terminate, if at all, by giving Tenant written
notice thereof within thirty (30) days following Landlord’s receipt of Tenant’s
written notice. In the event that Landlord exercises its option to terminate,
the Lease shall terminate as of the Major Transfer Date or, in the event that
the Major Transfer occurs as a result of any assignment or sublease which is
not a Major Transfer when executed later becoming one by means of any
extension, expansion or otherwise, as of the date which is six (6) months after
the date of the Major Transfer. Without in any manner limiting the rights of
Landlord, following any such termination by Landlord, Landlord may lease all or
a portion of the Premises to any prospective assignee or subtenant proposed by
Tenant, without liability to the Tenant. Landlord’s failure to exercise such
termination right as herein provided shall not be construed as a waiver of
Landlord’s right with respect to any other assignment or sublease constituting
a Major Transaction or as Landlord’s consent to any proposed assignment or
subletting and Tenant shall comply with the terms of this paragraph 15 with
respect thereto.

 

15.6.        Landlord’s Remedies. Any assignment or
sublease without Landlord’s prior written consent (if required pursuant to this
paragraph 15) shall at Landlord’s election be void, and shall constitute a
default. If Tenant shall purport to assign this Lease, or sublease all or any
portion of the Premises, or permit any person or persons other than Tenant to
occupy the Premises without Landlord’s prior written consent, Landlord may
collect rent from the person or persons then or thereafter occupying the
Premises and apply the net amount collected to the rent reserved herein, but no
such collection shall be deemed a waiver of Landlord’s rights and remedies
under this paragraph 15, or the acceptance of any such purported assignee,
sublessee or occupant, or a release of Tenant from the further performance by
Tenant of covenants on the part of Tenant herein contained.

 

15.7.        Encumbrances, Licenses and Concession
Agreements. Except as permitted herein, Tenant shall not encumber its
interest under this Lease or any rights of Tenant hereunder, or enter into any
license or concession agreement respecting all or any portion of the Premises,
without Landlord’s prior written consent which consent shall not unreasonably
be withheld or delayed subject to the terms and conditions referred to in
paragraph 15.2 above, and Tenant’s granting of any such encumbrance, license,
or concession agreement shall constitute an assignment for purposes of this
paragraph 15.

 

38

 

16.           Default by Tenant.

 

16.1.        Event of Default. The occurrence of any
one or more of the following events (an “Event of Default”) shall constitute a
default and breach of this Lease by Tenant:

 

(a)           The failure by Tenant to make any payment of
rent or any other payment required to be made by Tenant hereunder, as and when
due, and such failure shall not have been cured within five (5) days after
Tenant receives written notice thereof from Landlord;

 

(b)           Tenant’s failure to perform any other term,
covenant or condition contained in this Lease and such failure shall have
continued for thirty (30) days after written notice of such failure is given to
Tenant; provided that, where such failure cannot reasonably be cured within
said thirty (30) day period, Tenant shall not be in default if Tenant commences
such cure within said thirty (30) day period and thereafter diligently
continues to pursue all reasonable efforts to complete said cure until
completion thereof. Said written notice shall constitute those required under
California Code of Civil Procedure, Section 1161, et seq.;

 

(c)           Tenant
abandons the Premises for more than thirty (30) days or violates the
restrictions on assignment or subletting in paragraph 15;

 

(d)           Tenant
ceases doing business as a going concern; makes an assignment for the benefit
of creditors; is adjudicated an insolvent, files a petition (or files an answer
admitting the material allegations of a petition) seeking relief under any
state or federal bankruptcy or other statute, law or regulation affecting
creditors’ rights; all or substantially all of Tenant’s assets are subject to
judicial seizure or attachment and are not released within 60 days, or
Tenant consents to or acquiesces in the appointment of a trustee, receiver or
liquidator for Tenant or for all or any substantial part of Tenant’s assets.

 

(e)           Tenant
fails, within sixty (60) days after the commencement of any proceedings against
Tenant seeking relief under any state or federal bankruptcy or other statute,
law or regulation affecting creditors’ rights, to have such proceedings dismissed,
or Tenant fails, within thirty (30) days after an appointment, without Tenant’s
consent or acquiescence, of any trustee, receiver or liquidator for Tenant or
for all or any substantial part of Tenant’s assets, to have such appointment
vacated.

 

16.2.        Remedies. Upon any Event of Default,
Landlord shall have the following remedies in addition to all other rights and
remedies provided by law or equity:

 

39

 

(a)           The rights and remedies provided by
California Civil Code Section 1951.4 (Landlord may continue the lease in effect
after Tenant’s breach and abandonment and recover rent as it becomes due, if
Tenant has right to sublet or assign, subject only to reasonable limitations). Acts
of maintenance or preservation, efforts to relet the premises, or the
appointment of a receiver upon Landlord’s initiative to protect its interest
under this Lease shall not constitute a termination of Tenant’s right to
possession;; or

 

(b)           Landlord may terminate the Tenant’s right
to possession by giving Tenant thirty (30) days written notice of
termination. Thirty (30) days after the giving of the notice, this Lease
and all of Tenant’s rights in the Premises shall terminate. Any termination
under this paragraph shall not release Tenant from the payment of any sum then
due Landlord or from any claim for damages or rent previously accrued or then
accruing against Tenant.

 

Tenant hereby waives its right under
California Code of Civil Procedure Section 1179. In the event this Lease is
terminated pursuant to this paragraph 16.2(b), Landlord may recover from
Tenant:

 

(i)            the worth at the time of award of the
unpaid rent which had been earned at the time of termination; plus

 

(ii)           the worth at the time of award of the amount
by which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss for the same period
that Tenant proves could have been reasonably avoided; plus

 

(iii)the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss for the same period that Tenant
proves could be reasonably avoided; plus

 

(iv)          any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant’s failure to perform
Tenant’s obligations under this Lease, or which in the ordinary course of
things would be likely to result therefrom.

 

The “worth at the time of award” of the
amounts referred to in subparagraphs (i) and (ii) of this paragraph 16.2(b)
shall be computed by allowing interest at the greater of ten percent (10%) per
annum or the Bank of America reference rate as of the date thereof plus two
percent (2%) per

 

40

 

annum. The “worth at the time
of the award” of the amount referred to in subparagraph (iii) of this paragraph
16.2(b) shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of the award plus one
percent (1%). The term “time of award” as used in subparagraphs (i), (ii) and
(iii) shall mean the date of entry of a judgment or award against Tenant in an
action or proceeding arising out of Tenant’s breach of this Lease. The term “rent”
as used in this paragraph shall include all sums required to be paid by Tenant
to Landlord pursuant to the terms of this Lease.

 

(c)           Upon
any termination of Tenant’s possession of the Premises or the abandonment of
the Premises by Tenant, Landlord may remove all Tenant’s property from the
Premises, and such property may be stored by Landlord in a public warehouse or
elsewhere at the sole cost and for the account of Tenant. If Landlord does not
elect to store any or all of Tenant’s property left in the Premises, Landlord
may consider such property to be abandoned by Tenant, and Landlord may
thereupon dispose of such property in any manner deemed appropriate by Landlord.
Any proceeds realized by Landlord on the disposal of any such property shall be
applied first to offset all expenses of storage and sale, then credited against
Tenant’s outstanding obligations to Landlord under this Lease, and any balance
remaining after satisfaction of all obligations of Tenant under this Lease
shall be delivered to Tenant.

 

(d)           This Lease may be terminated by a judgment
specifically providing for termination, or by Landlord’s delivery to Tenant of
written notice specifically terminating this Lease in accordance with
applicable law. In no event shall any one or more of the following actions by
Landlord alone, in the absence of a written election by Landlord to terminate
this Lease, constitute a termination of this Lease or a waiver of Landlord’s
right to recover damages under this paragraph 16:

 

(i)            appointment of a receiver in order to
protect Landlord’s interest hereunder;

 

(ii)           consent to any subletting of the Premises or
assignment of this Lease by Tenant, whether pursuant to provisions hereof
concerning subletting and assignment or otherwise; or

 

(iii)          any other action by Landlord or Landlord’s
agents intended to mitigate the adverse effects of any breach of this Lease by
Tenant, including without limitation any action taken to maintain and preserve
the Premises or any action taken to relet the Premises or any portion thereof
for the account of Tenant and in the name of Tenant.

 

41

 

16.3.        Landlord’s Right to Perform Tenant’s
Obligations. If Tenant shall at any time fail to make any payment or
perform any other act required to be made or performed by Tenant under this
Lease, then after the cure period provided herein and after reasonable notice
to Tenant, Landlord may, but shall not be obligated to, make such payment or
perform such other act to the extent Landlord may deem desirable, and may, in
connection therewith, pay any and all expenses incidental thereto and employ
counsel. No such action by Landlord shall be deemed a waiver by Landlord of any
rights or remedies Landlord may have as a result of such failure by Tenant, or
a release of Tenant from performance of such obligation. All sums so paid by
Landlord, including without limitation all penalties, interest and costs in
connection therewith, shall be due and payable by Tenant to Landlord on the day
immediately following notice to Tenant of any such payment by Landlord. Landlord
shall have the same rights and remedies for the nonpayment of any such sums as
Landlord may be entitled to in the case of default by Tenant in the payment of
rent.

 

16.4.        Interest on Past Due Obligations. Any amount
due to Landlord hereunder and not paid within the cure period provided herein
shall bear interest at the lesser annual rate of (i) ten percent (10%); or
(ii) the highest rate then allowed by law, from the date due until paid in full.
Payment of such interest shall not excuse or cure any default by Tenant under
this Lease.

 

16.5.        Additional Rent. All sums payable by
Tenant to Landlord or to third parties under this Lease shall be payable as
additional sums of rent. For purposes of any unlawful detainer action by
Landlord against Tenant pursuant to California Code of Civil Procedure Sections
1161-1174, or any similar or successor statutes, Landlord shall be entitled to
recover as rent not only such sums specified in paragraph 3 as may then be
overdue, but also all such additional sums of rent as may then be overdue.

 

16.6         Notice Requirements. When this Lease
requires service of a notice, that notice shall replace rather than supplement
any equivalent or similar statutory notice, including any notices required by
Code of Civil Procedure Section 1161 or any similar or successor statute. When
a statute requires service of a notice in a particular manner, service of that
notice (or a similar notice required by this Lease) in the manner required by
paragraph 22 shall replace and satisfy statutory service-of-notice
procedures, including those required by Code of Civil Procedure
Section 1162 or any similar or successor statute

 

16.7.        Remedies Not Exclusive. No remedy or
election hereunder shall be deemed exclusive but shall, wherever

 

42

 

possible, be cumulative with
all other remedies herein provided or permitted at law or in equity.

 

17.           Default by Landlord.

 

17.1.        Cure Period. Landlord shall not be
deemed to be in default in the performance of any obligation required to be
performed by it hereunder unless and until it has failed to perform such
obligation within the period of time specifically provided herein, or if no
period of time has been provided, then within thirty (30) days after receipt of
written notice by Tenant to Landlord specifying wherein Landlord has failed to
perform such obligation; provided, however, that if the nature of Landlord’s
obligation is such that more than thirty (30) days are reasonably required for
its performance, then Landlord shall not be deemed to be in default if it shall
commence such performance within such thirty (30) day period and thereafter
diligently prosecute the same to completion.

 

17.2.        Mortgagee Protection. If any deed of
trust or mortgage encumbers the Premises, in the event of any default on the
part of Landlord, Tenant will give notice by registered or certified mail to
any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises whose address shall have been furnished to Tenant and before Tenant
shall have any right to terminate this Lease Tenant shall grant such
beneficiary or mortgagee a reasonable period within which to cure the default,
including a reasonable period to obtain possession of the Premises by private
power of sale if such action is necessary to effect a cure. The provisions of
this Lease may require approval by a financial institution making a loan
secured by the Premises. If any such institution should require as a condition
to such financing any modification of the provisions of this Lease, Tenant will
approve and execute such modifications provided no such modification shall
relate to the rent payable hereunder, the length of the term or materially
alter the rights or obligations of Landlord or Tenant.

 

18.           Advertisements and Signs. Tenant
shall not place or permit to be placed any sign, display, advertisement, or
decoration (“sign”) on the exterior of the Building, or elsewhere on the
Premises, without all necessary approvals from the City of Palo Alto and the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, as to the color, size, style, character, content, and location of
each such sign. The cost of Tenant’s sign(s) and their installation, maintenance
and removal (including any necessary repairs to the Building or any other part
of the Premises caused by such removal) shall be Tenant’s sole cost and expense.
Upon termination of this Lease, Tenant shall remove any sign which it has
placed on the Premises or the Building, and shall repair any damage caused by
the installation or removal of such sign.

 

43

 

19.           Entry by Landlord. Landlord and its
agents shall be entitled to enter into and upon the Premises at all reasonable
times upon reasonable notice (except in the case of an emergency, in which
event no notice shall be required), for purposes of (i)exercising its rights
under this Lease; (ii) posting notices of non-responsibility for alterations, additions,
or repairs, (iii) during the final year of the lease term for the purpose of
placing upon the Premises any ordinary “for sale” signs, and during the one
hundred eight (180) day period prior to the expiration of this Lease, to place
upon the Premises any usual or ordinary “for lease” signs and exhibit the
Premises to prospective tenants at reasonable hours; (iv)determining whether
the Premises are in good condition; (v) performing any maintenance or repair of
the Building or Premises that Landlord has the right or obligation to perform;
(vi) determining whether Tenant is complying with its obligations under this
Lease (including, without limitation, its obligations under paragraph 5);
or(vii) doing any other act or thing necessary for the safety or preservation
of the Building or the Premises, all without any abatement of rent and without
liability to Tenant for any injury or inconvenience to or interference with
Tenant’s business, quiet enjoyment of the Premises, or any other loss
occasioned thereby, except for Landlord’s gross negligence or willful
misconduct. Landlord’s rights of entry as set forth in this paragraph shall be
subject to the reasonable security regulations of Tenant and good laboratory
practices as determined by Tenant, and to the requirement that Landlord shall
at all times act in a manner designed to minimize interference with Tenant’s
business activities on the Premises.

 

20.           Subordination and Attornment.

 

20.1.        Subordination. This Lease shall be
subject and subordinate to any mortgage, deed of trust, ground lease or other
instrument of security now of record or which is recorded after the date of
this Lease affecting the land and Building, or land or Building, of which the
Premises form a part, and such subordination is hereby made effective without
any further act of Tenant; provided that such subordination shall not be
effective with respect to any mortgage, deed of trust, ground lease or other
instrument or security recorded after the date of this Lease unless Landlord
first obtains from the lender or ground lessor a written agreement that
provides in essence that as long as Tenant performs its obligations under this
Lease within any applicable notice and cure periods, no foreclosure of, deed
given in lieu of foreclosure, or sale under the encumbrance, and no steps or
procedures taken under the encumbrance, shall affect Tenant’s rights or
increase Tenant’s obligations under this Lease. Tenant shall execute and
deliver to Landlord any written agreement and any other documents reasonably
required by the lender or ground lessor to accomplish the purposes of this

 

44

 

paragraph, within ten (10) days
after delivery thereof to Tenant; provided that, in any case where Tenant is
entitled to the above-described nondisturbance agreement, either prior to or
concurrently with the request Tenant is provided the required nondisturbance
agreement by the lender or ground lessor. Anything in this paragraph 20.1 to
the contrary notwithstanding, if a lender so elects in writing, this Lease
shall be deemed superior to the lien held by the lender, regardless of the date
of recordation of the lien, and Tenant will execute an agreement confirming the
lender’s election on request. Landlord represents that there is no loan
currently outstanding which is secured by the Premises.

 

20.2.        Attornment. Subject to the foregoing
paragraph 20.1, Tenant shall attorn to any third party purchasing or otherwise
acquiring the Premises at any sale or other proceeding, or pursuant to the
exercise of any rights, powers or remedies under any mortgages or deeds of
trust or ground leases now or hereafter encumbering all or any part of the
Premises, as if such third party had been named as Landlord under this Lease.

 

21.           Estoppel Certificates and Financial
Statements.

 

21.1.        Estoppel Certificates. Tenant shall,
within ten (10) days following request by Landlord, execute and deliver any
documents, including estoppel certificates, in any reasonable form presented by
Landlord:  (i) certifying that this Lease
has not been modified or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect,
(ii) stating the date to which the rent and other charges are paid in advance,
if at all, (iii) acknowledging that there are not, to Tenant’s knowledge,
any uncured defaults on the part of either party hereunder, or if there are
uncured defaults, stating the nature of such uncured defaults,
(iv) evidencing the status, to Tenant’s knowledge, of this Lease (with
respect the subordination thereof or any other matter) as may be required
either by a lender making a loan to be secured by a deed of trust or mortgage
encumbering the Premises or a purchaser of the Premises from Landlord; and (v)
stating any other information as Landlord may reasonably request. Any person or
entity purchasing, acquiring an interest in or extending financing with respect
to the Premises shall be entitled to rely upon any such certificate. If Tenant
fails to deliver such certificate within five (5) days after Landlord’s second
written request therefor, Tenant shall be liable to Landlord for any damages
incurred by Landlord, including any profits or other benefits from any sale or
financing of the Premises or any interest therein which are lost or made
unavailable as a result, directly or indirectly, of Tenant’s failure or refusal
to timely execute or deliver such estoppel certificate.

 

45

 

21.2.        Financial
Statements Within ten (10) days after written request therefor, which
request shall not be made more frequently than twice per year, Tenant shall
deliver to Landlord a copy of Tenant’s most current financial statements
(including at least a year end balance sheet and a statement of operations) of
Tenant (and of each guarantor, if any, of Tenant’s obligations under this
Lease) and for each of the three most recently completed years (if available),
prepared in accordance with generally accepted accounting principles (and, if
such is Tenant’s normal practice, audited by an independent certified public
accountant), all then available subsequent quarterly statements, and such other
financial information as may reasonably be requested by Landlord or required by
any lender. This requirement shall not apply in any period during which Tenant
is a “reporting company” as defined in the Securities and Exchange Act of 1934.

 

22.           Notices. Any notice, approval,
request, demand or consent (collectively “notice”) required or desired to be
given under this Lease shall be in writing and shall be delivered (i) by United
States mail, registered or certified, postage prepaid, (ii) by a recognized
courier service with proof of delivery and addressed to the party to be served
at the last address given by that party to the other party under the provisions
of this paragraph, or (iii) by receipted facsimile to the number indicated
below, with a hard copy delivered in accordance with clauses (i) or (ii). At
the date of execution of this Lease, the addresses of Landlord and Tenant are
as set forth below:

 

	
  Landlord:

  	
   

  	
  California Pacific

  
	
   

  	
   

  	
  Commercial Corporation

  
	
   

  	
   

  	
  2200 Sand Hill Road, Suite 230

  
	
   

  	
   

  	
  Menlo Park, CA 94025

  
	
   

  	
   

  	
  Attn: Dan McGanney III,

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
  Facsimile:

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Stephen L. Englert

  
	
   

  	
   

  	
  Epstein, Englert, Staley &

  
	
   

  	
   

  	
  Coffey

  
	
   

  	
   

  	
  425 California Street, 17th

  
	
   

  	
   

  	
  Floor

  
	
   

  	
   

  	
  San Francisco, CA 94104

  
	
   

  	
   

  	
  Facsimile: (415) 398-6938

  
	
   

  	
   

  	
   

  
	
  Tenant:

  	
   

  	
  Anacor Pharmaceuticals, Inc.

  
	
   

  	
   

  	
   

  
	
  Prior to the

  	
   

  	
   

  
	
  Commencement
  Date:

  	
   

  	
  1060 East Meadow Circle

  
	
   

  	
   

  	
  Palo Alto, CA 94303-4230

  

 

46

 

	
   

  	
   

  	
  Attn: Chief Financial Officer

  
	
   

  	
   

  	
  Facsimile: (650) 424-8144

  
	
   

  	
   

  	
   

  
	
  Following
  the

  	
   

  	
   

  
	
  Commencement
  Date:

  	
   

  	
  At the Premises

  
	
   

  	
   

  	
   

  
	
  With a copy
  to:

  	
   

  	
  Greenberg Traurig, LLP

  
	
   

  	
   

  	
  1900 University Avenue

  
	
   

  	
   

  	
  East Palo Alto, CA 94303

  
	
   

  	
   

  	
  Attn: Toni Pryor Wise

  
	
   

  	
   

  	
  Facsimile: (650) 426-7887

  

 

Any notice delivered by mail pursuant to this paragraph shall be deemed
to have been delivered three (3) business days after the posted date of
mailing.

 

23.           Waiver. The waiver by either party of
any breach of any term, covenant, or condition herein contained shall not be
deemed to be a waiver of such term, covenant or condition or any subsequent
breach of the same or any other term, 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 Tenant to pay the particular rental so
accepted, regardless of Landlord’s knowledge of such preceding breach at the
time of acceptance of such rent. No term, covenant or condition shall be deemed
to have been waived by either party unless such waiver is in writing and signed
by the party making such waiver.

 

24.           No Accord and Satisfaction. No
payment by Tenant, or receipt by Landlord, or an amount which is less than the
full amount of rent and all other sums payable by Tenant hereunder at such time
shall be deemed to be other than on account of (a) the earliest of such other
sums due and payable, and thereafter (b) the earliest Base Rent due and payable
hereunder. No endorsement or statement on any check or any letter accompanying
any payment of rent or such other sums shall be deemed an accord and satisfaction.
Landlord may accept any such check or payment without prejudice to Landlord’s
right to receive payment of the balance of such rent and/or other sums or to
Landlord’s right to pursue any remedies to which Landlord may be entitled to
recover such balance.

 

25.           Attorneys’ Fees. If any action or
proceeding at law or in equity, or an arbitration proceeding (collectively an “action”)
shall be brought to recover any rent under this Lease, or for or on account of
any breach of or to enforce or interpret any of the terms, covenants or
conditions of this Lease, or for the recovery of possession of the Premises,
the prevailing party

 

47

 

shall be entitled to recover
from the other party as a part of such action, or in a separate action brought
for that purpose, its reasonable attorneys’ fees and costs and expenses
incurred in connection with the prosecution or defense of such action
(including any appeal and enforcement of any judgment or award), whether or not
the dispute is litigated or prosecuted to final judgment. “Prevailing party”
within the meaning of this paragraph shall include, without limitation, a party
who brings an action against the other after the other is in breach or default,
if such action is dismissed upon the other’s payment of the sums allegedly due
for performance of the covenants allegedly breached, or if the party commencing
such action obtains substantially the relief sought by it in such action,
whether or not such action proceeds to a final judgment or determination.

 

26.           Surrender. Tenant shall, upon
expiration or sooner termination of this Lease, surrender the Premises to
Landlord in the same condition as existed on the Commencement Date (reasonable
wear and tear, losses due to casualty and condemnation and Landlord’s repair
obligations excepted) with all holes in walls repaired,  all HVAC equipment in good operating order
and in good repair (reasonable wear and tear, losses due to casualty and
condemnation and Landlord’s repair obligations excepted), and the Premises in
broom clean condition, all to the reasonable satisfaction of Landlord. In
addition, prior to the expiration or earlier termination of this Lease Tenant
shall:  (a) upon Landlord’s request,
remove all telephone and other cabling installed in the Building by Tenant;
(b) remove from the Premises all Tenant’s personal property and trade
fixtures, and all property not so removed shall be deemed abandoned by Tenant;
and (c) remove all alterations that Landlord has elected to require Tenant
to remove ; and Tenant shall repair any damage and perform any restoration work
caused by removal of any of the foregoing items. If such removal is not
completed within the time periods required herein, Landlord shall have the
right (but no obligation) to remove the same and Tenant shall be liable to
Landlord for costs of removal of any abandoned trade fixtures or equipment of
Tenant, or of any alterations Tenant fails to remove if required by this Lease,
together with the cost of returning the Premises to the condition required by
this Lease, and the transportation and storage costs of such items. All keys to
the Premises or any part thereof shall be surrendered to Landlord upon
expiration or sooner termination of the lease term.

 

Normal wear and tear, for purposes of this provision, shall be
construed to mean wear and tear caused to the Premises by the natural aging
process that occurs in spite of application of good standards for maintenance,
repair and janitorial practices. It is not intended, nor shall it be construed,
to include items of neglected or deferred maintenance which should have been
attended to by Tenant in accordance with the requirements of this Lease.

 

48

 

27.           Holding Over. Unless Tenant exercises
in a timely manner its option to extend the term, this Lease shall terminate
without further notice at the expiration of the initial lease term. Any holding
over after the expiration shall be at one hundred seventy five percent (175%) of
the monthly Base Rent for the last month of the lease term for the first month
and thereafter be at two hundred percent (200%) of the monthly Base Rent for
the last month of the lease term, unless otherwise agreed in writing by
Landlord, and shall otherwise be on the terms and conditions herein specified
insofar as applicable, unless otherwise mutually agreed in writing by the
parties. Tenant shall indemnify, defend and hold Landlord harmless from and
against all claims, demands, actions, liabilities, damages, losses, costs and
expenses, including reasonable attorneys’ fees, arising or resulting directly
or indirectly from Tenant’s failure to timely surrender the Premises,
including, without limitation, (i) any rent payable by or any loss, cost,
or damages paid by Landlord to any subsequent tenant of the Premises, and
(ii) Landlord’s damages as a result of a tenant terminating, a subsequent
lease of the Premises by reason of such failure to timely surrender the
Premises. Any holding over by Tenant after expiration shall not constitute a
renewal or extension of the lease term or give Tenant any rights in or to the
Premises unless otherwise expressly provided in this Lease.

 

28.           Transfer of Premises by Landlord. The
term “Landlord” as used in this Lease, so far as the covenants or obligations
on the part of Landlord are concerned, shall be limited to mean and include
only the owner at the time in question of the fee title to the Premises. In the
event of any transfer of such fee title, the Landlord herein named (and in case
of any subsequent transfer or conveyance, the then grantor) shall after the
date of such transfer or conveyance by automatically freed and relieved of all
liability with respect to performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed. The
covenants and obligations contained in this Lease on the part of Landlord
shall, subject to the foregoing, be binding upon each Landlord hereunder only
during his or its respective period of ownership except for any prior uncured
defaults unless Tenant failed to specify the default in an estoppel certificate
requested for the benefit of such successor.

 

29.           General Provisions.

 

29.1.        Entire Agreement. This instrument
including the Exhibits attached hereto contains all of the agreements and
conditions made between the parties hereto and may not be modified orally or in
any manner other than by an agreement in writing signed by all of the parties
hereto or their respective

 

49

 

successors in interest. Any
executed copy of this Lease shall be deemed an original for all purposes.

 

29.2.        Time. Time is of the essence with
respect to the performance of each and every provision of this Lease in which
time of performance is a factor. All references to days contained in this Lease
shall be deemed to mean calendar days unless otherwise specifically stated.

 

29.3.        Captions. The captions and headings of
the numbered paragraphs of this Lease are inserted solely for the convenience
of the parties hereto, and are not a part of this Lease and shall have no
effect upon the construction or interpretation of any part hereof.

 

29.4.        California Law; Construction. This Lease
shall be construed and interpreted in accordance with the laws of the State of
California. The language in all parts of this Lease shall in all cases be
construed as a whole according to its fair meaning and not strictly for or
against either Landlord or Tenant, and without regard to which party prepared this
Lease.

 

29.5.        Gender; Singular and Plural. When
required by the context of this Lease, the neuter includes the masculine, the
feminine, a partnership, a corporation or a joint venture, and the singular
shall include the plural.

 

29.6.        Partial Invalidity. If any provision of
this Lease is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions hereof shall nonetheless
continue in full force and effect and shall in no way be affected, impaired, or
invalidated thereby.

 

29.7.        No Warranties. Any agreements,
warranties or representations not expressly contained herein shall not bind
either Landlord or Tenant, and Landlord and Tenant expressly waive all claims
for damages by reason of any statement, representation, warranty, promise or
agreement, if any, not expressly contained in this Lease.

 

29.8         Tenant Representations and Warranties. Tenant
hereby represents and warrants the following to Landlord:

 

(i)            Authority. Tenant has all requisite
power and authority to execute and deliver, and to perform all of its
obligations under, this Lease.

 

(ii)           Due Execution. This Lease and all
agreements, instruments and documents herein provided to be executed or to be
caused to be executed by Tenant are duly authorized, executed and delivered by
Tenant.

 

50

 

(iii)          Consents; No Conflict. Tenant has
obtained all consents and permissions related to the transactions herein
contemplated and required under any covenant, agreement, encumbrance, or
applicable law. Neither this Lease nor any agreement, document or instrument
executed or to be executed in connection with the same, nor anything provided
in or contemplated by this Lease or any such other agreement, document or
instrument, does now or shall hereafter breach, invalidate, cancel, make
inoperative or interfere with, or result in the acceleration or maturity of,
any agreement, document, instrument, right or interest, to which Tenant is a
party.

 

29.9.        Successors and Assigns. The covenants
and conditions herein contained, subject to the provisions as to assignment,
shall apply to and bind the heirs, executors, administrators, assigns, and any
other person or entity succeeding lawfully, and pursuant to the provisions of
this Lease, to the rights or obligations of either of the parties hereto.

 

29.10.      Amendments. This Lease may be amended by
written agreement of amendment executed by both parties, but not otherwise.

 

29.11.      Memorandum of Lease. Neither party may
record this Lease or a short form memorandum hereof without the prior written
consent of the other party.

 

29.12.      Merger. The voluntary or other surrender
of this Lease, or a mutual cancellation thereof, shall not work an automatic
merger, but shall, at the sole option of Landlord, either terminate all or any
existing subleases or subtenancies, or operate as an assignment to Landlord of
any or all of such subleases or subtenancies.

 

29.13.      Real Estate Brokers. Except as provided in
this paragraph 29.13, each party represents that it has not had any dealings
with any real estate broker, finder or other person with respect to this Lease,
and each party shall hold harmless the other party from all damages, expenses,
and liabilities resulting from any claims that may be asserted against the
other party by any broker, finder or other person with whom the other party has
dealt. Landlord and Tenant each has engaged Cornish & Carey Commercial in
connection with this transaction and Landlord shall be obligated to pay any and
all commissions or fees which may be due said broker in connection with this
transaction pursuant to its agreement with said broker. The parties acknowledge
that Cornish & Carey Commercial has disclosed that certain of its agents
have ownership interests in Landlord.

 

29.14.      Limitation on Liability. If Tenant obtains
a money judgment against Landlord resulting from any default or

 

51

 

other claim arising under this
Lease, such judgment shall be satisfied only out of Landlord’s interest in the
Premises or out of the rents, profits, income or insurance proceeds received by
Landlord with respect to its right, title and interest in the Premises. No
other real, personal or mixed property of Landlord shall be subject to levy to
satisfy any such judgment and Landlord shall have no personal liability under
this Lease.

 

29.15.      Quiet Enjoyment. Landlord agrees to and
shall in the commencement of this Lease place Tenant in quiet possession of the
Premises and shall secure it in the quiet possession thereof against all
persons lawfully claiming the same during the lease term.

 

29.16.      Third Party Beneficiaries. Except as
otherwise expressly provided in this Lease, Landlord and Tenant do not intend
by any provision of this Lease to confer any right, remedy or benefit upon any
third party, and no third party shall be entitled to enforce or otherwise shall
acquire any right, remedy or benefit by reason of any provision of this Lease.

 

29.17.      Interpretation. Each party acknowledges
and agrees that this Lease: (i) has been reviewed by it and its counsel; (ii)
is the product of negotiations between the parties, and (iii) shall not be
deemed prepared or drafted by any one party. In the event of any dispute
between the parties concerning this Lease, the parties agree that any ambiguity
in the language of the Lease is to not to be resolved against Landlord or
Tenant, but shall be given a reasonable interpretation in accordance with the
plain meaning of the terms of this Lease and the intent of the parties as
manifested hereby.

 

29.18.      Joint and Several Liability. If more than
one person or entity is identified as Tenant hereunder, the obligations of each
and all of them under this Lease shall be joint and several.

 

29.19.      Counterparts.
This Lease may be executed in multiple counterparts, each of which shall
constitute an original and all of which together shall constitute one

 

agreement.

 

IN WITNESS WHEREOF, Landlord and Tenant have
executed this Lease on the dates specified below immediately adjacent to their
respective signatures. Delivery of this Lease to Landlord, duly executed by
Tenant, constitutes an offer by Tenant to lease the Premises as herein set
forth, and under no circumstances shall such delivery be deemed to create an
option or reservation to lease the Premises for the benefit of Tenant. This
Lease

 

52

 

shall only become effective and
binding upon execution of this Lease by Landlord and delivery of a signed copy
to Tenant.

 

 

	
   

  	
  “Landlord”

  
	
   

  	
   

  
	
   

  	
  CALIFORNIA
  PACIFIC COMMERCIAL

  
	
   

  	
  CORPORATION,
  a California

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:  Oct. 5, 2007

  	
  By:

  	
  /s/Daniel J. McGanney, III

  	
   

  
	
   

  	
  Daniel J.
  McGanney, III

  
	
   

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “Tenant”

  
	
   

  	
   

  
	
   

  	
  ANACOR
  PHARMACEUTICALS, INC.,

  
	
   

  	
  a Delaware
  corporation

  
	
   

  	
   

  
	
  Dated:  Oct. 5, 2007

  	
  By:

  	
  /s/ Christine Gray-Smith

  	
   

  
	
   

  	
      Its: Senior Vice President and

  
	
   

  	
           Chief
  Financial Officer

  

 

53

 

EXHIBITS

 

	
  Exhibit A

  	
   

  	
  Description
  of Premises

  
	
   

  	
   

  	
   

  
	
  Exhibit B

  	
   

  	
  Work Letter
  Agreement

  
	
   

  	
   

  	
   

  
	
  Exhibit C

  	
   

  	
  Intentionally
  Omitted

  
	
   

  	
   

  	
   

  
	
  Exhibit D

  	
   

  	
  Permitted
  Uses

  

 

54

 

PROPERTY DESCRIPTION 1020 EAST MEADOW CIRCLE

 

PALO ALTO, CALIFORNIA

 

Parcel Three, Parcel Map Recorded

April 22, 1974, Map Book 338 Page 4

Santa Clara County Records

 

EXHIBIT “A”

 

 

EXHIBIT “B”

 

WORK LETTER AGREEMENT

 

This Work Letter Agreement (The “Agreement”) supplements the Lease
dated October 5, 2007, executed concurrently herewith by and between CALIFORNIA
PACIFIC COMMERCIAL CORPORATION (“Landlord”) and ANACOR PHARMACEUTICALS, INC. (“Tenant”).

 

1.             General.

 

(a)           The purpose of this
Agreement is to set forth how the Tenant Improvements (as defined in Section 4
below) in the Premises are to be constructed, who will undertake the construction
of the Tenant Improvements, who will pay for the construction of the Tenant
Improvements, and the procedure for preparation and Landlord’s approval of the
Final Plans (as defined in Section 2 below).

 

(b)           Except as defined in
this Agreement to the contrary, all terms used in this Agreement shall have the
same meaning given them in the Lease. When work, services, consents or
approvals are to be provided by or on behalf of Landlord, the term “Landlord”
shall include Landlord’s agents, contractors, employees and affiliates.

 

(c)           The provisions of the
Lease (including, without limitation, the provisions of paragraph 7), except to
the extent inconsistent or inapplicable to this Agreement, are incorporated
into this Agreement.

 

(d)           The Tenant Improvements
shall be constructed pursuant to this Agreement by Tenant. Landlord shall
provide the Tenant Improvement Allowance (as defined in Section 5(a) below.

 

(e)           Tenant shall make all
Tenant Improvements to the Premises. All work done by or for Tenant on the
Premises shall be in conformity with all applicable Laws. The term “Laws” as
used in this Lease shall mean all laws, statutes, codes, rules or regulations
applicable to the Building. Tenant shall obtain at its expense all necessary
permits for construction of the Tenant Improvements.

 

2.             Preparation
of Plans. Tenant shall arrange for the preparation of the plans and
specifications for its proposed Tenant Improvements in accordance with this
paragraph 2 by a licensed architect approved by Landlord, in the reasonable
exercise of its discretion.

 

1

 

(a)           Preparation and
Approval of Preliminary Plans.

 

(i)            Tenant shall have
prepared preliminary plans showing all of its proposed Tenant Improvements to
the Premises (the “Preliminary Plans”).

 

(ii)           Tenant shall submit to
Landlord the Preliminary Plans for Landlord’s review and approval. Within ten
(10) days after Landlord receives the Preliminary Plans, Landlord shall either
approve or disapprove the Preliminary Plans; provided, however, that Landlord’s
approval shall not be unreasonably withheld, conditioned or delayed. In the
event that Landlord disapproves the Preliminary Plans, Landlord shall return
the Preliminary Plans to Tenant together with the reasons for Landlord’s
disapproval (each, a “Design Problem”). Tenant shall make the changes necessary
in order to correct the Design Problems and shall return the Preliminary Plans
to Landlord which Landlord shall approve or disapprove within five (5) days
after Landlord receives the revised Preliminary Plans. This procedure shall be
repeated until the Preliminary Plans are finally approved by Landlord and
written approval has been delivered to and received by Tenant.

 

(b)           Preparation and
Approval of Working Drawings.

 

(i)            After the Preliminary
Plans are approved by Landlord, Tenant shall submit to Landlord drawings (“Working
Drawings”) which shall be compatible with the design, construction and
equipment of the Building, be capable of logical measurement and construction,
contain all such information as may be required for the construction of the
Tenant Improvements and the permits for such Tenant Improvements and contain
all plumbing locations, air conditioning system and duct work, special air
conditioning requirements, reflected ceiling plans,  and special security systems, if applicable.

 

(ii)           Landlord shall approve
the Working Drawings within ten (10) days after receipt of same or designate by
notice given within such time period to Tenant the specific changes reasonably
required to be made to the Working Drawings and shall return the Working
Drawings to Tenant. Tenant shall make the changes necessary and shall return
the Working Drawings to Landlord, which Landlord shall approve or disapprove
within five (5) days after Landlord receives the revised Working Drawings. This
procedure shall be repeated until all of the Working Drawings are finally
approved by Landlord and written approval has been delivered to and received by
Tenant. The Working Drawing so approved are referred to as the “Final Plans”.

 

2

 

(iii)          Tenant shall verify, in
the field, the dimensions and conditions as shown on the relevant portions of
any Building plans provided by Landlord to Tenant. Tenant shall be solely
responsible for the same and Landlord shall have no responsibility in
connection therewith.

 

(c)           No
Liability for Approval. Landlord’s review and approval of the Preliminary
Plans, Working Drawings, the Final Plans(collectively, the “Construction
Drawings”) or other documents shall be for its sole purpose and not constitute
any representation or warranty by or on behalf of Landlord as to the adequacy,
efficiency, suitability, fitness or desirability of any space layout or
improvements or otherwise constitute assumption by Landlord of any
responsibility for the accuracy or sufficiency thereof, or to be interpreted as
a statement of compliance with code requirements. Accordingly, notwithstanding
that any Construction Drawings are reviewed by Landlord or its architect,
engineers and consultants, and notwithstanding any advice or assistance which
may be rendered to Tenant by Landlord or Landlord’s architect, engineers, and
consultants, Landlord shall have no liability whatsoever in connection
therewith and shall not be responsible for any omissions or errors contained in
the Construction Drawings.

 

3.             Contractor. Tenant
shall select a contractor (“Contractor”) subject to the approval of Landlord,
which approval shall not be unreasonably withheld, delayed or conditioned. Tenant
may have Landlord approve three (3) or more contractors prior to any
competitive bidding. Work involving sprinkler, plumbing, mechanical, electrical
power, lighting or fire safety systems of the Building shall be performed only
by subcontractors approved by Landlord, which approval shall not be
unreasonably withheld, delayed or conditioned.

 

4.             Tenant
Improvements. The term “Tenant Improvements” shall mean all improvements
shown in the Final Plans. The Tenant Improvements shall be constructed in
accordance with the Final Plans. No material changes shall be made to the Final
Plans without the prior approval of Landlord in accordance with paragraph 6
below and obtaining all requisite governmental approvals for such changes. All
Tenant’s materials, work, installations and decorations of any nature brought
upon or installed in the Premises before or after the Commencement Date shall
be at Tenant’s risk, and neither Landlord nor any party acting on Landlord’s
behalf shall be responsible for any damage thereto or loss or destruction
thereof except to the extent arising from the gross negligence or willful
misconduct of Landlord or any party acting on Landlord’s behalf, except as
otherwise provided in the Lease. Except as provided in paragraph 5 below, all
cost of construction shall be borne by Tenant. Upon completion of the Tenant
Improvements, Tenant shall deliver to Landlord “as-built” plans and
specifications therefor.

 

3

 

5.             Tenant
Improvement Allowance.

 

(a)         Amount. Landlord will pay to Tenant an
amount equal to Three Hundred Sixty Nine Thousand Six Hundred Dollars
($369,600) (“Tenant Improvement Allowance”) as reimbursement for the costs of
the construction of the Tenant Improvements, including any amount paid for
design, space planning, consultants, construction drawings, laboratory
construction (including the cost of purchase and installation of fume hoods),
IT/wiring costs, cosmetic upgrades, office renovation and related plumbing,
HVAC and electrical upgrades. No portion of the Tenant Improvement Allowance
may be used for furnishings, trade fixtures, or other items or equipment (such
as laboratory benches) that are that are removable by Tenant upon the
expiration of the term of the Lease.

 

(b)           Disbursement.
The Tenant Improvement Allowance shall be paid to Tenant upon substantial
completion of the Tenant Improvements. As a condition precedent to the payment
of the Tenant Improvement Allowance, Tenant shall have (i)substantially
completed the Tenant Improvements and delivered to Landlord (A) a certification
from Tenant’s architect that the Tenant Improvements have been completed
substantially in accordance with the Final Plans and (B) a copy of the
occupancy permit issued by the City of Palo Alto; (ii)provided Landlord with
copies of paid invoices for the entire cost of the Tenant Improvements; (iii)
provided Landlord with appropriate unconditional mechanic’s lien releases with
respect to all of the work performed in the construction of the Tenant
Improvements; and (iv) have provided evidence reasonably satisfactory to
Landlord that the statutory time period for filing liens has expired and that
no mechanics or other liens have been filed in connection with the construction
of the Tenant Improvements.

 

6.             Change
Orders. In the event that Tenant requests any changes to the Final Plans,
Landlord shall not unreasonably withhold, delay or condition its consent to any
such changes.

 

7.             No
Fee to Landlord. Landlord shall receive no fee for supervision,
administration, profit, overhead or general conditions in connection with the
Tenant Improvements.

 

8.             Bonding.
Landlord shall have the right to require the Contractor to obtain a payment and
performance bond in form reasonably acceptable to Landlord in the event that
the Contractor is not on the approved list attached hereto as Exhibit A.

 

IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first written above.

 

4

 

	
  LANDLORD:

  
	
   

  
	
  CALIFORNIA PACIFIC COMMERCIAL CORPORATION

  
	
   

  
	
  By:

  	
  /s/ Daniel McGanney

  	
   

  
	
               President

  
	
   

  
	
   

  
	
  TENANT:

  
	
   

  
	
  ANACOR PHARMACEUTICALS, INC.

  
	
   

  
	
  By:

  	
  Christine Gray-Smith

  	
   

  
	
           Senior Vice
  President and Chief Financial Officer

  

 

5

 

Exhibit “D”

 

Reportable Uses

 

Approved “Reportable Uses” are those for which the following permits
are required:

 

	
   

  	
   

  	
  Permit
  or License

  	
   

  	
  Administering
  Agency

  	
   

  	
  Description

  
	
  1)

  	
   

  	
  Hazardous Material Use Permit

  	
   

  	
  City of Palo Alto

  	
   

  	
  Permits the storage, handle, and use of hazardous materials.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2)

  	
   

  	
  Wastewater discharge permit

  	
   

  	
  City of Palo Alto

  	
   

  	
  Allows discharge of industrial wastewater for treatment at the local
  PTOW.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3)

  	
   

  	
  Medical Waste Permit

  	
   

  	
  Santa Clara County

  	
   

  	
  Permit the shipment for proper controlled disposal of biowaste
  material.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4)

  	
   

  	
  Air Emissions Permit

  	
   

  	
  Bay Air Quality Control District

  	
   

  	
  Permits the use of an emergency generator.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5)

  	
   

  	
  Radiological Use License

  	
   

  	
  Cal Radiological Health Branch

  	
   

  	
  Allows the use of radioisotopes in select lab processes.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6)

  	
   

  	
  EPA Id Number

  	
   

  	
  Environmental Protection Agency

  	
   

  	
  Allows hazardous waste shipment for proper disposal.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7)

  	
   

  	
  Control Substance Permit

  	
   

  	
  Drug Enforcement Agency

  	
   

  	
  Permits the possession of select narcotics for research purposes.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00130-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00130-of-00352.parquet"}]]