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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-12950
ALLIANCE PHARMACEUTICAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 14-1644018
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3040 Science Park Road, San Diego, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 619-558-4300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
common stock, par value $0.01.
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(TITLE OF CLASS)
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
[COVER PAGE 1 OF 2 PAGES]
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market on September 4, 1998, was $83 million.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at September 4, 1998 was 32,042,482.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to
the 1998 Annual Meeting of Shareholders, which the Registrant intends to file
with the Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this report.
[COVER PAGE 2 OF 2 PAGES]
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PART I
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN. THE
COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN
OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE COMPANY'S RECENT
REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-15905).
ITEM 1. BUSINESS
Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into medical products and licensing these products to
multinational pharmaceutical companies in exchange for fixed payments and
royalties. To date, the Company has developed three innovative products
through initial clinical (human) trials, and is in, or is preparing to enter,
pivotal clinical trials for these products. The products are OXYGENT-TM-, an
intravascular oxygen carrier to temporarily augment oxygen delivery in
surgical and other patients at risk of acute tissue hypoxia (oxygen
deficiency); LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use
in reducing a patient's exposure to the harmful effects of conventional
mechanical ventilation; and IMAGENT-Registered Trademark-, an intravenous
contrast agent for enhancement of ultrasound images to assess cardiac
function, organ lesions and to detect blood flow abnormalities, which is
licensed to Schering AG, Germany.
The Company's strategy is to identify potential new medical products
through scientific collaborations with researchers and clinicians in
universities and medical centers where many of the basic causes of disease
and potential targets for new therapies are discovered. Using its experience
in defining pharmaceutical formulations, designing manufacturing processes,
conducting preclinical pharmacology and toxicology studies, and conducting
human testing, Alliance endeavors to advance such discoveries into clinical
development. The Company seeks collaborative relationships for the final
stages of product development, including completing late-phase human testing,
obtaining worldwide regulatory approvals, building large-scale manufacturing
capacities, and marketing.
The Company was incorporated in New York in 1983. Its principal
executive offices are located at 3040 Science Park Road, San Diego,
California 92121, and its telephone number is (619) 558-4300.
PRODUCTS IN CLINICAL DEVELOPMENT
Three of Alliance's products are currently in late-stage clinical
development. These are OXYGENT, LIQUIVENT, and IMAGENT, which are based
upon perfluorochemical ("PFC") and emulsion technologies. PFCs are
biochemically inert compounds and may be employed in a variety of therapeutic
and diagnostic applications. The Company's primary drug substance is
perflubron, a brominated PFC that has a high solubility for respiratory gases
and can be used to transport these gases safely throughout the body. The
Company also has two additional products in clinical development, RODA-TM-,
a device intended to measure the cardiovascular and oxygenation status of
patients, and FloGel-Registered Trademark-, a thermoreversible agent for
reduction of surgical adhesions.
OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen delivery
system to temporarily augment oxygen delivery in surgical and other patients
at risk of acute tissue oxygen deficit. It will be used as a temporary
oxygen carrier to provide oxygen to tissues during elective surgeries where
substantial blood loss is anticipated. It is estimated that in excess of
three million patients annually in the United States may receive one or more
units of blood during elective surgeries, including, for example,
cardiovascular, orthopedic, and general surgical procedures. An oxygen
carrier could be used instead of blood for a portion of these patients. The
OXYGENT dose for surgical applications is expected to provide the equivalent
oxygen delivery of at least two units of red blood cells.
OXYGENT has several potential advantages over the use of allogeneic
(donor) blood: there is no risk of infectious disease transmission; it is
compatible with all blood types; it has a shelf-life of approximately two
years; and it can be sterilized. According to the 1995 estimates in the
American Journal of Surgery, the risks per unit of blood transfused in the
United States are 1:2,500 for bacterial infections, 1:5,000 for hepatitis,
1:600,000 for fatal hemolytic reactions, primarily due to clerical error, and
1:420,000 for HIV infection (AIDS). To minimize the use of allogeneic blood
and to avoid these risks, certain techniques can be employed that allow use
of the patient's own (autologous) blood during surgery. These
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techniques include (i) predonation, in which the patient donates several
units of his or her blood in the six weeks preceding surgery, (ii)
perioperative hemodilution, in which several units of the patient's blood are
removed just prior to surgery and are replaced with a plasma expander, and
(iii) blood salvage, wherein a device (cell saver) is used to collect blood
lost during the surgical procedure. OXYGENT can be used with any of these
autologous blood collection techniques to enhance safety, by reducing the
need for allogeneic blood. When a blood transfusion is indicated during
surgery, one or more doses of OXYGENT would be used in place of allogeneic
blood to maintain an adequate level of oxygen delivery despite a lower red
blood cell concentration. This use of OXYGENT should delay or reduce the
need for the transfusion of donor blood, thereby avoiding its associated
risks. OXYGENT may also be advantageous during emergency situations such as
trauma, acute myocardial infarctions (heart attacks), or transient ischemia
(oxygen deprivation) in specific organs where there is an immediate need to
augment oxygen delivery to the tissues.
In fiscal 1997, two large multicenter Phase II clinical studies of
OXYGENT were completed in general surgery patients in the United States and
Europe. In fiscal 1998, three additional Phase II studies were completed in
which OXYGENT was administered to cardiac surgery patients undergoing
cardiopulmonary bypass procedures. Phase III clinical trials in general
surgery patients are expected to begin before the end of calendar 1998.
In August 1994, the Company entered into a license agreement (the "Ortho
License Agreement"), with Ortho Biotech, Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation, both affiliates of Johnson & Johnson (collectively referred to
as "Ortho"), which provided Ortho with certain development and worldwide
marketing rights to the Company's injectable PFC emulsions capable of
transporting oxygen for therapeutic use, including OXYGENT. In May 1998,
because of disagreements as to the scope and timing of further clinical
development, including whether to proceed with Phase III trials at that time
and for which indications, Ortho and Alliance restructured their agreement.
Under the restructured agreement, Alliance assumed responsibility for
worldwide development of OXYGENT at its own cost, and Ortho has a limited
right of first offer to enter into a development or marketing or license
agreement for OXYGENT, which right may be repurchased by Alliance for $2
million under certain circumstances.
LIQUIVENT. LIQUIVENT (neat perflubron) is an intrapulmonary agent for use in
reducing a patient's exposure to the harmful effects of conventional
mechanical ventilation. Each year, more than 800,000 patients in the United
States are placed on mechanical gas ventilators for treatment of lung
dysfunction. Many of these patients suffer from acute respiratory failure, a
disorder that can result from many causes, including serious infections,
traumatic shock, severe burns, or inhalation of toxic substances. Acute
respiratory failure is generally characterized by an excessive inflammatory
response, which leads to blockage of the small airways and collapse of
alveoli, resulting in inadequate gas exchange and impairment of normal lung
function. The most urgent need for these patients is to improve their blood
oxygenation. However, the prolonged use of high ventilatory pressures or
high continuous concentrations of inspired oxygen can further damage the
patient's lungs. Some of these patients may benefit from treatment with
LIQUIVENT.
LIQUIVENT is intended to be used in a technique called partial liquid
ventilation ("PLV"). In this procedure, the drug is administered through an
endotracheal tube into the lungs of a patient being supported by a mechanical
ventilator. The initial goal of LIQUIVENT/PLV therapy is to open collapsed
alveoli to improve gas exchange. Once this has been accomplished, ventilator
pressure and oxygen concentration may be lowered to minimize
ventilator-induced lung trauma. Published results from initial clinical
trials have indicated that LIQUIVENT improved lung oxygenation, without
clinically significant side effects. In clinical studies, LIQUIVENT has also
been observed to promote the migration of mucus and alveolar debris to the
central airways, where suctioning is easier. The ability to remove such
debris may reduce the excessive inflammatory response associated with acute
respiratory failure and enhance the effectiveness of other therapeutic
interventions, all serving potentially to reduce patient recovery time. The
U.S. Food and Drug Administration ("FDA") has granted Subpart E status
(expedited review) for the product.
In April 1997, the Company temporarily suspended enrollment in its
ongoing Phase III LIQUIVENT trial in pediatric patients to analyze an
unexplained, substantial decrease in the mortality rate for the control group
which occurred after a protocol amendment in December 1996. The decision was
not prompted by any LIQUIVENT-related adverse events. In August 1997, the
Company completed its analysis of data from the clinical trial. The Company
found that after the protocol amendment, patients in the post-amendment
control group were younger and had different disease etiologies compared to
the pre-amendment control group. Additionally, post-amendment control group
patients received additional
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therapies such as extracorporeal membrane oxygenation, high frequency
oscillatory ventilation, nitric oxide or surfactants more frequently,
earlier, and for a longer duration compared to both the pre-amendment control
group and the LIQUIVENT-treated patients. The study analysis also supported
previous reports that PLV therapy with LIQUIVENT is a safe procedure. In
December 1997, the Company started a small Phase II adult clinical trial
intended to validate the protocol for a subsequent pivotal trial with adult
patients. That trial has been completed and the Company intends to initiate
a Phase II/III clinical study in adult patients before the end of calendar
1998.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which
provided HMRI with worldwide marketing and manufacturing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation. The product was being
developed jointly by Alliance and HMRI. In June 1997, Alliance announced
that the parties agreed in principle to adjust certain milestone payments, to
temporarily revise the method for reimbursing expenses of the development
work and terms to repurchase clinical supplies sold, in conjunction with the
April 1997 temporary interruption of the clinical development program. In
December 1997, HMRI terminated the HMRI License Agreement and Alliance
regained all rights to the product. In connection with the termination the
Company may acquire approximately $2.3 million of inventory from HMRI. HMRI
has also asserted a claim for an amount up to $7.5 million payable in 2002 in
cash or common stock, at the Company's election. The Company does not
believe the claim is meritorious and intends to contest such claim; however,
no assurances can be given that the Company will prevail on the claim.
IMAGENT. IMAGENT is an intravenous contrast agent for enhancement of
ultrasound images to assess cardiac function and organ lesions, and to detect
solid organ lesions and blood flow abnormalities. More than 30 million scans
of the heart, vasculature, and abdominal organs are performed annually in the
United States, some of which may potentially benefit from a cost-effective
contrast agent. To be successful in the marketplace, ultrasound contrast
agents should provide enhanced diagnostic images during several minutes of
scanning, be easy to use, be stable during transportation, and have a long
shelf-life. IMAGENT is being developed to meet these requirements.
IMAGENT is a powder comprising hollow microspheres containing a mixture
of PFC vapor and gas and water-soluble components that are known to be
acceptable for parenteral use. Prior to use, IMAGENT is reconstituted with
water to form microbubbles that are then injected into the patient. The gas
microbubbles are highly echogenic and, when delivered intravenously, reflect
signals that enhance ultrasound images. In early clinical trials with
IMAGENT, gray-scale contrast enhancement of cardiac, abdominal, and vascular
structures has been observed with no serious adverse events.
In March 1998, the Company initiated two Phase III clinical trials to
assess cardiac function. The multicenter trials are designed to demonstrate
the use of IMAGENT to aid in the evaluation of cardiac function as assessed
by both ejection fraction and endocardial border definition. A Phase II
myocardial perfusion feasibility study is also underway for assessment of
blood flow defects in the muscle of the heart. In July 1998, two Phase II
prostate and breast feasibility studies were initiated. Enrollment in a
Phase II clinical trial was completed in 1997 in adults undergoing diagnostic
procedures for evaluation of space-occupying lesions of the liver and kidney
and vascular flow abnormalities.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("Schering"), which
provides Schering with worldwide exclusive marketing and manufacturing rights
to Alliance's drug compounds, drug compositions and medical devices and
systems related to perfluorocarbon ultrasound imaging products, including
IMAGENT. The product is being developed jointly by Alliance and Schering.
RODA. In July 1997, the Company entered into a development agreement (the
"VIA Development Agreement") with VIA Medical Corporation ("VIA") for the
joint development of RODA (Real-time Oxygen Dynamics Analyzer). RODA is an
EX VIVO device intended to provide on-line measurements of the cardiovascular
and oxygenation status of surgical patients by minimally invasive means. The
device could assist physicians in their decisions regarding transfusions and
other interventions. RODA will combine oxygen dynamics software designed by
the Company with VIA's EX VIVO blood gas and chemistry monitor and other VIA
technology. The Company has conducted pilot clinical studies in the U.S. and
Europe to assess its oxygen dynamics software. VIA is currently developing an
engineering prototype of the final device to use for clinical testing and
regulatory submissions. In August 1998, Alliance and VIA entered into a
manufacturing, marketing and distribution agreement (the "VIA Marketing
Agreement") whereby VIA will be responsible for manufacturing and marketing
RODA, and the parties will share revenues from the sale of products.
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OTHER PRODUCTS
PULMOSPHERES-TM-. PULMOSPHERES are hollow, porous spheres (in powder form)
suspended in perflubron or fluorochemical propellants for the purpose of
pulmonary drug delivery. Drugs can be stabilized within the wall structure
of these respirable particles, which are typically 1-3 microns in diameter.
Laboratory and preclinical testing indicates that PULMOSPHERE formulations
may provide advantages over current formulation technologies with regard to
particle suspension stability and flow aerodynamics, which could enhance the
efficiency of pulmonary drug delivery.
Over the past year, different types of drugs have been successfully
formulated in PULMOSPHERES for feasibility testing purposes. Drugs such as
bronchodilators and steriodal anti-inflammatory agents could potentially be
formulated in PULMOSPHERES and delivered to the lung by way of standard
metered-dose inhaler (MDI) devices for the topical treatment of asthma.
Alternatively, proteins or peptides intended for systemic distribution and
treatment of other chronic diseases might be incorporated into PULMOSPHERES
and be delivered by other commonly used devices such as nebulizers or dry
powder inhalers, which tend to propel small particles deeper into the lung
for improved systemic uptake.
The current business strategy for PULMOSPHERES involves Alliance
formulating the drugs and subsequently manufacturing bulk powders for
pharmaceutical company partners. The partners would be responsible for
filling the powders in delivery device(s), conducting preclinical and
clinical trials, and marketing the resultant products.
FLOGEL-Registered Trademark-. In November 1996, Alliance acquired all of
the stock of MDV Technologies, Inc. ("MDV") for initial payments of $15.5
million over a one-year period, with additional payments and royalties to the
former MDV shareholders upon the occurrence of certain clinical development,
licensing, or commercialization events. The Company is developing a
thermo-reversible gel, FLOGEL, intended for use as an anti-adhesion treatment
for patients undergoing abdominal or pelvic surgeries. FLOGEL is applied in
a cold liquid form and becomes a gel at body temperature, forming a barrier
between tissues. Preliminary human safety data with a previous formulation
for the product have been obtained and, during the past year, preclinical
studies have been performed on additional formulations. The Company has
selected a formulation for a pilot clinical trial which is expected to
commence in the near future. In addition to the anti-adhesion product, MDV
also has patents covering the use of gels for drug delivery and ophthalmic
indications.
Alliance is also supporting internal research efforts to expand the
applicability of its core technologies. The Company has patented fluorinated
surfactants that are potentially useful in the preparation of therapeutic or
diagnostic emulsions and other formulations.
In addition to PULMOSPHERES, Alliance is investigating the use of other
PFC-containing reverse emulsions, microemulsions, gels, foams, and other
compositions as drug delivery agents. These compositions are either aqueous
or oil-based, and may be administered via oral, intravenous, intrapulmonary,
or topical routes to distribute antibiotics, chemotherapy agents, gene
therapies, or other medicaments systemically or to selected areas of the body.
The Company has certain agreements with research institutions to develop
discoveries that the Company believes may be the basis of new products.
Antigenized antibodies that could potentially stimulate or down-regulate
antibody production are being developed in conjunction with Mt. Sinai Medical
Center in New York City. A prototype vaccine for infectious disease and a
prototype tolerogen for an autoimmune disease are also under development. In
addition, Alliance is working with researchers at Temple University to
develop an apoptotic factor for regulating the death of certain cancer cells.
Alliance has developed and is marketing SAT PAD-Registered Trademark-, a
re-usable magnetic resonance ("MR") imaging accessory that improves the
quality of images obtained by certain MR imaging techniques. SAT PAD is
distributed by dealers specializing in radiology products. Sales of SAT PAD
were approximately $100,000 for fiscal 1998. Alliance expects that the sales
volume of SAT PAD will be limited and does not anticipate significant revenue
from the product.
The Company intends to consider other technologies that may be available
for licensing and research agreements with other institutions or inventors.
Alliance intends, where appropriate, to seek outside sources of funding. If
new license and research agreements are added and the Company is not able to
obtain outside sources of funding, the Company's losses from research and
development activities are expected to increase significantly.
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The Company's products require substantial development efforts. The
Company may encounter unforeseen technical and other problems which may force
delay, abandonment, or substantial change in the development of a specific
product or process, or technological change, or product development by
others, any of which may have a material adverse effect on the Company. The
Company expends substantial amounts of money on research and development and
expects to do so for the foreseeable future. In fiscal 1998, 1997, and 1996,
the Company incurred research and development expenses of $50.1 million,
$43.3 million, and $33.7 million, respectively.
COLLABORATIVE RELATIONSHIPS
SCHERING AG. In September 1997, the Company entered into the Schering
License Agreement, which provides Schering with worldwide exclusive marketing
and manufacturing rights to Alliance's drug compounds, drug compositions and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAGENT. This product is being developed jointly by
Alliance and Schering. Under the Schering License Agreement, Schering paid
to Alliance an initial license fee of $4 million and agreed to pay further
milestone payments and royalties on product sales. Schering also agreed to
provide funding to Alliance for some of its development expenses. In
conjunction with the Schering License Agreement, Schering Berlin Venture
Corp. ("SBVC"), an affiliate of Schering, purchased 500,000 shares of the
Company's convertible Series D Preferred Stock for $10 million.
HOECHST MARION ROUSSEL, INC. In February 1996, the Company entered into the
HMRI License Agreement, which provided HMRI with worldwide exclusive
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. This product was being developed jointly by Alliance and HMRI,
with HMRI responsible for most of the costs of development and marketing. On
June 30, 1997, HMRI paid the Company a $2.5 million milestone payment and
$2.5 million for the purchase of clinical trial supplies. In June 1997, the
Company also announced that the parties had agreed in principle to modify the
HMRI License Agreement to (i) adjust certain milestone payments, (ii)
temporarily revise the method for reimbursing the expenses for portions of
the development work, and (iii) provide for the Company to repurchase any
unused clinical trial supplies if the license agreement is terminated before
January 1, 1998, in conjunction with the temporary interruption of the
LIQUIVENT clinical development program in April 1997. In December 1997, HMRI
terminated the HMRI License Agreement and Alliance regained all rights to the
product. In connection with the termination the Company may acquire
approximately $2.3 million of inventory from HMRI. HMRI has also asserted a
claim for an amount up to $7.5 million payable in 2002 in cash or common
stock, at the Company's election. The Company does not believe the claim is
meritorious and intends to contest such claim, however, no assurances can be
given that the Company will prevail on the claim.
ORTHO BIOTECH, INC. In August 1994, the Company entered into the Ortho
License Agreement which provided Ortho with worldwide exclusive marketing and
manufacturing rights to injectable PFC emulsions capable of transporting
oxygen for therapeutic use, including OXYGENT. The product was being
developed jointly by Alliance and Ortho, with Ortho responsible for
substantially all of the costs of developing and marketing the product. In
May 1998, because of disagreements as to the scope and timing of further
clinical development, including whether to proceed with Phase III trials at
that time and for which indications, Ortho and Alliance restructured their
agreement. Under the restructured agreement, Alliance assumed responsibility
for worldwide development of OXYGENT at its own cost, and Ortho has a limited
right of first offer to enter into a development or marketing or license
agreement for OXYGENT, which right may be repurchased by Alliance for $2
million under certain circumstances.
VIA MEDICAL CORPORATION. In July 1997, the Company entered into the VIA
Development Agreement for the joint development of RODA, an EX VIVO device
intended to measure the cardiovascular and oxygenation status of patients by
minimally invasive means. Pursuant to the VIA Development Agreement, VIA
will combine Alliance's oxygen dynamics software with VIA's EX VIVO blood gas
and chemistry monitor and other technology. Alliance will reimburse VIA for
substantially all of its development costs and will be responsible for
obtaining regulatory approval of the product. In August 1998, Alliance and
VIA entered the VIA Marketing Agreement whereby VIA will be responsible for
manufacturing and marketing RODA, and the parties will share revenues on the
sale of products.
The Company intends to obtain new collaborative relationships for
OXYGENT and LIQUIVENT, and to also obtain collaborative relationships for its
other products. There can be no assurances that the Company will be able to
enter into future collaborative relationships on acceptable terms. The
termination of any collaborative relationship or failure to enter into such
relationships may limit the ability of the Company to develop its technology
and may have a material adverse effect on the Company's business.
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MARKETING
The Company does not have internal marketing and sales capabilities.
The Company's strategy is for its collaborative partners to market and sell
any products which it successfully develops for the market. The Company's
only commercialized product, SAT PAD, is currently distributed through
certain distributors of MR imaging equipment and supplies. Currently,
Schering will be solely responsible for all activities related to marketing
and sales of IMAGENT. Under the terms of the restructured Ortho agreement,
Ortho has a limited right of first offer to enter into a marketing agreement
for OXYGENT. The Company intends to obtain appropriate marketing
relationships for its other products. To the extent that the Company enters
into co-promotion or other licensing arrangements, any revenues received by
the Company will be dependent on the efforts of third parties, and there can
be no assurance that any such efforts will be successful. Further, there can
be no assurance that the Company will be able to enter into future marketing
relationships on acceptable terms. The termination of any marketing
relationships may limit the ability of the Company to market its products and
may have a material adverse effect on the Company's business.
Should the Company have to market and sell its products directly, the
Company would need to develop a marketing and sales force with technical
expertise and distribution capability. The creation of infrastructure to
commercialize pharmaceutical products is an expensive and time-consuming
process. There can be no assurance that the Company would be able to
establish marketing and sales capabilities or be successful in gaining market
acceptance for its products.
MANUFACTURING
The Company manufactures all of its products for preclinical testing and
clinical trials. OXYGENT is produced at one of Alliance's San Diego
facilities, which includes both a pilot plant and a production-scale
manufacturing facility. The Company believes that this production facility
will provide sufficient capacity for future clinical trials and market launch
of OXYGENT, if and when it is approved by the FDA. However, a larger
facility may be required in the future.
LIQUIVENT is manufactured for clinical trials at the Company's
Otisville, New York facility. LIQUIVENT is the same drug substance as
IMAGENT GI, for which Alliance obtained FDA approval in August 1993 as an
oral contrast agent for MR imaging. As a result, certain chemistry,
manufacturing, and control requirements have been accepted by the FDA, which
may benefit the Company in the regulatory review process. The Company
believes the Otisville facility has sufficient capacity for market launch of
LIQUIVENT, if and when it is approved by the FDA. However, a larger facility
may be required in the future.
IMAGENT is manufactured for clinical studies at one of the San Diego
facilities, using a proprietary process to form dry, PFC vapor-containing
spheres which are reconstituted with an aqueous solution to form microbubbles
just prior to use. Alliance is in the process of expanding its market launch
production capacity in San Diego for IMAGENT. The Schering License Agreement
requires the Company to manufacture products at its San Diego facility for a
period of time after market launch at a negotiated price. Schering will be
responsible for establishing production capacity beyond the maximum capacity
of the San Diego facility.
Expansion for any of the Company's products may occur in stages, each of
which would require regulatory approval, and product demand could at times
exceed supply capacity. The Company has not selected a site for such
expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of a
facility will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products nor can
there be any assurance that it will be able to do so.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company has obtained a sufficient inventory of perflubron, the
principal raw material utilized in OXYGENT and LIQUIVENT, for clinical
trials. The Company is currently negotiating with a potential supplier to
secure a long-term supply of perflubron. The Company also believes it has a
sufficient supply of the principal raw material for IMAGENT for clinical
trials and is in the process of negotiating with a potential supplier to
secure long-term supply of that material. Although
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some raw materials for its products are available from only one source, the
Company attempts to acquire a substantial inventory of such materials and to
negotiate long-term supply arrangements. The Company believes it will not
have any raw material supply issues; however, no assurances can be given that
a long-term supply will be obtained for such materials or that a long-term
supply agreement for such materials can be obtained on terms acceptable to
the Company. The Company's business could be materially and adversely
affected if it or its collaborative partners are unable to obtain necessary
raw materials on a timely basis and at a cost-effective price.
PATENTS
The Company seeks proprietary protection for its products, processes,
technologies, and ongoing improvements. The Company is pursuing patent
protection in the United States and in foreign countries that it regards as
important for future endeavors. Numerous patent applications have been filed
in the European Patent Office, Australia, Canada, Israel, Japan, Norway, and
South Africa, and patents have been granted in many of these countries.
Alliance has numerous issued U.S. patents related to or covering PFC
emulsions with corresponding patents and applications in Europe and Japan.
Such emulsions are the basis of the Company's OXYGENT products. The issued
patents and pending patent applications cover specific details of emulsified
PFCs through product-by-process claims, composition claims, and method claims
describing their manufacture and use. In addition to the specific OXYGENT
formulation, issued patents broadly cover concentrated PFC emulsions, as well
as methods for their manufacture and use.
In September 1994, Alliance received a U.S. patent for its preferred
method of using blood substitutes to facilitate oxygen delivery. A related
U.S. patent was issued in September 1995. Corresponding patents are pending
in Europe, Japan, and other countries. The issued claims cover methods for
facilitating autologous blood use in conjunction with administering
oxygen-enriched gas and oxygen carriers that contain fluorochemicals, as well
as those derived from human, animal, plant, or recombinant hemoglobin, in
order to reduce or eliminate the need for allogeneic blood transfusions
during surgery.
The Company has filed U.S. and foreign patent applications on its method
of using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators. In August 1995, a U.S. patent licensed to the
Company issued covering methods of administering liquids, including
LIQUIVENT, to patients. Other U.S. patents, covering additional methods of
enhancing respiratory gas exchange by administering liquids to patients,
including LIQUIVENT, have subsequently issued. The Company also has issued
patents and pending patent applications which seek to cover the use of PFCs
to deliver drugs to the lungs and to wash debris from, and open, collapsed
lungs. In November 1995, the Company received a U.S. patent covering the use
of fluorochemicals to treat localized and systemic inflammation.
Additionally, the Company has issued patents and pending applications that
cover apparatus for liquid ventilation using PFCs.
Alliance has several issued U.S. patents and patent applications related
to IMAGENT. The issued patents and pending applications contain claims
directed to the manufacture and use of novel stabilized microbubble
compositions based on the discovery that PFC gases, in combination with
appropriate surfactants or other non-PFC gases, can stabilize microbubbles
for use in ultrasonic imaging. The patents further contain claims directed
to formulations and compositions that cover IMAGENT. International
applications directed to the same subject matter have also been filed. In
March 1998, the Company received its second U.S. patent covering the use of
various contrast agents, including IMAGENT, in harmonic imaging.
The Company also has issued patents and pending patent applications
covering its novel fluorinated surfactants. These compounds may be useful in
oxygen-carrying or drug transport compositions, and in liposomal formulations
that have therapeutic and diagnostic applications. Additionally, the
fluorinated compounds may be employed in cosmetics, protective creams, and
lubricating agents, as well as being incorporated in emulsions,
microemulsions, and gels that may be useful as drug delivery vehicles or
contrast agents. The Company also has pending applications relating to
various types of emulsions and microstructures (tubules, helixes, fibers)
that may have uses in the fields of medicine, biomolecular engineering,
microelectronics, and electro-optics.
The Company, through its wholly owned subsidiary, MDV, has numerous
issued U.S. patents and pending applications related to the use, manufacture
and composition of FLOGEL. Corresponding patents have issued, or
applications have been filed, in Europe, Japan and certain other foreign
countries. MDV also has issued claims in the United States and
7
<PAGE>
Europe covering the use of poloxamer gels for the prevention of adhesion
formation, delivery of drugs and ophthalmic applications.
Aside from the issued patents and allowed applications referred to
above, however, no assurance can be given that any of these applications will
result in issued U.S. or foreign patents. Although patents are issued with a
presumption of validity and require a challenge with a high degree of proof
to establish invalidity, no assurance can be given that any issued patents
would survive such a challenge and would be valid and enforceable.
The Company also attempts to protect its proprietary products,
processes, and other information by relying on trade secret laws and
non-disclosure and confidentiality agreements with its employees,
consultants, and certain other persons who have access to such products,
processes, and information. The agreements affirm that all inventions
conceived by employees are the exclusive property of the Company, with the
exception of inventions unrelated to the Company's business and developed
entirely on the employee's own time. Nevertheless, there can be no assurance
that these agreements will afford significant protection against or adequate
compensation for misappropriation or unauthorized disclosure of the Company's
trade secrets.
COMPETITION
Biotechnology and pharmaceutical companies are highly competitive.
There are many pharmaceutical companies, biotechnology companies, public and
private universities, and research organizations actively engaged in research
and development of products that may be similar to Alliance's products. Many
of the Company's existing or potential competitors have substantially greater
financial, technical, and human resources than the Company and may be better
equipped to develop, manufacture, and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing
the intended purposes of the Company's products, which might render the
Company's technology and products uncompetitive or obsolete. There can be no
assurance that the Company will be able to compete successfully.
Well-publicized side effects associated with the transfusion of human
donor blood have spurred efforts to develop a blood substitute. There are
two primary approaches for temporary oxygen delivery: PFC emulsions and
hemoglobin solutions. Hemoglobin development efforts include chemically
modified, stroma-free hemoglobin from human or bovine red blood cells, and
the use of genetic engineering to produce recombinant hemoglobin. There are
several companies working on hemoglobin solutions as a temporary oxygen
carrier "blood substitute", two of which are in Phase III clinical trials.
The Company believes that the relatively low cost and ease of production of
OXYGENT provide advantages over hemoglobin-based products. Alliance is aware
of two other companies developing PFC-based temporary oxygen carriers, one of
which has entered Phase II clinical trials.
Although liquid ventilation therapy has been in the research phase for
the last two decades, the Company is unaware of any potential liquid
ventilation competitor that has reached the clinical trial stage; however,
other companies are evaluating compounds with the possibility of entering
this field. If major manufacturers of PFCs entered the field, the Company
could face competition from companies with substantially greater resources.
The Company believes that its patent position and stage of research and
development give it an advantage over potential competitors. Several other
companies are attempting to develop alternative types of therapies for
treatment of acute respiratory failure. One company has started a Phase
II/III clinical trial for acute respiratory failure with a surfactant, and
several others have started Phase II clinical trials with various compounds
for acute respiratory failure.
Competition in the development of ultrasound imaging contrast agents is
intense and is expected to increase. There are currently only two available
ultrasound contrast agents for certain cardiology applications in the U.S.
There are currently five (including the two U.S. approved contrast agents)
that have been approved in Europe, three of which are currently being sold.
In addition, certain companies are in advanced clinical trials for the use of
ultrasound contrast agents for assessing certain organs and vascular
structures. The Company expects that competition in the ultrasound contrast
imaging agent field will be based primarily on each product's safety profile,
efficacy, stability, ease of administration, breadth of approved indications,
and physician, healthcare payor and patient acceptance. The Company believes
if and when IMAGENT is approved for commercial sale, it will be well
positioned to compete successfully, although there can be no assurance that
the product will be able to do so.
8
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PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS
The sale or use of the Company's present products and any other products
or processes that may be developed or sold by the Company may expose the
Company to potential liability from claims by end-users of such products or
by manufacturers or others selling such products, either directly or as a
component of other products. While the Company has product liability
insurance, there can be no assurance that the Company will continue to
maintain such insurance or that it will provide adequate coverage. If the
Company is held responsible for damages in a product liability suit, the
Company's financial condition could be materially and adversely affected.
GOVERNMENT REGULATION
The Company's products require governmental approval before production
and marketing can commence. The regulatory approval process is administered
by the FDA in the United States and by similar agencies in foreign countries.
The process of obtaining regulatory clearances or approvals is costly and
time consuming. The Company cannot predict how long the necessary clearances
or approvals will take or whether it will be successful in obtaining them.
Generally, all potential pharmaceutical products must successfully
complete two major stages of development (preclinical and clinical testing)
prior to receiving marketing approval by the governing regulatory agency. In
preclinical testing, potential compounds are tested both IN VITRO and in
animals to gain safety information prior to administration in humans.
Knowledge is obtained regarding the effects of the compound on bodily
functions as well as its absorption, distribution, metabolism, and
elimination.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with
the initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance. Phase II typically involves studies in a larger patient
population to identify possible adverse effects and safety risks, to begin
gathering preliminary efficacy data, and to investigate potential dose sizes
and schedules. Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient
population. Each trial is conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and the efficacy criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the investigational new drug
application. Further, each clinical study must be evaluated by an independent
review board at the institution at which the study will be conducted. The
review board will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution.
Following completion of these studies, a new drug application ("NDA")
must be submitted to and approved by the FDA in order to market the product
in the United States. Similar applications are required in foreign
countries. There can be no assurance that, upon completion of the foregoing
trials, the results will be considered adequate for government approval. If
and when approval is obtained to market a product, the FDA's (or applicable
foreign agency's) regulations will govern manufacturing and marketing
activities.
The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some
new drugs, such as LIQUIVENT, which has been so designated.
Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain
halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have
been implicated in stratospheric ozone depletion. The FDA issued a Finding
of No Significant Impact under the National Environmental Protection Act in
connection with the approval for marketing of IMAGENT GI, a perflubron-based
drug previously developed by the Company. However, all materials contained
in the Company's products remain subject to regulation by governmental
agencies.
In addition to FDA regulation, the Company is subject to regulation by
various governmental agencies including, without limitation, the Drug
Enforcement Administration, the U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food
and Drug Branch. Such regulation, by governmental authorities in the United
States and other countries, may impede or limit the Company's ability to
develop and market its products.
9
<PAGE>
EMPLOYEES
As of September 4, 1998, the Company had 284 full-time employees, of
whom 247 were engaged in research and development, production and associated
support, six in business development and market research, and 31 in general
administration. There can be no assurance that the Company will be able to
continue attracting and retaining sufficient qualified personnel in order to
meet its needs. None of the Company's employees is represented by a labor
union. The Company believes that its employee relations are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company:
DUANE J. ROTH. Mr. Roth, who is 48, has been Chief Executive Officer since
1985 and Chairman since October 1989. Prior to joining Alliance, Mr. Roth
served as President of Analytab Products, Inc., an American Home Products
company involved in manufacturing and marketing medical diagnostics,
pharmaceuticals and devices. For the previous ten years, he was employed in
various sales, marketing, and general management capacities by Ortho
Diagnostic Systems, Inc., a Johnson & Johnson company, which is a
manufacturer of diagnostic and pharmaceutical products. Mr. Roth's brother,
Theodore D. Roth, is President and Chief Operating Officer of the Company.
THEODORE D. ROTH. Mr. Roth, who is 47, was Executive Vice President and
Chief Financial Officer of the Company since November 1987, and was
appointed President and Chief Operating Officer in May 1998. For more than
ten years prior to joining the Company, he was General Counsel of SAI
Corporation, a company in the business of operating manufacturing concerns,
and General Manager of Holland Industries, Inc., a manufacturing company.
Mr. Roth received his J.D. from Washburn University and an LL.M. in Corporate
and Commercial Law from the University of Missouri in Kansas City. He is the
brother of Duane J. Roth, the Chairman and Chief Executive Officer of the
Company.
HAROLD W. DELONG. Mr. DeLong, who is 50, has been Executive Vice President,
Business Development for the Company since February 1989. Mr. DeLong has
been employed for more than 25 years in the medical diagnostics and
pharmaceutical industry in various sales, marketing, and management
positions. Prior to joining Alliance, Mr. DeLong was Vice President, Sales
and Marketing for Murex Corporation, a company participating in the
infectious disease diagnostics market. He previously served as Director,
Sales and Marketing for Becton Dickinson's Immunocytometry Systems division.
Mr. DeLong was also employed previously by Ortho Diagnostic Systems, Inc. for
over ten years, where his last position was Director of the Hemostasis and
Chemistry Products business units.
KEITH W. CHAPMAN. Mr. Chapman, who is 48, was appointed Vice President,
Operations in July 1997, having joined the Company in 1992 as Director,
Transfer Operations. For 14 years prior to joining Alliance, he was
responsible for scale-up development and production of modified hemoglobins
for the Army's Blood Substitute Program. He received training as a research
associate in dermatology, tropical medicine, and blood cell preservation at
the Letterman Army Institute of Research, Presidio of San Francisco,
California.
B. JACK DEFRANCO. Mr. DeFranco, who is 53, has been Vice President, Market
Development for Alliance since January 1991. He has more than 25 years
experience in sales and marketing in the medical products industry. He was
President of Orthoconcept Inc., a private firm marketing orthopedic and
urological devices from 1986 through 1990. Prior to 1986, he was Director of
Marketing and New Business Development for Smith and Nephew Inc., which
markets orthopedic and general wound-care products, and he served in various
sales and marketing positions with Ortho Diagnostic Systems, Inc. Mr.
DeFranco received his M.B.A. from Fairleigh Dickinson University.
N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 58, has been Vice
President, Medical Affairs Development for the Company since September 1990.
Dr. Faithfull joined Alliance after serving as Director of Medical Research
for Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D.
from Erasmus University, Rotterdam and his M.D. from London University.
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KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 48, was appointed Vice President,
Clinical Research in August 1998, having joined Alliance in 1990 as Director
of Clinical Research. Dr. Flaim has over 15 years of experience in clinical
trial design and regulatory submissions. For nine years before joining
Alliance, she was Associate Director of the Division of Clinical Research and
Development at SmithKline Beecham. Previously, she was an Assistant
Professor at the Milton S. Hershey Medical Center at Pennsylvania State
University. Dr. Flaim received her Ph.D. at the University of California at
Davis.
HENRY A. GRAHAM, PH.D. Dr. Graham, who is 55, is Vice President, Quality.
Prior to joining Alliance in January 1990, he worked for Johnson & Johnson
for 17 years on a broad range of projects including injectable human
biologicals, immunohematology reagents, immunoassay reagents and instrument
systems. Dr. Graham was Director of Product Development for Ortho Diagnostic
Systems, Inc. for over five years prior to 1990. During his tenure at
Johnson & Johnson, he was the recipient of several awards, including the
Corporate Medal for Outstanding Research. Dr. Graham received his Ph.D. in
immunology from Rutgers University.
JOERG LIMMER, DVM. Dr. Limmer, who is 57, was appointed Vice President,
Clinical Operations and New Technology Assessment in September 1996. Prior
to joining Alliance, Dr. Limmer worked six years for Boehringer Ingelheim
Pharma as Regional Director and Vice President where he was responsible for
medical and marketing affairs for Eastern European countries. For the
previous 20 years he was Director of Clinical Research at Dr. Karl Thomae
GmbH, a subsidiary of Boehringer Ingelheim GmbH in Germany. His primary
focus was in the area of diabetes mellitus, fat metabolism, atherosclerosis,
and intensive care products. Dr. Limmer received his DVM from the Freie
Universitaet of Berlin, Germany.
TIMOTHY J. PELURA, PH.D. Dr. Pelura, who is 44, was appointed Vice
President, Pharmaceutical Research & Development in July 1997, having joined
Alliance in 1988 as Director, Product Research. For over 22 years he has
worked extensively in the field of emulsion research and parenteral product
development. Prior to joining Alliance, he spent 12 years at Pharmacia and
KabiVitrum Inc. working in various areas including quality control,
formulation and process development, project management, and basic research.
Dr. Pelura received a M.S. and Ph.D. in Chemistry from Rutgers University.
GWEN ROSENBERG. Ms. Rosenberg, who is 43, was appointed Vice President,
Corporate Communications in May 1998. Ms. Rosenberg joined the Company in
1990 and has served in various capacities, most recently as Director of
Corporate Communications. For the previous eleven years, she was a research
scientist at the University of California, San Diego and at Scripps Clinic
and Research Foundation, and was concurrently a science reporter for the San
Diego Daily Transcript. Ms. Rosenberg has also taught high school chemistry
and biology in New York. She received her B.A. and M.A. degrees from Adelphi
University and The State University of New York at Stony Brook, respectively.
GORDON L. SCHOOLEY, PH.D. Dr. Schooley, who is 51, has been Vice President,
Clinical and Regulatory Development since January 1989. Dr. Schooley has
been employed for over 25 years in research and development in the
pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs. For the previous
eight years, he was Director of Clinical Research and Biostatistics for
Allergan Pharmaceuticals, a division of SmithKline Beecham, developing
ophthalmologic and dermatologic drugs and devices. He was also employed by
McGaw Laboratories as Manager of Biostatistics for parenteral products, and
by The Upjohn Company as a senior biostatistician for analgesic and CNS
drugs. Dr. Schooley received his Ph.D. from the University of Michigan
School of Public Health.
MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 45, was appointed Vice
President, Drug Safety in August 1998, having joined Alliance in 1993 as
Director, Toxicology. For more than ten years prior to joining the Company,
he held positions in both general and reproductive toxicology at Parke-Davis,
Pharmaceutical Research Division of the Warner-Lambert Company, and 3M
Pharmaceuticals. Dr. Seefeld received his Ph.D. from the University of
Wisconsin-Madison and is board certified by the American Board of Toxicology.
TIM T. HART, CPA. Mr. Hart, who is 41, was appointed Chief Financial Officer
in August 1998. He joined the Company in 1991 as Controller and has also
served as Treasurer since 1994. Prior to joining Alliance in 1991, he was
Group Controller of the Cubic Revenue Collection Group, a group of nine
domestic and international Cubic Corporation companies that design,
manufacture and service automatic fare-collection systems. Mr. Hart was
employed in various financial management positions at Cubic for over eight
years. He was also employed by Ernst & Whinney in San Diego, California as a
C.P.A. Mr. Hart received a B.S. from San Diego State University.
LLOYD A. ROWLAND, JR. Mr. Rowland, who is 42, was appointed Secretary of the
Company in May 1998, having served as General Counsel and Assistant Secretary
since 1993. Prior to joining Alliance, Mr. Rowland served as Vice President
and Senior Counsel, Finance and Securities, at Imperial Savings Association
for four years. For the previous eight years, he was engaged in the private
practice of corporate law with the San Diego, California law firm of Gray
Cary Ames & Fry, and the Houston, Texas law firm of Bracewell & Patterson.
He received a J.D. from Emory University.
11
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ITEM 2. PROPERTIES
FACILITIES
The Company has principal facilities in two locations: San Diego,
California and Otisville, New York. In San Diego, California, where the
Company has approximately 159,000 square feet in four leased facilities, the
Company maintains its principal executive offices, performs research and
development on its PFC-based products, and has its emulsion products
manufacturing facility. The fourth San Diego facility was leased in 1997 and
consists of manufacturing and development space. The Otisville site, where
the Company has established the LIQUIVENT and SAT PAD production facility,
also includes laboratories and administrative offices.
The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983. In connection with the
acquisition, the Company entered into a land use agreement (the "Land Use
Agreement") with New York City and the PDC. The Company estimates that the
cost of complying with the Land Use Agreement for fiscal 1998 was
approximately $140,000. The provisions of the Land Use Agreement are
"covenants running with the land," which may bind the Company and subsequent
owners of the Otisville site for a substantial period of time.
While the Company believes that it can produce materials for clinical
trials and initial market launch for OXYGENT and IMAGENT at its existing San
Diego facilities and for LIQUIVENT at its Otisville, New York facility, it
may need to expand its commercial manufacturing capabilities for its products
in the future. Any expansion for any of its products may occur in stages,
each of which would require regulatory approval, and product demand could at
times exceed supply capacity. The Company has not selected a site for such
expanded facilities and cannot predict the amount it will expend for the
construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products nor can
there be any assurance that it will be able to do so. The Schering License
Agreement requires the Company to manufacture products at its San Diego
facility for a period of time after market launch at a negotiated price.
Schering will be responsible for establishing production capacity beyond the
maximum capacity of the San Diego facility.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the last quarter of Alliance's fiscal year ended June 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the Nasdaq National Market under the symbol ALLP.
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The following table sets forth, for the periods indicated, the high and
low sale prices of the common stock as reported on Nasdaq, without retail
mark-up, markdown or commission.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998
Quarter ended September 30, 1997 $ 13.25 $ 8.125
Quarter ended December 31, 1997 $ 12.875 $ 6.625
Quarter ended March 31, 1998 $ 11.375 $ 6.75
Quarter ended June 30, 1998 $ 8.938 $ 3.625
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997
Quarter ended September 30, 1996 $ 18.125 $ 12.25
Quarter ended December 31, 1996 $ 17.375 $ 10.50
Quarter ended March 31, 1997 $ 15.75 $ 11.875
Quarter ended June 30, 1997 $ 12.00 $ 5.875
</TABLE>
On September 4, 1998, the closing price of the Company's common stock
was $3.313.
The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
On September 4, 1998, the approximate number of record holders of the
Company's common stock was 1,420. The Company believes that, in addition,
there are in excess of 14,000 beneficial owners of its common stock whose
shares are held in street name and, consequently, the Company is unable to
determine the actual number of beneficial holders thereof.
On September 23, 1997 the Company sold 500,000 shares of its convertible
Series D Preferred Stock for an aggregate purchase price of $10 million to
SBVC in connection with the licensing of IMAGENT to Schering. The shares
were sold in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended. The Series D Preferred Stock
is convertible on the earlier of (i) receipt of written notice from the
holders of 50% or more of the Series D Preferred Stock, (ii) termination of
the Schering License Agreement by Schering or, if such agreement is
terminated by the Company, at Schering's election, or (iii) such time as a
twenty-day average of the last reported selling price of Company common stock
equals or exceeds $20 per share.
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ITEM 6. SELECTED FINANCIAL DATA
The following information has been summarized from the financial
statements included elsewhere herein and should be read in conjunction with
such financial statements and the related notes thereto (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 21,209 $ 44,580 $ 17,323 $ 11,816 $ 409
Net loss $ (33,003) $ (19,016) $ (23,172) $ (29,717) $ (36,946)
Net loss per common
Basic and diluted $ (1.04) $ (.63) $ (.91) $ (1.35) $ (1.83)
<CAPTION>
June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 48,730 $ 62,995 $ 73,244 $ 22,346 $ 19,446
Total assets $ 93,677 $ 112,013 $ 108,343 $ 56,030 $ 53,132
Long-term debt and other $ 8,921 $ 2,871 $ 1,166 $ 843 $ 348
Stockholders' equity $ 76,090 $ 91,331 $ 101,467 $ 50,077 $ 49,825
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(References to years are to the Company's fiscal years ended June 30.)
Alliance has devoted substantial resources to research and development
related to its medical products. The Company has been unprofitable since
inception and expects to incur operating losses for at least the next several
years due to substantial spending on research and development, preclinical
testing, clinical trials, regulatory activities, and commercial manufacturing
start-up. The Company has collaborative research and development agreements
with companies for IMAGENT and RODA. Under the arrangement for IMAGENT,
Schering has agreed to reimburse the Company for some of its development
expenses. Schering will also make milestone payments to the Company upon the
achievement of certain product development events, followed by royalties on
sales at commercialization. With respect to RODA, the Company has agreed to
reimburse VIA for substantially all of its development expenses and to share
revenues from the sale of products. Due to the termination of the HMRI
License Agreement in December 1997, and the restructuring of the Ortho
License Agreement in May 1998, Alliance expects to incur a substantial
increase in development expenses related to LIQUIVENT and OXYGENT and a
substantial decrease in related research revenue relative to prior years.
There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis.
14
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LIQUIDITY AND CAPITAL RESOURCES
Through June 1998, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. To date, the Company's revenue from the sale of products
has not been significant.
In August 1998, the Company sold 100,000 shares of Series E-1 Preferred
Stock ("E-1 Stock") to certain investors pursuant to a preferred stock
purchase agreement (the "Stock Purchase Agreement") for an aggregate amount
equal to $6 million. Pursuant to the Stock Purchase Agreement, the Company
has the option to sell preferred shares on substantially similar terms to the
investors from time to time through early 1999 in an amount not to exceed an
additional $14 million, subject to certain limitations. The 100,000 shares
of E-1 Stock are convertible into common stock at $6 per share through
January 3, 1999, and thereafter certain adjustments may apply based on the
market price. The Company has the right to redeem the preferred shares under
certain circumstances. No dividends will accrue to the holders. In
connection with the sale of preferred stock, the investors obtained a right
to receive a royalty on future sales of one of the Company's products under
development, provided that such product is approved by the FDA by December
2003. The royalty amount will be between 0.4% and 1.6%, subject to
adjustments downward, of net sales of the product for a period of three
years. The Company has certain rights to repurchase the royalty right.
In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and in December
1997, the amount available under the loan was increased to $15.2 million. In
June 1998, the Company restructured the loan to provide for up to $15
million. Amounts borrowed are secured by certain fixed assets and are to be
repaid over 4.5 years. If certain financial covenants are not satisfied, the
outstanding balance may become due and payable. On June 30, 1998, the
balance outstanding on this loan was $10 million. The Company also has a
$1.5 million line of credit available with another bank. The Company has
financed substantially all of its office and research facilities and related
leasehold improvements under operating lease arrangements and loan and
security agreements.
In November 1996, the Company acquired MDV by a merger (the "MDV
Merger") of a wholly owned subsidiary of the Company into MDV. MDV is
engaged in the development of a thermoreversible gel, FLOGEL, intended for
use as an anti-adhesion treatment for persons undergoing abdominal or pelvic
surgeries. The consideration in the MDV Merger consisted of $15.5 million,
of which $8 million was paid through the delivery of 703,093 shares of common
stock during 1997, and $7.5 million was paid through the delivery of 706,100
shares of common stock during 1998. Additionally, the Company will pay up to
$20 million if advanced clinical development or licensing milestones are
achieved in connection with MDV's technology. The Company will also make
certain royalty payments on the sales of products, if any, developed from
such technology. The Company may buy out its royalty obligation for $10
million at any time prior to the first anniversary of the approval by U.S.
regulatory authorities of any products based upon the MDV technology (the
amount increasing thereafter over time). All of such payments to the former
MDV shareholders may be made in cash or, at the Company's option, shares of
the Company's common stock, except for the royalty obligations which will be
payable only in cash. The Company has not determined whether subsequent
payments (other than royalties) will be made in cash or in common stock or,
if made in cash, the source of such payments. There can be no assurance that
any of the contingent payments will be made because they are dependent on
future developments that are inherently uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5
million payments described above and related transaction costs.
From September 1994 until May 1998, under the Ortho License Agreement,
Ortho was responsible for substantially all the costs of developing and
marketing OXYGENT. In June 1996, the convertible Series A Preferred Stock
held by J&JDC and accrued dividends thereon were converted into 815,625
shares of common stock of the Company. In June 1996, J&JDC also exercised
its warrant for 300,000 shares, resulting in proceeds to the Company of $4.5
million. In December 1996, Ortho paid to Alliance a $15 million milestone
payment. In May 1998, Ortho and the Company restructured the Ortho License
Agreement and Alliance assumed responsibility for worldwide development of
OXYGENT at its expense. Under the restructured agreement, Ortho retained
certain rights to be the exclusive marketing agent for the product. In 1998,
Ortho reimbursed the Company $10.2 million for research and development
expenses. As a result of the restructuring, Alliance expects to incur a
substantial increase in development expenses related to OXYGENT and a
substantial decrease in related research revenue over prior years.
15
<PAGE>
From February 1996 through June 1997, HMRI was responsible for most of
the costs of development and marketing of LIQUIVENT. In conjunction with the
HMRI License Agreement, HMRI purchased shares of convertible Series B
Preferred Stock and shares of convertible Series C Preferred Stock for an
aggregate of $22 million. In addition, HMRI paid Alliance an initial license
fee of $5 million and agreed to pay milestone payments and royalties on
product sales. HMRI also received a five-year warrant to acquire 300,000
shares of common stock at $20 per share. On June 6, 1996, the Series B
Preferred Stock and accrued dividends thereon were converted into 759,375
shares of common stock of the Company. On June 30, 1997, the Series C
Preferred Stock was converted into 345,327 shares of common stock of the
Company. On June 30, 1997, HMRI paid the Company a $2.5 million milestone
payment and $2.5 million for the purchase of clinical trial supplies. The
Company also announced in June 1997 that the parties agreed in principle to
modify the HMRI License Agreement to (i) adjust certain milestone payments,
(ii) temporarily revise the method for reimbursing the expenses for portions
of the development work, and (iii) provide for the Company to repurchase any
unused clinical trial supplies if the license agreement is terminated before
January 1, 1998. The Company recorded the $2.5 million in clinical trial
supplies as deferred revenue and at June 30, 1998, the unused supplies were
approximately $2.3 million. In December 1997, the HMRI License Agreement was
terminated. Therefore, Alliance has not been reimbursed for its LIQUIVENT
development expenses since July 1, 1997, and it will be responsible for all
future LIQUIVENT development expenses worldwide. HMRI has no continuing
rights to the development or marketing of LIQUIVENT. The parties are
considering a repurchase by Alliance of clinical trial supplies from HMRI.
In May 1998, HMRI asserted a claim for an amount up to $7.5 million, payable
in 2002 in cash or common stock, at the Company's election. The Company does
not believe that the claim is meritorious and intends to vigorously contest
such claim.
In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions, and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAGENT. The product is being developed jointly by
Alliance and Schering. Under the Schering License Agreement, Schering paid to
Alliance in 1998 an initial license fee of $4 million, and agreed to pay
further milestone payments and royalties on product sales. Schering is also
providing funding to Alliance for some of its development expenses related to
IMAGENT. In conjunction with the Schering License Agreement, SBVC purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.
The Company had net working capital of $48.7 million at June 30, 1998,
compared to $63 million at June 30, 1997. The Company's cash, cash
equivalents, and short-term investments decreased to $49.9 million at June
30, 1998 from $72.4 million at June 30, 1997. The decrease resulted
primarily from cash used in operations of $28.1 million and property, plant,
and equipment additions of $10.1 million, partially offset by proceeds from a
loan and security agreement of $6.8 million and by net proceeds from the sale
to SBVC of convertible Series D Preferred Stock in the amount of $9.6 million
in conjunction with the Schering License Agreement. The Company's operations
to date have consumed substantial amounts of cash, and are expected to
continue to do so for the foreseeable future.
The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential. Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the
product to market. Based on these and other factors, the Company may from
time to time reallocate its resources among its product development
activities. Additions to products under development or changes in products
being pursued can substantially and rapidly change the Company's funding
requirements.
The Company expects to incur substantial additional expenditures
associated with product development, particularly for LIQUIVENT and OXYGENT
as they move into pivotal clinical trials. The Company will seek additional
collaborative research and development relationships with suitable corporate
partners for its non-licensed products. There can be no assurance that such
relationships, if any, will successfully reduce the Company's funding
requirements. Additional equity or debt financing may be required, and there
can be no assurance that such financing will be available on reasonable
terms, if at all. If adequate funds are not available, the Company may be
required to delay, scale back, or eliminate one or more of its product
development programs, or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, product candidates, or products that the Company
would not otherwise relinquish.
16
<PAGE>
Alliance anticipates that its current capital resources, including
proceeds from the sale of the E-1 Stock in August 1998, expected revenue
from the Schering License Agreement and investments, and future proceeds from
the sale of additional preferred stock under the August 1998 Stock Purchase
Agreement, will be adequate to satisfy its capital requirements for at least
the next 12 months. The Company's future capital requirements will depend on
many factors, including, but not limited to, continued scientific progress in
its research and development programs, progress with preclinical testing and
clinical trials, the time and cost involved in obtaining regulatory
approvals, patent costs, competing technological and market developments,
changes in existing collaborative relationships, the ability of the Company
to establish additional collaborative relationships, and the cost of
manufacturing scale-up.
While the Company believes that it can produce materials for clinical
trials and the initial market launch for OXYGENT and IMAGENT at its existing
San Diego facilities and for LIQUIVENT at its Otisville, New York facility,
it may need to expand its commercial manufacturing capabilities for its
products in the future. Any expansion for any of its products may occur in
stages, each of which would require regulatory approval, and product demand
could at times exceed supply capacity. The Company has not selected a site
for such expanded facilities and cannot predict the amount it will expend for
the construction of such facilities. There can be no assurance as to when or
whether the FDA will determine that such facilities comply with Good
Manufacturing Practices. The projected location and construction of such
facilities will depend on regulatory approvals, product development, and
capital resources, among other factors. The Company has not obtained any
regulatory approvals for its production facilities for these products, nor
can there be any assurance that it will be able to do so. The Schering
License Agreement requires the Company to manufacture products at its San
Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity
beyond the maximum capacity of the San Diego facility.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries
to distinguish the 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Management has initiated its Year 2000 program, which has
already identified several systems that are not yet Year 2000 compliant. The
Company expects to complete its initial assessment by the end of the year.
The assessment will include third-party confirmations with respect to their
computers, software and systems, and a listing of all equipment subject to
Year 2000 concerns. The Company has already initiated the removal and
exchange of some non-compliant systems and expects to continue such
replacement or other remedial programs to assure that its computers,
software, and other systems will continue to operate in the Year 2000. While
the Company has begun evaluating potential strategies for resolving its Year
2000 problems, the dollar amount the Company will spend to remediate such
issues remains uncertain. The Company believes such costs will not have a
material effect on the Company's consolidated financial position or results
of operations. There can be no assurance, however, that the Company's
computer systems and applications of other companies on which the Company's
operations rely, will be timely converted, or that any such failure to
convert by another company will not have a material adverse effect on the
Company systems. Moreover, a failure of (i) Company scientific, manufacturing
and other equipment to operate at all or operate accurately, (ii) clinical
trial site medical equipment to perform properly, (iii) necessary materials
or supplies to be available to the Company when needed, or (iv) other
equipment, software, or systems as a result of Year 2000 problems could have
a material adverse effect on the Company's business or financial condition.
Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that
these statements are only predictions and that the Company's business is
subject to significant risks. The factors discussed herein and other
important factors, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for 1999, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include the inability to enter into collaborative
relationships to further develop and commercialize the Company's products;
changes in any such relationships, or the inability of any collaborative
partner to adequately commercialize any of the Company's products; the
uncertainties associated with the lengthy regulatory approval process;
obtaining and enforcing patents important to the Company's business; possible
competition from other products; and Year 2000 issues. Furthermore, even if
the Company's products appear promising at an early stage of development,
they may not reach the market for a number of important reasons. Such reasons
include, but are not limited to, the possibilities that the potential
17
<PAGE>
products will be found ineffective during clinical trials; failure to receive
necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to
commercialize because of proprietary rights of third parties. The research,
development, and market introduction of new products will require the
application of considerable technical and financial resources, while revenues
generated from such products, assuming they are developed successfully, may
not be realized for several years. Other material and unpredictable factors
which could affect operating results include, without limitation, the
uncertainty of the timing of product approvals and introductions and of sales
growth; the ability to obtain necessary raw materials at cost-effective
prices or at all; the effect of possible technology and/or other business
acquisitions or transactions; and the increasing emphasis on controlling
healthcare costs and potential legislation or regulation of healthcare
pricing.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
- ---------------------
The Company's license and research revenue was $21.2 million for 1998,
compared to $44.6 million for 1997. Research revenue in 1997 included a $15
million milestone payment from Ortho under the Ortho License Agreement. The
decrease in revenue is primarily due to decreased milestone payments and the
decreased development expense reimbursement from HMRI, due to the
restructuring and eventual termination of the HMRI License Agreement. The
Company expects research revenue to significantly decrease in 1999 compared
to 1998, due to the lack of revenue from the Ortho License Agreement.
Research and development expenses increased by 16% to $50.1 million for
1998, compared to $43.3 million for 1997. The increase in expenses was
primarily due to a $4.1 million increase in staffing costs for employees
primarily engaged in research and development activities, a $791,000 increase
in rent and lease expense, an $833,000 increase in depreciation expense, a
$487,000 increase in payments to outside researchers for preclinical and
clinical trials and other product development work, as well as other
increases related to the Company's research and development activities.
General and administrative expenses were $7.9 million for 1998, compared
to $7.9 million for 1997.
The Company accounted for the acquisition of MDV as a purchase and
recorded a one-time charge in 1997 of $16.5 million, including payments to
former MDV shareholders of $15.5 million and related transaction costs.
Investment income and other was $3.8 million for 1998, compared to $4.1
million for 1997. The decrease was primarily a result of lower average cash
and short-term investment balances.
1997 COMPARED TO 1996
- ---------------------
The Company's license and research revenue was $44.6 million for 1997,
compared to $17.3 million for 1996. The increase was primarily a result of
the $15 million milestone payment from Ortho under the Ortho License
Agreement, and the $2.5 million milestone payment and increased research
revenue from HMRI under the HMRI License Agreement.
Research and development expenses increased by 28% to $43.3 million for
1997, compared to $33.7 million for 1996. The increase in expenses was
primarily due to a $4.7 million increase in payments to universities and
outside consultants for preclinical and clinical trials and other product
development work, a $2.3 million increase in staffing costs, a $1 million
increase in depreciation expense, a $414,000 increase in rent and lease
expense, and a $369,000 increase in repairs and maintenance expense, as well
as other increases related to the Company's research and development
activities. The expenses for 1996 included a $757,000 charge arising from
the acquisition of certain PFC patents, patent rights, and related documents.
General and administrative expenses increased by 10% to $7.9 million for
1997, compared to $7.2 million for 1996. The increase in general and
administrative expenses was primarily due to increased professional fees.
Investment income and other was $4.1 million for 1997, compared to $1.4
million for 1996. The increase was primarily a result of higher average cash
balances as a result of the Ortho milestone payment received in December
1996, the February 1996 HMRI transaction, and the receipt of approximately
$44 million from the April 1996 public offering by the Company of 2.9 million
shares of common stock.
18
<PAGE>
Alliance expects to continue to incur substantial and increasing
expenses associated with its research and development programs. Operating
results may fluctuate from quarter to quarter as a result of the differences
in the timing of revenues earned and expenses incurred and such fluctuations
may be substantial. The Company's historical results are not necessarily
indicative of future results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is
contained in Part I of this Annual Report on Form 10-K under the caption
"Executive Officers of the Registrant." Information concerning the directors
of the Company is incorporated by reference to the section entitled "Election
of Directors" that the Company intends to include in its definitive proxy
statement for Alliance's November 1998 Annual Meeting of Shareholders (the
"Proxy Statement"). Copies of the Proxy Statement will be duly filed with
the commission pursuant to Rule 14a-6(c) promulgated under the Securities
Exchange Act of 1934, as amended, not later than 120 days after the end of
the fiscal year covered by its Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation" and "Election of
Directors" to appear in the Company's Proxy Statement are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Ownership of Voting Securities by Certain
Beneficial Owners and Management" to appear in the Company's Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Election of Directors" and "Executive
Compensation" to appear in the Company's Proxy Statement are incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report.
19
<PAGE>
1. See Table of Contents to Consolidated Financial Statements on
Page F-1 for a list of Financial Statements being filed herein.
2. See Page F-2 for the Report of Ernst & Young LLP, Independent
Auditors, being filed herein.
3. See Exhibits below for a list of all Exhibits being filed or
incorporated by reference herein.
(b) A report on Form 8-K was filed with the Commission on June 1, 1998.
The Company reported that on May 14, 1998, the Company and Ortho Biotech,
Inc. and The R. W. Johnson Pharmaceutical Research Institute, both
subsidiaries of Johnson & Johnson, entered into an agreement to restructure
their collaboration with respect to the development of the Company's OXYGENT
product.
(c) Exhibits.
(3) (a) Restated Certificate of Incorporation of the Company, as
amended through August 31, 1994. (Incorporated by reference to Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1994 (the "1994 10-K").)
(b) Certificate of Amendment to the Certificate of Incorporation
of the Company filed on March 25, 1996. (Incorporated by reference to
Exhibit 3 to Amendment No. 1 of the S-3 Registration Statement of the Company
filed on March 28, 1996 (the "1996 S-3")).
(c) Certificate of Amendment to the Certificate of Incorporation
of the Company filed on September 22, 1997. (Incorporated by reference to
Exhibit 3(c) of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.)
(d) Certificate of Amendment to the Certificate of Incorporation
filed on August 14, 1998.
(e) By-Laws of the Company, as amended. (Incorporated by
reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989 (the "1989 10-K").)
(10) (a) Lease Agreement, as amended, between the Company and Hartford
Accident and Indemnity Company relating to certain research and manufacturing
facilities in San Diego, California . (Incorporated by reference to Exhibit
10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993.)
(b) Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed. (Incorporated by reference to Exhibit
10(d) to the 1994 10-K.)
(c) Formula Award of Stock Options for Non-employee Members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed.
(Incorporated by reference to Exhibit 10(e) to the 1994 10-K.)
(d) Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation.
(Incorporated by reference to Exhibit 10(g) to the 1994 10-K.)
(e) Stock and Warrant Purchase Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc. (Incorporated by
reference to Exhibit 10 (b) to the 1996 S-3).
(f) Agreement and Plan of Merger by and among the Company, MDV
Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996.
(Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K
filed on November 20, 1996)
(g) License Agreement dated September 23, 1997, between the
Company and Schering AG, Germany. (Incorporated by reference to Exhibit 2(a)
to the Current Report on Form 8-K/A filed on February 27, 1998 (the "1997
8_K/A")(1)
20
<PAGE>
(h) Preferred Stock Purchase Agreement dated September 23, 1997,
between the Company and Schering Berlin Venture Corp. (Incorporated by
reference to Exhibit 2(b) to the 1997 8-K/A.)
(i) Agreement dated May 14, 1998, between the Company and Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute with
respect to the restructuring of the relationship between the Company and such
companies. (Incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K filed on May 14, 1998.)
(j) Convertible Preferred Stock Purchase Agreement dated as of
August 13, 1998 between the Company and certain investors ("E-1 Investors")
pertaining to the sale of Series E-1 Preferred Stock.
(k) Royalty Rights Agreement dated as of August 13, 1998 between
the Company and the E-1 Investors.
(l) Registration Rights Agreement dated as of August 13, 1998
between the Company and the E-1 Investors.
(m) Credit Agreement dated as of June 17, 1998 between the Company
and Imperial Bank.
(n) Promissory Note in the amount $15 million dated June 17, 1998
executed by the Company in favor of Imperial Bank.
(o) Security Agreement dated June 17, 1998 executed by the Company
in favor of Imperial Bank.
(p) Lease Agreement dated November 7, 1998 between the Company and
WHAMC Real Estate Limited Partnership, a Delaware limited partnership,
relating to certain manufacturing and development facilities in San Diego,
California.
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(1) Certain confidential portions of this exhibit have been deleted
pursuant to an order granted by the Securities and Exchange Commission under
the Securities Exchange Act of 1934.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
Date: September 7, 1998 By: /s/ Theodore D. Roth
-------------------------------------
Theodore D. Roth
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Duane J. Roth Chairman and September 7, 1998
- ----------------------------------- Chief Executive Officer
Duane J. Roth
/s/ Theodore D. Roth Director, President, and September 7, 1998
- ----------------------------------- Chief Operating Officer
Theodore D. Roth
/s/ Tim T. Hart Chief Financial Officer, Treasurer, September 7, 1998
- ----------------------------------- and Chief Accounting Officer
Tim T. Hart
/s/ Pedro Cuatrecasas, M.D. Director September 7, 1998
- -----------------------------------
Pedro Cuatrecasas, M.D.
/s/ Carroll O. Johnson Director September 7, 1998
- -----------------------------------
Carroll O. Johnson
/s/ Stephen M. McGrath Director September 7, 1998
- -----------------------------------
Stephen M. McGrath
/s/ Helen M. Ranney, M.D. Director September 7, 1998
- -----------------------------------
Helen M. Ranney, M.D.
/s/ Donald E. O'Neill Director September 7, 1998
- -----------------------------------
Donald E. O'Neill
/s/ Jean Riess, PH.D. Director September 7, 1998
- -----------------------------------
Jean Riess, Ph.D.
/s/ Thomas F. Zuck, M.D. Director September 7, 1998
- -----------------------------------
Thomas F. Zuck, M.D.
</TABLE>
22
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-14
</TABLE>
No consolidated financial statement schedules are filed herewith because they
are not required or are not applicable, or because the required information
is included in the consolidated financial statements or notes thereto.
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.
We have audited the accompanying consolidated balance sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
July 31, 1998, except for Note 8,
as to which the date is August 14, 1998
F-2
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,809,000 $ 15,368,000
Short-term investments 38,046,000 57,041,000
Research revenue receivable 6,847,000 7,250,000
Other current assets 694,000 1,147,000
-------------- --------------
Total current assets 57,396,000 80,806,000
PROPERTY, PLANT AND EQUIPMENT - NET 23,087,000 16,574,000
PURCHASED TECHNOLOGY - NET 12,880,000 14,400,000
OTHER ASSETS - NET 314,000 233,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,191,000 $ 2,807,000
Accrued expenses 3,121,000 3,439,000
Deferred revenue 2,286,000 2,500,000
Payable for acquired in-process technology - 7,557,000
Current portion of long-term debt 1,068,000 1,508,000
-------------- --------------
Total current liabilities 8,666,000 17,811,000
LONG-TERM DEBT 8,882,000 2,742,000
OTHER 39,000 129,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
500,000 and 0 shares of Series D issued and outstanding at
June 30, 1998 and 1997, respectively; liquidation preference of
$10,000,000 and $0 at June 30, 1998 and 1997, respectively 5,000 -
Common stock - $.01 par value; 50,000,000 shares authorized;
31,994,338 and 31,164,935 shares issued and outstanding at
June 30, 1998 and 1997, respectively 320,000 311,000
Additional paid-in capital 340,016,000 322,268,000
Accumulated deficit (264,251,000) (231,248,000)
-------------- --------------
Total stockholders' equity 76,090,000 91,331,000
-------------- --------------
$ 93,677,000 $ 112,013,000
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
License and research revenue $ 21,209,000 $ 44,580,000 $ 17,323,000
OPERATING EXPENSES:
Research and development 50,084,000 43,278,000 33,730,000
General and administrative 7,886,000 7,932,000 7,214,000
Acquired in-process technology - 16,450,000 -
-------------- -------------- --------------
57,970,000 67,660,000 40,944,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (36,761,000) (23,080,000) (23,621,000)
INVESTMENT INCOME AND OTHER - NET 3,758,000 4,064,000 1,355,000
-------------- -------------- --------------
NET LOSS (33,003,000) (19,016,000) (22,266,000)
DIVIDENDS ON PREFERRED STOCK - - (906,000)
-------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON SHARES $ (33,003,000) $ (19,016,000) $ (23,172,000)
-------------- -------------- --------------
-------------- -------------- --------------
NET LOSS PER COMMON SHARE:
Basic and diluted $ (1.04) $ (0.63) $ (0.91)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 31,749,000 30,302,000 25,504,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1995 1,500,000 $ 15,000 24,759,000 $ 248,000 $238,874,000 $(189,060,000)
Sale of convertible Series B and Series C
Preferred Stock 950,000 9,500 21,530,000
Sale of common stock 2,865,000 29,000 43,925,000
Exercise of stock options and warrants 745,000 7,000 6,548,000
Conversion of convertible Series A Preferred
Stock to common shares (1,500,000) (15,000) 750,000 7,500 8,000
Conversion of convertible Series B Preferred
Stock to common shares (750,000) (7,500) 750,000 7,500
Conversion of convertible preferred
stock dividend to common shares 75,000 1,000 1,499,000
Payment related to acquisition of technology
rights 50,000 757,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 8,000 114,000
Net unrealized gain on available-for-sale
securities 142,000
Dividends on preferred stock (906,000)
Net loss (22,266,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1996 200,000 2,000 30,002,000 300,000 313,397,000 (212,232,000)
Exercise of stock options and warrants 105,000 1,000 654,000
Conversion of convertible Series C Preferred
Stock to common shares (200,000) (2,000) 345,000 3,000 (1,000)
Payment related to acquired in-process technology 703,000 7,000 7,840,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 10,000 133,000
Net unrealized gain on available-for-sale securities 245,000
Net loss (19,016,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1997 - - 31,165,000 311,000 322,268,000 (231,248,000)
Exercise of stock options and warrants 104,000 1,000 741,000
Sale of convertible Series D Preferred Stock 500,000 5,000 9,595,000
Payment related to acquired in-process technology 706,000 8,000 7,492,000
Issuance of stock in satisfaction of employer
matching contribution to 401(k) savings plan 19,000 141,000
Net unrealized loss on available-for-sale securities (221,000)
Net loss (33,003,000)
---------- ---------- ---------- ---------- ------------ -------------
BALANCES AT JUNE 30, 1998 500,000 $ 5,000 31,994,000 $ 320,000 $340,016,000 $(264,251,000)
---------- ---------- ---------- ---------- ------------ -------------
---------- ---------- ---------- ---------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (33,003,000) $ (19,016,000) $ (22,266,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 5,064,000 3,997,000 3,086,000
Charge for acquired in-process technology - 16,450,000 757,000
Non-cash compensation - net 320,000 133,000 277,000
Changes in operating assets and liabilities:
Research revenue receivable 403,000 (1,500,000) (3,690,000)
Other assets 372,000 888,000 219,000
Accounts payable and accrued
expenses and other (1,024,000) 1,162,000 (263,000)
Deferred revenue (214,000) 2,500,000 -
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (28,082,000) 4,614,000 (21,880,000)
--------------- --------------- ---------------
INVESTING ACTIVITIES:
Short-term investments 18,775,000 5,183,000 (50,815,000)
Property, plant and equipment (10,057,000) (6,823,000) (4,010,000)
Payment for acquired in-process technology (57,000) (1,046,000) -
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 8,661,000 (2,686,000) (54,825,000)
--------------- --------------- ---------------
FINANCING ACTIVITIES:
Issuance of common stock
and warrants 562,000 597,000 50,461,000
Issuance of convertible preferred stock - net 9,600,000 - 21,540,000
Proceeds from long-term debt 6,800,000 3,493,000 2,208,000
Principal payments on long-term debt (1,100,000) (908,000) (543,000)
--------------- --------------- ---------------
Net cash provided by financing activities 15,862,000 3,182,000 73,666,000
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,559,000) 5,110,000 (3,039,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,368,000 10,258,000 13,297,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,809,000 $ 15,368,000 $ 10,258,000
--------------- --------------- ---------------
--------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payable for acquired in-process technology $ 7,557,000
Issuance of common stock in connection with
acquired in-process technology $ 7,500,000 $ 7,847,000
Issuance of common stock and warrants in connection with
acquisition of patent rights and related documents $ 757,000
Preferred stock dividends $ 906,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company" or "Alliance") are engaged in identifying, designing, and
developing novel medical products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., the accounts of its wholly owned subsidiary Astral,
Inc., its wholly owned subsidiary MDV Technologies, Inc. ("MDV") from the
acquisition date of November 1996, and its majority-owned subsidiaries, Talco
Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees
("ATTA"). ATTA was dissolved in 1997. All significant intercompany accounts
and transactions have been eliminated. Certain amounts in 1997 and 1996 have
been reclassified to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's short-term investments as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of
stockholders' equity. The Company considers instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established guidelines relative
to diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and modified to take advantage of trends
in yields and interest rates. The Company has not experienced any material
losses on its short-term investments.
PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS
Buildings, furniture, and equipment are stated at cost and depreciation
is computed using the straight-line method over the estimated useful lives of
3 to 25 years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease term. Technology and patent rights are amortized using the
straight-line method over 5 to 20 years.
PURCHASED TECHNOLOGY
The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
1989. The technology acquired is the Company's core perfluorochemical
("PFC") technology and was valued based on an analysis of the present value
of future earnings anticipated from this technology at that time. The
Company identified alternative future uses for the PFC technology, including
the OXYGENT-TM-(temporary blood substitute) and LIQUIVENT-Registered
Trademark- (intrapulmonary oxygen carrier) products. Purchased technology
also includes $2 million for technology capitalized as a result of the
acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991. Since
the acquisition, an alternative future use of the acquired technology has
been pursued by the Company. An intrapulmonary drug delivery system using
the PFC-based liquid as a carrier (or dispersing agent) is being developed by
Alliance from the liquid ventilation technology.
F-7
<PAGE>
The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. The PFC technology has
a book value of $12.4 million and $13.5 million net of accumulated
amortization of $10.8 million and $9.7 million at June 30, 1998 and 1997,
respectively. The technology acquired from BioPulmonics has a book value of
approximately $480,000 and $850,000 and is being amortized over five to seven
years and is net of accumulated amortization of $1.5 million and $1.2 million
at June 30, 1998 and 1997, respectively.
The carrying value of purchased technology is reviewed periodically
based on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues. If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.
ACQUIRED IN-PROCESS TECHNOLOGY
In November 1996, the Company acquired MDV by a merger (the "MDV
Merger") of a wholly owned subsidiary of the Company into MDV. MDV is
engaged in the development of a thermoreversible gel, FLOGEL-Registered
Trademark-, intended for use as an anti-adhesion treatment for persons
undergoing abdominal or pelvic surgeries. The consideration payable in the
MDV Merger consisted of $15.5 million, payable in common stock or cash, of
which $8 million was paid through the delivery of 703,093 shares of common
stock during fiscal 1997, and $7.5 million was paid through the delivery of
706,100 shares of common stock during fiscal 1998. Additionally, the Company
will pay up to $20 million if advanced clinical development or licensing
milestones are achieved in connection with MDV's technology. The Company
will also make certain royalty payments on the sales of products, if any,
developed from such technology. The Company may buy out its royalty
obligation for $10 million at any time prior to the first anniversary of the
approval by U.S. regulatory authorities of any products based upon the MDV
technology (the amount increasing thereafter over time). All of such
payments to the former MDV shareholders may be made in cash or, at the
Company's option, shares of the Company's common stock, except for the
royalty obligations which will be payable only in cash. The Company has not
determined whether subsequent payments (other than royalties) will be made in
cash or in common stock or, if made in cash, the source of such payments.
There can be no assurance that any of the contingent payments will be made
because they are dependent on future developments which are inherently
uncertain.
The Company has accounted for the MDV Merger as a purchase, and recorded
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5
million payments described above and related transaction costs.
LONG-TERM DEBT
The Company entered into a loan and security agreement in August 1995
under which the Company received $2.2 million at an interest rate of 10.84%.
The loan was paid in full during fiscal 1998.
In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and in December
1997, the amount available under the loan was increased to $15.2 million. In
June 1998, the Company restructured the loan to provide for up to $15 million
at the bank's prime rate plus .5% (9% at June 30, 1998). Amounts borrowed
are secured by certain fixed assets and are to be repaid over 4.5 years. If
certain financial covenants are not satisfied, the outstanding balance may
become due and payable. On June 30, 1998, the balance outstanding on this
loan was approximately $10 million.
The Company's principal payments for the long-term debt for the years
ending June 30, 1999, 2000, 2001, 2002 and 2003 are $1.1 million, $1.4
million, $1.4 million, $1.4 million and $4.6 million, respectively.
REVENUE RECOGNITION
Revenue under collaborative research agreements is recognized as
services are provided and milestone payments are recognized upon the
completion of the milestone event or requirement under such agreements.
Revenue from product sales is recognized as products are shipped.
Non-refundable contract fees that reimburse the Company for previously
incurred research and development are recorded as revenue upon contract
"execution."
F-8
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenditures are charged to expense as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to retain its current intrinsic value-based method and will disclose
the pro forma effect of using the fair value-based method to account for its
stock-based compensation in its financial statements.
NET INCOME (LOSS) PER SHARE
The Company computes net loss per common share in accordance with
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 requires the presentation of basic and diluted earnings
per share amounts. Basic earnings per share is calculated based upon the
weighted average number of common shares outstanding during the period while
diluted earnings per share also gives effect to all potential dilutive common
shares outstanding during the period such as options, warrants, convertible
securities, and contingently issuable shares. All potential dilutive
common shares have been excluded from the calculation of diluted earnings per
share as their inclusion would be anti-dilutive.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both of these standards
are effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires that all components of comprehensive income, including net
income, be reported in the financial statements in the period in which they
are recognized. The Company believes that comprehensive income or loss will
not be materially different than net income or loss. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available regularly by the Company in deciding how
to allocate resources in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company is in the process of evaluating the
effect and believes that adoption of these standards will not have a material
impact on the Company's financial statements.
2. FINANCIAL STATEMENT DETAILS
PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 2,193,000 1,657,000
Furniture, fixtures, and equipment 18,825,000 15,446,000
Leasehold improvements 15,542,000 9,402,000
------------ ------------
37,085,000 27,030,000
Less accumulated depreciation and amortization (13,998,000) (10,456,000)
------------ ------------
$ 23,087,000 $ 16,574,000
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Payroll and related expenses $ 2,786,000 $ 2,569,000
Rent and related operating expenses 205,000 206,000
Other 130,000 664,000
------------ ------------
$ 3,121,000 $ 3,439,000
------------ ------------
------------ ------------
</TABLE>
3. INVESTMENTS
The Company classifies its investment securities as available-for-sale
and records holding gains or losses in stockholders' equity.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------------------------- --------------------------------------------
Gross Unrealized Estimated Gross Unrealized Estimated
Cost Gains (Losses) Fair Value Cost Gains (Losses) Fair Value
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Securities $ 12,785,000 $ 10,000 $ 12,795,000 $ 32,700,000 $ 242,000 $ 32,942,000
Corporate Securities 25,240,000 11,000 25,251,000 24,099,000 -- 24,099,000
-------------------------------------------- --------------------------------------------
$ 38,025,000 $ 21,000 $ 38,046,000 $ 56,799,000 $ 242,000 $ 57,041,000
-------------------------------------------- --------------------------------------------
-------------------------------------------- --------------------------------------------
</TABLE>
The gross realized gains on sales of available-for-sale securities
totaled $357,000 and $65,000, in 1998 and 1997, respectively. The gross
unrealized gains of $21,000 and $242,000, in 1998 and 1997, respectively,
are recorded as components of additional paid-in capital. The unrealized
gains had no cash effect and therefore are not reflected in the consolidated
statements of cash flows.
The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1998 and 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------------- ------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ 23,885,000 $ 23,885,000 $ 34,517,000 $ 34,759,000
Due after one year through three years 12,221,000 12,227,000 22,282,000 22,282,000
Due after three years 1,919,000 1,934,000 - -
-------------- -------------- -------------- --------------
$ 38,025,000 $ 38,046,000 $ 56,799,000 $ 57,041,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
4. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991
Stock Option Plan which provides for both incentive and non-qualified stock
options (the "1991 Plan"). These plans provide for the granting of options
to purchase shares of the Company's common stock (up to an aggregate of
500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program,
and 1991 Plan, respectively) to directors, officers, employees, and
consultants. The optionees, date of grant, option price (which cannot be
less than 100% and 80% of the fair market value of the common stock on the
date of grant for incentive stock options and non-qualified stock options,
respectively), vesting schedule, and term of options, which cannot exceed ten
years (five years under the 1983 Plan), are determined by the Compensation
Committee of the Board of Directors. The 1983 Plan has expired and no
additional options may be granted under such plan.
F-10
<PAGE>
The following table summarizes stock option activity through June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
-----------------------------------
<S> <C> <C>
Balance at June 30, 1995 3,043,988 $ 9.02
Granted 288,600 $ 13.62
Exercised (469,078) $ 7.73
Terminated/Expired (122,937) $ 13.47
--------------
Balance at June 30, 1996 2,740,573 $ 9.53
Granted 1,403,100 $ 13.07
Exercised (108,830) $ 6.67
Terminated/Expired (236,239) $ 13.65
--------------
Balance at June 30, 1997 3,798,604 $ 10.66
Granted 1,814,750 $ 8.89
Exercised (135,660) $ 5.44
Terminated/Expired (391,771) $ 11.47
--------------
Balance at June 30, 1998 5,085,923 $ 10.11
--------------
--------------
Available for future grant under the 1983 Program 37,185
--------------
--------------
Available for future grant under the 1991 Plan 1,375,520
--------------
--------------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Exercise Number Average Remaining Number Average
Prices Outstanding Exercise Contractual Exercisable Exercise
Price Life Price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.01 129,918 $0.01 0.4 years 129,918 $0.01
$ 3.25-$6.94 976,270 $5.28 6.4 years 680,920 $5.34
$ 7.00-$9.25 818,340 $8.40 5.5 years 535,630 $8.47
$ 9.38-$9.88 1,389,725 $9.41 9.1 years 151,975 $9.60
$10.00-$13.63 1,180,620 $12.70 7.6 years 437,575 $12.37
$14.00-$28.00 591,050 $19.13 5.2 years 455,375 $20.14
------------- -------------
5,085,923 $10.11 7.0 years 2,391,393 $10.13
------------- -------------
------------- -------------
</TABLE>
F-11
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
In accordance with its provisions, the Company applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans, and accordingly, no compensation cost has been recognized for
stock options in 1998, 1997 or 1996. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant
date amortized to expense over their vesting period as prescribed by SFAS No.
123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss
As reported $(33,003,000) $(19,016,000) $(23,172,000)
Pro forma (34,708,000) (21,453,000) (23,958,000)
Net loss per share
As reported $ (1.04) $ (.63) $ (.91)
Pro forma (1.09) (.71) (.94)
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculations; accordingly, the 1998,
1997 and 1996 pro forma adjustments are not indicative of future period pro
forma adjustments when the calculation will reflect all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 1998,
1997 and 1996, respectively: risk-free interest rate range of 5.63% to
6.63%, 5.25% to 6.5%, and 5.25% to 6.5%; dividend yield of 0% (for all
years); volatility factor of 66%, 63%, and 63%; and a weighted-average
expected term of 6 years, 4 years, and 4 years. The estimated weighted
average fair value at grant date for the options granted during 1998, 1997
and 1996 was $5.85, $6.90 and $7.02 per option, respectively.
WARRANTS
At June 30, 1998, the Company had warrants outstanding to purchase
573,835 shares of common stock at prices ranging from $6.67 to $20 per share.
The warrants expire on various dates from August 1998 through February 2001.
PREFERRED STOCK
In fiscal 1996, in conjunction with a license agreement, Hoechst Marion
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible
Series B Preferred Stock and 200,000 shares of its convertible Series C
Preferred Stock for an aggregate of $22 million. In June 1996, all
outstanding shares of convertible Series A Preferred Stock (issued to Johnson
& Johnson Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock
and accrued dividends thereon were converted into 815,625 and 759,375 shares
of Alliance common stock, respectively. In June 1997, all outstanding shares
of Series C Preferred Stock were converted into 345,327 shares of Alliance
common stock (see Note 5). In September 1997, in conjunction with a license
agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering
AG, Germany ("Schering"), purchased 500,000 shares of the Company's
convertible Series D Preferred Stock for $10 million. The Series D Preferred
Stock is convertible into Alliance common stock upon certain events at a rate
based upon a 20 day average of the closing market prices of the common stock
at the time of conversion. The Series D Preferred Stock is entitled to one
vote per share and has no annual dividend.
The Series A Preferred Stock carried a cumulative annual dividend of
$0.50 per share. The Series B Preferred Stock carried a cumulative annual
dividend of $1.00 per share. The dividends were payable in cash or common
stock. In June 1996, these dividends were paid by issuing 75,000 shares of
Alliance common stock.
5. LICENSE AGREEMENTS
In August 1994, the Company executed a license agreement (the "Ortho
License Agreement") with Ortho Biotech Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical
Corporation (collectively referred to as "Ortho"), which provided Ortho with
worldwide marketing and, at its election, manufacturing rights to the
Company's injectable perfluorochemical emulsions capable of transporting
oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay to
Alliance a royalty based upon sales of products after commercialization. In
addition, Ortho paid to Alliance an initial license fee of $4 million and
agreed to make other payments upon the achievement of certain milestones.
Under the agreement, Ortho was responsible for substantially all of the costs
of developing and marketing the products. In December 1996, Ortho paid the
Company a $15 million milestone payment. In conjunction with the Ortho
License Agreement, J&JDC purchased 1.5 million shares of Alliance Series A
Preferred Stock for $15 million and obtained a three-year warrant to purchase
300,000 shares of Alliance common stock at $15 per share. In June 1996, the
preferred stock and warrant were converted into common stock (see Note 4).
In May 1998, Ortho and the Company restructured the agreement.
F-12
<PAGE>
Under the restructured agreement, Alliance assumed responsibility for
worldwide development of OXYGENT at its own cost, and Ortho retained certain
rights to be the exclusive marketing agent for the product.
In February 1996, the Company entered into a license agreement (the
"HMRI License Agreement") with HMRI, which provided HMRI with worldwide
marketing and manufacturing rights to the intratracheal administration of
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid
ventilation. Under the agreement, HMRI was responsible for most of the costs
of development and marketing of LIQUIVENT. On June 30, 1997, HMRI paid the
Company a $2.5 million milestone payment and $2.5 million for the purchase of
clinical trial supplies. The Company also announced in June 1997 that the
parties agreed in principle to modify the HMRI License Agreement to (i)
adjust certain milestone payments, (ii) temporarily revise the method for
reimbursing the expenses for portions of the development work and (iii)
provide for the Company to repurchase any unused clinical trial supplies if
the license agreement is terminated before January 1, 1998. The Company
recorded the $2.5 million in clinical trial supplies as deferred revenue and
at June 30, 1998 the unused supplies were approximately $2.3 million. In
December 1997, the HMRI License Agreement was terminated. Therefore,
Alliance has not been reimbursed for its LIQUIVENT development expenses since
July 1, 1997, and it will be responsible for all future LIQUIVENT development
expenses worldwide. HMRI has no continuing rights to the development or
marketing of LIQUIVENT. The parties are considering a repurchase by Alliance of
clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an
amount up to $7.5 million, payable in 2002 in cash or common stock, at the
Company's election. The Company does not believe that the claim is
meritorious and intends to vigorously contest such claim.
In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering, which provides Schering with
worldwide exclusive marketing and manufacturing rights to Alliance's drug
compounds, drug compositions, and medical devices and systems related to
perfluorocarbon ultrasound imaging products, including IMAGENTS. The product
will be developed jointly by Alliance and Schering. Under the Schering
License Agreement, Schering paid to Alliance an up-front, non-refundable
initial license fee of $4 million and agreed to pay further milestone
payments and royalties on product sales. Schering also agreed to provide
funding to Alliance for some of its development expenses. In conjunction
with the Schering License Agreement, SBVC purchased 500,000 shares of the
Company's convertible Series D Preferred stock for $10 million.
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of June
30, 1998 are shown below. A valuation allowance of $96,202,000, of which
$9,111,000 is related to 1998, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 74,481,000 $ 69,360,000
Research and development credits 8,571,000 8,220,000
Capitalized research expense 10,744,000 7,286,000
Other - net 2,406,000 2,225,000
------------- -------------
Total deferred tax assets 96,202,000 87,091,000
Valuation allowance for deferred tax assets (96,202,000) (87,091,000)
------------- -------------
Net deferred tax assets $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Approximately $3,580,000 of the valuation allowance for deferred tax
assets relates to stock option deductions which, when recognized, will be
allocated to contributed capital.
At June 30, 1998, the Company had federal and various state net
operating loss carryforwards of approximately $206,015,000 and $41,320,000,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss
carryforwards will begin expiring in fiscal 1999, unless previously utilized.
The California tax loss carryforwards will continue to expire in fiscal 1999
unless previously utilized. The Company also has federal and state research
and development tax credit carryforwards of $8,879,000 and $2,868,000,
respectively, which will begin expiring in fiscal 1999 unless previously
utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual
use of the Company's net operating loss and credit carryforwards may be
limited because of cumulative changes in ownership of more than 50% which
have
F-13
<PAGE>
occurred; however, the Company does not believe such limitation will have a
material impact upon the utilization of these carryforwards.
7. COMMITMENTS
The Company leases certain office and research facilities in San Diego
and certain equipment under operating leases. Provisions of the facilities
lease provide for abatement of rent during certain periods and escalating
rent payments during the lease terms based on changes in the Consumer Price
Index. Rent expense is recognized on a straight-line basis over the term of
the leases.
Minimum annual commitments related to operating lease payments at June
30, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1999 $ 3,389,000
2000 2,406,000
2001 2,262,000
2002 2,331,000
2003 1,617,000
Thereafter 4,306,000
------------
Total $ 16,311,000
------------
------------
</TABLE>
Rent expense for fiscal 1998, 1997, and 1996 was $3.4 million, $2.6
million, and $2.1 million, respectively.
8. SUBSEQUENT EVENT
In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million and retained
the right to sell similar preferred stock periodically through early 1999 in
an amount not to exceed an additional $14 million. The preferred shares are
convertible at the option of the holder into common stock at $6 per share
through January 3, 1999, and thereafter certain adjustments may apply based
on the market price. These adjustments to the market price could potentially
result in a conversion price below the then trading market price of the
stock. In recognition of this beneficial conversion feature, the Company will
recognize an imputed dividend of approximately $450,000 on these preferred
shares. At the option of the Company, beginning in 2003, the Company can
either force the conversion of any remaining unconverted shares into common
stock, or can redeem the stock at the then prevailing conversion price. The
Company may be liable for penalties if certain conditions are not met. The
Series E-1 Preferred Stock has the same voting rights as common stock and has
a liquidation preference of $60 per share. No dividends will accrue to the
holders of the preferred stock, however, the investors obtained a right to
receive a royalty on future sales of one of the Company's products under
development, provided that the product is approved by the U.S. Food and Drug
Administration by December 2003. The royalty amount will be between 0.4% and
1.6%, subject to adjustments downward, of net sales of the product for a
period of three years. The Company has certain rights to repurchase the
royalty right.
F-14
<PAGE>
EXHIBIT INDEX
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Number Document
- ------ --------
<S> <C>
3(c) Certificate of Amendment to the Certificate of Incorporation of the
Company filed August 14, 1998.
10(j) Convertible Preferred Stock Purchase Agreement dated as of August 13,
1998 between the Company and certain investors ("E-1 Investors").
10(k) Royalty Rights Agreement dated as of August 13, 1998 between the
Company and the E-1 Investors.
10(l) Registration Rights Agreement dated as of August 13, 1998 between the
Company and the E-1 Investors.
10(m) Credit Agreement dated as of June 17, 1998 between the Company and
Imperial Bank.
10(n) Promissory Note in the amount $15 million dated June 17, 1998 executed
by the Company in favor of Imperial Bank.
10(o) Security Agreement dated June 17, 1998 executed by the Company in
favor of Imperial Bank.
10(p) Lease Agreement dated November 7, 1997 between the Company and WHAMC
Real Estate Limited Partnership, a Delaware limited partnership,
relating to certain manufacturing and development facilities in
San Diego, California.
(23.1) Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ALLIANCE PHARMACEUTICAL CORP.
Under Section 805 of the Business Corporation Law
We, the undersigned, Theodore D. Roth and Lloyd A. Rowland, being
respectively the President and the Secretary of Alliance Pharmaceutical Corp.,
hereby certify:
1. The name of the corporation is Alliance Pharmaceutical Corp.
(hereinafter called the "COMPANY"). The name under which the Company was formed
is Otisville Biologics, Inc.
2. The Certificate of Incorporation was filed in the office of the
Secretary of State on the 23rd day of February, 1983.
3. The Certificate of Incorporation of the Company was first
restated and the Restated Certificate was filed on November 10, 1993.
4. The Certificate of Incorporation of the Company, as amended
heretofore, is further amended by the addition of the following provisions that
designate the relative rights, preferences, and limitations of 100,000 shares of
the authorized 5,000,000 shares of preferred stock, $0.01 par value, which
provisions establish an additional series of preferred stock of the Company
designated as "SERIES E-1 PREFERRED STOCK."
5. A new Section (f) is added to Article 4 thereof, which
Section (f) reads in its entirety as follows:
"(f) Convertible Preferred Stock, Series E-1.
Section 1. DESIGNATION, AMOUNT, PAR VALUE, STATED VALUE AND RANK.
The series of preferred stock shall be designated as Convertible Preferred
Stock, Series E-1 (the "SERIES E-1 PREFERRED STOCK"), and the number of shares
so designated shall be 100,000 (which shall not be subject to increase without
the consent of the holders of the Series E-1 Preferred Stock ("HOLDERS")). Each
share of Series E-1 Preferred Stock shall have a par value of $0.01 per share
and a stated value of $60.00 per share (the "STATED VALUE").
The Series E-1 Preferred Stock shall rank senior to the Junior
Securities (as defined below) and pari passu with all other series of preferred
stock of the Company issued and outstanding as to distributions and upon
liquidation, dissolution or winding up.
1
<PAGE>
Section 2. JUNIOR SECURITIES. So long as any Series E-1 Preferred
Stock shall remain outstanding, except pursuant to existing agreements of the
Company, neither the Company nor any subsidiary thereof shall redeem, purchase
or otherwise acquire otherwise than upon conversion or exchange directly or
indirectly any Junior Securities (as defined in Section 7), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities.
Section 3. VOTING RIGHTS. The holders of Series E-1 Preferred Stock
shall have the right to vote, together with the holders of all the outstanding
shares of Common Stock (and the holders of every other class or series entitled
to vote together with such holders) and not by class, except as otherwise
required by New York law, on all matters on which holders of Common Stock shall
have the right to vote. Each holder of Series E-1 Preferred Stock shall have
the right to cast ten (10) votes for each share of Preferred Stock held by such
holder. In addition, so long as any shares of Series E-1 Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not to,
without the affirmative vote of the holders of 66.66% of the shares of the
Series E-1 Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series E-1 Preferred Stock, (b) alter
or amend this Article 4(f), other than to renumber this Article 4(f), (c)
authorize or create any class of stock ranking as to distribution of assets upon
a Liquidation (as defined in Section 4) or otherwise senior to the Series E-1
Preferred Stock, (d) amend its Certificate of Incorporation, bylaws or other
charter documents so as to affect adversely any rights of any Holders, (e)
increase the authorized number of shares of Series E-1 Preferred Stock, and (f)
enter into any agreement with respect to the foregoing.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "LIQUIDATION"),
subject to the provisions of Section 502 of the New York Business Corporation
Law, if applicable, the Holders shall be entitled to receive out of the assets
of the Company, whether such assets are capital or surplus, for each share of
Series E-1 Preferred Stock an amount equal to the Stated Value before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Series E-1
Preferred Stock shall be distributed among the holders of Series E-1 Preferred
Stock and the holders of all securities ranking pari passu to the Series E-1
Preferred Stock ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. A sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written notice of
any such Liquidation, not less than 45 days prior to the payment date stated
therein, to each record holder of Series E-1 Preferred Stock.
2
<PAGE>
Section 5. CONVERSION.
(a) (i) Each share of Series E-1 Preferred Stock shall be
convertible into shares of Common Stock (subject to Section 5(a)(iii)
and Section 5(a)(iv)) at the Conversion Ratio (as defined in Section 7)
at the option of the Holder in whole or in part at any time after the
Original Issue Date. The Holders shall effect conversions by
surrendering the certificate or certificates representing the shares of
Series E-1 Preferred Stock to be converted to the Company, together with
the form of conversion notice attached hereto as EXHIBIT A (the "HOLDER
CONVERSION NOTICE"). Each Holder Conversion Notice shall specify the
number of shares of Series E-1 Preferred Stock to be converted and the
date on which such conversion is to be effected, which date may not be
prior to the date the holder delivers such Holder Conversion Notice by
facsimile (the "HOLDER CONVERSION DATE"). If no Holder Conversion Date
is specified in a Holder Conversion Notice, the Holder Conversion Date
shall be the date that the Holder Conversion Notice is deemed delivered
pursuant to Section 5(i). Subject to Sections 5(a)(iii) and 5(b) hereof,
each Holder Conversion Notice, once given, shall be irrevocable. If the
Holder is converting less than all shares of Series E-1 Preferred Stock
represented by the certificate or certificates tendered by the Holder
with the Holder Conversion Notice, or if a conversion hereunder cannot
be effected in full for any reason, the Company shall promptly deliver
to such Holder (in the manner and within the time set forth in Section
5(b)) a certificate for such number of shares as have not been
converted.
(ii) On the fifth anniversary of the Original Issue Date, the
Company may require the conversion of all of the then outstanding and
unconverted shares of Series E-1 Preferred Stock at the Conversion Ratio
(subject to reduction pursuant to Section 5(a)(iii)) by delivering to
the Holder of such shares to be converted a notice in the form attached
hereto as EXHIBIT B (the "COMPANY CONVERSION NOTICE"), PROVIDED,
HOWEVER, that no such conversion shall be permitted unless at the time
of the delivery of the Company Conversion Notice and on the Company
Conversion Date (as defined below), (a) the shares of Common Stock
issuable upon such conversion are listed for trading on the Nasdaq
National Market, the Nasdaq Small Cap Market or are otherwise publicly
traded and (b) the Company is in material compliance with all of its
obligations under this Article 4(f), the Purchase Agreement, the Royalty
Agreement and the Registration Rights Agreement. In the event that the
shares are not listed on the Nasdaq National Market or a registered
national exchange at the time of conversion under this paragraph then
the Company shall pay to each Holder 3.5% of the aggregate Stated Value
of the shares of Series E-1 Preferred Stock then held by such Holder, in
cash, as liquidated damages and not as a penalty, concurrently with the
delivery of shares of Common Stock to the Holders in connection with
such conversion. Each Company Conversion Notice shall specify the
number of shares of Series E-1 Preferred Stock to be converted and the
date on which such conversion is to be effected, which date may not be
prior to the day after the Company delivers such Company Conversion
Notice by facsimile (the "COMPANY CONVERSION DATE"). If no Company
Conversion Date is specified in a Company Conversion Notice, the Company
Conversion Date shall be the date that the Company Conversion Notice is
deemed delivered pursuant to Section 5(i). A Holder Conversion Date and
a Company Conversion Date are sometimes referred to herein as the
"CONVERSION DATE" and a Holder Conversion Notice and a Company
Conversion Notice are sometimes referred to as a "CONVERSION NOTICE."
Any conversion pursuant to this Section 5(a)(ii) shall be subject to
Section 5(b) with respect to consequences of the
3
<PAGE>
Company's failure to deliver shares of Common Stock in respect of a
conversion under this Section. If the Company is converting less than
all shares of Series E-1 Preferred Stock represented by the certificate
or certificates tendered by the Holder in response to a Company
Conversion Notice, or if a conversion hereunder cannot be effected in
full for any reason, the Company shall promptly deliver to such
tendering Holder (in the manner and within the time set forth in Section
5(b)) a certificate for such number of shares as have not been
converted. In the absence of receipt by the Company of Holder's election
not to receive new certificates, the Company shall deliver such
certificate(s) as provided herein.
(iii) If on the Conversion Date applicable to any conversion,
(A) the Common Stock is then listed for trading on the Nasdaq National
Market, the New York Stock Exchange, the American Stock Exchange or the
Nasdaq Small Cap Market, (B) the Conversion Price then in effect is such
that the aggregate number of shares of Common Stock that would then be
issuable upon conversion of all outstanding shares of Series E-1
Preferred Stock, together with any shares of Common Stock previously
issued upon conversion of Series E-1 Preferred Stock, would equal or
exceed 20% of the number of shares of Common Stock outstanding on the
Original Issue Date (the "ISSUABLE MAXIMUM"), and (C) the Company has
not previously obtained (or attempted pursuant to clause (1) of this
subsection to obtain) Shareholder Approval (as defined below), then the
Company shall issue to any Holder so requesting conversion of Series E-1
Preferred Stock its pro rata portion of the Issuable Maximum in the same
ratio that the number of shares of Series E-1 Preferred Stock held by
any such Holder bears to all shares of Series E-1 Preferred Stock then
outstanding and, with respect to any shares of Common Stock that
otherwise would have been issuable to such Holder in respect of the
Holder Conversion Notice at issue in excess of the Issuable Maximum, the
Company shall, as promptly as possible, but in no event later than 75
days after such Conversion Date, at the Company's option, either, (1)
convene a meeting of the holders of the Common Stock and use its best
efforts to obtain the Shareholder Approval or a waiver of such approval
from the Nasdaq National Market, the Nasdaq Small Cap Market or the
appropriate exchange, or (2) redeem all or a portion of the shares of
Series E-1 Preferred Stock to which such Holder Conversion Notice
applies as would cause the number of shares of Common Stock issuable
upon such conversion to exceed the Issuable Maximum, for an amount, paid
in cash, equal to the greater of (A) the Stated Value of such shares
multiplied by 120%, or (B) the applicable Conversion Ratio as of the
Conversion Date multiplied by the average Per Share Market Value for the
five Trading Days immediately preceding the Conversion Date or the date
of payment, whichever is greater. If the Company elects to seek
Shareholder Approval pursuant to clause (1) of the preceding sentence
and fails for any reason to obtain such Shareholder Approval within 75
days after the Conversion Date, then the Company shall be obligated to
either (x) redeem the Preferred Stock not converted as a result of the
provisions of this Section in accordance with the provisions of clause
(2) of the preceding sentence as promptly as possible but in any event
within seven days after such failure or (y) convert the shares of Series
E-1 Preferred Stock into Common Stock as requested in such Holder
Conversion Notice. "SHAREHOLDER APPROVAL" means the approval by a
majority of the total votes cast on the proposal, in person or by proxy,
at a meeting of the shareholders of the Company held in accordance with
the Company's Certificate of Incorporation and bylaws, of the issuance
by the Company of shares of Common Stock exceeding the Issuable Maximum
as a consequence of the conversion of Series E-1 Preferred Stock into
Common Stock at a
4
<PAGE>
price less than the greater of the book or market value on the Original
Issue Date as and to the extent required pursuant to Rule 4460(i) of the
Nasdaq National Market (or any successor or replacement provision
thereof).
(iv) In no event shall a Holder be permitted to convert any
shares of Series E-1 Preferred Stock in excess of the number of such
shares upon the conversion of which, (x) the number of shares of Common
Stock beneficially owned by such Holder (other than shares of Common
Stock issuable upon conversion of shares of Series E-1 Preferred Stock)
plus (y) the number of shares of Common Stock issuable upon the
conversion of such shares of Series E-1 Preferred Stock, would be equal
to or exceed (z) 4.999% of the number of shares of Common Stock then
issued and outstanding, including shares issuable on conversion of the
Series E-1 Preferred Stock held by such Holder after application of this
Section 5(a)(iv). As used herein, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder. To the extent that the limitation contained in this
paragraph 5(a)(iv) applies, the determination of whether shares of
Series E-1 Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Series E-1
Preferred Stock are convertible shall be in the sole discretion of such
Holder, and the submission of shares of Series E-1 Preferred Stock for
conversion shall be deemed to be such Holder's determination of whether
such shares of Series E-1 Preferred Stock are convertible (in relation
to other securities owned by a Holder) and of which shares of Series E-1
Preferred Stock are convertible, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained
herein shall be deemed to restrict the right of a Holder to convert such
shares of Series E-1 Preferred Stock at such time as such conversion
will not violate the provisions of this paragraph. The provisions of
this Section 5(a)(iv) may be waived by a Holder of Series E-1 Preferred
Stock as to itself (and solely as to itself) upon not less than 75 days
prior notice to the Company, and the provisions of this Section 5(a)(iv)
shall continue to apply until such 75th day (or later, if stated in the
notice of waiver). The limitations of this Section 5(a)(iv) shall not
apply to any conversion pursuant to Section 5(a)(ii). Each conversion
by a Holder shall be deemed to be accompanied by the representation that
such conversion is in accordance with the provisions of this paragraph.
No conversion in violation of this paragraph but otherwise in accordance
with this Article 4(f) shall affect the status of the securities issued
upon such conversion as validly issued, fully-paid and nonassessable.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the holder (A) a
certificate or certificates which shall be free of restrictive legends
and trading restrictions (other than those required by SECTION 3. l(b)
of the Purchase Agreement) representing the number of shares of Common
Stock being acquired upon the conversion of shares of Series E-1
Preferred Stock (subject to reduction pursuant to Section 5(a)(iii) and
Section 5(a)(iv)), and (B) one or more certificates representing the
number of shares of Series E-1 Preferred Stock not converted; PROVIDED,
HOWEVER, that the Company shall not be obligated to issue the
certificates set forth in (A) and (B) above until two Trading Days after
certificates evidencing such shares of Series E-1 Preferred Stock are
either delivered for conversion to the Company or the holder of such
Series E-1 Preferred Stock notifies the Company that such certificates
have been lost, stolen or destroyed and provides a bond (or other
adequate security) reasonably satisfactory to the Company to indemnify
the Company from any loss incurred by it in
5
<PAGE>
connection therewith. Failure of a Holder to deliver such Series E-1
Preferred Stock certificate or affidavit of loss and indemnity to the
Company within ten (10) Trading Days of the Conversion Date shall enable
the Company, upon written notice to the Holder, to rescind the
conversion. Upon request of the holder, any certificate or certificates
required to be delivered under this Section shall be electronically
delivered through a direct or indirect participant of the Depository
Trust Company or another established clearing corporation performing
similar functions. If in the case of any Conversion Notice such
certificate or certificates are not delivered to or as directed by the
applicable holder by the third Trading Day after the Conversion Date,
the holder shall be entitled by written notice to the Company at any
time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Series
E-1 Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section hereunder by the
later of the third Trading Day after the Conversion Date or the second
Trading Day after the Company receives the certificate representing the
shares of Series E-1 Preferred Stock to be converted or an affidavit of
loss and indemnity, the Company shall pay to such Holder, in cash,
$5,000 per Trading Day for each Trading Day until such certificates are
delivered. If the Company fails to deliver to the Holder such
certificate or certificates pursuant to this Section prior to the 15th
Trading Day after the Conversion Date, the Company shall, at the
Holder's option redeem, from funds legally available therefor at the
time of such redemption, such number of shares of Series E-1 Preferred
Stock then held by such Holder, as requested by such Holder, in cash.
The redemption price shall be equal to the number of shares of Series
E-1 Preferred Stock then held by such Holder multiplied by the average
Per Share Market Value for the five Trading Days immediately preceding
(A) the Conversion Date or (B) the date of payment in full by the
Company of such prepayment price, whichever is greater, multiplied by
the Conversion Ratio calculated on the Conversion Date. If the Holder
has requested that the Company redeem shares of Series E-1 Preferred
Stock pursuant to this Section and the Company fails for any reason to
pay the redemption price, as calculated pursuant to the immediately
preceding sentence, within seven days after such notice is deemed
delivered pursuant to Section 5(i), the Company will pay interest on the
redemption price at a rate of 15% per annum, in cash to such Holder,
accruing from such seventh day until the redemption price and any
accrued interest thereon is paid in full. Nothing herein shall limit a
Holder's right to pursue actual damages for the Company's failure to
deliver certificates representing shares of Common Stock upon conversion
within the period specified herein (including, without limitation,
damages relating to any purchase of shares of Common Stock by such
Holder to make delivery on a sale effected in anticipation of receiving
certificates representing shares of Common Stock upon conversion, such
damages to be in an amount equal to (A) the aggregate amount paid by
such holder for the shares of Common Stock so purchased minus (B) the
aggregate amount of net proceeds, if any, received by such Holder from
the sale of the shares of Common Stock issued by the Company pursuant to
such conversion), and such Holder shall have the right to pursue all
remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).
6
<PAGE>
(iii) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), by the later of the third
Trading Day after the Conversion Date or the second Trading Day after
the Company receives the certificate or certificates representing the
shares of Series E-1 Preferred Stock to be converted or an affidavit of
loss and indemnity, and if after such third Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such
conversion (a "BUY-IN"), then the Company shall pay in cash to the
Holder (in addition to any remedies available to or elected by the
Holder) the amount by which (A) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (B) the aggregate Stated Value of the shares of
Preferred Stock for which such conversion was not timely honored. For
example, if the Holder purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 aggregate stated value of the shares of Preferred
Stock, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In.
(c) (i) The conversion price for each share of Series E-1
Preferred Stock (the "CONVERSION PRICE") in effect on any Conversion
Date shall be (A) at all times prior to January 4, 1999, a fixed amount
(the "INITIAL CONVERSION PRICE") equal to 120% of the Per Share Market
Value on the Trading Day immediately prior to the Series E-1 Closing
Date (as defined in the Purchase Agreement), PROVIDED, that if the Per
Share Market Value on such date is at least $4.50 and no more than $5.50
on such date, then the Initial Conversion Price shall be $6.00, and (B)
on or after January 4, 1999, the lesser of (1) the Initial Conversion
Price or (2) 100% of the lowest average Per Share Market Value for
fifteen (15) consecutive Trading Days during the sixty-four (64) Trading
Days (the "LOOK-BACK PERIOD") prior to the Conversion Date (the
"VARIABLE CONVERSION PRICE"), except that any Trading Day on which a
Holder shall have consummated a short sale or sales of the Common Stock
in an amount equal to at least 5% of the aggregate pro rata amount of
the Series E-1 Purchase Price, Series E-2 Purchase Price and Series E-3
Purchase Price (as such terms are defined in the Purchase Agreement)
paid by such Holder shall not be included in such fifteen-day or
sixty-four day period with respect to such Holder, and such fifteen-day
period shall be extended by adding a number of days immediately prior
thereto or thereafter, as appropriate, and the sixty-four day period
shall be extended by adding a number of days immediately prior thereto,
equal to the total number of days excluded for short sales in order to
achieve a full fifteen-day period average at the lowest price average,
and similarly, if during any period (a "BLACK-OUT PERIOD"), a Holder is
unable to trade any Common Stock issued or issuable upon conversion of
Preferred Stock immediately due to the postponement of filing or delay
or suspension of effectiveness of a registration statement or because
the Company has otherwise informed such Holder that an existing
prospectus cannot be used at that time in the sale or transfer of such
Common Stock, such Holder shall have the option but not the
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obligation on any Conversion Date within ten Trading Days following the
expiration of the Black-out Period of using the Conversion Price
applicable on such Conversion Date or any Conversion Price selected by
such Holder that would have been applicable had such Conversion Date
been at any earlier time during the Black-out Period or within the ten
Trading Days thereafter. If, during the period after the later of (i)
January 4, 1999, or (ii) January 4, 1999 plus the length of any
Black-out Period that occurred prior to such date, or (iii) if a
Black-out Period is still in effect on January 4, 1999, the expiration
of a ten day period following such Black-out Period plus the number of
days in any Black-out Period occurring before January 4, 1999, the Per
Share Market Value has exceeded 150% of the Initial Conversion Price for
at least twenty (20) of thirty (30) consecutive Trading Days, then
provided the Company has given notice to the Holders no later than ten
(10) Trading Days after such thirty (30) consecutive Trading Day period,
the Initial Conversion Price shall be applied to any remaining
conversion of the Series E-1 Preferred Stock. Notwithstanding the
foregoing, if (a) the Underlying Shares Registration Statement is not
filed on or prior to the 30th day after the Original Issue Date, or (b)
the Company fails to file with the Commission a request for acceleration
in accordance with Rule 12d1-2 promulgated under the Exchange Act within
five (5) Trading Days of the date that the Company is notified (orally
or in writing, whichever is earlier) by the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not
subject to further review, or (c) the Underlying Shares Registration
Statement is not declared effective by the Commission on or prior to the
90th day after the Original Issue Date, or (d) such Underlying Shares
Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "EFFECTIVENESS
PERIOD" (as such term as defined in the Registration Rights Agreement),
without being succeeded within fifteen Trading Days by a subsequent
Underlying Shares Registration Statement filed with and declared
effective by the Commission, or (e) trading in the Common Stock shall be
suspended or if the Common Stock is delisted for any reason for more
than three Trading Days in the aggregate, or (f) the conversion rights
of the Holders are suspended for any reason except as a result of
Section 5(a)(iv) hereof, or (g) the Company breaches in a material
respect any covenant or other material term or condition to this Article
4(f), the Purchase Agreement (other than a representation or warranty
contained therein), the Registration Rights Agreement or any other
agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby, and such breach
continues for a period of thirty days after written notice thereof to
the Company, or (h) the Company elects to convene a shareholders meeting
pursuant to Section 5(a)(iii) and fails to convene a meeting of
shareholders within the time periods specified in Section 5(a)(iii) or
does so convene a meeting of shareholders within such time period but
fails to obtain Shareholder Approval at such meeting, or (i) the Company
has breached Section 3(p) of the Registration Rights Agreement (any such
failure or breach being referred to as an "EVENT," and for purposes of
clauses (a), (c) and (f) the date on which such Event occurs, or for
purposes of clause (b) the date on which such five day period is
exceeded, or for purposes of clause (d) the date which such fifteen
Trading Day-period is exceeded, or for purposes of clause (e) the date
on which such three Trading Day period is
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exceeded, or for clause (g) the date on which such thirty day period is
exceeded, being referred to as "EVENT DATE"), then the Conversion Price
shall be decreased by 2% as of the Event Date and shall be decreased an
additional 2% as of each monthly anniversary of the Event Date until the
earlier to occur of the second month anniversary after the Event Date
and such time as the applicable Event is cured. Commencing the second
month anniversary after the Event Date, the Company shall pay to the
Holders $70,000 per month until the applicable Event is cured (each
holder being entitled to receive such portion of such amount as equals
its pro rata portion of the Series E-1 Preferred Stock). Any decrease in
the Conversion Price pursuant to this Section shall continue
notwithstanding the fact that the Event causing such decrease has been
subsequently cured. Additionally, if the Company has failed to file a
registration statement as required by the Registration Rights Agreement
within 30 days after the date (the "FILING DATE") it was required to
file such registration statement pursuant to the Registration Rights
Agreement or if any registration statement required to be filed by the
Company pursuant to the Registration Rights Agreement has not been
declared effective by the Commission within 120 days of the date it was
required to be filed pursuant to the Registration Rights Agreement, or
if the Company has allowed any registration statement required to be
filed pursuant to the Registration Rights Agreement to lapse for a
period of 60 consecutive days, then the Conversion Price shall,
immediately after such 30th, 120th or 60th day, as applicable, be
decreased by an additional 2% and shall be further decreased by an
additional .07% for each subsequent day thereafter until such time as
such registration statement is filed, declared effective or had its
effectiveness reinstated, as applicable; PROVIDED, that if any such
registration statement is not effective within 180 days after the Filing
Date, then the Conversion Price shall be decreased by an additional
1.25% for each seven calendar days following such 180th day and
continuing until any such registration statement is effective. The
Company shall have the option, exercisable at any time after the 30th
day but prior to the 60th day following such 30th, 120th or 60th day, as
applicable, upon notice to all Holders to redeem all outstanding Series
E-1 Preferred Stock, in cash, at a redemption price equal to the number
of shares of Series E-1 Preferred Stock then outstanding and held by
such holder multiplied by the average Per Share Market Value for the
five Trading Days immediately preceding (x) the date of the redemption
notice or (y) the date of payment in full by the Company of such
prepayment price, whichever is greater, multiplied by the Conversion
Ratio calculated on the date of the payment in full by the Company of
the redemption price. Any such redemption shall take place within
fifteen days after the giving of such notice of redemption by the
Company. For each day after the 90th day from the Filing Date that such
registration statement is not effective, a day will be added to the
Look-Back Period. If the Company elects to redeem shares of Series E-1
Preferred Stock pursuant to this Section and the Company fails for any
reason to pay the redemption price as calculated above within five days
after such notice is given, the Company will pay interest on the
redemption price at a rate of 15% per annum, in cash, accruing from such
fifth day until the redemption price and any accrued interest thereon is
paid in full. The provisions of this Section are not exclusive and shall
in no way limit the Company's obligations under the Registration Rights
Agreement.
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(ii) If the Company, at any time while any shares of Series
E-1 Preferred Stock are outstanding, (a) shall pay a stock dividend or
otherwise make a distribution or distributions on shares of its Junior
Securities (other than with respect to the Subsequent Preferred) payable
in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of
Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock
of the Company, the applicable Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(ii) shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
re-classification.
(iii) If the Company, at any time while any shares of Series
E-1 Preferred Stock are outstanding, shall sell or issue additional
shares of Common Stock or rights or warrants to acquire shares of Common
Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, excluding any rights of
the holder of the Series D Preferred Stock to acquire Common Stock, the
applicable Conversion Price shall be multiplied by a fraction, of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such
shares, rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such
shares, rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase
at such Per Share Market Value. Such adjustment shall be made whenever
such shares, rights or warrants are issued, and shall become effective
immediately after the issuance of such shares, rights or warrants or, if
such rights or warrants are issued to stockholders of the Company, the
record date for the determination of shareholders entitled to receive
such rights or warrants. However, upon the expiration of any right or
warrant to purchase Common Stock the issuance of which resulted in an
adjustment in the applicable Conversion Price pursuant to this Section
5(c)(iii), if any such right or warrant shall expire and shall not have
been exercised, the applicable Conversion Price shall immediately upon
such expiration be re-computed and effective immediately upon such
expiration be increased to the price which it would have been (but
reflecting any other adjustments in the applicable Conversion Price made
pursuant to the provisions of this Section 5 after the issuance of such
rights or warrants) had the adjustment of the applicable Conversion
Price made upon the issuance of such rights or warrants been made on the
basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such
rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Series E-1
Preferred Stock are outstanding, shall distribute to all holders of
Common Stock (and not to holders of Series E-1 Preferred Stock)
evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in
Sections 5(c)(ii) and (iii) above), then in each such case the
applicable Conversion Price at which each share of
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Series E-1 Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of shareholders
entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value determined as of the
record date mentioned above, and of which the numerator shall be such
Per Share Market Value on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by the Board of Directors in good faith;
PROVIDED, HOWEVER, that in the event of a distribution exceeding ten
percent of the net assets of the Company, such fair market value shall
be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "APPRAISER") selected in good
faith by the holders of a majority in interest of the shares of Series
E-1 Preferred Stock then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have
the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the
determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the holders of Series E-1
Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
(v) All calculations under this Section 5 shall be made to
the nearest cent or the nearest l/l00th of a share, as the case may be.
(vi) Whenever the applicable Conversion Price is adjusted
pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly
mail to each holder of Series E-1 Preferred Stock, a notice setting
forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person,
which reclassification, consolidation or merger has been properly
approved by the Board of Directors of the Company and pursuant to which
(i) a majority of the Board of Directors will not constitute a majority
of the board of directors of the surviving entity or (ii) less than 50%
of the outstanding shares of the capital stock of the surviving entity
will be held by the same shareholders of the Company prior to such
reclassification, consolidation or merger, the sale or transfer of all
or substantially all of the assets of the Company or any compulsory
share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, the holders of the Series E-1
Preferred Stock then outstanding shall have the right thereafter to
convert such shares only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger,
sale, transfer or share exchange, and the holders of the Series E-1
Preferred Stock shall be entitled upon such event to receive such amount
of securities, cash or property as the shares of the Common Stock of the
Company into which such shares of Series E-1 Preferred Stock could have
been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled; provided, however, that each Holder shall
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<PAGE>
have the option to require the Company to redeem, from funds legally
available therefor at the time of such redemption, its shares of Series
E-1 Preferred Stock at a price per share equal to the product of (i) the
average Per Share Market Value for the five Trading Days immediately
preceding (1) the effective date, the date of the closing or the date of
the announcement, as the case may be, of the reclassification,
consolidation, merger, sale, transfer or share exchange the triggering
such redemption right or (2) the date of payment in full by the Company
of the redemption price hereunder, whichever is greater, and (ii) the
Conversion Ratio calculated on the date of the closing or the effective
date, as the case may be, of the reclassification, consolidation,
merger, sale, transfer or share exchange triggering such redemption
right, as the case may be. The entire redemption price shall be paid in
cash, and the terms of payment of such redemption price shall be subject
to the provisions set forth in Section 6(b). The terms of any such
consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the holder of Series E-1
Preferred Stock the right to receive the securities, cash or property
set forth in this Section 5(c)(vii) upon any conversion or redemption
following such consolidation, merger, sale, transfer or share exchange.
This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants
to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. the approval of any shareholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which
the Company is a party, any sale or transfer of
all or substantially all of the assets of the
Company, of any compulsory share of exchange
whereby the Common Stock is converted into other
securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding
up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Series E-1 Preferred Stock,
and shall cause to be mailed to the Holders of Series E-1 Preferred
Stock at their last addresses as they shall appear upon the stock books
of the Company, at least 30 calendar days prior to the applicable record
or effective date hereinafter specified, a notice stating (x) the date
on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a
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record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as
of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash
or other property deliverable upon such reclassification, consolidation,
merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the
failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required
to be specified in such notice. Holders are entitled to convert shares
of Series E-1 Preferred Stock during the 30-day period commencing the
date of such notice to the effective date of the event triggering such
notice.
(ix) If the Company (A) makes a public announcement that it
intends to enter into a Change of Control Transaction or (B) any person,
group or entity (including the Company, but excluding a Holder or any
affiliate of a Holder) publicly announces a bona fide tender offer,
exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "MAJOR
ANNOUNCEMENT" and the date on which a Major Announcement is made, the
"ANNOUNCEMENT DATE"), then, in the event that a Holder seeks to convert
shares of Series E-1 Preferred Stock on or following the Announcement
Date, the Conversion Price shall, effective upon the Announcement Date
and continuing through the earlier to occur of the consummation of the
proposed transaction or tender offer, exchange offer or other
transaction and the Abandonment Date (as defined below), be equal to the
lower of (1) the average Per Share Market Value on the five (5) Trading
Days immediately preceding (but not including) the Announcement Date and
(2) the Conversion Price in effect on the Conversion Date for such
Series E-1 Preferred Stock. "ABANDONMENT DATE" means with respect to any
proposed transaction or tender offer, exchange offer or other
transaction for which a public announcement as contemplated by this
paragraph has been made, the date upon which the Company (in the case of
clause (A) above) or the person, group or entity (in the case of clause
(B) above) publicly announces the termination or abandonment of the
proposed transaction or tender offer, exchange offer or another
transaction which caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Series E-1 Preferred Stock (different than
or distinguished from the effect generally on rights of holders of any class of
the Company's capital stock) or if at any time any such conditions are expected
to arise by reason of any action contemplated by the Company, the Company shall
mail a written notice briefly describing the action contemplated and the
material adverse effects of such action on the rights of the holders of Series
E-1 Preferred Stock at least 10 calendar days prior to the effective date of
such action, and an Appraiser selected by the holders of majority in interest of
the Series E-1 Preferred Stock shall give its opinion as to the adjustment, if
any (not inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Series E-1 Preferred Stock may thereafter be convertible)
and any distribution which is or would be required to preserve without diluting
the rights of the holders of shares of Series E-1 Preferred Stock; PROVIDED,
HOWEVER, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an
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additional Appraiser, in good faith, in which case the adjustment shall be equal
to the average of the adjustments recommended by each such Appraiser. The Board
of Directors shall make the adjustment recommended forthwith upon the receipt of
such opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Conversion Price to more
than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Series E-1 Preferred Stock free from preemptive
rights or any other actual contingent purchase rights of persons other than the
holders of Series E-1 Preferred Stock, not less than such number of shares of
Common Stock as shall (subject to any additional requirements of the Company as
to reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 5(c)) upon the
conversion of all outstanding shares of Series E-1 Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and
freely tradable.
(f) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the holder of a share of
Series E-1 Preferred Stock shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Series E-1 Preferred Stock shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate.
(h) Shares of Series E-1 Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued shares of
undesignated preferred stock.
(i) Any and all notices or other communications or deliveries to be
provided by the holders of the Series E-1 Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight courier
service, addressed to the attention of the President and to the Secretary of the
Company at the facsimile telephone number or address of the principal place of
business of the Company as set forth in the Purchase Agreement. Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile or sent by
a nationally recognized overnight courier service, addressed to each Holder of
Series E-1 Preferred Stock at the facsimile telephone number or address of such
holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earlier of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 7:00 p.m. (Eastern Time), (ii) the date after
the date of transmission, if such notice or communication is delivered via
facsimile at
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the facsimile telephone number specified in this Section later than 7:00 p.m.
(New York Time) on any date and earlier than 11:59 p.m. (Eastern Time) on such
date, (iii) receipt, if sent by a nationally recognized overnight courier
service, or (iv) actual receipt by the party to whom such notice is required to
be given.
Section 6. REDEMPTIONS.
(a) At the Company's option, all outstanding and unconverted shares
of Series E-1 Preferred Stock on the fifth anniversary of the Original Issue
Date not converted pursuant to Section 5(a)(ii) shall be redeemed by the Company
pursuant to this Section 6(a), from funds legally available therefor at a price
per share equal to the product of (i) the average Per Share Market Value for the
five Trading Days immediately preceding (1) the fifth anniversary of the
Original Issue Date or (2) the date of payment in full by the Company of the
redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio
calculated on the fifth anniversary of the Original Issue Date. Thereafter, all
shares of Series E-1 Preferred Stock shall cease to be outstanding and shall
have the status of authorized but undesignated preferred stock. The entire
redemption price shall be paid in cash within five (5) business days after the
fifth anniversary of the Original Issue Date.
(b) If any portion of the applicable redemption price under Section
6(a) shall not be paid by the Company within five calendar days after the date
due, interest shall accrue thereon at the rate of 15% per annum until the
redemption price plus all such interest is paid in full (which amount shall be
paid as liquidated damages and not as a penalty). In addition, if any portion of
such redemption price remains unpaid for more than ten (10) calendar days after
the date due, the holder of the Series E-1 Preferred Stock subject to such
redemption may elect, by written notice to the Company given within 30 days
after the date due, to either (i) demand conversion in accordance with the
formula and the time frame therefor set forth in Section 5 of all of the shares
of Series E-1 Preferred Stock for which such redemption price, plus accrued
liquidated damages thereof, has not been paid in full (the "UNPAID REDEMPTION
SHARES"), in which event the Conversion Ratio for such shares shall be the
higher of the Conversion Ratio calculated on the date such redemption price was
originally due and the Conversion Ratio as of the holder's written demand for
conversion, or (ii) invalidate AB INITIO such redemption, notwithstanding
anything herein contained to the contrary. If the holder elects option (i)
above, the Company shall within five Trading Days of its receipt of such
election deliver to the holder the shares of Common Stock issuable upon
conversion of the Unpaid Redemption Shares subject to such holder conversion
demand and otherwise perform its obligations hereunder with respect thereto; or,
if the Holder elects option (ii) above, the Company shall promptly, and in any
event not later than five Trading Days from receipt of holder's notice of such
election, return to the holder all of the Unpaid Redemption Shares.
Section 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Section 13(d)(3) of the Exchange Act) of in excess of 50% of
the voting securities of the Company, (ii) a replacement of more than one-half
of the members of the Company's board of directors which is not approved by
those individuals who are members of the board of directors on the date hereof,
or their duly elected successors who are directors immediately prior to such
transaction, in one or a series of
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related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions, unless following such
transaction, the holders of the Company's securities continue to hold at least
50% of such securities following such transaction, or (iv) the execution by the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
"COMMON STOCK" means the common stock, $0.01 par value per share, of the
Company and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, of which the
numerator is Stated Value and of which the denominator is the Conversion Price
at such time.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Series E-1 Preferred Stock.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Series E-1 Preferred Stock regardless of the number of transfers
of any particular shares of Series E-1 Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Series E-1 Preferred
Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other registered national stock exchange on which the Common Stock is
then listed or if there is no such price on such date, then the closing bid
price on such exchange or quotation system on the date nearest preceding such
date, or (b) if the Common Stock is not listed then on the Nasdaq National
Market or any registered national stock exchange, the closing bid price for a
share of Common Stock in the over-the-counter market, as reported by the Nasdaq
National Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the holders of a majority in interest of the shares of the
Series E-1 Preferred Stock; PROVIDED, HOWEVER, that the Company, after receipt
of the determination by such Appraiser, shall have the right to select an
additional Appraiser, in which case, the fair market value shall be equal to the
average of the determinations by each such Appraiser; and PROVIDED, FURTHER that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
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"PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, among the Company and the
original holders of the Series E-1 Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the Original Issue Date, by and among the Company and the original
Holders.
"ROYALTY AGREEMENT" means the Royalty Rights Agreement dated as of the
Original Issue Date by and among the Company and the original Holders.
"TRADING DAY" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or other registered national stock exchange on which the
Common Stock has been listed, or (b) if the Common Stock is not listed on the
Nasdaq National Market or any registered national stock exchange, a day or which
the Common Stock is traded in the over-the-counter market, as reported by the
OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which
banking institutions in the State of New York are authorized or required by law
or other government action to close.
"UNDERLYING SHARES" means the number of shares of Common Stock into
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
17
<PAGE>
The manner in which the foregoing Amendment of the Certificate of
Incorporation was authorized is as follows: The Board of Directors of the
Corporation authorized the Amendment under the authority vested in said Board of
Directors under the provisions of the Certificate of Incorporation and of
Section 502 of the Business Corporation Law.
IN WITNESS WHEREOF, we have subscribed this document on the date set opposite
each of our names below and do hereby affirm, under the penalties of perjury,
that the statements contained therein have been examined by us and are true and
correct.
Date: , 1998
----------------
-----------------------------------------------
Name: Theodore D. Roth
Title: President and Chief Operating Officer
-----------------------------------------------
Name: Lloyd A. Rowland
Title: General Counsel and Secretary
18
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(TO BE EXECUTED BY THE REGISTERED HOLDER IN
ORDER TO CONVERT SHARES OF SERIES E-1 PREFERRED
STOCK)
The undersigned hereby elects to convert the number of shares of Series
E-1 Convertible Preferred Stock indicated below, into shares of common stock,
par value $0.01 per share, of Alliance Pharmaceutical Corp. (the "COMPANY")
according to the conditions hereof, as of the date written below. The
undersigned hereby represents and warrants that it has not consummated any short
sales of the Common Stock on any of the days used for calculation of the
Conversion Price. A calculation of the fifteen-day period used to determine the
Conversion Price is attached hereto as SCHEDULE I. If shares are to be issued
in the name of a person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.
Conversion calculations:
----------------------------------------
Date to Effect Conversion
----------------------------------------
Number of shares of Series E-1 Preferred
Stock to be Converted
----------------------------------------
Number of shares of Common Stock to be
Issued
----------------------------------------
Applicable Conversion Price
----------------------------------------
Signature
----------------------------------------
Name
----------------------------------------
Address
<PAGE>
EXHIBIT B
NOTICE OF CONVERSION AT
THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of Alliance Pharmaceutical
Corp. (the "COMPANY") hereby notifies the addressee hereof that the Company
hereby elects to exercise its right to convert ____ shares of its Series E-1
Convertible Preferred Stock held by the Holder into shares of the Company's
common stock, par value $0.01 per share, according to the terms hereof, as of
the date written below. No fee will be charged to the Holder for any conversion
hereunder, except for such transfer taxes, if any which may be incurred by the
Company if shares are to be issued in the name of a person other than the person
to whom this notice is addressed.
Conversion calculations:
----------------------------------------
Date to Effect Conversion
----------------------------------------
Number of shares of Series E-1 Preferred
Stock to be Converted
----------------------------------------
Number of shares of Common Stock to be
Issued
----------------------------------------
Applicable Conversion Price
----------------------------------------
Name of Holder
----------------------------------------
Address of Holder
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Between
ALLIANCE PHARMACEUTICAL CORP.,
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.,
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.,
WESTOVER INVESTMENTS L.P.,
MONTROSE INVESTMENTS LTD.
and
BAY HARBOR INVESTMENTS, INC.
Dated as of August 13, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I PURCHASE AND SALE OF PREFERRED SHARES . . . . . . . . . . . . . . . . . .1
1.1 Purchase and Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.3 The Closings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . .5
2.1 Representations, Warranties and Agreements of the Company. . . . . . . . . .5
2.2 Representations and Warranties of the Purchasers. . . . . . . . . . . . . 12
ARTICLE III OTHER AGREEMENTS OF THE PARTIES . . . . . . . . . . . . . . . . . . . 13
3.1 Transfer Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Stop Transfer Instruction. . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Furnishing of Information. . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Blue Sky Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.6 Certain Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 Listing and Reservation of Underlying Shares.. . . . . . . . . . . . . . . 15
3.8 No Violation of Applicable Law. . . . . . . . . . . . . . . . . . . . . . 15
3.9 Notice of Breaches.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.10 Conversion Obligations of the Company. . . . . . . . . . . . . . . . . . . 16
3.11 Subsequent Registrations. . . . . . . . . . . . . . . . . . . . . . . . . 16
3.12 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.13 Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.14 Right of First Refusal; Subsequent Registrations. . . . . . . . . . . . . 18
3.15 Short Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IV CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.1 Conditions Precedent to the Obligation of the Company to Sell the
Series E-1 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.2 Conditions Precedent to the Obligation of the Purchasers to Purchase
the Series E-2 Shares and the Series E-3 Shares. . . . . . . . . . . . . . 22
ARTICLE V MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.1 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.2 Entire Agreement; Amendments. . . . . . . . . . . . . . . . . . . . . . . 25
5.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.4 Amendments; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.5 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.7 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . 26
5.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.9 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.10 Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.11 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.13 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.14 Independent Nature of Purchasers' Obligations and Rights. . . . . . . . . 27
</TABLE>
<PAGE>
SCHEDULES AND EXHIBITS
Schedule 1 - Purchasers of Series E-1 Shares
Schedule 2.1(a) - Organization and Qualification; Subsidiaries
Schedule 2.1(c) - Capitalization; Rights to Acquire Capital Stock
Schedule 2.1(f) - Consents and Approvals
Schedule 2.1(g) - Litigation; Proceedings
Schedule 2.1(u) - Registration Rights, Rights of Participation
Schedule 2.1(v) - Title
Exhibit A - Certificate of Amendment
Exhibit B - Registration Rights Agreement
Exhibit C1 - Legal Opinion of Lloyd A. Rowland, General Counsel of the
Company
Exhibit C2 - Legal Opinion of Stroock & Stroock & Lavan LLP
Exhibit D - Transfer Agent Instructions
Exhibit E - Royalty Rights Agreement
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT"), dated as
of August 13, 1998, between Alliance Pharmaceutical Corp., a New York
corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund, Ltd., a Cayman
Islands exempt company ("BROWN SIMPSON LTD."), and Brown Simpson Strategic
Growth Fund, L.P., a New York limited partnership ("BROWN SIMPSON L.P."),
Westover Investments L.P., a Delaware limited partnership ("WESTOVER"), Montrose
Investments Ltd., a Cayman Islands exempt company ("MONTROSE") and Bay Harbor
Investments, Inc., a corporation organized and existing under the laws of the
British Virgin Islands ("BAY HARBOR"). Brown Simpson Ltd., Brown Simpson L.P.,
Westover, Montrose and Bay Harbor are each referred to herein as a "PURCHASER"
and are collectively referred to herein as the "PURCHASERS."
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers, and the Purchasers
desire to acquire from the Company, shares of the Company's Series E-1
Convertible Preferred Stock, par value $0.01 per share (the "SERIES E-1
PREFERRED"), the Company's Series E-2 Convertible Preferred Stock, par value
$0.01 per share (the "SERIES E-2 PREFERRED") and the Company's Series E-3
Convertible Preferred Stock, par value $0.01 per share (the "SERIES E-3
PREFERRED" and together with the Series E-1 Preferred and the Series E-2
Preferred, the "PREFERRED STOCK").
IN CONSIDERATION of the mutual covenants contained in this Agreement, the
Company and each Purchaser agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED SHARES
1.1 PURCHASE AND SALE.
(a) Subject to the terms and conditions set forth herein, the Company
shall issue and sell to the Purchasers, and the Purchasers, severally and
not jointly, shall purchase from the Company: (i) 100,000 shares of Series
E-1 Preferred (the "SERIES E-1 SHARES"); (ii) up to 100,000 shares of
Series E-2 Preferred (the "SERIES E-2 SHARES"); and (iii) up to 100,000
shares of Series E-3 Preferred (the "SERIES E-3 SHARES" and together with
the Series E-1 Shares and the Series E-2 Shares, the "SHARES").
Notwithstanding anything to the contrary set forth in this Agreement, the
aggregate number of Shares to be sold hereunder shall not exceed 300,000.
(b) The Series E-1 Preferred shall have the respective rights,
preferences and privileges (the "SERIES E-1 TERMS") set forth in the
Certificate of Amendment to the Certificate of Incorporation of the Company
(the "SERIES E-1 DESIGNATION") the form of which is attached hereto as
EXHIBIT A attached hereto, which shall be approved by the
<PAGE>
Purchasers and the Company's Board of Directors (the "BOARD OF DIRECTORS")
and filed on or prior to the Series E-1 Closing (as defined below) by the
Company with the Secretary of State of the State of New York. The Series
E-2 Preferred and Series E-3 Preferred shall have respective rights,
preferences and privileges identical to the Series E-1 Terms, mutatis
mutandis, and shall rank pari passu with the Series E-1 Preferred with
regard to dividends, liquidation, voting rights and any other preferential
rights designated therein, except that the Initial Conversion Price (as
defined in the Series E-1 Designation) for conversion of the Series E-2
Shares and Series E-3 Shares shall equal 120% of the Per Share Market Value
on the Trading Day immediately prior to the Series E-2 Closing Date (as
defined below) or the Series E-3 Closing Date (as defined below), as
applicable.
The Series E-2 Preferred and Series E-3 Preferred shall be authorized
pursuant to certificates of amendment identical, except with respect to the
calculation of the Initial Conversion Price, to the Series E-1 Designation,
MUTATIS MUTANDIS, prepared by the Company, subject to the approval of the
Purchasers, and filed at or prior to the Series E-2 Closing Date (as defined
below) and Series E-3 Closing Date (as defined below), as applicable, by the
Company with the Secretary of State of the State of New York (such certificates
of amendment, together with the Series E-1 Designation, are referred to as the
"CERTIFICATES OF DESIGNATION").
For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL ISSUE DATE,"
"CONVERSION DATE" "TRADING DAY" and "PER SHARE MARKET VALUE" shall have the
meanings set forth in the Certificates of Designation; and "MARKET PRICE" at any
date shall mean the average Per Share Market Value for the five (5) Trading Days
immediately preceding such date.
1.2 PURCHASE PRICE. The purchase price per Share shall be $60.00.
1.3 THE CLOSINGS.
(a) The Series E-1 Closing.
(i) The closing of the purchase and sale of the Series E-1
Shares (the "SERIES E-1 CLOSING") shall take place at the offices of
Akin, Gump, Strauss, Hauer & Feld, L.L.P. ("AKIN, GUMP"), 590 Madison
Avenue, New York, New York 10022, immediately following the execution
hereof or such later date or different location as the parties shall
agree, but not prior to the date that the conditions set forth in
Section 4.1 have been satisfied or waived by the appropriate party.
The date of the Series E-1 Closing is hereinafter referred to as the
"SERIES E-1 CLOSING DATE." At the Series E-1 Closing, the Company
shall sell and issue to the Purchasers, and the Purchasers shall,
severally and not jointly, purchase from the Company, 100,000 Series
E-1 Shares for an aggregate purchase price of $6 million (the "SERIES
E-1 PURCHASE PRICE").
(ii) At the Series E-1 Closing (a) the Company shall deliver to
each Purchaser stock certificates representing the Series E-1 Shares
purchased by such Purchaser as set forth next to such Purchaser's name
on SCHEDULE 1 attached
2
<PAGE>
hereto, each registered in the name of such Purchaser, and all other
documents, instruments and writings required to have been delivered at
or prior to the Series E-1 Closing by the Company pursuant to this
Agreement and the Registration Rights Agreement, dated the date
hereof, by and between the Company and the Purchasers, in the form of
EXHIBIT B hereto (the "REGISTRATION RIGHTS AGREEMENT"), and (b) each
Purchaser shall deliver to the Company the portion of the Series E-1
Purchase Price set forth next to its name on SCHEDULE 1, in United
States dollars in immediately available funds by wire transfer to an
account designated in writing by the Company for such purpose on or
prior to the Series E-1 Closing Date, and all documents, instruments
and writings required to have been delivered at or prior to the Series
E-1 Closing by such Purchaser pursuant to this Agreement and the
Registration Rights Agreement.
(b) THE SERIES E-2 CLOSING.
(i) Subject to the terms and conditions set forth in Section 4.2
and elsewhere in this Agreement, the Company shall, if the Per Share
Market Value has not been less than $3.00 for any ten consecutive
Trading Days since the Series E-1 Closing Date, have the right to
deliver a written notice to the Purchasers (a "SERIES E-2 SUBSEQUENT
FINANCING NOTICE") requiring the Purchasers to purchase Series E-2
Shares. The Company may deliver a Series E-2 Subsequent Financing
Notice no earlier than the date on which the Registration Statement on
Form S-3 filed with the Securities and Exchange Commission (the
"COMMISSION") with respect to the Series E-1 Shares has been declared
effective by the Commission and no later than 60 days after such
effective date. Such Series E-2 Subsequent Financing Notice shall set
forth the dollar amount of Series E-2 Shares that the Company intends
to sell to the Purchasers, PROVIDED, HOWEVER, that the minimum amount
of such sale and purchase shall be $5,000,000 and the maximum amount
of such sale and purchase shall be equal to $15,000,000 minus the
Series E-1 Purchase Price. At the Series E-2 Closing each Purchaser
shall be obligated (subject to the terms and conditions herein) to
purchase such portion of such Series E-2 Shares as equals such
Purchaser's pro rata portion of the purchase price for the Series E-1
Shares issued and sold at the Series E-1 Closing. The closing of the
purchase and sale of the Series E-2 Shares (the "SERIES E-2 CLOSING")
shall take place in the same manner as the Series E-1 Closing, on such
date indicated in the Series E-2 Subsequent Financing Notice (which
may not be prior to the 20th day after receipt by the Purchasers of
the Series E-2 Subsequent Financing Notice or as otherwise agreed to
by the parties); PROVIDED, HOWEVER, that in no case shall the Series
E-2 Closing take place unless and until the conditions listed in
Section 4.2 have been satisfied or waived by the appropriate party.
The date of the Series E-2 Closing is hereinafter referred to as the
"SERIES E-2 CLOSING DATE" and the purchase price paid for the Series
E-2 Shares is hereinafter referred to as the "SERIES E-2 PURCHASE
PRICE.")
3
<PAGE>
(ii) At the Series E-2 Closing, (a) the Company shall deliver (A)
to each Purchaser (1) a pro rata portion of the Series E-2 Shares
(determined by reference to the amount of Series E-1 Shares issued and
sold at the Series E-1 Closing) to be issued and sold thereat (or such
other amount upon which the parties may agree), registered in the name
of the appropriate Purchaser, (2) the legal opinions referenced in
Section 4.2(l), substantially in the forms attached hereto as EXHIBIT
C1 and EXHIBIT C2, and (3) all other documents, instruments and
writings required to have been delivered at or prior to the Series E-2
Closing by the Company to the Purchasers pursuant to this Agreement,
and (b) each Purchaser shall deliver to the Company (1) the purchase
price for the Series E-2 Shares being purchased by it at the Series
E-2 Closing in United States dollars in immediately available funds by
wire transfer to an account designated in writing by the Company for
such purpose on or prior to the Series E-2 Closing Date and (2) all
documents, instruments and writings required to have been delivered at
or prior to the Series E-2 Closing by such Purchaser pursuant to this
Agreement.
(c) THE SERIES E-3 CLOSING.
(i) Subject to the terms and conditions set forth in Section 4.2
and elsewhere in this Agreement, the Company shall, if the Per Share
Market Value has not been less than $3.00 for any ten consecutive
Trading Days since the Series E-1 Closing Date, have the right to
deliver a written notice to the Purchasers (a "SERIES E-3 SUBSEQUENT
FINANCING NOTICE") requiring the Purchasers to purchase Series E-3
Shares. The Company may deliver a Series E-3 Subsequent Financing
Notice no earlier than the date on which the Registration Statement on
Form S-3 filed with the Commission with respect to the Series E-2
Shares has been declared effective by the Commission and no later than
60 days after such effective date. Such Series E-3 Subsequent
Financing Notice shall set forth the dollar amount of Series E-3
Shares that the Company intends to sell to the Purchasers, PROVIDED,
HOWEVER, that the amount of such sale and purchase shall not exceed
$5,000,000. At the Series E-3 Closing each Purchaser shall be
obligated (subject to the terms and conditions herein) to purchase
such portion of such Series E-3 Shares as equals such Purchaser's pro
rata portion of the purchase price for the Series E-1 Shares issued
and sold at the Series E-1 Closing. The closing of the purchase and
sale of the Series E-3 Shares (the "SERIES E-3 CLOSING") shall take
place in the same manner as the Series E-1 Closing on such date
indicated in the Series E-3 Subsequent Financing Notice (which may not
be prior to the 20th day after receipt by the Purchasers of the Series
E-3 Subsequent Financing Notice or as otherwise agreed to by the
parties); PROVIDED that in no case shall the Series E-3 Closing take
place unless and until the conditions listed in Section 4.2 have been
satisfied or waived by the appropriate party. The date of the Series
E-3 Closing is hereinafter referred to as the "SERIES E-3 CLOSING
DATE."
(ii) At the Series E-3 Closing, (a) the Company shall deliver (A)
to each Purchaser (1) a pro rata portion of the Series E-3 Shares
(determined by
4
<PAGE>
reference to the amount of Series E-1 Shares issued and sold at the
Series E-1 Closing) to be issued and sold thereat (or such other
amount upon which the parties may agree), registered in the name of
the appropriate Purchaser, (2) the legal opinions referenced in
Section 4.2(l), substantially in the forms attached hereto as EXHIBIT
C1 and EXHIBIT C2, and (3) all other documents, instruments and
writings required to have been delivered at or prior to the Series E-3
Closing by the Company to the Purchasers pursuant to this Agreement,
and (b) each Purchaser shall deliver to the Company (1) the purchase
price for the Series E-3 Shares being purchased by it at the Series
E-3 Closing in United States dollars in immediately available funds by
wire transfer to an account designated in writing by the Company for
such purpose on or prior to the Series E-3 Closing Date and (2) all
documents, instruments and writings required to have been delivered at
or prior to the Series E-3 Closing by such Purchaser pursuant to this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company
hereby makes the following representations and warranties to the Purchasers:
(a) ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. The Company is a
corporation, duly incorporated, validly existing and in good standing under
the laws of the State of New York, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. The Company has no subsidiaries other than
as set forth in SCHEDULE 2.1(a) (collectively the "SUBSIDIARIES"). Each of
the Subsidiaries is a corporation, duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the full corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. Each of the Company and the Subsidiaries is duly
qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, would
not, individually or in the aggregate, (x) adversely affect the legality,
validity or enforceability of the Preferred Stock or any of the Transaction
Documents (as defined below), (y) have or result in a material adverse
effect on the results of operations, assets, prospects, or financial
condition of the Company and the Subsidiaries, taken as a whole or (z)
adversely impair the Company's ability to perform fully on a timely basis
its obligations under any Transaction Document (any of (x), (y) or (z),
being a "MATERIAL ADVERSE EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by this Agreement and the other Transaction
Documents, and otherwise to carry out its obligations hereunder and
thereunder. This Agreement, the Certificates of Designation
5
<PAGE>
the Royalty Rights Agreement between the Company and the Purchasers (the
"ROYALTY AGREEMENT") and the Registration Rights Agreement are collectively
referred to as the "TRANSACTION DOCUMENTS." The execution and delivery of
each of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated hereby and thereby have been duly
authorized by all necessary action on the part of the Company and no
further action is required by the Company. Each of the Transaction
Documents has been duly executed by the Company and when delivered in
accordance with the terms hereof will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general
application. Neither the Company nor any Subsidiary is in violation of any
of the provisions of its respective certificate of incorporation, bylaws or
other charter documents. Prior to each of the closing dates the respective
Certificate of Designation has been filed with the Secretary of State of
the State of New York and will be in full force and effect, enforceable
against the Company in accordance with the terms thereof.
(c) CAPITALIZATION; RIGHTS TO ACQUIRE CAPITAL STOCK. The authorized,
issued and outstanding capital stock of the Company as of August 12, 1998,
is set forth in SCHEDULE 2.1(c). Except as disclosed in SCHEDULE 2.1(c), no
shares of the capital stock of the Company are entitled to preemptive or
similar rights, nor is any holder of the capital stock of the Company
entitled to preemptive or similar rights arising out of any agreement or
understanding with the Company by virtue of any of the Transaction
Documents. Except as disclosed in SCHEDULE 2.1(c), as of August 12, 1998,
there are no outstanding options, warrants, script rights to subscribe to,
calls or commitments of any character whatsoever relating to, or, except as
a result of the purchase and sale of the Shares, securities, rights or
obligations convertible into or exchangeable for, or giving any person any
right to subscribe for or acquire any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. Except as specifically disclosed in the SEC Documents (as
defined below) or SCHEDULE 2.1(c), and, to the best knowledge of the
Company, no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT")) or has the right to acquire
by agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock. A "PERSON" means an
individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other
entity of any kind.
(d) ISSUANCE OF SHARES. The Shares are duly authorized, and when
issued and paid for in accordance with the terms hereof, shall be validly
issued, fully paid and nonassessable, free and clear of all liens,
encumbrances and rights of first refusal of any
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kind (collectively, "LIENS"). The Company has and, at the Series E-1
Closing Date, the Series E-2 Closing Date and the Series E-3 Closing Date
(each a "CLOSING DATE"), as the case may be, will have and at all times
while the Shares are outstanding will maintain an adequate reserve of duly
authorized shares of Common Stock to enable it to perform its obligations
under this Agreement and the Certificates of Designation with respect to
the number of Shares issued and outstanding at such Closing Date and in no
circumstances shall such reserved and available shares of Common Stock be
less than 175% of the maximum number of shares of Common Stock which would
be issuable upon conversion of the Shares issued pursuant to the terms
hereof with respect to the number of Shares issued and outstanding at such
Closing Date were such conversion effected on the Original Issue Date for
such Shares. The shares of Common Stock issuable upon conversion of the
Shares are referred to herein as the "UNDERLYING SHARES." When issued in
accordance with the Certificates of Designation, the Underlying Shares will
be duly authorized, validly issued, fully paid and nonassessable, free and
clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and
thereby do not and will not (i) conflict with or violate any provision of
its certificate of incorporation, bylaws or other charter documents (each
as amended through the date hereof) or (ii) subject to obtaining the
consents referred to in Section 2.1(f), conflict with, or constitute a
default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument (evidencing a Company debt or otherwise) to which the Company is
a party or by which any property or asset of the Company is bound or
affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company is subject (including Federal
and state securities laws and regulations), or by which any material
property or asset of the Company is bound or affected, except in the case
of each of clauses (ii) and (iii), such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have or result in a Material Adverse
Effect. The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental authority except for
any such violation as would not, individually or in the aggregate, have or
result in a Material Adverse Effect.
(f) CONSENTS AND APPROVALS. Except as specifically set forth in
SCHEDULE 2.1(f), neither the Company nor any Subsidiary is required to
obtain any consent, waiver, authorization or order of, give any notice to,
or make any filing or registration with, any court or other federal, state,
local or other governmental authority or other person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the approval of the Board of Directors and the
filings of the Certificates of Designation with respect to the Preferred
Stock with the Secretary of State of the State of New York, which filings
and approvals with respect to each of the Series E-1 Shares, the Series E-2
Shares and the Series E-3 Shares shall be
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effected prior to the Series E-1 Closing Date, the Series E-2 Closing Date
and the Series E-3 Closing Date, as appropriate, (ii) the filing of
Underlying Shares Registration Statements with the Commission, which shall
be filed in accordance with and in the time periods set forth in the
Registration Rights Agreement, (iii) the application(s) or any letter(s)
acceptable to the Nasdaq National Market for the listing of the Underlying
Shares with the Nasdaq National Market (and with any other national
securities exchange or market on which the Common Stock is then listed),
and (iv) any filings, notices or registrations under applicable federal and
state securities laws (together with the consents, waivers, authorizations,
orders, notices and filings referred to in SCHEDULE 2.1(f), the "REQUIRED
APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically set forth in
SCHEDULE 2.1(g) or as disclosed in the Disclosure Materials (as hereinafter
defined) there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries or any of their
respective properties before or by any court, governmental or
administrative agency or regulatory authority (federal, state, county,
local or foreign) which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Preferred Stock or (ii) could reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary
(i) is in default under or in violation of any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound which could reasonably be
expected to, individually or in the aggregate, have a Material Adverse
Effect, (ii) is in violation of any order of any court, arbitrator or
governmental body applicable to it, or (iii) is in violation of any
statute, rule or regulation of any governmental authority to which it is
subject, which violation could reasonably be expected to, individually or
in the aggregate, have a Material Adverse Effect.
(i) SCHEDULES. The Schedules to this Agreement furnished by or on
behalf of the Company do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading.
(j) PRIVATE OFFERING. The Company and all Persons acting on its
behalf have not made, and will not make, offers or sales of the Preferred
Stock, and any securities that might be integrated with offers and sales of
the Preferred Stock, except to Accredited Investors (as defined in
Regulation D ("REGULATION D") under the Securities Act of 1933, as amended
(the "SECURITIES ACT")) without any general solicitation or advertising and
otherwise in compliance with the conditions of Regulation D. The offer and
sale by the Company to the Purchasers of the Preferred Stock and the
Underlying Shares into which the Preferred Stock is convertible is exempt
from the registration requirements of the Securities Act.
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(k) SEC DOCUMENTS; FINANCIAL STATEMENTS; NO ADVERSE CHANGE. The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the three
years preceding the date hereof (the foregoing materials being collectively
referred to herein as the "SEC DOCUMENTS" and, together with the Schedules
to this Agreement and the Private Placement Memorandum dated August 6,
1998, the "DISCLOSURE MATERIALS") on a timely-basis or has received a valid
extension of such time of filing and has filed any such SEC Documents prior
to the expiration of any such extension. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission
promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. All material agreements to which the Company is a
party or to which the property or assets of the Company are subject have
been filed as exhibits to the SEC Documents as required; neither the
Company nor any of its subsidiaries is in breach of any agreement where
such breach could reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect. The financial statements of the
Company included in the SEC Documents comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved, except as may be otherwise specified in such financial
statements or the notes thereto, and fairly present in all material
respects the financial position of the Company as of and for the dates
thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end
audit adjustments. Since the date of the financial statements included in
the Company's last filed Quarterly Report on Form 10-Q for the period ended
March 31, 1998, there has been no event, occurrence or development that has
had a Material Adverse Effect which has not been specifically disclosed to
the Purchasers by the Company. The Company last filed audited financial
statements with the Commission on September 25, 1997, and has not received
any comments from the Commission in respect thereof.
(l) SENIORITY. No class of equity securities of the Company is senior
to the Preferred Stock in right of payment, whether upon liquidation,
dissolution or otherwise.
(m) INVESTMENT COMPANY. The Company is not, and is not controlled by
or under common control with an affiliate (an "AFFILIATE") of, an
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
(n) CERTAIN FEES. Except for fees payable to Brown Simpson Asset
Management, LLC ("BROWN SIMPSON") pursuant to the section entitled "Fees
and Expenses" of the letter agreement (the "TERM LETTER") dated July 16,
1998 between the Company and Brown Simpson, and fees payable to the
Company's placement agent, and
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such placement agent's co-advisor, in connection with this transaction, no
fees or commissions will be payable by the Company to any broker, financial
advisor, finder, investment banker, or bank with respect to the
transactions contemplated by this Agreement. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by
or on behalf of other Persons for fees of a type contemplated in this
Section 2.1(n) that may be due in connection with the transactions
contemplated by this Agreement. The Company shall indemnify and hold
harmless each of the Purchasers, its employees, officers, directors,
agents, and partners, and their respective Affiliates (as such term is
defined under Rule 405 promulgated under the Securities Act), from and
against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any
such claimed or existing fees.
(o) SOLICITATION MATERIALS. The Company has not distributed any
offering materials in connection with the offering and sale of the Shares
or the Underlying Shares other than the Disclosure Materials and any
amendments and supplements thereto. The Disclosure Materials do not
contain any untrue statement of material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. The Company confirms that it has not provided the
Purchasers or their agents or counsel with any information that constitutes
or might constitute material non-public information. The Company
understands and confirms that the Purchasers shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
(p) FORM S-3 ELIGIBILITY. The Company is, and at each Closing Date
will be, eligible to register securities (including the Underlying Shares)
for resale with the Commission under Form S-3 promulgated under the
Securities Act.
(q) EXCLUSIVITY. The Company shall not issue and sell the Preferred
Stock to any Person other than the Purchasers pursuant to this Agreement
other than with the specific prior written consent of each of the
Purchasers.
(r) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. The Company has
not in the three years preceding the date hereof received notice (written
or oral) from any stock exchange, market or trading facility on which the
Common Stock is or has been listed (or on which it has been quoted) to the
effect that the Company is not in compliance with the listing or
maintenance requirements of such exchange or market. After giving effect to
the transactions contemplated in this Agreement, the Company believes that
it is in compliance with all such maintenance requirements.
(s) PATENTS AND TRADEMARKS. To the best knowledge of the Company, the
Company has, or has rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and rights (collectively, the "INTELLECTUAL PROPERTY RIGHTS")
which are necessary for use in connection with its
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business, as currently conducted and as described in the SEC Documents, and
which the failure to so have would have a Material Adverse Effect.
(t) ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Underlying Shares upon conversion of the Shares in
accordance with the Certificates of Designation may result in dilution of
the outstanding shares of Common Stock, which dilution may be substantial
under certain market conditions. The Company further acknowledges that its
obligation to issue Underlying Shares upon conversion of the Shares in
accordance with the Certificates of Designation is unconditional and
absolute regardless of the effect of any such dilution.
(u) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as described
on SCHEDULE 2.1(u) hereto, (A) the Company has not granted or agreed to
grant to any Person any rights (including "piggy-back" registration rights)
to have any securities of the Company registered with the Commission or any
other governmental authority which has not been satisfied and (B) except as
set forth on SCHEDULE 2.1(c) hereto, no Person, including, but not limited
to, current or former shareholders of the Company, underwriters, brokers or
agents, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by this Agreement or any other Transaction Document.
(v) TITLE. Except as disclosed in SCHEDULE 2.1(v), the Company and
the Subsidiaries have good and marketable title in fee simple to all real
property and personal property owned by them which is material to the
business of the Company and its Subsidiaries, in each case free and clear
of all Liens, except for liens, claims or encumbrances as do not materially
affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company and its
Subsidiaries. Any real property and facilities held under lease by the
Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.
(w) REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Documents except where the
failure to possess such permits would not, individually or in the
aggregate, have a Material Adverse Effect ("MATERIAL PERMITS"), and neither
the Company nor any such Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(x) CLINICAL STATUS. The clinical status for the Company's products
that are the subject of the Royalty Agreement (as defined below) are as
follows: (i) Phase II studies for Oxygent have been completed and Phase
III clinical trials are scheduled to commence in the fourth quarter of 1998
and (ii) a Phase II/III study for LiquiVent is scheduled to commence in the
fourth quarter of 1998.
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2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the
Purchasers, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is a corporation duly
incorporated or a limited liability company or limited partnership duly
formed, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or formation with the requisite power and
authority, corporate or otherwise, to enter into and to consummate the
transactions contemplated hereby and by the Registration Rights Agreement
and otherwise to carry out its obligations hereunder and thereunder. The
purchase by such Purchaser of the Shares hereunder has been duly authorized
by all necessary action on the part of such Purchaser. Each of this
Agreement and the Registration Rights Agreement has been duly executed and
delivered by such Purchaser and constitutes the valid and legally binding
obligation of such Purchaser, enforceable against such Purchaser, in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights generally and to
general principles of equity.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the Shares and the
Underlying Shares for its own account for investment purposes only and not
with a view to or for distributing or reselling such Shares or Underlying
Shares or any part thereof or interest therein, without prejudice, however,
to such Purchaser's right, subject to the provisions of this Agreement and
the Registration Rights Agreement, at all times to sell or otherwise
dispose of all or any part of such Shares or Underlying Shares pursuant to
an effective registration statement under the Securities Act and in
compliance with applicable State securities laws or under an exemption from
such registration.
(c) PURCHASER STATUS. At the time such Purchaser was offered the
Shares, and at each Closing Date, (i) it was and will be, an "accredited
investor" as defined in Rule 501 under the Securities Act, or (ii) such
Purchaser either alone or together with its representatives, had and will
have such knowledge, sophistication and experience in business and
financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Shares and the Underlying Shares, and had
and will have so evaluated the merits and risks of such investment.
(d) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. Such Purchaser
is able to bear the economic risk of an investment in the Shares and the
Underlying Shares and, at the present time, is able to afford a complete
loss of such investment.
(e) RELIANCE. Each Purchaser understands and acknowledges that (I)
the Shares are being offered and sold to the Purchaser without registration
under the Securities Act in a private placement that is exempt from the
registration provisions of the Securities Act under Section 4(2) of the
Securities Act or Regulation D promulgated thereunder and (ii) the
availability of such exemption, depends in part on, and the
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Company will rely upon the accuracy and truthfulness of, the foregoing
representations and such Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS.
(a) If any Purchaser should decide to dispose of Shares (and upon
conversion thereof any of the Underlying Shares) held by it, each Purchaser
understands and agrees that it may do so only pursuant to an effective
registration statement under the Securities Act, to the Company or pursuant
to an available exemption from the registration requirements of the
Securities Act. In connection with any transfer of any Shares or any
Underlying Shares other than pursuant to an effective registration
statement or to the Company, the Company may require the transferor thereof
to provide to the Company a written opinion of counsel experienced in the
area of United States securities laws selected by the transferor, the form
and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration of
such transferred securities under the Securities Act. Notwithstanding the
foregoing, the Company hereby consents to and agrees to register (i) any
transfer of Shares by one Purchaser to another Purchaser, and agrees that
no documentation other than executed transfer documents shall be required
for any such transfer, and (ii) any transfer by any Purchaser to an
Affiliate of such Purchaser or to an Affiliate of another Purchaser, or any
transfer among any such Affiliates, provided that transferee certifies in
writing to the Company that it is an "accredited investor" as defined in
Rule 501(a) under the Securities Act. Any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the
rights of a Purchaser under this Agreement and the Registration Rights
Agreement.
(b) Each Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Shares:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
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NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
The Underlying Shares issuable upon conversion of Shares shall not contain
the legend set forth above if the conversion of such Shares occurs at any time
while the Underlying Shares Registration Statement is effective under the
Securities Act or in the event there is not an effective Underlying Shares
Registration Statement at such time, if in the written opinion of counsel
experienced in the area of United States securities laws such legend is not
required under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company agrees that it will provide each Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from such
legend at such time as such legend is no longer required hereunder.
3.2 STOP TRANSFER INSTRUCTION. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in Section 3.1.
3.3 FURNISHING OF INFORMATION. As long as any Purchaser owns Shares or
Underlying Shares, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act and to promptly furnish the Purchasers with
true and complete copies of all such filings. As long as any Purchaser owns
Shares or Underlying Shares, if the Company is not required to file reports
pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) promulgated under the Securities Act annual and quarterly financial
statements, together with a discussion and analysis of such financial statements
in form and substance substantially similar to those that would otherwise be
required to be included in reports required by Section 13(a) or 15(d) of the
Exchange Act, as well as any other information required thereby, in the time
period that such filings would have been required to have been made under the
Exchange Act. The Company further covenants that it will take such further
action as any holder of Shares may reasonably request, all to the extent
required from time to time to enable such Person to sell Underlying Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
the legal opinion referenced above in Section 3.1. Upon the request of any such
Person, the Company shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with such requirements.
3.4 BLUE SKY LAWS. In accordance with the Registration Rights Agreement,
the Company shall qualify the Underlying Shares under the securities or Blue Sky
laws of such jurisdictions as the Purchasers may request and shall continue such
qualification at all times through the third anniversary of the last Closing
Date.
3.5 INTEGRATION. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Shares or the Underlying Shares in a manner that
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would require the registration under the Securities Act of the sale of the
Shares or the Underlying Shares to any Purchaser.
3.6 CERTAIN AGREEMENTS. As long as any Purchaser owns Shares, the Company
shall not and shall cause the Subsidiaries not to, without the consent of the
holders of all of the Shares then outstanding, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of any Purchaser; (ii) declare, authorize, set aside or pay any dividend
or other distribution with respect to the Common Stock except as permitted under
the Certificates of Designation and as would not adversely affect the rights of
any Purchaser hereunder or under the Certificates of Designation; (iii) repay,
repurchase or offer to repay, repurchase or otherwise acquire shares of its
Common Stock in any manner; (iv) issue any series of preferred stock or other
securities with rights senior (in respect of liquidations, dividends,
preferences and similar rights) to those of the Shares, or (v) enter into any
agreement with respect to any of the foregoing.
3.7 LISTING AND RESERVATION OF UNDERLYING SHARES.
(a) The Company shall (i) not later than the fifth Business Day
following the applicable Closing Date prepare and file with the Nasdaq
National Market (as well as any other national securities exchange or
market on which the Common Stock is then listed) an additional shares
listing application or a letter acceptable to the Nasdaq National Market
covering and listing a number of shares of Common Stock which is at least
equal to 175% of the maximum number of Underlying Shares then issuable,
(ii) take all steps necessary to cause the Underlying Shares to be approved
for listing in the Nasdaq National Market (as well as on any other national
securities exchange or market on which the Common Stock is then listed) as
soon as possible thereafter, and (iii) provide to the Purchasers evidence
of such listing, and the Company shall maintain the listing of its Common
Stock on such exchange.
(b) The Company shall reserve for issuance upon conversion of the
Shares pursuant to the terms of the Certificates of Designation the number
of shares to be listed on the Nasdaq National Market (and such other
national securities exchange or market on which the Common Stock is then
listed or traded) as set forth in Section 3.7(a). Shares of Common Stock
reserved for issuance upon the conversion of the Shares as set forth in
Section 3.7(a) shall be allocated pro rata to each of the Purchasers in
accordance with the amount of Shares issued and delivered to such Purchaser
at each Closing, as applicable.
3.8 NO VIOLATION OF APPLICABLE LAW. Notwithstanding any provision of this
Agreement to the contrary, if the redemption of Shares under this Agreement, any
applicable Certificate of Designation or the Registration Rights Agreement would
be prohibited by the relevant provisions of the New York Business Corporation
Law, such redemption shall be effected as soon as it is permitted under such
law; provided, however, that from the 5th day after any redemption notice until
such redemption price is paid in full, interest on any such unpaid amount shall
accrue and be payable at the rate of 15% per annum in accordance with the
applicable Certificate of Designation.
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3.9 NOTICE OF BREACHES.
(a) Each of the Company and each Purchaser shall give prompt written
notice to the other of any breach of any representation, warranty or other
agreement contained in this Agreement or in the Registration Rights
Agreement, as well as any events or occurrences arising after the date
hereof and prior to, with respect to the Series E-2 Closing, the Series E-2
Closing Date and with respect to the Series E-3 Closing, the Series E-3
Closing Date, which would reasonably be likely to cause any representation
or warranty or other agreement of such party, as the case may be, contained
herein to be incorrect or breached as of such Closing Date. However, no
disclosure by either party pursuant to this Section 3.9 shall be deemed to
cure any breach of any representation, warranty or other agreement
contained herein or in the Registration Rights Agreement.
(b) Notwithstanding the generality of Section 3.9(a) the Company
shall promptly notify each Purchaser of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that
the consummation of the transactions contemplated hereby and by the
Registration Rights Agreement violates or would violate any written
agreement or understanding between such lender and the Company, and the
Company shall promptly furnish by facsimile to the holders of the Shares a
copy of any written statement in support of or relating to such claim or
notice.
(c) The default by any Purchaser of any of its obligations,
representations or warranties under any Transaction Document shall not be
imputed to, and shall have no effect upon, any other Purchaser or affect
the Company's obligations under the Transaction Documents to any
non-defaulting Purchaser.
3.10 CONVERSION OBLIGATIONS OF THE COMPANY. The Company covenants to
convert Shares and to deliver Underlying Shares in accordance with the terms and
conditions and time period set forth in the respective Certificates of
Designation.
3.11 SUBSEQUENT REGISTRATIONS. Other than Underlying Shares and other
"REGISTRABLE SECURITIES" (as defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement, the Company
shall not, for a period of not less than 90 Trading Days after the respective
dates that the Underlying Shares Registration Statements relating to the
securities issued on the Series E-1 Closing Date, the Series E-2 Closing Date
and the Series E-3 Closing Date are declared effective by the Commission,
without the prior written consent of the Purchasers, (i) register for resale any
securities of the Company, except for the securities set forth on SCHEDULE
2.1(u) under paragraphs (1), (2) and (3) thereof, and those held by any
Strategic Partner or (ii) issue or sell any of its or any of its Affiliates'
equity or equity-equivalent securities except for (A) securities sold to any
established biotechnology or pharmaceutical company with whom the Company
executes or has executed a written agreement providing that the Company and such
entity will be "partnered" in the development or distribution of one or more of
the Company's chemical compounds (a "STRATEGIC PARTNER"), (B) securities issued
upon the exercise or conversion of the securities set forth on SCHEDULE 2.1(c)
or
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(C) securities sold pursuant to the Company's employee benefit plans. Any days
that any Purchaser is unable to sell Underlying Shares under an Underlying
Shares Registration Statement shall be added to such 90 Trading Day period for
the purposes of (i) and (ii) above. Notwithstanding the foregoing, the Company
may, after a period of not less than 30 Trading Days after the respective dates
that the Underlying Shares Registration Statements relating to the securities
issued on the Series E-1 Closing Date, the Series E-2 Closing Date and the
Series E-3 Closing Date are declared effective, sell its or its Affiliates'
equity securities in an underwritten public offering, PROVIDED, that written
notice of such an offering be provided to the Purchasers ten (10) Trading Days
in advance of the commencement of such an offering.
3.12 USE OF PROCEEDS. The Company shall use all of the proceeds from the
sale of the Shares for working capital and general corporate purposes and not
for the satisfaction of any portion of Company borrowings outside the normal
course of business or to redeem Company equity or equity-equivalent securities.
Pending application of the proceeds of this placement in the manner permitted
hereby, the Company will invest such proceeds in interest bearing accounts
and/or short-term, investment grade interest bearing securities.
3.13 REIMBURSEMENT. In the event that any Purchaser or Brown Simpson
becomes involved in any capacity in any action, proceeding or investigation
brought by or against any person, including shareholders of the Company, in
connection with or as a result of either Brown Simpson's engagement or any
matter referred to in this Agreement, the Company will reimburse such Purchaser
or Brown Simpson for its legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith, except to the
extent that such action, proceeding, or investigation results from the gross
negligence or bad faith of, or knowing breach of this Agreement by, such
Purchaser or Brown Simpson. The Company also will indemnify and hold the
Purchasers and Brown Simpson harmless against any and all losses, claims,
damages or liabilities to any such person in connection with or as a result of
either Brown Simpson's engagement or any matter referred to in this Agreement,
except to the extent that any such loss, claim, damage or liability results from
the gross negligence or bad faith of, or knowing breach of this Agreement by,
such Purchaser or Brown Simpson. If for any reason the foregoing indemnification
is unavailable to such Purchaser or to Brown Simpson or is insufficient to hold
such person harmless, then the Company shall contribute to the amount paid or
payable by such Purchaser or Brown Simpson as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect the relative
economic interests of the Company and its shareholders on the one hand and the
Purchasers and Brown Simpson on the other hand in the matters contemplated by
this Agreement as well as the relative fault of the Company, the Purchasers and
Brown Simpson with respect to such loss, claim, damage or liability and any
other relevant equitable considerations. The reimbursement, indemnity and
contribution obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any affiliate of the Purchasers and Brown
Simpson and the partners, directors, agents, employees and controlling persons
(if any), as the case may be, of the Purchasers and Brown Simpson and any such
affiliate, and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, the Purchasers,
Brown Simpson, any such affiliate and any such person. The Company also agrees
that neither the Purchasers nor Brown Simpson
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nor any of such affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any person
asserting claims on behalf of or in right of the Company in connection with or
as a result of either Brown Simpson's engagement or any matter referred to in
this Agreement except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or bad faith of, or knowing breach of this Agreement by, the Purchasers or Brown
Simpson. Promptly after receipt by the Purchasers or Brown Simpson or any
affiliate, partners, directors, agents, employees and controlling persons, as
the case may be, of notice of any claim or other commencement of any action in
respect of which indemnity may be sought, such party will notify the Company in
writing of the receipt or commencement thereof and the Company shall have the
right to assume the defense of such claim or action (including the employment of
counsel reasonably satisfactory to the indemnified parties and the payment of
fees and expenses of such counsel). The indemnified party shall cooperate with
the Company and the Company's counsel in the defense of such claim or action.
The Purchasers and Brown Simpson understand that the Company shall not in
connection with any one such claim or action or separate but substantially
similar related claims or actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for all of the indemnified
parties unless the defense of one indemnified party is unique or separate from
that of another indemnified party or one or more legal defenses are available to
an indemnified party but not to other indemnified parties subject to the same
claim or action. In the event the Company does not promptly assume the defense
of a claim or action, the indemnified parties shall have the right to employ
counsel reasonably satisfactory to the Company, at the Company's expense, to
defend such claim or action. The indemnified party shall not admit any liability
with respect to the claim or action or settle, compromise, pay or discharge the
same without the prior written consent of the Company so long as the Company is
reasonably contesting or defending the same in good faith. The Company shall not
compromise, settle or discharge any claim or action without the Purchasers' or
Brown Simpson's consent, as applicable, which consent will not be unreasonably
withheld, unless there is no finding or admission of any violation of any law
against the indemnified party and the sole relief is monetary damages paid in
full by the Company. Any right to trial by jury with respect to any action or
proceeding arising in connection with or as a result of either our engagement or
any matter referred to in this Agreement is hereby waived by the parties hereto.
The provisions of this Section 3.13 shall survive any termination or completion
of this Agreement.
3.14 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. The Company shall
not, directly or indirectly, without the prior written consent of the
Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities or any instrument that permits the holder thereof to acquire Common
Stock at any time over the life of the security or investment at a price that is
less than the market price of the Common Stock at the time of issuance of such
security or investment (a "SUBSEQUENT PLACEMENT") for a period of 180 days after
any Closing Date, except (i) the granting of options or warrants to employees,
officers and directors, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereinafter duly adopted by
the Company, (ii) shares issued upon exercise of any currently outstanding
warrants and upon conversion of any currently outstanding
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convertible preferred stock in each case disclosed in SCHEDULE 2.1(c), and (iii)
shares of Common Stock issued upon conversion of Preferred Shares, unless (A)
the Company delivers to each Purchaser a written notice (the "SUBSEQUENT
PLACEMENT NOTICE") of its intention to effect such Subsequent Placement, which
Subsequent Placement Notice shall describe in reasonable detail the proposed
terms of such Subsequent Placement, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Placement shall be effected,
and attached to which shall be a term sheet or similar document relating thereto
and (B) no Purchaser shall have notified the Company by 5:00 p.m. (New York
time) on the fifth (5th) Trading Day after its receipt of the Subsequent
Placement Notice of its willingness to provide (or to cause its sole designee to
provide), subject to completion of mutually acceptable documentation, financing
to the Company on substantially the terms set forth in the Subsequent Placement
Notice. If no Purchaser shall notify the Company of its intention to provide
the financing as proposed in the Subsequent Placement Notice within such time
period, the Company may effect the Subsequent Placement substantially upon the
terms and to the Person (or Affiliates of such Persons) set forth in the
Subsequent Placement Notice; PROVIDED, that the Company shall provide each
Purchaser with a second Subsequent Placement Notice, and the Purchasers shall
again have the right of first refusal set forth above in this paragraph (a), if
the Subsequent Placement subject to the initial Subsequent Placement Notice
shall not have been consummated for any reason on the terms set forth in such
Subsequent Placement Notice within thirty (30) Trading Days after the date of
the initial Subsequent Placement Notice with the Person (or an Affiliate of such
Person) identified in the Subsequent Placement Notice. If the Purchasers shall
indicate a willingness to provide financing in excess of the amount set forth in
the Subsequent Placement Notice, then each Purchaser shall be entitled to
provide financing pursuant to such Subsequent Placement Notice up to an amount
equal to such Purchaser's pro rata portion of the Preferred Stock purchased by
the Purchasers under this Agreement at the Series E-1 Closing. Notwithstanding
the foregoing, the Company may, after a period of not less than 30 Trading Days
after the respective dates that the Underlying Shares Registration Statements
relating to the securities issued on the Series E-1 Closing Date, the Series E-2
Closing Date and the Series E-3 Closing Date are declared effective, sell its or
its Affiliates' equity securities in an underwritten public offering, PROVIDED,
that written notice of such an offering be provided to the Purchasers ten (10)
Trading Days in advance of the commencement of such an offering.
3.15 SHORT SALES. No Purchaser shall engage in a short selling
transaction in which the number of shares of Common Stock shorted exceeds the
number of shares of Common Stock held by such Purchaser plus the number of
shares of Common Stock into which the shares of Preferred Stock held by such
Purchaser are then convertible.
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ARTICLE IV
CONDITIONS
4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL THE
SERIES E-1 SHARES.
(a) The obligation of the Company to sell the Series E-1 Shares
hereunder is subject to the satisfaction or waiver by the Company, at or
before the Series E-1 Closing, of each of the following conditions:
(i) ACCURACY OF THE PURCHASERS' REPRESENTATIONS AND
WARRANTIES. The representations and warranties of each Purchaser shall
be true and correct in all material respects as of the date when made
and as of the Series E-1 Closing Date, as though made on and as of
such date;
(ii) PERFORMANCE BY THE PURCHASERS. Each Purchaser shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Purchaser at or prior to
the Series E-1 Closing; and
(iii) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights
Agreement.
(b) CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO
PURCHASE THE SERIES E-1 SHARES. The obligation of each Purchaser hereunder
to acquire and pay for the Series E-1 Shares is subject to the satisfaction
or waiver by such Purchaser, at or before the Series E-1 Closing, of each
of the following conditions:
(i) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Company set forth in this
Agreement and in the Registration Rights Agreement shall be true and
correct in all material respects as of the date when made and as of
the Series E-1 Closing Date as though made on and as of such date;
(ii) PERFORMANCE BY THE COMPANY. The Company shall have
performed, satisfied and complied with in all material respects all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to
the Series E-1 Closing;
(iii) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by
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any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by
this Agreement or the Registration Rights Agreement;
(iv) ADVERSE CHANGES. Since the date of the financial
statements included in the Company's Quarterly Report on Form 10-Q or
Annual Report on Form 10-K, whichever is more recent, last filed prior
to the date of this Agreement, no event which had a Material Adverse
Effect and no material adverse change in the financial condition of
the Company shall have occurred (for purposes hereof changes in the
market price of the Common Stock may be considered as a factor in
determining whether there has occurred an event which has had a
Material Adverse Effect or whether a material adverse change has
occurred);
(v) NO SUSPENSIONS OF TRADING IN COMMON STOCK. The trading in
the Common Stock shall not have been suspended by the Commission or on
the Nasdaq National Market which suspension shall remain in effect;
(vi) LISTING OF COMMON STOCK. The Company shall have filed a
listing application to list the Underlying Shares for trading on the
Nasdaq National Market;
(vii) LEGAL OPINIONS. The Company shall have delivered to the
Purchasers the opinions of Lloyd A. Rowland, the Company's general
counsel, and of Stroock & Stroock & Lavan LLP, outside counsel to the
Company, in substantially the forms attached hereto as EXHIBIT C1 and
EXHIBIT C2;
(viii) REQUIRED APPROVALS. All Required Approvals shall have been
obtained;
(ix) SHARES OF COMMON STOCK. On or prior to the Series E-1
Closing Date, the Company shall have duly reserved the number of
Underlying Shares required by the Transaction Documents to be reserved
for issuance upon conversion of Series E-1 Shares;
(x) DELIVERY OF STOCK CERTIFICATES. The Company shall have
delivered to each Purchaser or such Purchaser's designee, the stock
certificate(s) representing the Series E-1 Shares, registered in the
name of such Purchaser, each in form satisfactory to the Purchaser;
(xi) REGISTRATION RIGHTS AGREEMENT. The Company shall have
executed and delivered the Registration Rights Agreement;
(xii) CERTIFICATES OF DESIGNATION. The Series E-1 Designation
shall have been duly approved by the Board of Directors and filed with
the Secretary of State
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of the State of New York, and the Company shall have delivered a copy
thereof to the Purchaser certified as filed by the office of the
Secretary of State of the State of New York;
(xiii) CHANGE OF CONTROL. No Change of Control (as hereafter
defined) shall have occurred between the date hereof and the Series
E-1 Closing Date; and
(xiv) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer
Agent Instructions, in the form of EXHIBIT D attached hereto, shall
have been delivered to and acknowledged in writing by the Company's
transfer agent.
(xv) ROYALTY RIGHTS AGREEMENT. The Company and the Purchasers
shall have entered into the Royalty Agreement in the form attached
hereto as EXHIBIT E.
4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASERS TO PURCHASE
THE SERIES E-2 SHARES AND THE SERIES E-3 SHARES. The obligation of each
Purchaser hereunder to acquire and pay for the Series E-2 Shares and the Series
E-3 Shares is subject to the satisfaction or waiver by each Purchaser, at or
before the Series E-2 Closing or the Series E-3 Closing, as applicable, of each
of the following conditions:
(a) SERIES E-1 CLOSING. The Series E-1 Closing shall have occurred.
(b) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained herein and in the
Registration Rights Agreement shall be true and correct as of the date when
made and as of the Series E-2 Closing Date and the Series E-3 Closing Date,
as applicable, as though made on and as of such date, except where the
event causing such representation or warranty to be untrue or incorrect
would not result in a Material Adverse Effect.
(c) PERFORMANCE BY THE COMPANY. The Company shall have performed,
satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement, the Registration
Rights Agreement and the Royalty Agreement to be performed, satisfied or
complied with by the Company at or prior to the Series E-2 Closing Date and
the Series E-3 Closing Date, as applicable.
(d) UNDERLYING SHARES REGISTRATION STATEMENTS. With respect to the
Series E-2 Closing, the Underlying Shares Registration Statement with
respect to the Underlying Shares issuable on conversion of all outstanding
Series E-1 Shares shall have been declared effective under the Securities
Act by the Commission; and with respect to the Series E-3 Closing, the
Underlying Shares Registration Statement with respect to the Underlying
Shares issuable on conversion of all outstanding Series E-2 Shares shall
have been declared effective under the Securities Act by the Commission;
and on each such Closing Date such Underlying Shares Registration Statement
shall be effective, not subject to any stop order and not be subject to any
suspension pursuant to Section 3(p) of
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the Registration Rights Agreement, and shall have been effective and shall
not have been subject to any stop order for the 30 business days prior to
such Closing Date and no stop order shall be pending or threatened as of
such Closing Date.
(e) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court of governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement or the Registration Rights Agreement
relating to the issuance or conversion of any of the Shares.
(f) ADVERSE CHANGES. During the period which is ten Trading Days
prior to the date of the delivery of either a Series E-2 Subsequent
Financing Notice or a Series E-3 Subsequent Financing Notice and the date
of the Series E-2 Closing and the Series E-3 Closing, respectively, the Per
Share Market Value of the Common Stock shall not have decreased by more
than 50% from the highest Per Share Market Value during such period;
provided, however, that if the Per Share Market Value shall have so
decreased by more than 50%, but shall have subsequently increased so that
on the applicable Closing Date it has been, for the three consecutive
Trading Days immediately prior to such Closing Date, no more than 25% below
the highest Per Share Market Value during such period, then this condition
shall be satisfied.
(g) LITIGATION. No litigation shall have been instituted or
threatened against the Company which could reasonably be expected to,
individually or in the aggregate, have a Material Adverse Effect.
(h) MANAGEMENT. In the reasonable judgment of each Purchaser, there
have been no substantial changes in the senior management of the Company,
except for the acquisition of a Chief Scientific Officer, and for changes
which could not reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect.
(i) NO SUSPENSIONS OF TRADING IN COMMON STOCK. The trading in the
Common Stock shall not have been suspended by the Commission or on the
Nasdaq National Market (except for any suspension of trading of limited
duration solely to permit dissemination of material information regarding
the Company).
(j) LISTING OF COMMON STOCK. The Common Stock shall have been at all
times since the Series E-1 Closing Date, and on the Series E-2 Closing Date
and the Series E-3 Closing Date be listed for trading on the Nasdaq
National Market.
(k) CHANGE OF CONTROL. No Change of Control in the Company shall have
occurred. "CHANGE OF CONTROL" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d5(b)(1) promulgated under the Exchange
Act) of in excess of 50% of the voting securities of the Company, (ii) a
replacement of more than one-half of the members of the Board of Directors
which is not approved by those individuals who are members of the Board of
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Directors on the date hereof in one or a series of related transactions,
(iii) the merger of the Company with or into another entity, consolidation
or sale of all or substantially all of the assets of the Company in one or
a series of related transactions or (iv) the execution by the Company of an
agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or (iii).
(l) LEGAL OPINIONS. The Company shall have delivered to the
Purchasers the opinions of the Company's legal counsel, in substantially
the forms attached hereto as EXHIBIT C1 and EXHIBIT C2, dated the
applicable Closing Date.
(m) REQUIRED APPROVALS. All Required Approvals shall have been
obtained.
(n) SHARES OF COMMON STOCK. On each of the Series E-2 Closing Date
and the Series E-3 Closing Date the Company shall have duly reserved the
number of Underlying Shares required by this Agreement to be reserved for
issuance upon conversion of Series E-2 Shares and Series E-3 Shares,
respectively.
(o) DELIVERY OF STOCK CERTIFICATES. The Company shall have delivered
to each Purchaser or such Purchaser's designee the stock certificate(s)
representing the Shares being purchased at such Closing, registered in the
name of such Purchaser, each in form satisfactory to such Purchaser.
(p) PERFORMANCE OF CONVERSION/EXERCISE OBLIGATIONS. The Company shall
have delivered Underlying Shares upon conversion of Shares and otherwise
performed its obligations in accordance with the terms, conditions and
timing requirements of each Certificate of Designation.
(q) COMMON STOCK PRICE. The Per Share Market Value shall not have
been less than $3.00 per share for any ten consecutive Trading Days since
the Series E-1 Closing Date.
(r) TRANSFER AGENT INSTRUCTIONS. The Irrevocable Transfer Agent
Instructions, in the form of EXHIBIT D attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.
(s) OFFICER'S CERTIFICATE. On each Closing Date the Company shall
deliver to the Purchasers an Officer's Certificate dated the Closing Date
and signed by an executive officer of the Company confirming the accuracy
of the Company's representations, warranties and covenants as of such
Closing Date and confirming the compliance by the Company with the
conditions precedent set forth in this Section 4.2 as of such Closing Date.
(t) INTERIM FINANCINGS. The Purchasers shall have no obligation to
purchase the Series E-2 Preferred or the Series E-3 Preferred if, after the
Series E-1 Closing or after the Series E-2 Closing, respectively, the
Company has sold or issued, in a private
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placement transaction or series of such transactions to a single entity or
a group of entities under common control or which are related such that
they could be considered a single entity, equity or equity equivalent
securities in an amount exceeding $500,000, unless such entity is a
Strategic Partner.
ARTICLE V
MISCELLANEOUS
5.1 FEES AND EXPENSES. Except (i) as set forth in the Term Letter under
the caption "Fees and Expenses," (ii) as set forth in the Registration Rights
Agreement and (iii) as otherwise set forth in this Agreement, each party shall
pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of the Shares pursuant hereto.
5.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the
Exhibits and Schedules hereto, the Registration Rights Agreement and each
Certificate of Designation (each when filed) contain the entire understanding of
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters.
5.3 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed to have been received (a) upon hand delivery (receipt acknowledged) or
delivery by telex (with correct answer back received), telecopy or facsimile
(with transmission confirmation report) at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery (if
delivered on a business day after normal business hours where such notice is to
be received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be as set forth below each parties' name on SCHEDULE
1, and if to any Purchaser with copies to Akin, Gump, Strauss, Hauer & Feld,
L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201, Attn: Diane B.
Muse, Esq., fax: (214) 969-4343, or such other address as may be designated in
writing hereafter, in the same manner, by such person. Copies of notices to the
Company shall be sent to Stroock & Stroock & Lavan LLP, 1800 Maiden Lane, New
York, New York 10038, Attn: Mel Epstein, Esq., fax: (212) 806-6006, or such
other address as may be designated in writing hereafter, in the same manner, by
such person.
5.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the Company and the Purchasers; or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition
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or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of either party to exercise any right hereunder
in any manner impair the exercise of any such right accruing to it thereafter.
Notwithstanding the foregoing, no such amendment shall be effective to the
extent that it applies to less than all of the holders of the Shares
outstanding. The Company shall not offer or pay any consideration to a Purchaser
for consenting to such an amendment or waiver unless the same consideration is
offered to each Purchaser and the same consideration is paid to each Purchaser
which consents to such amendment or waiver.
5.5 HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each of the Purchasers. The Purchasers may
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Company, except that any assignee must make the
representations and warranties set forth in Section 2.2 and otherwise comply
with the terms of this Agreement otherwise applicable to its assignor. This
provision shall not limit a Purchaser's right to transfer securities or transfer
or assign rights under the Registration Rights Agreement.
5.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
5.8 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the nonexclusive jurisdiction of the state and federal
courts sitting in the City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper.
5.9 SURVIVAL. The agreements, covenants, representations, warranties and
provisions contained in this Agreement shall survive the delivery of the Shares
pursuant to this Agreement and each Closing hereunder and any conversion of
Shares.
5.10 EXECUTION. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
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obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
5.11 PUBLICITY. The Company and each Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other party with prior notice of such public statement. The Company
shall not publicly or otherwise disclose the names of any of the Purchasers
without each such Purchaser's prior written consent unless otherwise required by
law, in which case the Company shall inform such Purchaser of such disclosure in
writing prior to making such disclosure.
5.12 SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
5.13 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchasers (severally and
not jointly) agree that monetary damages would not be adequate compensation for
any loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
5.14 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of the other Purchasers hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any Closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Preferred Stock Purchase Agreement to be duly executed by their respective
authorized persons as of the date first indicated above.
ALLIANCE PHARMACEUTICAL CORP.
By:
--------------------------------------------
Name: Theodore D. Roth
Title: President and Chief Operating Officer
BROWN SIMPSON STRATEGIC
GROWTH FUND, LTD.
By:
--------------------------------------------
Name:
Title:
BROWN SIMPSON STRATEGIC
GROWTH FUND, L.P.
By:
--------------------------------------------
Name:
Title:
WESTOVER INVESTMENTS L.P.
By:
--------------------------------------------
Name:
Title:
MONTROSE INVESTMENTS LTD.
By:
--------------------------------------------
Name:
Title:
28
<PAGE>
BAY HARBOR INVESTMENTS, INC.
By:
--------------------------------------------
Name:
Title:
29
<PAGE>
EXHIBIT II
SCHEDULE I
COMPANY:
ALLIANCE PHARMACEUTICAL CORP.
3040 Science Park Road
San Diego, CA 92121
Attn: Theodore D. Roth
Fax: (619) 558-5306
PURCHASERS:
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Mitchell D. Kaye
Fax: (212) 247-1329
Portion of Series E-1 Purchase Price - $1,700,040
Series E-1 Shares - 28,334
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Mitchell D. Kaye
Fax: (212) 247-1329
Portion of Series E-1 Purchase Price - $799,980
Series E-1 Shares - 13,333
WESTOVER INVESTMENTS L.P.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn: Will Rose
Fax: (214) 758-1221
Portion of Series E-1 Purchase Price - $679,980
Series E-1 Shares - 11,333
MONTROSE INVESTMENTS LTD.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn: Will Rose
Fax: (214) 758-1221
Portion of Series E-1 Purchase Price - $1,320,000
Series E-1 Shares - 22,000
<PAGE>
EXHIBIT II
BAY HARBOR INVESTMENTS, INC.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Attn: Robert Miller
Fax: (212) 332-3256
With copies to:
Robinson Silverman Pearce Aronson & Berman, LLP
1290 Avenue of the Americas
New York, New York 10104
Attn: Kenneth L. Henderson
Fax: (212) 541-4630
Portion of Series E-1 Purchase Price - $1,500,000
Series E-1 Shares - 25,000
<PAGE>
SCHEDULE 2.1(a)
SUBSIDIARY LIST
ASTRAL, INC., A DELAWARE CORPORATION
MDV TECHNOLOGIES, INC., A DELAWARE CORPORATION
TALCO PHARMACEUTICAL, INC., A DELAWARE CORPORATION
<PAGE>
SCHEDULE 2.1(c)
CAPITAL STOCK, RIGHTS TO ACQUIRE CAPITAL STOCK & 5% SHAREHOLDERS
<TABLE>
<S> <C>
AUTHORIZED CAPITAL STOCK
Authorized Common Stock, $.01 par value 50,000,000
Authorized Preferred Stock, $.01 par value 5,000,000
1.5 million shares of Series A Preferred Stock
500,000 shares of Series D Preferred Stock
OUTSTANDING SECURITIES AS OF JULY 31, 1998
Common Stock 32,014,005
Series D Preferred Stock 500,000
Outstanding Options 4,881,221
Outstanding Warrants 565,523
</TABLE>
RIGHTS TO ACQUIRE CAPITAL STOCK
Pursuant to Section 7.1 of a preferred stock purchase agreement, the holder of
all 500,000 shares of Series D Preferred Stock, Schering Berlin Venture Corp.
("SBVC"), has the right to acquire additional shares of Common Stock if the
Company issues (an "Issuance") additional shares of Common Stock in a public or
private offering (including upon the conversion of warrants or other convertible
securities). The purchase price is to be equal to the price per share of Common
Stock paid in such Issuance. The number of shares SBVC may purchase is equal to
1.59% of the Common Stock issued in the Issuance.
In November 1996, the Company acquired MDV Technologies, Inc. ("MDV") by a
merger (the "MDV Merger") of a wholly owned subsidiary of the Company into MDV.
The Company may pay up to $20 million to former shareholders of MDV if advanced
clinical development or licensing milestones are achieved in connection with
MDV's technology. The Company will also make certain royalty payments on the
sales of products, if any, developed from such technology. The Company may buy
out its royalty obligation for $10 million at any time prior to the first
anniversary of the approval by U.S. regulatory authorities of any products based
upon the MDV technology (the amount increasing thereafter over time). All of
such payments to the former MDV shareholders may be made in cash or, at the
Company's option, shares of the Company's common stock, except for the royalty
obligations which will be payable only in cash. The Company has not determined
whether subsequent payments (other than royalties) will be made in cash or in
common stock.
5% SHAREHOLDERS
Wellington Management Company, LLP
FMR Corp. and related entities and funds / Edward C. Johnson, III / Abigail P.
Johnson
<PAGE>
SCHEDULE 2.1(f)
NOTICES, CONSENTS AND WAIVERS
1. SBVC owns 500,000 shares of Series D Preferred Stock which must consent to
the issuance of additional preferred stock with rights that are senior to
or on a parity with the Series D Preferred Stock with respect to dividends,
redemptions or upon liquidation or dissolution of the Company.
2. The Company is required to give notice to the holders of outstanding
warrants listed on Schedule 2.1(u) of registration with the Securities and
Exchange Commission of the shares of common stock receivable on conversion
of Series E Preferred Stock (and to offer the opportunity to register
common stock upon exercise of the warrants with respect to warrants with
piggyback registration rights).
<PAGE>
SCHEDULE 2.1(g)
LITIGATION; PROCEEDINGS
None.
<PAGE>
SCHEDULE 2.1(u)
REGISTRATION RIGHTS
REGISTRATION RIGHTS
1) The holders of outstanding warrants for 465,523 shares of Common Stock
issuable at prices ranging from $6.67 to $20 per share have demand and/or
piggyback registration rights.
2) Hoechst Marion Roussel, Inc. ("HMRI") received 345,327 shares of common
stock upon conversion in June 1997 of preferred stock of Alliance. HMRI
has demand registration rights for such shares.
3) SBVC owns 500,000 shares of Series D Preferred Stock which converts into a
number of shares of Common Stock, such number to be determined by a
formula. The Company has an obligation to register the Common Stock to be
received upon conversion and other shares of Common Stock received by SBVC
pursuant to a right to participate in Issuances (see Schedule 2.1(c)) or
Common Stock issued pursuant to stock dividends, stock splits or similar
distributions.
4) In connection with the MDV Merger (see Schedule 2.1(c)), the Company
registered the estimated number of shares to potentially be received by the
former MDV shareholders. Under certain circumstances the Company could be
required to issue and register additional shares of Common Stock which
would be required to be registered.
<PAGE>
SCHEDULE 2.1(v)
TITLE AND LIENS
In connection with the purchase of the Otisville, New York facility in 1983, the
Company entered into a land use agreement with the New York City Development
Corporation, the provisions of which require the Company to care for retired
police horses. The provisions are "covenants running with the land" binding
upon the Company and subsequent owners.
The Company has a line of credit for up to $1.5 million with Wells Fargo Bank.
The loan is secured by certain cash and securities accounts.
In June 1998, Imperial Bank entered into a credit agreement providing for a loan
of up to $15 million to the Company. As security for the loan the Company
granted a security interest in all then existing or thereafter acquired personal
property of the Company, excluding certain specific equipment and all intangible
assets (including intellectual property, patents and patent applications).
<PAGE>
ROYALTY RIGHTS AGREEMENT
THIS ROYALTY RIGHTS AGREEMENT (this "AGREEMENT") is made and
entered into as of the August 13, 1998, among Alliance Pharmaceutical Corp.,
a New York corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund,
L.P., a New York limited partnership ("BROWN SIMPSON LP"), Brown Simpson
Strategic Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON
LTD."), Westover Investments L.P., a Delaware limited partnership
("WESTOVER"), Montrose Investments Ltd., a Cayman Islands exempt company
("MONTROSE"), and Bay Harbor Investments, Inc., a corporation organized and
existing under the laws of the British Virgin Islands ("BAY HARBOR"). Brown
Simpson LP, Brown Simpson Ltd., Westover, Montrose and Bay Harbor are each
referred to herein as a Purchaser and are collectively referred to herein as
the Purchasers.
RECITALS
WHEREAS, this Agreement is made pursuant to the Convertible
Preferred Stock Purchase Agreement, dated as of the date hereof among the
Company and the Purchasers (the "PURCHASE AGREEMENT");
WHEREAS, the Company has developed certain technology concerning
an intravascular oxygen carrier ("blood substitute") designed to temporarily
augment oxygen delivery in patients (the "OXYGENT TECHNOLOGY");
WHEREAS, the Company has developed certain technology concerning
an intrapulmonary agent to reduce a patient's exposure to the harmful effects of
conventional mechanical ventilation (the "LIQUIVENT TECHNOLOGY");
WHEREAS, the Company has developed certain technology concerning
pharmaceutically active suspension compositions used as a drug delivery platform
for the administration of drugs to the lungs (the "PULMOSPHERES TECHNOLOGY");
WHEREAS the Company owns or has licensed the entire right, title
and interest in, to and under United States Patents Nos. 5,628,930, 5,634,461,
5,344,393 and 5,451,205 and all associated foreign counter-parts (if any) which
relate to the Oxygent Technology;
WHEREAS the Company owns or has licensed the entire right, title
and interest in, to and under United States Patents Nos. 5,655,521, 5,590,651,
5,490,498 and 5,437,272 and all associated foreign counter-parts (if any) which
relate to the Liquivent Technology;
WHEREAS the Company owns or has licensed the entire right, title
and interest in, to and under United States Provisional Patent Application
Serial No. 60/060,337 and all associated nonprovisional and foreign
counter-parts (if any) which relate to the Pulmospheres Technology;
<PAGE>
WHEREAS, the Purchase Agreement provides, as a condition to the
Series E-1 Closing (as defined in the Purchase Agreement), that the Company
and the Purchasers shall enter into and execute this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises, covenants and agreements hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. OXYGENT TECHNOLOGY means that certain technology
developed by the Company concerning an intravascular oxygen carrier ("blood
substitute") designed to temporarily augment oxygen delivery in patients,
including, but not limited to, the subject matter disclosed and claimed in
United States Patents Nos. 5,628,930, 5,634,461, 5,344,393 and 5,451,205 and
all associated foreign counter-parts (if any) which relate thereto as well as
any later filed amendments, continuations, continuations-in-part, divisions,
reissues, reexaminations, extensions or improvements thereof.
Section 1.02. LIQUIVENT TECHNOLOGY means that certain
technology developed by the Company concerning an intrapulmonary agent to
reduce a patient's exposure to the harmful effects of conventional mechanical
ventilation, including but not limited to the subject matter disclosed and
claimed in United States Patents Nos. 5,655,521, 5,590,651, 5,490,498 and
5,437,272 and all associated foreign counter-parts (if any) which relate
thereto as well as any later filed amendments, continuations,
continuations-in-part, divisions, reissues, reexaminations, extensions or
improvements thereof.
Section 1.03. PULMOSPHERES TECHNOLOGY means that certain
technology developed by the Company concerning pharmaceutically active
suspension compositions used as a drug delivery platform for the
administration of drugs to the lungs, including but not limited to the
subject matter disclosed and claimed in United States Provisional Patent
Application No. 60/060,337 and all associated nonprovisional and foreign
counter-parts (if any) which relate thereto as well as any later filed
amendments, continuations, continuations-in-part, divisions, reissues,
reexaminations, extensions or improvements thereof.
Section 1.04. "ROYALTY-BEARING PRODUCT" means the first drug
compound arising out of (i) the OXYGENT TECHNOLOGY, (ii) the LIQUIVENT
TECHNOLOGY, or (iii) the PULMOSPHERES TECHNOLOGY to gain FDA approval for
sale in the United States for administration to humans.
Section 1.05. "FDA" means the U.S. Food and Drug Administration.
Section 1.06. "Net Sales" with respect to the Royalty Bearing
Product means the amount agreed upon by the Company and its licensee or
sublicensee of the Royalty Bearing Product for purposes of calculating the
royalties to be paid by the sublicensee to the Company or, if there is
2
<PAGE>
no licensee or sublicensee of the Royalty Bearing Product, the invoice price of
the Royalty Bearing Product in finished packaged form sold by the Company or,
where applicable, its sublicensees and distributors, to unaffiliated third
parties on a worldwide basis, less (i) all normal and customary trade and
quantity discounts, allowances and rebates, including government rebates such as
Medicaid, given to such third parties; (ii) product returns; (iii) any freight
charges paid by the Company for delivery; and (iv) excise, value added and other
taxes applicable to sales of products which the Company or its distributors have
to pay or absorb on such sales. In the event that a Royalty Bearing Product is
sold in combination with another product, Net Sales shall be calculated by
multiplying the invoice price of such combination product by the fraction
A/(A+B) where A is the invoice price of the Royalty Bearing Product and B is the
invoice price of the other product.
ARTICLE II
ROYALTIES
Section 2.01. ROYALTY. The Company shall pay to the Purchasers
a royalty on Net Sales. Each Purchaser shall receive its pro rata portion of
each royalty payment pursuant to Section 2.05 of this Agreement.
Section 2.02. RATE.
(a) Royalties shall be equal to a percentage of Net Sales
determined as follows:
(i) The royalty rate shall be .2% per $5,000,000 of Preferred Stock
collectively purchased by the Purchasers on the Series E-1 Closing Date,
Series E-2 Closing Date and Series E-3 Closing Date, pro rated for any
amounts purchased that are not in even $5 million increments. (For
example, if an aggregate of $7,500,000 of Preferred Stock is sold at all
closings, then the royalty rate computed pursuant to this clause (i) would
be .3% in the aggregate.) Notwithstanding the foregoing, if on the Royalty
Commencement Date (as defined below) the aggregate amount of Preferred
Stock issued and sold to all Purchasers is not more than $5 million, then
the royalty rate shall be .25% per $5 million of Preferred Stock purchased
at all closings, pro rated if the amount purchased is not in even $5
million increments. The Royalty Rate computed pursuant to this clause (i)
is referred to as the "BASE ROYALTY RATE."
(ii) For Purchasers who hold Preferred Stock (or to the extent their
transferees hold such Preferred Stock) on the first anniversary of the
Series E-1 Closing Date, the royalty rate shall be retroactively increased
by .2% per $5,000,000 of Preferred Stock that is outstanding on the first
anniversary of the Series E-1 Closing Date, pro rated if the amount
purchased and held is not in even $5 million increments. Notwithstanding
the foregoing, if on the Royalty Commencement Date the aggregate amount of
Preferred Stock issued and sold to all Purchasers is not more than $5
million, then for Purchasers who hold Preferred Stock (or to the extent
their transferees hold such Preferred Stock) on the first anniversary of
the Series E-1 Closing Date the Royalty Rate shall be retroactively
increased by .25% per $5,000,000 of Preferred Stock that is outstanding on
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<PAGE>
the first anniversary of the Series E-1 Closing Date, pro rated if the
amount outstanding on such first anniversary is not in even $5 million
increments. The increase in the Royalty Rate pursuant to this clause (ii)
is referred to as the "INCREMENTAL ROYALTY RATE."
(b) Royalties computed and payable based on the Base Royalty Rate shall be
payable to the Purchasers pro rata in accordance with their relative amounts of
Preferred Stock purchased at all closings. Royalties computed and payable based
on the Incremental Royalty Rate shall be payable to the Purchasers pro rata in
accordance with their relative amounts of Preferred Stock held on the first
anniversary of the Series E-1 Closing. For purposes of the foregoing, shares
originally purchased by a Purchaser that are held by the Purchaser or by any
other party on such first anniversary shall be deemed to be held by such
Purchaser.
Section 2.03. TERM. Royalties shall be payable for a period of three (3)
years from the date of first commercial sale of the ROYALTY-BEARING PRODUCT in
the United States following FDA approval of the ROYALTY-BEARING PRODUCT (the
"ROYALTY COMMENCEMENT DATE").
Section 2.04. REPURCHASE OF ROYALTY OBLIGATION. The Company shall have
the right, exercisable at any time after all funding permitted or required to be
provided under the Purchase Agreement has been provided, to purchase the
Purchasers' collective rights to receive the royalties specified in this Article
II for an amount computed as follows:
(a) The aggregate purchase price for all royalties computed at the Base
Royalty Rate shall be, for each $5 million of Preferred Stock purchased at all
closings (pro rated if the aggregate amount purchased at all closings is not in
even $5 million increments), (A) $1.5 million if the repurchase is on or prior
to the third anniversary of the Series E-1 Closing, (B) $2 million if the
repurchase is after the third anniversary and on or prior to the fourth
anniversary of the Series E-1 Closing, and (C) $2.5 million if the repurchase is
after the fourth anniversary of the Series E-1 Closing. The purchase price
computed and payable pursuant to this subsection (a) shall be payable to the
Purchasers pro rata based on the relative amounts of Preferred Stock purchased
at all closings.
(b) The aggregate purchase price for all royalties computed at the
Incremental Royalty Rate shall be, for each $5 million of Preferred Stock
outstanding on the first anniversary of the Series E-1 Closing (pro rated if the
aggregate amount so outstanding is not in even $5 million increments), (A) $1.5
million if the repurchase is on or prior to the third anniversary of the Series
E-1 Closing, (B) $2 million if the repurchase is after the third anniversary and
on or prior to the fourth anniversary of the Series E-1 Closing, and (C) $2.5
million if the repurchase is after the fourth anniversary of the Series E-1
Closing. The purchase price computed and payable pursuant to this subsection
(b) shall be payable to the Purchasers pro rata in accordance with their
relative amounts of Preferred Stock, held on the first anniversary of the Series
E-1 Closing. For purposes of the foregoing, shares originally purchased by a
Purchaser that are held by the Purchaser or by any other party on such first
anniversary shall be deemed to be held by such Purchaser.
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<PAGE>
(c) Payment of the repurchase price shall be made within thirty days of
notice by the Company to the Purchasers of its election to repurchase all
royalty rights. Any amounts not paid when due shall bear interest at the rate
of 12% per annum until paid in full.
Section 2.05. PAYMENTS. Payments shall be made to Purchasers within
ninety (90) days after the end of the applicable fiscal year of the Company,
beginning with the first fiscal year ending after the first commercial sale of a
Royalty Bearing Product. All dollar amounts referred to in this Agreement are
expressed in United States dollars. All payments to Purchasers under this
Agreement shall be made in United States dollars by check. If the Company
receives royalties based on Net Sales in currency other than United States
dollars, Net Sales shall be converted into United States dollars at the
conversion rate for the foreign currency which the Company's sublicensee or
distributor, if any, uses to pay royalties based on Net Sales to the Company, or
as published in the eastern edition of THE WALL STREET JOURNAL as of the last
business day of the applicable fiscal year.
Section 2.06. ROYALTY CALCULATION REPORTS; AUDITS. Royalty payments shall
be accompanied by a schedule detailing the calculation of the royalty including
the amount of Net Sales upon which the royalty was calculated and all expenses
deducted. The Purchasers shall have the right, within six months after a
royalty payment has been made, to have an audit of the books and records of the
Company conducted on their behalf by an independent accounting firm in order to
confirm the calculation of such royalty payment. The accounting firm shall hold
all information provided to it by the Company confidential and provide to the
Purchasers only the information necessary to confirm the calculation of the
royalty payment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants solely for the benefit of the Purchasers that as of the
effective date of this Agreement:
(a) The Company possesses full power and authority to enter into this
Agreement and to fulfill its obligations hereunder;
(b) This Agreement and each of its terms do not conflict with any other
agreement to which the Company is a party or by which it is bound;
(c) The Company owns or has licensed the entire right, title and interest
in and to the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES
TECHNOLOGY;
(d) To the best of the Company's knowledge, the practice of the OXYGENT
TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY does not
infringe upon or conflict with the rights of any third parties;
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<PAGE>
(e) To the best of the Company's knowledge, the Company owns or has the
right to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and rights
(collectively, the "INTELLECTUAL PROPERTY RIGHTS") which are necessary for use
in connection with its business, as currently conducted; and
(f) No litigation is pending or, to the best of the Company's knowledge
following diligent inquiry, threatened which contains allegations respecting the
validity, enforceability, infringement, misappropriation or ownership of any of
the Intellectual Property Rights, the OXYGENT TECHNOLOGY, the LIQUIVENT
TECHNOLOGY and the PULMOSPHERES TECHNOLOGY.
Section 3.02. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. The
Purchasers represent and warrant solely for the benefit of the Company that as
of the effective date of this Agreement:
(a) the Purchasers possess full power to enter into this Agreement and to
fulfill their obligations hereunder; and
(b) This Agreement and each of its terms do not conflict with any other
agreement to which the Purchasers or any of them are a party or by which they or
any of them are bound.
ARTICLE IV
INDEMNIFICATION
Section 4.01. THE COMPANY'S AGREEMENT TO INDEMNIFY. The Company agrees
that it is wholly responsible for all goods and services offered or sold by it
and that the Purchasers shall have no liability for or in connection with the
Company's exploitation of the OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and
the PULMOSPHERES TECHNOLOGY including, without limitation, any goods and/or
services offered, sold or otherwise provided by the Company. Subject to the
terms and conditions of this Agreement, the Company shall indemnify, defend and
hold harmless the Purchasers and each of them, their subsidiaries and their
officers, directors, shareholders, employees and agents (collectively, the
"INDEMNIFIED PARTIES" or individually an "INDEMNIFIED PARTY"), from and against
any and all claims, demands, losses, assessments, fines, penalties, liabilities,
damages, reasonable expenses of investigations, reasonable experts' fees,
reasonable disbursements and other reasonable costs (including reasonable
attorneys' fees) (all of the foregoing hereinafter referred to collectively as
"DAMAGES") asserted against, resulting to, imposed upon or incurred by the
Purchasers and each of them in connection with the Company's exploitation of the
OXYGENT TECHNOLOGY, the LIQUIVENT TECHNOLOGY and the PULMOSPHERES TECHNOLOGY.
The Indemnified Parties shall promptly notify the Company of any claim or action
giving rise to Damages. The Company shall have the right to defend any such
claim or action, at its cost and expense. If the Company fails or declines to
assume the defense of any such claim or action within thirty (30) days after
notice thereof, the Indemnified Parties may assume the defense of such claim or
action for the account and at the expense of the Company, and any Damages
related thereto shall be conclusively deemed a liability of the Company. The
Company shall pay promptly to the
6
<PAGE>
Indemnified Parties any Damages to which the foregoing indemnity relates, as
incurred. Notwithstanding anything to the contrary in this Agreement, the
Company may use one law firm to defend the interest of the Company and all
Indemnified Parties unless it is determined by the law firm defending the
Company, that a conflict of interest actually exists between the Company and any
one or all of the Indemnified Parties. In such event, the Company shall pay for
counsel to defend the Indemnified Parties as a group, or individually if a
conflict of interest actually exists between any one or more of the Indemnified
Parties. Any Indemnified Party may retain its own counsel at its own expense.
Section 4.02. LIMITATION ON DAMAGES. NEITHER PARTY SHALL BE LIABLE FOR
ANY CONTINGENT, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR SPECIAL, DAMAGE OR
EXPENSE ASSOCIATED WITH THE OXYGENT TECHNOLOGY, THE LIQUIVENT TECHNOLOGY AND THE
PULMOSPHERES TECHNOLOGY PURSUANT TO THIS AGREEMENT FOR ANY REASON WHATSOEVER.
ARTICLE V
PATENT PROSECUTION AND MAINTENANCE
Section 5.01. PATENT PROSECUTION. During the term of this Agreement, the
Company shall pay any and all fees and expenses associated with the filing and
prosecution of all United States and all corresponding foreign patent
applications (if any) it deems appropriate in the exercise of its business
judgment associated with or relating to the OXYGENT TECHNOLOGY, the LIQUIVENT
TECHNOLOGY and the PULMOSPHERES TECHNOLOGY.
Section 5.02. MAINTENANCE OF PATENTS. During the term of this Agreement,
the Company shall pay any and all maintenance fees it deems appropriate in the
exercise of its business judgment to maintain the enforceability of any and all
patents associated with or relating to the OXYGENT TECHNOLOGY, the LIQUIVENT
TECHNOLOGY and the PULMOSPHERES TECHNOLOGY.
ARTICLE VI
TERM
Section 6.01. This Agreement shall terminate on December 31, 2003 if there
is no Royalty Bearing Product in existence or upon the expiration of the
Company's obligation to pay any royalties to Purchasers hereunder.
ARTICLE VII
MISCELLANEOUS
Section 7.01. ASSIGNMENT. The Company may not assign, transfer, delegate
or divest itself of its rights and obligations hereunder, without prior written
approval by each of the Purchasers.
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<PAGE>
Section 7.02. BINDING AGREEMENT. This Agreement shall be binding upon all
parties hereto, their heirs, legal representatives, successors and permitted
assigns.
Section 7.03. ENTIRE AGREEMENT. This Agreement together with the Purchase
Agreement and the Registration Rights Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and may not be modified
or amended except by a writing duly executed by all parties hereto.
Section 7.04. SEVERABILITY. If any provision of this Agreement shall be
held invalid or unenforceable, such invalidity or unenforceability shall attach
only to such provision and shall not in any manner affect or render invalid or
unenforceable any other severable provision of this Agreement, and this
Agreement shall be carried out as if any such invalid or unenforceable provision
were not contained herein.
Section 7.05. HEADINGS. The paragraph headings contained herein are for
the purpose of convenience only and are not intended to define or limit the
contents of said paragraphs.
Section 7.06. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of law.
Section 7.07. NOTICES. All notices or demands of any kind which may be
required to be served under the terms of this Agreement shall be in writing and
shall be deemed served when personally delivered or when received by mail,
postage prepaid priority, registered, certified mail, or by recognized courier
service, addressed as follows:
TO THE COMPANY: Alliance Pharmaceutical Corp.
3040 Science Park Road
San Diego, CA 92121
Attn.: Theodore D. Roth
Fax.: (619) 558-5306
Alliance Pharmaceutical Corp.
3040 Science Park Road
San Diego, CA 92121
Attn.: Lloyd A. Rowland
Fax.: (619) 678-4133
TO PURCHASERS: Brown Simpson Strategic Growth Fund, L.P.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn.: Mitchell D. Kaye
Fax: (212) 247-1329
Brown Simpson Strategic Growth Fund, Ltd.
8
<PAGE>
152 West 57th Street, 40th Floor
New York, New York 10019
Attn.: Mitchell D. Kaye
Fax: (212) 247-1329
Westover Investments L.P.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn.: Will Rose
Fax: (214) 758-1221
Montrose Investments Ltd.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn.: Will Rose
Fax: (214) 758-1221
Bay Harbor Investments, Inc.
C/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Attn.: Robert Miller
Fax: (212) 332-3256
With copies to:
Robinson Silverman Pearce Aronson & Berman, LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Kenneth L. Henderson
Fax: (212) 541-4630
Any party may change the address set forth herein by giving written notice
of said change to all other parties.
Section 7.08. NO AGENCY. Nothing contained in this Agreement shall create
a joint venture, partnership or agency relationship between the parties hereto.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.
SIGNATURE PAGE FOLLOWS.]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
ALLIANCE PHARMACEUTICAL CORP.
By:
--------------------------------------------
Name: Theodore D. Roth
Title: President and Chief Operating Officer
BROWN SIMPSON STRATEGIC
GROWTH FUND, L.P.
By:
--------------------------------------------
Name:
Title:
BROWN SIMPSON STRATEGIC
GROWTH FUND, LTD.
By:
--------------------------------------------
Name:
Title:
WESTOVER INVESTMENTS L.P.
By:
--------------------------------------------
Name:
Title:
MONTROSE INVESTMENTS LTD.
By:
--------------------------------------------
Name:
Title:
BAY HARBOR INVESTMENTS, INC.
By:
--------------------------------------------
Name:
Title:
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of August 13, 1998, among Alliance Pharmaceutical Corp., a New
York corporation (the "COMPANY"), Brown Simpson Strategic Growth Fund, L.P., a
New York limited partnership ("BROWN SIMPSON LP"), Brown Simpson Strategic
Growth Fund, Ltd., a Cayman Islands exempt company ("BROWN SIMPSON LTD."),
Westover Investments L.P., a Delaware limited partnership ("WESTOVER"), Montrose
Investments Ltd., a Cayman Islands exempt company ("MONTROSE"), and Bay Harbor
Investments, Inc., a corporation organized and existing under the laws of the
British Virgin Islands ("BAY HARBOR"). Brown Simpson LP, Brown Simpson Ltd.,
Westover, Montrose and Bay Harbor are each referred to herein as a "PURCHASER"
and are collectively referred to herein as the "PURCHASERS."
This Agreement is made pursuant to the Convertible Preferred Stock
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used and not otherwise defined herein shall have the
meanings given such terms in the Purchase Agreement. As used in this Agreement,
the following terms shall have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(o).
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "CONTROL," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "AFFILIATED," CONTROLLING" and "CONTROLLED" have meanings
correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"CLOSING DATE" shall have the meaning set forth in the Purchase
Agreement.
"COMMISSION" means the Securities and Exchange Commission.
<PAGE>
"COMMON STOCK" means the Company's Common Stock, par value $0.01 per
share.
"EFFECTIVENESS DATE" means (i) with respect to the Registration
Statement to be filed with respect to the Series E-1 Shares, the 90th day
following the Series E-1 Closing Date, (ii) with respect to the Registration
Statement to be filed with respect to the Series E-2 Shares, the 90th day
following the Series E-2 Closing Date and (iii) with respect to the Registration
Statement to be filed with respect to the Series E-3 Shares, the 90th day
following the Series E-3 Closing Date; PROVIDED, HOWEVER, that, if the Company
is required by the SEC to file a new Registration Statement with respect to any
of such securities, then the time periods set forth above shall be increased by
30 days.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FILING DATE" means (i) with respect to the shares of Common Stock
issuable upon conversion of the Series E-1 Shares, the 30th day following the
Series E-1 Closing Date, (ii) with respect to the shares of Common Stock
issuable upon conversion of the Series E-2 Shares, the 30th day following the
Series E-2 Closing Date and (iii) with respect to the shares of Common Stock
issuable upon conversion of the Series E-3 Shares, the 30th day following the
Series E-3 Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"PREFERRED STOCK" means the shares of Series E-1, Series E-2 and
Series E-3 Preferred, par value $0.01 per share, of the Company issued to the
Purchasers pursuant to the Purchase Agreement.
"PROCEEDING" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
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<PAGE>
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"REGISTRABLE SECURITIES" means (a) with respect to the Registration
Statement to be filed within 30 days after the Series E-1 Closing, the shares of
Common Stock issuable upon conversion of the Series E-1 Shares, (b) with respect
to the Registration Statement to be filed within 30 days after the Series E-2
Closing, the shares of Common Stock issuable upon conversion of the Series E-2
Shares, and (c) with respect to the Registration Statement to be filed within 30
days after the Series E-3 Closing, the shares of Common Stock issuable upon
conversion of the Series E-3 Shares; PROVIDED, HOWEVER, that in order to account
for the fact that the number of shares of Common Stock that are issuable upon
conversion of shares of Preferred Stock is determined in part upon the market
price of the Common Stock at the time of conversion Registrable Securities shall
include (but not be limited to) a number of shares of Common Stock equal to no
less than 175% of the maximum number of shares of Common Stock into which the
applicable series of Preferred Stock are convertible, assuming such conversion
occurred on the particular Closing Date for such series of Preferred Stock.
Such registered shares of Common Stock shall be allocated among the Holders pro
rata based on the total number of Registrable Securities issued or issuable as
of each date that a Registration Statement, as amended, relating to the resale
of the Registrable Securities is declared effective by the Commission.
Notwithstanding anything herein contained to the contrary, if the actual number
of shares of Common Stock into which the shares of Preferred Stock are
convertible exceeds 175% of the number of shares of Common Stock into which the
particular series of Preferred Stock are convertible based upon a computation as
at a particular Closing Date, the term "Registrable Securities" shall be deemed
to include such additional shares of Common Stock.
"REGISTRATION STATEMENT" means the registration statements and any
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
"RULE 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
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<PAGE>
"RULE 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means any special counsel to the Holders, for which
the Holders will be reimbursed by the Company pursuant to Section 4.
"STRATEGIC PARTNER" means any established biotechnology or
pharmaceutical company with whom the Company executes a written agreement
providing that the Company and such entity will be "partnered" in the
development or distribution of one or more of the Company's chemical compounds.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. SHELF REGISTRATION.
(a) On or prior to each applicable Filing Date the Company shall
prepare and file with the Commission a "Shelf" Registration Statement covering
all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if
the Company is not then eligible to register for resale the Registrable
Securities on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith). The Company shall (i) not permit any
securities other than the Registrable Securities and those securities listed in
Schedule 2.1(u) of the Purchase Agreement to be included in the Registration
Statement and (ii) use its commercially reasonable efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Registration Statement continuously
effective under the Securities Act until the date which is five years after the
date that such Registration Statement is declared effective by the Commission or
such earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144 as determined by the counsel to the Company pursuant to a written
opinion letter, addressed to the Company's transfer agent to such effect (the
"EFFECTIVENESS PERIOD"). If an additional Registration Statement is required to
be filed because the actual number of shares of Common Stock into which the
Preferred Stock is convertible exceeds the number of shares of Common Stock
initially registered in respect of any particular series of Preferred Stock
based upon the computation on a particular Closing Date, the Company shall have
15 Business Days to file such additional Registration Statement, and the Company
shall use its commercially reasonable efforts to cause such additional
Registration Statement to be declared effective by the Commission as soon as
possible.
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<PAGE>
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated PRO RATA among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering provided that the Company shall consent to
the inclusion of such investment banker, which shall be a nationally recognized,
full service investment banking firm, which consent shall not be unreasonably
withheld. No Holder may participate in any Underwritten Offering hereunder
unless such Holder (i) agrees to sell its Registrable Securities on the basis
provided in any underwriting agreements approved by the Persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such arrangements.
3. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to each
applicable Filing Date, a Registration Statement on Form S-3 (or if the Company
is not then eligible to register for resale the Registrable Securities on Form
S-3 such registration shall be on another appropriate form in accordance
herewith, or, in connection with an Underwritten Offering hereunder, such other
form agreed to by the Company and by a majority-in-interest of Holders of
Registrable Securities) in accordance with the method or methods of distribution
thereof as specified by the Holders (except if otherwise directed by the
Holders), and cause the Registration Statement to become effective and remain
effective as provided herein; PROVIDED, HOWEVER, that not less than five (5)
Business Days prior to the filing of the Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated therein by reference), the Company shall, if reasonably
practicable (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated by reference) will be subject to the review of
such Holders, their Special Counsel and such managing underwriters, and (ii)
cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of respective counsel to such Holders and such underwriters,
to conduct a reasonable investigation within the meaning of the Securities Act.
The Company shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto to which the Holders of a majority of the
Registrable
5
<PAGE>
Securities, their Special Counsel, or any managing underwriters, shall
reasonably object in writing within three (3) Business Days of their receipt
thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as possible to any comments received
from the Commission with respect to the Registration Statement or any amendment
thereto and as promptly as possible provide the Holders true and complete copies
of all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as possible (and, in
the case of (i)(A) below, not less than five (5) days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later than
one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration Statement
is proposed to be filed; (B) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that makes any statement made
in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
6
<PAGE>
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all required
filings of such Prospectus supplement or such post-effective amendment as soon
as practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
provided, however, that the Company shall not be required to take any action
pursuant to this Section 3(e) that would, in the opinion of counsel for the
Company, violate applicable law or be materially detrimental to the business
prospects of the Company.
(f) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by a Registration
Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
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<PAGE>
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by applicable law, of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Holders may request at least two Business Days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the Nasdaq Stock Market and any
other securities exchange, quotation system, market or over-the-counter bulletin
board, if any, on which similar securities issued by the Company are then listed
as and when required pursuant to the Purchase Agreement.
(l) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings, and confirm the same if and when requested;
(ii) in the case of an Underwritten Offering obtain and deliver copies thereof
to the managing underwriters, if any, of opinions of counsel to the Company and
updates thereof addressed to each such underwriter, in form, scope and substance
reasonably satisfactory to any such managing underwriters and Special Counsel to
the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement, and, in the case of an
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to each selling Holder and each of the underwriters, if
any, in form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is
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<PAGE>
entered into, the same shall contain indemnification provisions and procedures
no less favorable to the selling Holders and the underwriters, if any, than
those set forth in Section 6 (or such other provisions and procedures acceptable
to the managing underwriters, if any, and holders of a majority of Registrable
Securities participating in such Underwritten Offering; and (v) deliver such
documents and certificates as may be reasonably requested by the Holders of a
majority of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the representations
and warranties made pursuant to clause 3(1)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(n) Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to underwriters in a firm commitment or best
efforts Underwritten Offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the Company
after the effective date of the Registration Statement, which statement shall
conform to the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to the
Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such information
within a reasonable time after receiving such request.
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<PAGE>
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(j), or until it is advised in writing (the "ADVICE")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
(p) If (a) there is material non-public information regarding the
Company which the Company's Board of Directors (the "BOARD") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (b) there is a significant
business opportunity (including but not limited to the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose, then the Company may postpone or suspend filing or
effectiveness of a registration statement for a period not to exceed 20
consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(p) for more than 45 days in the aggregate during
any 12 month period; provided, however, that no such postponement or suspension
shall be permitted for consecutive 20 day periods, arising out of the same set
of facts, circumstances or transactions.
4. REGISTRATION EXPENSES.
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in
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<PAGE>
the foregoing sentence shall include, without limitation, (i) all registration
and filing fees (including, without limitation, fees and expenses (A) with
respect to filings required to be made with the Nasdaq Stock Market and each
other securities exchange or market on which Registrable Securities are required
hereunder to be listed and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications of the Registrable Securities
and determination of the eligibility of the Registrable Securities for
investment under the laws of such jurisdictions as the managing underwriters, if
any, or the Holders of a majority of Registrable Securities may designate)),
(ii) printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of [$20,000],
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all reasonable costs, fees
and expenses in connection therewith, except for the fees and disbursements of
the Underwriters (including any underwriting commissions and discounts) and
their legal counsel and accountants (which shall be borne by the Holders).
Therefore, in such circumstances the Holder shall bear the expenses of the fees
and disbursements of any legal counsel or accounting firm retained by the
underwriters in connection with such Underwritten Offering and the costs of any
determination (but not filing) by the underwriters of the eligibility of the
Registrable Securities for investment under the applicable state securities
laws. By way of illustration which is not intended to diminish from the
provisions of Section 4(a), the Holders shall not be responsible for, and the
Company shall be required to pay the fees or disbursements incurred by the
Company (including by its legal counsel and accountants) in connection with, the
preparation and filing of a Registration Statement and related Prospectus for
such offering, the maintenance of such Registration Statement in accordance with
the terms hereof, the listing of the Registrable Securities in accordance with
the requirements hereof, and printing expenses incurred to comply with the
requirements hereof.
5. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the
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<PAGE>
offer and sale of Registrable Securities), brokers (including brokers who offer
and sell Registrable Securities as principal as a result of a pledge or any
failure to perform under a margin call of Common Stock), investment advisors and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "LOSSES"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading (in the case of any
Prospectus or form of Prospectus or supplement thereto, in light of the
circumstances under which they were made), except to the extent, but only to the
extent, that such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by such
Holder expressly for use therein, which information was reasonably relied on by
the Company for use therein or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, the directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent, but only to the extent, that
such untrue statement or omission is contained in any information so furnished
in writing by such Holder to the Company specifically for inclusion in the
Registration Statement or such Prospectus and that such information was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus or such form of prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PARTY"),
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<PAGE>
such Indemnified Party promptly shall notify the Person from whom indemnity is
sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to the Indemnified Party and the payment of all fees and expenses
incurred in connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the Indemnifying Party
of its obligations or liabilities pursuant to this Agreement, except (and only)
to the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 10 Business
Days of written notice thereof to the Indemnifying Party (regardless of whether
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party because of a failure or refusal
of a governmental authority to enforce such indemnification in accordance with
its terms (by reason of public policy or otherwise), then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and
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<PAGE>
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. RULE 144.
As long as any Holder owns Shares or Underlying Shares, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to Section 13(a) or l5(d) of the Exchange
Act and to promptly furnish the Holders with true and complete copies of all
such filings. As long as any Holder owns Shares or Underlying Shares, if the
Company is not required to file reports pursuant to Section 13(a) or l5(d) of
the Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Underlying Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including providing any legal opinions referred to in the
Purchase Agreement. Upon the request of any Holder, the Company shall deliver to
such Holder a written certification of a duly authorized officer as to whether
it has complied with such requirements.
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<PAGE>
7. MISCELLANEOUS.
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently in effect,
nor shall the Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its securities that is
inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as disclosed in SCHEDULE
2.1(u) of the Purchase Agreement, neither the Company nor any of its
subsidiaries has previously entered into any agreement currently in effect
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict with the
provisions of this Agreement; notwithstanding the foregoing, the Company may
grant such rights to a Strategic Partner except that in no case shall the
registration of securities of such a Strategic Partner cause any of the
Registrable Securities to fail to be registered pursuant to the terms of this
Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto or as
disclosed in SCHEDULE 2.L(u) of the Purchase Agreement) may include securities
of the Company in the Registration Statement other than the Registrable
Securities or as disclosed in SCHEDULE 2. L(u) of the Purchase Agreement, and
the Company shall not after the date hereof enter into any agreement providing
such right to any of its securityholders, unless the right so granted is subject
in all respects to the prior rights in full of the Holders set forth herein, and
is not otherwise in conflict with the provisions of this Agreement;
notwithstanding the foregoing, the Company may grant such rights to a Strategic
Partner except that in no case shall the registration of securities of such a
Strategic Partner cause any of the Registrable Securities to fail to be
registered pursuant to the terms of this Agreement.
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an
effective Registration Statement covering Underlying Shares for any outstanding
shares of Preferred Stock, the Company shall determine to prepare and file with
the Commission a registration
15
<PAGE>
statement relating to an offering for its own account or the account of others
under the Securities Act of any of its equity securities, other than on Form S-4
or Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection with
any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each holder of Registrable Securities written notice of such
determination and, if within fifteen (15) days after receipt of such notice, any
such holder shall so request in writing, (which request shall specify the
Registrable Securities intended to be disposed of by the Purchasers), the
Company will use reasonable efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the holder, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered, provided that if
at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to such holder and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay expenses in accordance with
Section 4 hereof), and (ii) in the case of a determination to delay registering,
shall be permitted to delay registering any Registrable Securities being
registered pursuant to this Section 7(d) for the same period as the delay in
registering such other securities. The Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, however, that the Company shall not
be required to register any Registrable Securities pursuant to this Section 7(d)
that are eligible for sale pursuant to Rule 144(k) of the Securities Act. In the
case of an underwritten public offering, if the managing underwriter(s) or
underwriter(s) should reasonably object to the inclusion of the Registrable
Securities in such registration statement, then if the Company after
consultation with the Underwriter's Representative should reasonably determine
that the inclusion of such Registrable Securities, would materially adversely
affect the offering contemplated in such registration statement, and based on
such determination recommends inclusion in such registration statement of fewer
or none of the Registrable Securities of the Holders, then (x) the number of
Registrable Securities of the Holders included in such registration statement
shall be reduced pro-rata among such Holders (based upon the number of
Registrable Securities requested to be included in the registration), if the
Company after consultation with the underwriter(s) recommends the inclusion of
fewer Registrable Securities, or (y) none of the Registrable Securities of the
Holders shall be included in such registration statement, if the Company after
consultation with the underwriter(s) recommends the inclusion of none of such
Registrable Securities; PROVIDED, however, that if Securities are being offered
for the account of other persons or entities as well as the Company, such
reduction shall not represent a greater fraction of the number of Registrable
Securities intended to be offered by the Holders than the fraction of similar
reductions imposed on such other persons or entities (other than the Company).
(e) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in
16
<PAGE>
writing and signed by the Company and the Holders of at least two-thirds of the
then outstanding Registrable Securities; PROVIDED, HOWEVER, that, for the
purposes of this sentence, Registrable Securities that are owned, directly or
indirectly, by the Company, or an Affiliate of the Company are not deemed
outstanding. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(f) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 7:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 7:00
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service or (iv) actual receipt
by the party to whom such notice is required to be given to each Holder at its
address set forth under its name on SCHEDULE 1 attached hereto or such other
address as may be designated in writing hereafter, in the same manner, by such
Person. Copies of notices to any Holder shall be sent to Akin, Gump, Strauss,
Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201,
Attn: Diane B. Muse, Esq., fax: (214) 969-4343. Copies of notices to the
Company shall be sent to Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New
York, New York 10038, Attn: Mel Epstein, Esq., fax: (212) 806-6006.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Purchaser may assign its rights hereunder in the manner and to
the Persons as permitted under the Purchase Agreement.
(h) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any Affiliate of such Holder, any
other Holder or Affiliate of any other Holder and up to four other assignees of
all or a portion of the shares of Preferred Stock or the Registrable Securities
if: (i) the Holder agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned,
(iii) following such transfer or assignment the further disposition of such
securities by the transferee or assignees is restricted under the Securities Act
and applicable state securities laws, (iv) at or
17
<PAGE>
before the time the Company receives the written notice contemplated by clause
(ii) of this Section, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions of this Agreement, and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Purchase Agreement. The rights to assignment shall apply to the Holders (and
to subsequent) successors and assigns.
(i) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(j) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
(k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(l) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(n) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
ALLIANCE PHARMACEUTICAL CORP.
By:
--------------------------------------------
Name: Theodore D. Roth
Title: President and Chief Operating Officer
BROWN SIMPSON STRATEGIC
GROWTH FUND, LTD.
By:
--------------------------------------------
Name:
Title:
BROWN SIMPSON STRATEGIC
GROWTH FUND, L.P.
By:
--------------------------------------------
Name:
Title:
WESTOVER INVESTMENTS L.P.
By:
--------------------------------------------
Name:
Title:
19
<PAGE>
MONTROSE INVESTMENTS LTD.
By:
--------------------------------------------
Name:
Title:
BAY HARBOR INVESTMENTS, INC.
By:
--------------------------------------------
Name:
Title:
20
<PAGE>
SCHEDULE I
COMPANY:
ALLIANCE PHARMACEUTICAL CORP.
3040 Science Park Road
San Diego, CA 92121
Attn: Theodore D. Roth
Fax: (619) 558-5306
PURCHASERS:
BROWN SIMPSON STRATEGIC GROWTH FUND, LTD.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Mitchell D. Kaye
Fax: (212) 247-1329
Portion of Series E-1 Purchase Price - $1,700,040
Series E-1 Shares - 28,334
BROWN SIMPSON STRATEGIC GROWTH FUND, L.P.
152 West 57th Street, 40th Floor
New York, New York 10019
Attn: Mitchell D. Kaye
Fax: (212) 247-1329
Portion of Series E-1 Purchase Price - $799,980
Series E-1 Shares - 13,333
WESTOVER INVESTMENTS L.P.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn: Will Rose
Fax: (214) 758-1221
Portion of Series E-1 Purchase Price - $679,980
Series E-1 Shares - 11,333
MONTROSE INVESTMENTS LTD.
300 Crescent Court, Suite 700
Dallas, Texas 75201
Attn: Will Rose
Fax: (214) 758-1221
Portion of Series E-1 Purchase Price - $1,320,000
Series E-1 Shares - 22,000
<PAGE>
BAY HARBOR INVESTMENTS, INC.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Attn: Robert Miller
Fax: (212) 332-3256
With copies to:
Robinson Silverman Pearce Aronson & Berman, LLP
1290 Avenue of the Americas
New York, New York 10104
Attn: Kenneth L. Henderson
Fax: (212) 541-4630
Portion of Series E-1 Purchase Price - $1,500,000
Series E-1 Shares - 25,000
2
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[LOGO]
CREDIT AGREEMENT
This Agreement is made by and between Alliance Pharmaceutical, Corp.
("Borrower") and Imperial Bank, a California banking corporation, ("Bank").
In consideration of mutual covenants and conditions hereof, the parties
hereto agree as follows:
1. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of New York, without limit as to
the duration of its existence and is authorized and in good standing to do
business in the State of California; Borrower has corporate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement
1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, as the case may be, and this Agreement is
the valid, binding and legally enforceable obligation of Borrower in accordance
with its terms; subject only to bankruptcy, insolvency or similar laws affecting
creditors rights generally.
1.03 NO CONFLICT. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it or any of
its property may be bound or affected, and do not cause any lien, charge or
other encumbrance to be created or imposed upon any such property by reason
thereof.
1.04 LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower which if determined adversely to
Borrower or its interest would have a material adverse effect on the financial
condition of Borrower, and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority.
1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of March 31,
1998, a copy of which has heretofore been delivered to Bank by Borrower, and all
other statements and data submitted in writing by Borrower to Bank in connection
with this request for credit are true and correct, and said balance sheet truly
presents the financial condition of Borrower as of the date thereof, and has
been prepared in accordance with generally accepted accounting principles on a
basis consistently maintained. Since such date, there have been no material
adverse changes in the financial condition or business of Borrower. Borrower
has no knowledge of any liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrower has not entered into any special
commitments or substantial contracts which are not reflected in said balance
sheet, other than in the ordinary and
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
normal course of its business, which may have a materially adverse effect upon
its financial condition, operations or business as now conducted.
1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section 3.03 hereof.
1.07 TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
1.09 REGULATION U. None of the proceeds of any loan from the Bank to
Borrower shall be used to purchase or carry margin stock (as defined within
Regulation U of the Board of Governors of the Federal Reserve system).
2. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under
borrowings, or other indebtedness, it will, unless Bank shall otherwise consent
in writing:
2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2.02 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.
2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
2
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
All financial information referenced herein shall be interpreted and
prepared in accordance with generally accepted accounting principals
applied on a basis consistent with previous years.
2.04 FINANCIAL COVENANTS. Borrower to maintain "Liquid Assets" of not less
than $25,000,000 at all times. "Liquid Assets" will be defined as cash, cash
equivalents, short term investments, and corporate partner receivables (within
45 days of receipt) up to a maximum of $8,000,000.
2.05 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
a. MONTHLY COMPLIANCE REPORT. Borrower to submit monthly compliance
report attesting to "Liquid Asset" position and certified by an
Officer of Borrower within 15 days of each month end.
b. QUARTERLY FINANCIAL STATEMENT. Within forty five (45) days after
the close of each quarter of each fiscal year of Borrower, commencing
with the quarter next ending, Borrower to submit 1O-Q as of the close
of such period and covering operations for the portion of Borrower's
fiscal year ending on the last day of such period, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles on a basis consistently maintained by Borrower and
certified by an appropriate officer of Borrower;
c. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any
event within one hundred twenty (120) days after the close of each
fiscal year of Borrower, a 10-K report of Company as of the close of
and for each fiscal year, all in reasonable detail, prepared on a
audited basis, together with an unqualified opinion on such financial
statements by an independent certified public accountant selected by
Borrower and reasonably acceptable to Bank, in accordance with
generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of
Borrower;
d. OTHER INFORMATION. Such other information relating to the
affairs of Borrower as the Bank reasonably may request from time to
time;
e. MANAGEMENT LETTER. In connection with each fiscal year end
financial statement furnished to Bank hereunder, any management letter
of Borrower's independent certified public accountant.
2.06 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence
of any Event of Default hereunder or any event which upon notice and lapse of
time would be an Event of Default.
3
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
2.07 OPERATING ACCOUNTS. Maintain most operating accounts with Bank during
the term of any loans from Bank to Borrower. Borrower shall maintain, or cause
to be maintained, on deposit with Imperial Bank, non-interest bearing demand
deposit balances sufficient to compensate Bank for all services provided by
Bank. Balances shall be calculated after reduction for the reserve requirement
of the Federal Reserve Board and uncollected funds. Any deficiencies shall be
charged directly to the Borrower on a monthly basis.
2.08 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice,
with interest thereon from the date of expenditure at the rate applicable to any
loans from Bank to Borrower, reasonable attorneys' fees and all costs and
expenses paid or incurred by Bank in collecting or compromising any such loan
after the occurrence of an Event of Default, whether or not suit is filed. If
suit is brought to enforce any provision of this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
2.09 DOCUMENTATION FEE. Pay to the Bank a $250.00 documentation fee per
facility at the time of execution of documents.
3. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent:
3.01 TYPE OF BUSINESS. Make any substantial change in the character of its
business.
3.02 OUTSIDE INDEBTEDNESS. Other than in the ordinary course of business
and consistent with past practices, create, incur, assume or permit to exist any
indebtedness for borrowed moneys, other than loans from the Bank, except
obligations now existing as shown in the financial statement dated March 31,
1998, excluding those obligations being refinanced by Bank.
3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business
which includes obtaining collaboration agreements with corporate partners, and
consistent with past practices, create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned and given as
security in connection with this agreement, other than liens for taxes not
delinquent and liens in Bank's favor, except for those already existing as of
March 31, 1998.
3.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business and consistent with past practices or make any investment in the
securities of any person or other entity inconsistent with company investment
guidelines; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business and
consistent with past practices. The foregoing will not restrict the Borrower
from issuing guarantees or otherwise becoming obligated to its landlords for
security deposits.
4
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Liquidate,
dissolve, merge or consolidate, or commence any proceedings therefor; or sell
any material assets except in the ordinary course of its business consistent
with past practices; or except in the ordinary course of business, sell, lease
assign or transfer any substantial part of its business or fixed assets, or any
property or other assets necessary for the continuance of its business as now
conducted, including without limitation the selling of any dividends, property
or other asset accompanied by the leasing back of the same.
4. EVENTS OF DEFAULT
The occurrence of any of the following events (each an "Event of
Default") shall, at Bank's option, terminate Bank's commitment to lend and make
all sums of principal and interest then remaining unpaid on all Borrower's
indebtedness to Bank immediately due and payable, all without demand,
presentment or notice, all of which are hereby expressly waived:
4.01 FAILURE TO PAY. Failure to pay any installment of principal or
interest on any indebtedness of Borrower to Bank within 10 days of due date.
4.02 BREACH OF COVENANT. Failure to perform any other term or condition of
this Agreement binding upon Borrower within 20 days of notice from Bank.
4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
respect.
4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
4.05 JUDGMENTS, ATTACHMENTS. Any money judgment greater than $100,000,
writ or warrant of attachment, or similar process shall be entered or filed
against Borrower or any of its assets and shall remain unvacated, unbonded or
unstayed for a period later than five days prior to the date of any proposed
sale thereunder.
4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors, if not terminated within 60 days, shall be instituted
by or against Borrower and, if instituted against it, shall be consented to.
5. MISCELLANEOUS PROVISIONS
5.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of any note issued by Borrower to Bank, in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.
5
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
All rights and remedies existing under this Agreement or any note issued in
connection with a loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
5.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
5.03 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assigns of
Borrower.
5.04 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California, to the jurisdiction
of whose courts the parties hereby agree to submit.
5.05 OFFSET. In addition to and not in limitation of all rights of offset
that Bank or other holder of any note issued by Borrower in favor of Bank may
have under applicable law, Bank or other holder of such notes shall, upon the
occurrence of any Event of Default or any event which with the passage of time
or notice would constitute such an Event of Default, have the right to
appropriate and apply to the payment of the outstanding under any such note any
and all balances, credits, deposits, accounts or monies of Borrower then or
thereafter with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
5.06 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
5.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of
this Agreement and of every part hereof.
5.08 ACCOUNTING. All accounting terms shall have the meanings applied
under generally accepted accounting principles unless otherwise specified.
5.10 MODIFICATION. This Agreement may be modified only by a writing signed
by both parties hereto.
5.11 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any General Security Agreement executed by Borrower in favor of Bank
or any Note executed by Borrower in favor of Bank (collectively, in this Section
5.11, the "Agreement") which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "CLAIM DATE" (defined as the date on
which
6
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
a party subject to this Agreement gives written notice to all other parties that
a controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638 ET SEQ
of the California Code of Civil Procedure, or their successor section ("CCP"),
which shall constitute the exclusive remedy for the settlement of any
controversy, dispute or claim concerning this Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where the Real Property, if any, is located or San
Diego County if none (the "COURT"). The referee shall be a retired Judge of the
Court selected by mutual agreement of the parties, and if they cannot so agree
within forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the powers
for a temporary judge, as authorized by law, and upon selection should take and
subscribe to the oath of office as provided for in Rule 244 of the California
Rules of Court (or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date of
selection of the referee and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Section
5.11 shall be completed no later than fifteen (15) days before the first hearing
date established by the referee. The referee may extend such period in the
event of a party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No party
shall be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Section 5.11, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the
7
<PAGE>
CREDIT AGREEMENT
JUNE 17, 1998
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
This Agreement is executed on behalf of the parties by duly authorized
representatives as of June 17, 1998.
IMPERIAL BANK ("BANK")
BY: /s/ Tim Bubnack
------------------------------
Tim Bubnack, Vice President
Date:
ALLIANCE PHARMACEUTICAL, CORP. ("BORROWER")
BY: /s/ Theodore D. Roth
------------------------------
Theodore D. Roth, President
Date:
BY: /s/ Tim T. Hart
------------------------------
Tim T. Hart, Treasurer
Date:
8
<PAGE>
[LOGO]
NOTE
$ 15,000,000 SAN DIEGO, California, JUNE 17,1998
On DECEMBER 2, 2002 and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking
corporation, or order, at its SOUTHERN CALIFORNIA EMERGING GROWTH INDUSTRIES
GROUP office, the principal sum of $ 15,000,000 or such sums up to the
maximum if so stated, as the Bank may now or hereafter advance to or for the
benefit of the undersigned in accordance with the terms hereof, together with
interest from date of disbursement or N/A, whichever is later, on the unpaid
principal balance / / at the rate of % per year /X/ at the rate of .50%
per year in excess of the rate of interest which Bank has announced as its
prime lending rate (the "Prime Rate"), which shall vary concurrently with any
change in such Prime Rate, or $250.00, whichever is greater. Interest shall
be computed at the above rate on the basis of the actual number of days
during which the principal balance is outstanding, divided by 360, which
shall, for interest computation purposes, be considered one year.
Interest shall be payable /X/ monthly / / quarterly / / included with
principal /X/ in addition to principal / / beginning JULY 15,1998, and if not
so paid shall become a part of the principal. All payments shall be applied
first to any late charges owing, then to interest and the remainder, if any,
to principal. /X/ (If checked), Principal shall be payable in installments of
$ * or more, each installment on the 15TH day of each MONTH, beginning
AUGUST 15, 1998. Advances not to exceed any unpaid balance owing at any one
time equal to the maximum amount specified above, may be made at the option
of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of
principal or interest when due, or in the performance or observance, when
due, of any item, covenant or condition of any deed of trust, security
agreement or other agreement (including amendments or extensions thereof)
securing or pertaining to this note, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and payable,
(b) thereafter bear interest, until paid in full, at the increased rate of 5%
per year in excess of the rate provided for above, as it may vary from time
to time.
Defaults shall include, but not be limited to, the failure of the
maker(s) to pay principal or interest when due; the filing as to each person
obligated hereon, whether as maker, co-maker, endorser or guarantor
(individually or collectively referred to as the "Obligor") of a voluntary or
involuntary petition** under the provisions of the Federal Bankruptcy Act; the
issuance of any attachment or execution against any asset of any Obligor; the
death of any Obligor** if not terminated within 60 days.
If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent ten or more days, Obligor
agrees to pay Bank a late charge in the amount of 5% of the payment so due and
unpaid, in addition to the payment; but nothing in this paragraph is to be
construed as any obligation on the part of the holder of this note to accept
payment of any payment past due or less than the total unpaid principal balance
after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorneys fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed
of trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed
against any portion of the security for this note in such order and in such
manner as such holder may consider appropriate, without waiving any rights
with respect to any of the security. Any delay or omission on the part of
the holder hereof in exercising any right hereunder, or under any deed of
trust, security agreement or other agreement, shall not operate as a waiver
of such right, or of any other right, under this note or any deed of trust,
security agreement or other agreement in connection herewith.
* See Addendum attached hereto and made a part hereof by this reference
Subject to the terms and limitations
contained in the Credit Agreement ALLIANCE PHARMACEUTICALS CORP.
dated June 17, 1998 a New York Corporation
- ------------------------------------ --------------------------------------
BY: /s/ Theodore D. Roth
- ------------------------------------ --------------------------------------
Theodore D. Roth, President
BY: /s/ Tim T. Hart
- ------------------------------------ --------------------------------------
Tim T. Hart, Treasurer
<PAGE>
ADDENDUM ATTACHED TO THAT CERTAIN NOTE IN THE AMOUNT OF $15,000,000.00 DATED
JUNE 17,1998 EXECUTED BY ALLIANCE PHARMACEUTICAL CORP., A NEW YORK CORPORATION:
ADDENDUM
On July 7, 1998 $6,000,000 of the total outstanding principal under the Note
shall be converted to an amortizing loan payable in 48 equal monthly payments of
principal plus accrued interest commencing August 15, 1998 based on a 7 year
amortization period. Interest only payments shall be due on the remaining
outstanding balance, including any additional funds advanced under the Note
through December 15, 1998, beginning July 15, 1998, and continuing on the 15th
day of each calendar month until December 15, 1998. Thereafter, the outstanding
principal balance under the Note shall be converted to an amortizing loan
payable in 48 equal monthly payments of principal plus accrued interest
commencing January 15, 1999 based on a 7 year amortization period.
All principal and accrued but unpaid interest shall in any event be due and
payable on December 2, 2002.
<PAGE>
GENERAL SECURITY AGREEMENT
(TANGIBLE AND INTANGIBLE PERSONAL PROPERTY)
IMPERIAL BANK
Member FDIC
This Agreement is executed on June 17, 1998, by
ALLIANCE PHARMACEUTICAL CORP. a New York corporation (hereinafter called
"Obligor"). In consideration of financial accommodations given, to be given
or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank")
a security interest in (a) all property (i) delivered to Bank by Obligor,
(ii) which shall be in Bank's possession or control in any matter or for any
purpose, (iii) described below, (iv) now owned or hereafter acquired by
Obligor of the type or class described below and/or in any supplementary
schedule hereto, or in any financing statement filed by Bank and executed by
or on behalf of Obligor; (b) all deposits accounts of Obligor at Bank and (c)
the proceeds, increase and products of such property, all accessions thereto,
and all property which Obligor may receive on account of such collateral
which Obligor will immediately deliver to Bank (collectively referred to as
"Collateral") to secure payment and performance of all of Obligor's present
or future debts or obligations to Bank, whether absolute or contingent
(hereafter referred to as "Debt"). Unless otherwise defined, words used
herein have the meanings given them in the California Uniform Commercial Code.
Collateral:
<TABLE>
<CAPTION>
A. VEHICLE, VESSEL, AIRCRAFT:
- ---------------------------------------------------------------------------------------------
Identification License or
Year Make/Manufacturer Model and Serial No. Registration No. New or Used
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
</TABLE>
Engine or other equipment:
-------------------------------------------------
(FOR AIRCRAFT - ORIGINAL INK SIGNATURE ON COPY TO FAA)
B. DEPOSIT ACCOUNTS:
Type Account Number Amount $
----------- ---------------- -----------------
In name of Depository
------------------ ----------------------------------
AND ALL EXTENSIONS OR RENEWALS THEREOF.
C. ACCOUNTS, INTANGIBLES AND OTHER: (DESCRIBE)
All personal property, excluding equipment subject to a prior security
interest in favor of the CIT Group/Equipment Financing Inc. and excluding
intangible assets (including intellectual property and patents or patents
applications), whether presently existing or hereafter created or acquired,
including but not limited to: All accounts, chattel paper, documents,
instruments, money, and deposit accounts including returns, repossessions,
books and records relating thereto, and equipment containing said books and
records. All investment property including securities and securities
entitlements. All goods including equipment and inventory. All proceeds
including, without limitation, insurance proceeds. All guarantees and
other security therefor.
The collateral not in Bank's possession will be located at: 9333 GENESEE
AVE. SAN DIEGO, CA 92121 & 3040 SCIENCE PARK ROAD SAN DIEGO, CA 92121 & 6175
LUSK BLVD. SAN DIEGO, CA 92121 & 229 OLD MOUNTAIN RD. OTISVILLE, NEW YORK, 10963
/ / If checked, the Obligor is executing this Agreement as an Accommodation
Debtor only and the Obligor's liability is limited to the security interest
granted in the Collateral described herein. The party being accommodated is
____________________________ (Borrower).
All the terms and provisions on page 2 hereof are incorporated herein as
though set forth in full, and constitute a part of this Agreement.
<TABLE>
<CAPTION>
Signature
Name: (indicate title, if applicable) Address
<S> <C> <C>
ALLIANCE PHARMACEUTICAL CORP. BY: /s/ THEODORE D. ROTH 3040 SCIENCE PARK
- ------------------------------ -------------------------------- ----------------------
A NEW YORK CORPORATION THEODORE D. ROTH, PRESIDENT SAN DIEGO, CA 92121
BY: /s/ TIM T. HART
- ------------------------------ -------------------------------- ----------------------
TIM T. HART, TREASURER
- ------------------------------ -------------------------------- ----------------------
</TABLE>
<PAGE>
SECURITY AGREEMENT (CONTINUED)
Obligor represents, warrants and agrees:
1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of
collecting the Debt, of protecting, insuring or realizing on Collateral, and any
expenditure of Bank pursuant hereto, including attorneys' fees and expenses,
with interest at the rate of 24% per year, or the rate applicable to the Debt,
whichever is less, from the date of expenditure, and (c) any deficiency after
realization of Collateral.
2. Obligor will use the proceeds of any loan that becomes Debt hereunder for
the purpose indicated on the application therefore, and will promptly contract
to purchase and pay the purchase price of any property which becomes Collateral
hereunder from the proceeds of any loan made for that purpose.
3. As to all Collateral in Obligor's possession (unless specifically otherwise
agreed to by Bank in writing), Obligor will:
(a) Have, or has, possession of the Collateral at the location disclosed
to Bank and will not remove the Collateral from the location.
(b) Keep the Collateral separate and identifiable.
(c) Maintain the Collateral in good and saleable condition, repair it if
necessary, clean, feed, shelter, water, medicate, fertilize, cultivate,
irrigate, prune and otherwise deal with the Collateral in all such ways as
are considered good practice by owners of like property, use it lawfully
and only as permitted by insurance policies, and permit Bank to inspect the
Collateral at any reasonable time.
(d) Not sell, contract to sell, lease, encumber or transfer the Collateral
(other than inventory Collateral or collateral less than $20,000.00 in
unit value). until the Debt has been paid, even though Bank has a security
interest in proceeds of such Collateral.
4. As to Collateral which is inventory and accounts, Obligor:
(a) May, until notice from Bank, sell, lease or otherwise dispose of
inventory Collateral in the ordinary course of business only, and collect
the cash proceeds thereof.
(b) Will, upon notice from Bank, deposit all cash proceeds as received in
a demand deposit account with Bank, containing only such proceeds and
deliver statements identifying units of inventory disposed of, accounts
which gave rise to proceeds, and all acquisitions and returns of inventory
as required by Bank.
c) Will receive in trust, schedule on forms satisfactory to the Bank and
deliver to Bank all non-cash proceeds other than inventory received in
trade.
d) If not in default, may obtain release of Bank's interest in individual
units of inventory upon request, therefore, payment to Bank of the release
price of such units shown on any Collateral schedule supplementary hereto,
and compliance herewith as to proceeds thereof.
5. As to Collateral which are accounts, chattel paper, general intangibles and
proceeds described in 4(c) above, Obligor warrants, represents and agrees:
(a) All such Collateral is genuine, enforceable in accordance with its
terms, free from default, prepayment, defense and conditions precedent
(except as disclosed to and accepted by Bank in writing), and is supported
by consecutively numbered invoices to, or rights against, the debtors
thereon. Obligor will supply Bank with duplicate invoices or other
evidence of Obligor's rights on Bank's request;
(b) All persons appearing to be obligated on such Collateral have
authority and capacity to contract;
(c) All chattel paper is in compliance with law as to form, content and
manner of preparation and execution and has been properly registered,
recorded, and/or filed to protect Obligor's interest thereunder;
(d) If an account debtor shall also be indebted to Obligor on another
obligation, any payment made by him not specifically designated to be
applied on any particular obligation shall be considered to be a payment on
the account in which Bank has a security interest. Should any remittance
include a payment not on an account, it shall be delivered to Bank and, if
no event of default has occurred, Bank shall pay Obligor the amount of such
payment;
(e) Obligor agrees not to compromise, settle or adjust any account or
renew or extend the time of payment thereof without Bank's prior written
consent.
6. Obligor owns all Collateral absolutely, and no other person has or claims
any interest in any Collateral, except as disclosed to and accepted by Bank in
writing. Obligor will defend any proceeding which may affect title to or Bank's
security interest in any Collateral, and will indemnify and hold Bank free and
harmless from all costs and expenses of Bank's defense.
7. Obligor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Obligor's possession, the
realty on which the Collateral is located.
8. Obligor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank,
and hereby assigns such policies to Bank, agrees to deliver them to Bank at
Bank's request, and authorizes Bank to make any claim thereunder, to cancel the
insurance on Obligor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Obligor should fail to
deliver the required policy or policies to the Bank, Bank may, at Obligor's cost
and expense, without any duty to do so, get and pay for insurance naming as the
insured, at Bank's option, either both Obligor and Bank, or only Bank, and the
cost thereof shall be secured by this Security Agreement, and shall be repayable
as provided in Paragraph 1 above.
9. Obligor will give Bank any reasonable information it requires. All
information at any time supplied to Bank by Obligor (including, but not limited
to, the value and condition of Collateral, financial statements, financing
statements, and statements made in documentary Collateral) is correct and
complete, and Obligor will notify Bank of any adverse change in such
information. Obligor will promptly notify Bank of any change of Obligor's
residence, chief executive office or mailing address.
10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act
which Obligor is obligated hereby to do, to exercise such rights as Obligor may
exercise, to use such equipment as Obligor might use, to enter Obligor's
premises to give notice of Bank's security interest, and to collect Collateral
and proceeds and to execute and file in Obligor's name any financing
statements and amendments thereto required to perfect Bank's security interest
hereunder, all to protect and preserve the Collateral and Bank's rights
hereunder. Bank may:
(a) Endorse, collect and receive delivery or payment of instruments and
documents constituting Collateral;
(b) make extension agreements with respect to or affecting Collateral,
exchange it for other Collateral, release persons liable thereon or take
security for the payment thereof, and compromise disputes in connection
therewith;
(c) Use or operate Collateral for the purpose of preserving Collateral or
its value and for preserving or liquidating Collateral.
11. If more than one Obligor signs this Agreement, their liability is joint and
several. Any Obligor who is married agrees that recourse may be had against
separate property for the Debt. Discharge of any Obligor except for full
payment, or any extension, forbearance, change of rate of interest, or
acceptance, release or substitution of Collateral or any impairment or
suspension of Bank's rights against an Obligor, or any transfer of an Obligor's
interest to another shall not affect the liability of any other Obligor. Until
the Debt shall have been paid or performed in full, Bank's rights shall continue
even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank
to proceed against any Obligor before any other, or to pursue any other remedy;
(b) presentment, protest and notice of protest, demand and notice of nonpayment,
demand or performance, notice of sale, and advertisement of sale; (c) any right
to the benefit of or to direct the application of any Collateral until the Debt
shall have been paid; (d) and any right of subrogation to Bank until Debt shall
have been paid or performed in full.
12. Upon default, at Bank's option, without demand or notice, all or any part
of the Debt shall immediately become due. Bank shall have all rights given by
law, and may sell, in one or more sales, Collateral in any county where Bank has
an office. Bank may purchase at such sale. Sales for cash or on credit to a
wholesaler, retailer or user of the Collateral, or at public or private auction,
are all to be considered commercially reasonable. Bank may require Obligor to
assemble the Collateral and make it available to Bank at the entrance to the
location of the Collateral, or a place designated by Bank.
Defaults shall include:
(a) Obligor's failure to pay or perform this or any agreement with Bank or
breach of any warranty herein, or Borrower's failure to pay or perform any
agreement with Bank.
(b) deleted XXXXXXXXXXXXXXXXX
(c) Any actual deterioration of the Collateral or in the market price
thereof which causes it, to become unsatisfactory as security.
(d) Any levy or seizure against Borrower or any of the Collateral.
(e) Death, termination of business, assignment for creditors, insolvency,
appointment of receiver, or the filing of any petition under bankruptcy or
debtor's relief laws of, by or against Obligor or Borrower or any guarantor
of the Debt, if not terminated within 60 days with respect to filings
against borrower or obligor.
(f) Any warranty or representation which is false or is believed in
good faith by Bank to be false.
13. Bank's acceptance of partial or delinquent payments or the failure of Bank
to exercise any right or remedy shall not waive any obligation of Obligor or
Borrower or right of Bank to modify this Agreement, or waive any other similar
default.
14. On transfer of all or any part of the Debt, Bank may transfer all or any
part of the Collateral. Bank may deliver all or any part of the Collateral
to any Obligor at any time. Any such transfer or delivery shall discharge
Bank from all liability and responsibility with respect to such Collateral
transferred or delivered. This Agreement benefits Bank's successors and
assigns and binds Obligor's heirs, legatees, personal representatives,
successors and assigns. Obligor agrees not to assert against any assignee of
Bank any claim or defense that may exist against Bank. Time is of the
essence. This Agreement and supplementary schedules hereto contain the
entire security agreement between Bank and Obligor. Obligor will execute any
additional agreements, assignments or documents reasonably required by Bank
to carry this Agreement into effect.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of California, to the jurisdiction of whose courts the Obligor
hereby agrees to submit. Obligor agrees that service of process may be
accomplished by any means authorized by California law. All words used herein
in the singular shall be considered to have been used in the plural where the
context and construction so require.
<PAGE>
SINGLE-TENANT INDUSTRIAL LEASE
------------------------------
(TRIPLE NET)
LANDLORD:
WHAMC REAL ESTATE LIMITED PARTNERSHIP,
A DELAWARE LIMITED PARTNERSHIP
TENANT:
ALLIANCE PHARMACEUTICAL CORP.,
A NEW YORK CORPORATION
<PAGE>
STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION TITLE PAGE
- ------- ----- ----
<S> <C> <C>
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS...............iii
1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
3. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4. Common Area; Operating Expenses. . . . . . . . . . . . . . . . . .3
5. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . .5
6. Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
7. Payments and Notices . . . . . . . . . . . . . . . . . . . . . . .8
8. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
9. Surrender; Holding Over. . . . . . . . . . . . . . . . . . . . . .8
10. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
11. Repairs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
12. Alterations. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
13. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
14. Assignment and Subletting. . . . . . . . . . . . . . . . . . . . 11
15. Entry by Landlord. . . . . . . . . . . . . . . . . . . . . . . . 12
16. Utilities and Services . . . . . . . . . . . . . . . . . . . . . 12
17. Indemnification and Exculpation. . . . . . . . . . . . . . . . . 13
18. Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . 13
19. Eminent Domain . . . . . . . . . . . . . . . . . . . . . . . . . 14
20. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
21. Waiver of Subrogation. . . . . . . . . . . . . . . . . . . . . . 16
22. Tenant's Default and Landlord's Remedies . . . . . . . . . . . . 16
23. Landlord's Default . . . . . . . . . . . . . . . . . . . . . . . 18
24. Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . 18
25. Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . 18
26. Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . 19
27. Modification and Cure Rights of Landlord's Mortgagees and Lessors19
28. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . . . 19
29. Transfer of Landlord's Interest. . . . . . . . . . . . . . . . . 19
30. Limitation on Landlord's Liability . . . . . . . . . . . . . . . 19
31. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 19
32. Lease Execution. . . . . . . . . . . . . . . . . . . . . . . . . 21
33. Cancellation Option. . . . . . . . . . . . . . . . . . . . . . . 21
34. Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
EXHIBITS
EXHIBIT "A-1" Project Site Plan
EXHIBIT "A-2" Project Legal Description
EXHIBIT "B" Description of Premises
EXHIBIT "C" Work Letter Agreement
EXHIBIT "D" Sample Form of Notice of Lease Term Dates
EXHIBIT "E" Environmental Questionnaire
EXHIBIT "F" Sample Form of Tenant Estoppel Certificate
EXHIBIT "G" Special Improvements
-i-
<PAGE>
STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Actual Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
ADA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Additional Landlord's Work . . . . . . . . . . . . . . . . . . . .EXHIBIT C
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Audit Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
BOMA Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Building's Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Cancellation Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cancellation Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cancellation Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cancellation Option. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cancellation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Common Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Declaration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Early Occupancy Date . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Election Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Estimate Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Existing Tenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Extension Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Fair Market Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Force Majeure Delays . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Hazardous Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Indemnified Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Landlord Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . .6
Landlord's Cost Cap. . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C
Landlord's Work. . . . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C
Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Occupied Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Option Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Other Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Outside Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
PCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Permitted Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Pre-Approved Change. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Preliminary Plans. . . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C
Real Property Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
rentable area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
rentable square footage. . . . . . . . . . . . . . . . . . . . . . . . . .1
Special Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Special Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Tenant Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tenant Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tenant Improvements. . . . . . . . . . . . . . . . . . . . . . . .EXHIBIT C
Tenant Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . 13
Tenant's Monthly Operating Expense Charge. . . . . . . . . . . . . . . . .4
Tenant's Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Tenant's Security System . . . . . . . . . . . . . . . . . . . . . . . . 12
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
usable area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
usable square footage. . . . . . . . . . . . . . . . . . . . . . . . . . .1
Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Work Letter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
</TABLE>
-ii-
<PAGE>
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS
This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby
incorporated into and made a part of the attached Single-Tenant Industrial Lease
which pertains to the Premises described in Section 1.4 below. All references
in the Lease to the "Lease" shall include this Summary. All references in the
Lease to any term defined in this Summary shall have the meaning set forth in
this Summary for such term. Any initially capitalized terms used in this
Summary and any initially capitalized terms in the Lease which are not otherwise
defined in this Summary shall have the meaning given to such terms in the Lease.
1.1 LANDLORD'S ADDRESS: WHAMC REAL ESTATE LIMITED PARTNERSHIP
c/o WCB Properties
450 Newport Center Drive, Suite 304
Newport Beach, California 92660
Attn: Mr. Ronald Lack
Telephone: (714) 640-6900
Facsimile: (714) 640-8399
1.2 TENANT'S ADDRESS: ALLIANCE PHARMACEUTICAL CORP.
3040 Science Park Road
San Diego, California 92121
Attn: Mr. Duane Roth
Telephone: (619) 558-4300
Facsimile: (619) 558-3625
1.3 PROJECT: The industrial development known as Pacific Corporate Plaza in
the City of San Diego, County of San Diego, State of California, as
shown on the project site plan attached hereto as EXHIBIT "A-1" and the
legal description of which is attached hereto as EXHIBIT "A-2". The
Project includes all buildings, improvements and facilities now or
subsequently located within such development, including, without
limitation, the Building constituting the Premises.
1.4 PREMISES: That certain 56,799 rentable square foot building
("Building") located within the Project known as 6175 Lusk Boulevard,
San Diego, California and more particularly described in EXHIBIT "A-1"
and EXHIBIT "B" attached hereto.
1.5 TERM: Ten (10) years.
1.6 COMMENCEMENT DATE: The earlier of (i) that date which is one hundred
twenty (120) days after the date of the full execution and delivery of
this Lease by Landlord and Tenant, (ii) the date Tenant commences
business operations from the Premises, or (iii) March 1, 1998.
1.7 LEASE EXPIRATION DATE: The last day of the tenth (10th) annual
anniversary of the Commencement Date, subject to two (2) extension
options of three (3) years pursuant to Section 2.4 of the Lease.
1.8 RENT
<TABLE>
<CAPTION>
PERIOD ANNUAL RENT MONTHLY RENT
------ ----------- ------------
<S> <C> <C>
1-12 $647,508.60 $53,959.05
13-24 $670,171.39 $55,847.61
25-36 $693,627.31 $57,802.28
37-48 $717,904.26 $59,825.35
49-60 $743,030.84 $61,919.24
61-72 $769,036.91 $64,086.41
73-84 $795,953.20 $66,329.43
85-96 $823,811.52 $68,650.96
97-108 $852,644.92 $71,053.74
109-120 $882,487.45 $73,540.62
</TABLE>
1.9 SECURITY DEPOSIT: $297,330.00 subject to the terms of Section 5 below.
1.10 PERMITTED USE: The Premises may be used only for general office and
biomedical manufacturing and any other legally permitted use consistent
with the character of the Project and approved by Landlord in Landlord's
reasonable discretion.
1.11 BROKERS: CB Commercial Real Estate Group, Inc. representing Landlord
and The Irving Hughes Group, Inc. representing Tenant.
-iii-
<PAGE>
1.12 INTEREST RATE: The lesser of: (a) the rate announced from time to time
by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to
publish such rate, then the rate announced from time to time by the
largest (as measured by deposits) chartered operating bank operating in
California, as its "prime rate" or "reference rate", plus three percent
(3%); or (b) the maximum rate permitted by law.
1.13 TENANT IMPROVEMENTS: The tenant improvements installed or to be
installed in the Premises by Tenant, as described in the Work Letter
Agreement attached hereto as EXHIBIT "C".
1.14 PARKING PASSES: One hundred sixty eight (168) parking privileges
consisting of (i) one hundred and sixty (160) unreserved, uncovered
parking privileges, and (ii) eight (8) unreserved, uncovered guest
parking privileges (which guest parking shall be identified as such and
located in front of the main entrance to the Building).
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SINGLE-TENANT INDUSTRIAL LEASE
This LEASE ("LEASE"), which includes the preceding Summary of Basic Lease
Information and Definitions ("SUMMARY") attached hereto and incorporated herein
by this reference, is made as of the 7th day of November, 1997, by and between
WHAMC REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership
("LANDLORD"), and ALLIANCE PHARMACEUTICAL CORP., a New York corporation
("TENANT").
1. PREMISES.
1.1 LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the Premises upon and subject to the terms, covenants and
conditions contained in this Lease to be performed by each party. Throughout
the Term of this Lease, Tenant shall have the right to the exclusive use of that
portion of that certain building in the Project commonly known as 6173 Lusk
Boulevard, San Diego, California (the "OTHER BUILDING") where the existing HVAC
system serving the Premises is situated only so long as such Other Building
contains the HVAC system servicing the Premises; provided, however, that
Tenant's exclusive use is limited to such portion of the Other Building (where
the existing HVAC system servicing the Premises is situated) and Tenant's use is
further limited for the express purposes of Tenant's access, maintenance and
repair of such HVAC system and for no other purpose. Such Other Building shall
be deemed to be part of the Premises for all purposes under this Lease except
that Tenant will not be obligated to pay Monthly Rent for such Other Building.
1.2 MEASUREMENT OF PREMISES AND/OR PROJECT. At Landlord's discretion, the
number of rentable square feet of the Premises and/or the Project shall be
subject to verification from time to time by Landlord's space measurement
consultant, and such verification shall be made in accordance with the
provisions of this Section 1.2. Tenant's architect may consult with Landlord's
space measurement consultant regarding verification of the number of rentable
square feet of the Premises; however, the reasonable determination of Landlord's
space measurement consultant shall be conclusive and binding upon the parties.
In the event that Landlord's space measurement consultant determines that the
amounts thereof shall be different from those set forth in this Lease, Landlord
shall modify all amounts, percentages and figures appearing or referred to in
this Lease to conform to such corrected rentable square footage (including,
without limitation, the amount of the "Rent," as that term is defined in
Section 3 of this Lease). If such modification is made, it will be confirmed in
writing by Landlord to Tenant. As used in this Lease, the following terms have
the meanings indicated:
(a) The term "USABLE AREA" or "USABLE SQUARE FOOTAGE" means the usable area
as determined in accordance with the Standard Method for Measuring Floor
Area in Office Buildings, ANSI/BOMA Z65.1 - 1996 (the "BOMA STANDARD");
and
(b) The term "RENTABLE AREA" or "RENTABLE SQUARE FOOTAGE" means the rentable
area measured in accordance with the BOMA Standard.
2. TERM.
2.1 TERM; NOTICE OF LEASE DATES. This Lease shall be effective upon the
date first above written (the "EFFECTIVE DATE"). Subject to Section 2.4 below,
the term of this Lease (the "TERM") shall commence upon the Commencement Date
and shall expire on the Lease Expiration Date, unless sooner terminated or
extended as permitted herein, and if extended, the "Term" will include the
applicable Option Period.
2.2 EARLY OCCUPANCY. Subject to Section 2.4 below, Landlord shall deliver
possession of the Premises but not the Occupied Portion (as such term is defined
in Section 2.4 below) within three (3) days following the full execution and
delivery of this Lease (the "EARLY OCCUPANCY DATE") for purposes of construction
of improvements to the Premises (but not the Occupied Portion) in accordance
with the Work Letter attached hereto as EXHIBIT "C" ("WORK LETTER"). Such early
occupancy shall be subject to all of the terms and conditions of this Lease,
including, without limitation, those provisions requiring that Tenant shall be
responsible for all costs, expenses and obligations relating to the Premises
(including, without limitation, Sections 3.2, 3.3, 4, 6, 10, 11, 17, 20 and 22)
except that Tenant will not be obligated to pay Monthly Rent during the period
of such early occupancy and Tenant will not, unless and until Tenant enters or
occupies such Occupied Portion, be subject to any of the terms and conditions of
this Lease for the Occupied Portion until Landlord delivers possession of the
Occupied Portion to Tenant, which delivery date is anticipated to occur on or
about January 1, 1998, subject to the surrender of such Occupied Portion by the
existing tenant thereof.
2.3 OPTIONS TO EXTEND. Tenant shall have two (2) options (each, an
"EXTENSION OPTION") to extend the Term (for the entire Premises only) for a
period (each, an "OPTION PERIOD") of three (3) years, commencing upon the Lease
Expiration Date or, as applicable, the second Option Period, upon the same terms
and conditions previously applicable, except for the grant of any exercised
Extension Option and Annual Rent (which shall be determined as set forth below).
Each Extension Option may be validly exercised only by notice in writing
received by Landlord not later than three hundred sixty (360) calendar days
prior to commencement of the applicable Option Period; provided, however, that
each such Extension Option may be validly exercised only if no uncured material
Tenant default exists as of the date of exercise and, at Landlord's option, as
of the commencement of the applicable Option Period. If Tenant does not
exercise the applicable Extension Option during the exercise period set forth
above in strict accordance with the provisions hereof, the Extension Option and
any unexercised Extension Option (if any) shall forever terminate and be of no
further force or effect. Each such Extension Option is personal to the original
Tenant, may not be exercised by any person or entity other than the original
Tenant and shall become null and void if the original Tenant assigns its
interest in this Lease unless such assignment is to an Affiliate of Tenant (as
that term is defined in Section 14.5) or to a Transferee
<PAGE>
who is a Permitted Business (as defined in Section 14.1) but only to the extent
such Transferee is conducting the biomedical manufacturing portion of Tenant's
Permitted Use ("SPECIAL TRANSFEREE"). For purposes of this Section 2.3 and
Section 33, the term "material" relative to a Tenant default shall mean any
monetary default and any material non-monetary default.
Annual Rent during the applicable Option Period shall be equal to ninety-five
percent (95%) of the Fair Market Rental as of the commencement of the applicable
Option Period, but in no event less than Annual Rent payable immediately prior
to the applicable Option Period. For purposes hereof, "FAIR MARKET RENTAL"
shall mean the base rent then being charged to renewal tenants by Landlord in
the Project (or, if not enough comparable transactions exist in the Project,
then the base rent payable during the applicable Option Period to a willing
landlord by a willing renewal tenant for comparable space in comparable
buildings in the vicinity of the Building) with tenants having a similar
financial responsibility, credit rating and capitalization as Tenant then has,
taking into account all other relevant factors for like and comparable space,
improved with tenant improvements of like and comparable quality to those then
existing in the Premises. At least four (4) months prior to the applicable
Option Period, Landlord shall notify Tenant of the Fair Market Rental as
determined by Landlord. Any dispute between the parties hereto with respect to
the amount so determined shall be resolved by arbitration, as set forth below;
provided, however, that there shall be deemed not to be such a dispute unless
Tenant notifies Landlord thereof in writing within one (1) month after Landlord
so notifies Tenant of the Fair Market Rental and Tenant sets forth in such
notice Tenant's determination of Fair Market Rental. If, in the event of a
dispute, the arbitrators have not determined the Fair Market Rental by
commencement of the applicable Option Period, Tenant shall pay as Annual Rent
the amount determined by Landlord until such time as the Fair Market Rental has
been determined by arbitration, whereupon Tenant shall pay any additional amount
due to Landlord based upon such subsequent determination of Fair Market Rental.
If the Annual Rent so paid by Tenant is higher than that ultimately determined
by the arbitration process, then Landlord shall reimburse such difference to
Tenant.
If Tenant timely notifies Landlord in writing of Tenant's dispute regarding
Landlord's determination of the Fair Market Rental, then Fair Market Rental
shall be determined as follows. Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate appraiser active over the
five (5) year period ending on the date of such appointment in the appraisal of
commercial properties in San Diego County and who shall not have been employed
or engaged by either party during said five (5) year period. Each such
arbitrator shall be appointed within fifteen (15) days after Tenant notifies
Landlord of Tenant's dispute of Landlord's determination of Fair Market Rental.
The two arbitrators so appointed shall within fifteen (15) days of the date of
the appointment of the last appointed arbitrator agree upon and appoint a third
arbitrator who shall be qualified under the same criteria set forth above. The
three arbitrators shall, within thirty (30) days of the appointment of the third
arbitrator, reach a decision as to whether the parties shall use Landlord's or
Tenant's submitted Fair Market Rental for the Premises, and shall notify
Landlord and Tenant thereof. Such decision shall be based upon the criteria and
variables set forth above. The new Annual Rent shall thereafter be equal to the
Fair Market Rental of the Premises so selected by the arbitrators. The decision
of the majority of the three arbitrators shall be binding upon Landlord and
Tenant. If either Landlord or Tenant fails to appoint an arbitrator within the
time period specified hereinabove, the arbitrator appointed by one of them shall
reach a decision, notify Landlord and Tenant thereof, and such arbitrator's
decision shall be binding upon Landlord and Tenant. If the two arbitrators fail
to agree upon and appoint a third arbitrator, both arbitrators shall be
dismissed and the matter to be decided shall be forthwith submitted to
arbitration under the provisions of the American Arbitration Association in
accordance with the method described above. The cost of arbitration shall be
paid by Landlord and Tenant equally.
2.4 CONDITIONS PRECEDENT. Landlord will not be obligated to deliver
possession of the Premises to Tenant (but Tenant will be liable, subject to
Section 2.2 hereof and the occurrence of the Commencement Date, for Rent if
Landlord can otherwise deliver the Premises, or the applicable portion thereof,
to Tenant as required hereunder) until (A) Landlord has received from Tenant all
of the following: (i) a copy of this Lease fully executed by Tenant;
(ii) evidence satisfactory to Landlord of the deposit of the Security Deposit in
accordance with Section 5 below, and the first installment of Monthly Rent in
accordance with Section 3.1 below; and (iii) copies of policies of insurance or
certificates thereof as required under Section 21 of this Lease and
(B) NextLevel Systems, Inc., the existing tenant ("EXISTING TENANT") in a
portion (the "OCCUPIED PORTION") of the Premises as of the date hereof has
vacated the Premises; provided, however, that Landlord and Tenant acknowledge
and agree that, subject to the other condition precedents set forth in this
Section 2.4, Landlord shall deliver possession of the Premises (but not the
Occupied Portion) to Tenant in accordance with Section 2.2 and Tenant shall
accept possession of such portion of the Premises on the date of Landlord's
delivery thereof. Notwithstanding anything above to the contrary, the
Commencement Date of this Lease shall occur in the event that Landlord is unable
to deliver possession of the Occupied Portion to Tenant by the Commencement Date
of the Lease with respect to the other portion of the Premises (not including
the Occupied Portion); provided, however, that (i) Tenant's obligation to pay
Monthly Rent with respect to the Occupied Portion of the Premises will, on a per
diem basis, be waived by Landlord (in the proportion that the rentable square
feet of the Occupied Portion bears to the total rentable square feet of the
Premises), for each day past March 1, 1998 ("OUTSIDE DATE") that Landlord so
fails to deliver possession of the Occupied Portion of the Premises to Tenant
and (ii) in accordance with, and subject to, Section 2.2 of this Lease, Tenant
will not be subject to any of the other terms and conditions of this Lease until
Landlord delivers possession of the Occupied Portion to Tenant (unless Tenant
enters or occupies such Occupied Portion).
3. RENT.
3.1 ANNUAL RENT. Tenant agrees to pay Landlord, as rent for the Premises,
the Annual Rent designated in Section 1.8 of the Summary. The Annual Rent shall
be paid by Tenant in twelve (12) equal monthly installments of Monthly Rent in
the amounts designated in Section 1.8 of the Summary in advance on the first day
of each and every calendar month commencing upon the Commencement Date, except
that the first full month's Monthly Rent for the Premises shall be paid upon
execution of this Lease by Tenant. Monthly Rent for any partial month shall be
prorated in the proportion that the number of days this Lease is in effect
during such month bears to the actual number of days in such month.
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3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this
Lease in addition to the Annual Rent described in Section 3.1 above shall be
considered additional rent for the purposes of this Lease, and the word "RENT"
in this Lease shall include such additional rent unless the context specifically
or clearly implies that only the Annual Rent is referenced. The Annual Rent and
additional rent shall be paid to Landlord as provided in Section 7, without any
prior demand therefor and without any deduction or offset except as specified
elsewhere in the Lease, in lawful money of the United States of America.
3.3 LATE PAYMENTS. Late payments of Monthly Rent and/or any item of
additional rent will be subject to interest and a late charge as provided in
Sections 22.6 and 22.7 below.
3.4 TENANT'S OBLIGATIONS. Except as otherwise provided herein, all Rent
shall be absolutely net to Landlord so that this Lease shall yield net to
Landlord, the Rent to be paid each month during the Term of this Lease. Nothing
herein contained shall be deemed to require Tenant to pay or discharge any liens
or mortgages of any character whatsoever which may exist or hereafter be placed
upon the Premises by an affirmative act or omission of Landlord.
4. COMMON AREA; OPERATING EXPENSES.
4.1 DEFINITION OF COMMON AREA. The term "COMMON AREA," as used in this
Lease means all areas and the improvements thereon within the exterior
boundaries of the Project now or later made available for the general use of
Landlord, Tenant and other persons entitled to occupy floor area in the Project
and their customers, including, without limitation, the parking facilities of
the Project, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, and similar areas and
facilities situated within the Project which are not reserved for the exclusive
use of any Project occupants and the exterior surfaces and roofs of all
buildings (including the Building) located within the Project. Without limiting
this definition, Landlord may include in the Common Area those portions of the
Project presently or later sold or leased to purchasers or tenants, as the case
may be, until the commencement of construction of the building(s) thereon, at
which time there shall be withdrawn from the Common Area those areas not
provided by such owner or lessee for common use. Common Area shall not include
(i) the entryway to a tenant's premises, (ii) any improvements installed by a
tenant outside of its premises, whether with or without Landlord's knowledge or
consent, or (iii) any areas or facilities that are included in the description
of premises leased to a tenant.
4.2 MAINTENANCE AND USE OF COMMON AREA. The manner in which the Common Area
shall be maintained shall be solely determined by Landlord in Landlord's
reasonable discretion. If any owner or tenant of any portion of the Project
maintains Common Area located upon its parcel or demised premises (Landlord
shall have the right in its sole discretion to allow any purchaser or tenant to
so maintain Common Area located upon its parcel or demised premises and to be
excluded from participation in the payment of Common Area Expenses as provided
below), Landlord shall not have any responsibility for the maintenance of that
portion of the Common Area and Tenant shall have no claims against Landlord
arising out of any failure of such owner or tenant to so maintain its portion of
the Common Area. The use and occupancy by Tenant of the Premises shall include
the right to use the Common Area (except areas used in the maintenance or
operation of the Project), in common with Landlord and other tenants of the
Project and their customers and invitees, subject to (i) any covenants,
conditions and restrictions now or hereafter of record (the "DECLARATION"), and
(ii) such reasonable, non-discriminatory rules and regulations concerning the
Project as may be established by Landlord from time to time. Tenant agrees to
promptly comply with all such rules and regulations and any reasonable,
non-discriminatory amendments thereto upon receipt of written notice from
Landlord.
4.3 CONTROL OF AND CHANGES TO COMMON AREA. Landlord shall have the sole and
exclusive control of the Common Area, as well as the right to make reasonable
changes to the Common Area. Provided Landlord does not materially interfere
with Tenant's use of and access to the Premises, Landlord's rights shall
include, but not be limited to, the right to (a) restrain the use of the Common
Area by unauthorized persons; (b) cause Tenant to remove or restrain persons
from any unauthorized use of the Common Area if they are using the Common Area
by reason of Tenant's presence in the Project; (c) utilize from time to time any
portion of the Common Area for promotional, entertainment, and related matters;
(d) temporarily close any portion of the Common Area for repairs, improvements
or alterations, to discourage non-customer use, to prevent public dedication or
an easement by prescription from arising, or for any other reason deemed
appropriate in Landlord's judgment; and (e) reasonably change the shape and size
of the Common Area, add, eliminate or change the location of improvements to the
Common Area, including, without limitation, buildings, lighting, parking areas,
landscaped areas, roadways, walkways, drive aisles and curb cuts.
4.4 OPERATING EXPENSES. As used in this Section 4.4, the term "BUILDING'S
SHARE" shall mean a fraction, the numerator of which is the rentable square
footage of the Building, and the denominator of which is the rentable square
footage of the Project. Throughout the Term of this Lease, commencing on the
Commencement Date, and in addition to Tenant's obligations set forth in Section
3.4 hereof, Tenant agrees to pay Landlord, as additional rent in accordance with
the terms of this Section 4, the Building's Share of Operating Expenses for the
operation, maintenance, repair, and replacement of the Project and the Common
Area including, without limitation: (i) any form of real property tax,
assessment (including, without limitation, change in ownership taxes and
assessments), license fee, license tax, business license fee, commercial rental
tax, levy, charge, improvement bond or similar imposition of any kind or nature
imposed by any authority having the direct power to tax, including any city,
county, state or federal government, or any school, agricultural, lighting,
drainage or other improvement or special assessment district thereof; (ii) any
and all assessments under any covenants, conditions and restrictions affecting
the Project; (iii) water, sewer and other utility charges for the Common Area;
(iv) costs of commercially reasonable insurance obtained by Landlord; (v) waste
disposal and janitorial services; (vi) security (if any); (vii) labor; (viii)
commercially reasonable management costs including, without limitation: (A)
wages and salaries (and payroll taxes and similar charges ) of property
management employees for the Common Area, (B) management office rental,
supplies, equipment and related operating expenses for the Common Area;
(C) commercially reasonable management/administrative fees; and (D) association
fees and assessments; (ix) supplies, materials, equipment and tools including
rental of personal property; (x) repair and maintenance of the structural
portions of the buildings within the Project, including the plumbing, heating,
ventilating, air-conditioning and electrical systems
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<PAGE>
installed or furnished by Landlord; (xi) maintenance, sweeping, repairs,
resurfacing, and upkeep of all parking and other Common Areas; (xii)
amortization on a straight line basis over the useful life together with
interest at the Interest Rate on the unamortized balance of all capitalized
expenditures to the Project; (xiii) gardening and landscaping; (xiv) maintenance
of signs (other than signs of tenants of the Project); (xv) personal property
taxes levied on or attributable to personal property used in connection with the
Common Areas; (xvi) reasonable accounting, audit, verification, legal and other
consulting fees; and (xvii) any other costs and expenses of repairs,
maintenance, painting, lighting, cleaning, and similar items, including
commercially reasonable reserves. Notwithstanding anything above to the
contrary, the term "Operating Expenses" shall not include costs to correct
latent defects in the base, shell and core of the Premises to the extent not
caused by Tenant or Tenant's improvements to the Premises.
4.5 TENANT'S MONTHLY OPERATING EXPENSE CHARGE. From and after the
Commencement Date, Tenant shall pay to Landlord, on the first day of each
calendar month during the Term of this Lease, the Building's Share of an amount
estimated by Landlord to be the Monthly Operating Expenses for the Project for
that month ("TENANT'S MONTHLY OPERATING EXPENSE CHARGE"). Notwithstanding
anything in this Section 4 to the contrary, in no event will Tenant be liable,
in any calendar year of this Lease, for Operating Expense increases in excess of
ten percent (10%) over the Operating Expenses for the immediately preceding
calendar year (the "CAP"); provided, however, that for purposes of the Cap,
costs of commercially reasonable insurance maintained by Landlord, Real Property
Taxes and the costs of capital expenditures, shall not be deemed to be part of
Operating Expenses.
4.6 ESTIMATE STATEMENT. Prior to the Commencement Date and on or about May
1st of each subsequent calendar year during the Term of this Lease, Landlord
will endeavor to deliver to Tenant a statement ("ESTIMATE STATEMENT") wherein
Landlord will estimate Tenant's Monthly Operating Expense Charge for the then
current calendar year. Tenant agrees to pay Landlord, as additional rent,
Tenant's estimated Monthly Operating Expense Charge each month thereafter,
beginning with the next installment of rent due, until such time as Landlord
issues a revised Estimate Statement or the Estimate Statement for the succeeding
calendar year; except that, concurrently with the regular monthly rent payment
next due following the receipt of each such Estimate Statement, Tenant agrees to
pay Landlord an amount equal to one monthly installment of Tenant's estimated
Monthly Operating Expense Charge (less any applicable Operating Expenses already
paid) multiplied by the number of months from January, in the current calendar
year, to the month of such rent payment next due, all months inclusive. If at
any time during the Term of this Lease, but not more often than quarterly,
Landlord reasonably determines that the Building's Share of Operating Expenses
for the current calendar year will be greater than the amount set forth in the
then current Estimate Statement, Landlord may issue a revised Estimate Statement
and Tenant agrees to pay Landlord, within thirty (30) days of receipt of the
revised Estimate Statement, the difference between the amount owed by Tenant
under such revised Estimate Statement and the amount owed by Tenant under the
original Estimate Statement for the portion of the then current calendar year
which has expired. Thereafter Tenant agrees to pay Tenant's Monthly Operating
Expense Charge based on such revised Estimate Statement until Tenant receives
the next calendar year's Estimate Statement or a new revised Estimate Statement
for the current calendar year.
4.7 ACTUAL STATEMENT. By May 1st of each calendar year during the Term of
this Lease, Landlord will also endeavor to deliver to Tenant a statement
("ACTUAL STATEMENT") which states the Building's Share of the actual Operating
Expenses for the preceding calendar year. If the Actual Statement reveals that
the Building's Share of the actual Operating Expenses is more than the total
Additional Rent paid by Tenant for Operating Expenses on account of the
preceding calendar year, Tenant agrees to pay Landlord the difference in a lump
sum within thirty (30) days of receipt of the Actual Statement. If the Actual
Statement reveals that the Building's Share of the actual Operating Expenses is
less than the Additional Rent paid by Tenant for Operating Expenses on account
of the preceding calendar year, Landlord will credit any overpayment toward the
next monthly installment(s) of the Building's Share of the Operating Expenses
due under this Lease. Such obligation will be a continuing one which will
survive the expiration or earlier termination of this Lease. Prior to the
expiration or sooner termination of the Lease Term and Landlord's acceptance of
Tenant's surrender of the Premises, Landlord will have the right to estimate the
actual Operating Expenses for the then current Lease Year and to collect from
Tenant prior to Tenant's surrender of the Premises, the Building's Share of any
excess of such actual Operating Expenses over the estimated Operating Expenses
paid by Tenant in such Lease Year.
4.8 MISCELLANEOUS. Any delay or failure by Landlord in delivering any
Estimate Statement or Actual Statement pursuant to this Section 4 will not
constitute a waiver of its right to require an increase in additional rent for
Operating Expenses nor will it relieve Tenant of its obligations pursuant to
this Section 4, except that Tenant will not be obligated to make any payments
based on such Estimate Statement or Actual Statement until thirty (30) days
after receipt of such Estimate Statement or Actual Statement. If Tenant does
not object to any Estimate Statement or Actual Statement within ninety (90) days
after Tenant receives any such statement, such statement will be deemed final
and binding on Tenant. Even though the Term has expired and Tenant has vacated
the Premises, when the final determination is made of the Building's Share of
the actual Operating Expenses for the year in which this Lease terminates,
Tenant agrees to promptly pay any increase due over the estimated expenses paid
and, conversely, any overpayment made in the event said expenses decrease shall
promptly be rebated by Landlord to Tenant. Such obligation will be a continuing
one which will survive the expiration or termination of this Lease.
4.9 BOOKS AND RECORDS. Landlord shall maintain books and records in
accordance with sound accounting and management practices, reflecting the
Operating Expenses. If Tenant wishes to review or audit the amount of the
Building's Share of Operating Expenses, Tenant must deliver to Landlord a
written notice of Tenant's desire to review or audit Landlord's books and
records ("AUDIT NOTICE") within three (3) months following Tenant's receipt of
Landlord's first annual reconciliation. Thereafter, if Tenant wishes to review
or audit the Building's Share of Operating Expenses as to any subsequent Lease
Year, Tenant and its duly authorized representatives (which representatives
(including Tenant's auditors, if any) shall be subject to Landlord's approval)
shall have the right to do so with respect to any calendar year within six (6)
months following receipt of the applicable Actual Statement for such calendar
year, upon thirty (30) days' prior delivery of an Audit Notice. Such audit will
be conducted (i) during normal business hours at Landlord's California business
offices or at the management office of the Building; (ii) on consecutive
business days until completed; and
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(iii) in an expeditious manner so as to minimize interference with Landlord's
operations. Landlord agrees that Tenant or its auditors shall have the right to
photocopy Landlord's books and records at Tenant's sole cost and expense.
Tenant shall pay in a timely manner as required by this Lease any amounts stated
as due on the Actual Statement, provided that such payment shall not waive any
right to audit and/or dispute by Tenant as set forth herein. In no event will
Landlord or its property manager be required to (i) photocopy any accounting
records or other items or contracts (provided however, that Tenant or its
auditors shall have the right to photocopy Landlord's books and records at
Tenant's sole cost and expense as provided above), (ii) create any ledgers or
schedules not already in existence, (iii) incur any costs or expenses relative
to such inspection, or (iv) perform any other tasks other than making available
such accounting records as are described in this paragraph. Tenant agrees to
deliver to Landlord the results of any such audit within thirty (30) days of
completion of the audit. If Tenant does not deliver an Audit Notice as to any
annual reconciliation within the time frames set forth hereinabove, then Tenant
acknowledges and agrees that such annual reconciliation, and the Actual
Statement and/or any Estimate Statement for such Lease Year, will be
conclusively binding on Tenant.
If Tenant's audit or review reveals that Landlord has overcharged Tenant and
Landlord agrees with the results of such audit or the results of such audit are
confirmed in an arbitration between the parties pursuant to Section 34, then
within thirty (30) days after the results of such audit are made available to
Landlord, Landlord agrees to reimburse Tenant the amount of such overcharge plus
interest at the Interest Rate stated in Section 1.12 of the Summary. If the
audit reveals that Tenant was undercharged, then within thirty (30) days after
the results of the audit are made available to Tenant, Tenant agrees to
reimburse Landlord the amount of such undercharge plus interest thereon at the
Interest Rate stated in Section 1.12 of the Summary within thirty (30) days of
demand by Landlord. Tenant agrees to pay the cost of such audit, provided that
if the audit reveals that Landlord's determination of the Building's Share of
Operating Expenses as set forth in a certified statement sent to Tenant was in
error in Landlord's favor by more than six percent (6%) of the amount paid by
Tenant prior to delivering the Audit Notice and Landlord agrees with the results
of such audit or the results of such audit are confirmed in an arbitration
between the parties pursuant to Section 34, then Landlord agrees to pay the
reasonable, third-party cost of such audit incurred by Tenant within thirty (30)
days of demand by Tenant. To the extent Landlord must pay the cost of such
audit, such cost shall not exceed a reasonable hourly charge for a reasonable
amount of hours spent by such third-party in connection with the audit.
Landlord shall not be liable for any contingency fee payments to any auditors or
consultants of Tenant. Tenant agrees to keep the results of the audit (and any
settlement, if any, resulting therefrom) confidential and will cause its agents,
employees and contractors to keep such results (and any settlement, if any,
resulting therefrom) confidential. If Landlord disputes the results of Tenant's
audit of Operating Expenses, Landlord shall have the right to initiate an
arbitration of the dispute as provided in Section 34.
5. SECURITY DEPOSIT.
5.1 DELIVERY OF LETTER OF CREDIT. On or before December 10, 1997, Tenant
shall deliver to Landlord the Security Deposit in the form of an unconditional,
irrevocable and renewable letter of credit ("Letter of Credit") in favor of
Landlord in form and issued by a bank with an office (capable of honoring a
demand on the Letter of Credit) located in San Diego County, California,
reasonably satisfactory to Landlord, in the initial principal amount specified
in Section 1.9 of the Summary, as security for the faithful performance and
observance by Tenant of the terms, provisions and conditions of this Lease. The
Letter of Credit shall state that an authorized officer or other representative
of Landlord may make demand on Landlord's behalf for the amount owed by Tenant
to Landlord, and that the issuing bank must immediately honor such demand,
without qualification or satisfaction of any conditions, except the proper
identification of the party making such demand and a certification that Tenant
is in default under this Lease, which default is continuing after notice and
expiration of any applicable notice and cure period required by this Lease. In
addition, the Letter of Credit shall indicate that it is transferable in its
entirety by Landlord as beneficiary and that upon receiving written notice of
transfer, and upon presentation to the issuer of the original Letter of Credit,
the issuer will reissue the Letter of Credit naming such transferee as the
beneficiary. If the term of the Letter of Credit held by Landlord will expire
prior to thirty (30) days following the last day of the Term and it is not
extended, or a new Letter of Credit for an extended period of time is not
substituted, within thirty (30) days prior to the expiration of the Letter of
Credit, then Landlord may deliver written notice of such fact to Tenant and if
Tenant does not extend the Letter of Credit or substitute a new Letter of Credit
within ten (10) business days after Tenant's receipt of such notice from
Landlord, Landlord shall be entitled to make demand for the principal amount of
said Letter of Credit and, thereafter, to hold such funds in accordance with
Section 5.3 below. In the event Tenant fails to deliver such Letter of Credit
to Landlord on or before December 10, 1997 then Landlord, in addition to any of
its other rights and remedies, shall have the right to immediately terminate
this Lease or cause Tenant to cease construction of its Tenant Improvements
until such Letter of Credit is furnished to Landlord.
5.2 PRINCIPAL AMOUNT OF LETTER OF CREDIT. The principal amount of the
Letter of Credit shall be as follows:
<TABLE>
<CAPTION>
REQUIRED
MONTHS OF TERM PRINCIPAL AMOUNT
-------------- ----------------
<S> <C>
1-60 $297,330.00
61-120 To be equal to the Monthly Rent due
and payable by Tenant for the sixty-
first (61st) month of the Lease Term.
</TABLE>
Notwithstanding the foregoing, if as of the applicable reduction date set forth
above, (i) Tenant is in default under this Lease, or (ii) circumstances exist
that would, with notice or lapse of time, or both, constitute a default, then
the principal amount shall not be reduced, unless and until such default or
circumstances shall have been fully cured, at which time the principal amount
may be reduced as hereinabove described. Further notwithstanding the foregoing,
the reduction of the Security Deposit after the sixtieth (60th) month shall also
be conditioned upon (i) Landlord's not having given Tenant written notice of a
failure to pay Rent pursuant to Section 22.1(b) more than three (3) times during
the preceding sixty (60) month period and (ii) Tenant not exercising its
Termination Option (as defined in Section 33 hereof).
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5.3 APPLICATION OF LETTER OF CREDIT. The Letter of Credit shall be held by
Landlord as security for the faithful performance by Tenant of all of the terms,
covenants and conditions of this Lease. If Tenant commits a default with
respect to any provision of this Lease, Landlord may (but shall not be required
to) draw upon the Letter of Credit and use, apply or retain all or any part of
the proceeds for the payment of any sum which is in default, or for the payment
of any other amount which Landlord may spend or become obligated to spend by
reason of Tenant's default or to compensate Landlord for any loss or damage
which Landlord may suffer by reason of Tenant's default. If any portion of the
Letter of Credit is so used or applied, Tenant shall, within ten (10) business
days after demand therefor, post an additional Letter of Credit in an amount
sufficient to restore the Letter of Credit to the principal amount required
under Section 5.2 above. Landlord shall not be required to keep any proceeds
from the Letter of Credit separate from its general funds and Tenant shall not
be entitled to any interest on such proceeds. Should Landlord sell its interest
in the Premises during the Term and if Landlord deposits with the purchaser
thereof the Letter of Credit or any proceeds of the Letter of Credit, thereupon
Landlord shall be discharged from any further liability with respect to the
Letter of Credit and said proceeds.
6. USE.
6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use
specified in Section 1.10 of the Summary, and shall not use or permit the
Premises to be used for any other use or purpose whatsoever. Except for
Landlord's obligations under Section 11.2 of this Lease, Tenant shall, at its
sole cost and expense, observe and comply with all requirements of any board of
fire underwriters or similar body relating to the Premises, and all laws,
statutes, codes, rules and regulations now or hereafter in force relating to or
affecting the use, occupancy, alteration or improvement (whether structural or
non-structural, including unforeseen and/or extraordinary alterations or
improvements, and regardless of the period of time remaining in the Term) of the
Premises, including, without limitation, the provisions of the Americans with
Disabilities Act ("ADA") as it pertains to Tenant's use, occupancy, improvement
and alteration (whether structural or non-structural, including unforeseen
and/or extraordinary alterations or improvements, and regardless of the period
of time remaining in the Term) of the Premises. Tenant shall not use or allow
the Premises to be used (a) in violation of any recorded covenants, conditions
and restrictions affecting the Premises or of any law or governmental rule or
regulation, or of any certificate of occupancy issued for the Premises, or (b)
for any improper, immoral, unlawful or reasonably objectionable purpose. Tenant
shall not cause, maintain or permit any nuisance in, on or about the Premises,
nor commit or suffer to be committed any waste in, on or about the Premises.
6.2 SIGNS, AWNINGS AND CANOPIES. Tenant shall have the right, at Tenant's
sole cost and expense to install a sign on the Building constituting the
Premises, provided Tenant complies with any covenants of record and obtains
approval from all governmental authorities having jurisdiction over the Premises
and from Landlord, which approval shall not be unreasonably withheld. To the
extent Landlord installs a signage monument adjacent to the Premises, Tenant
shall have the right, at Tenant's sole cost and expense, to install its name on
such signage monument if and when such signage monument is installed by
Landlord. The exact location, dimensions, color, illumination and other
features of all of Tenant's signage shall be subject to Landlord's prior written
approval and otherwise in accordance with the Project's signage program. All of
Tenant's exterior sign rights are personal to the original Tenant executing this
Lease, to any Affiliate of the original Tenant, and to any Special Transferee,
only so long as the original Tenant and/or any Affiliate of the original Tenant
and/or any Special Transferee is occupying at least seventy-five percent (75%)
of the total rental square feet comprising the Premises. Tenant agrees, at
Tenant's sole cost and expense, to maintain any such sign, awning, canopy,
decoration, lettering or advertising matter as may be approved by Landlord in
good condition and repair at all times. At the expiration or earlier
termination of this Lease, at Landlord's election, Tenant shall remove all
signs, awnings, canopies, decorations, lettering and advertising installed by or
at the direction of Tenant and shall repair any damage to the Premises resulting
therefrom all at Tenant's sole cost and expense. If Tenant fails to maintain
any such approved sign, awning, decoration, lettering, or advertising, Landlord
may do so and Tenant shall reimburse Landlord for such cost plus a twenty
percent (20%) overhead fee. If, without Landlord's prior written consent,
Tenant installs any sign, awning, decoration, lettering or advertising, or fails
to remove any such item(s) at the expiration or earlier termination of this
Lease, Landlord may have such item(s) removed and stored and may repair any
damage to the Premises at Tenant's expense. The removal, repair and/or storage
costs shall bear interest until paid at the Interest Rate specified in
Section 1.12 of the Summary.
6.3 HAZARDOUS MATERIALS. Except for ordinary and general office supplies,
such as copier toner, liquid paper, glue, ink and common household cleaning
materials and, to the extent approved in writing by Landlord (which shall not be
unreasonably withheld), materials reasonably necessary for the conduct of
Tenant's business that are used and stored in compliance with all applicable
laws (some or all of which may constitute "Hazardous Materials" as defined in
this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be
brought upon, stored, used, handled, generated, released or disposed of on, in,
under or about the Premises by Tenant, its agents, employees, subtenants,
assignees, licensees, contractors or invitees (collectively, "TENANT'S
PARTIES"), without the prior written consent of Landlord, which consent Landlord
may, except as otherwise expressly provided above (with respect to materials
reasonably necessary for the conduct of Tenant's business that are used and
stored in compliance with all applicable laws), withhold in its sole and
absolute discretion. Concurrently with the execution of this Lease, Tenant
agrees to complete and deliver to Landlord an Environmental Questionnaire in the
form of EXHIBIT "E" attached hereto. Upon the expiration or earlier termination
of this Lease, Tenant agrees to promptly remove from the Premises, at its sole
cost and expense, any and all Hazardous Materials, including any equipment or
systems containing Hazardous Materials which are installed, brought upon,
stored, used, generated or released upon, in, under or about the Premises by
Tenant or any of Tenant's Parties. To the fullest extent permitted by law,
Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord
and Landlord's partners, officers, directors, employees, agents, successors and
assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation, clean-up,
removal, remediation and restoration costs, sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees and court costs) which arise or
result from the presence of Hazardous Materials on, in, under or about the
Premises and which are caused or permitted by Tenant or any of Tenant's Parties.
Tenant agrees to promptly notify Landlord of any release of Hazardous Materials
which Tenant becomes aware of during the Term of this Lease, whether caused by
Tenant or any other persons or entities. In the
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event of any release of Hazardous Materials caused or permitted by Tenant or any
of Tenant's Parties or any other persons or entities, Landlord shall have the
right, but not the obligation, to cause Tenant to immediately take all steps
Landlord deems necessary or appropriate to remediate such release and prevent
any similar future release to the satisfaction of Landlord and Landlord's
mortgagee(s). At all times during the Term of this Lease and in accordance with
Section 15 hereof, Landlord will have the right, but not the obligation, to
enter upon the Premises to inspect, investigate, sample and/or monitor the
Premises to determine if Tenant is in compliance with the terms of this Lease
regarding Hazardous Materials. Tenant will, upon the reasonable request of
Landlord (which request shall not, unless Tenant has failed to comply with the
terms and provisions of this Section 6.3 or except in cases of emergency, be
made more than once every six (6) months throughout the Term of this Lease,
cause to be performed an environmental audit of the Premises at Tenant's expense
by an environmental consulting firm reasonably acceptable to Landlord. As used
in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any
hazardous or toxic materials, substances or wastes as now or hereafter
designated under any law, statute, ordinance, rule, regulation, order or ruling
of any agency of the State, the United States Government or any local
governmental authority, including, without limitation, asbestos, petroleum,
petroleum hydrocarbons and petroleum based products, urea formaldehyde foam
insulation, polychlorinated biphenyls ("PCBs"), freon and other
chlorofluorocarbons, and any material defined as a "biohazardous waste" or
"medical waste" or other waste under California Health and Safety Code,
Division 20, Chapter 6.1 (Medical Waste Management Act). The provisions of this
Section 6.3 will survive the expiration or earlier termination of this Lease.
Tenant shall immediately advise Landlord in writing of, and provide Landlord a
copy of:
(1) Any notice of violation or potential or alleged violation of any
law concerning Hazardous Materials received by Tenant from any
governmental agency; and
(2) Any and all inquiry, investigation, enforcement, clean-up,
removal or governmental or regulatory actions instituted or
threatened relating to the Premises.
Landlord shall indemnify, defend and hold harmless Tenant from and against any
and all claims, judgments, damages, penalties, fines, costs, liabilities and
losses (including, without limitation, sums paid in settlement of claims and for
reasonable attorneys' fees, consultant fees and expert fees, (but specifically
excluding special, indirect or consequential damages including but not limited
to claims for loss of use, anticipated profit or business opportunity,
market-based stigma damages or business interruption, or mental or emotional
distress or fear of injury or disease) to the extent arising as a result of any
Hazardous Materials (1) located in, on or under the Building as of the
commencement of Tenant's occupancy of the Premises, or (2) hereafter caused to
be located in, on or under the Building by Landlord and/or any of Landlord's
employees, agents or representatives or any other persons or entities (except
Tenant or Tenant's Parties). This indemnification of Tenant by Landlord
includes, without limitation, costs incurred in connection with any
investigation of site conditions or any clean-up, remedial, removal or
restoration work. The provisions of this paragraph shall survive the expiration
of the Term or earlier termination of this Lease. Notwithstanding anything
above to the contrary, the foregoing indemnity shall not extend to Hazardous
Materials caused to be located in, on or under the Building by Tenant or any of
Tenant's Parties.
6.4 REFUSE AND SEWAGE. Tenant agrees not to keep any trash, garbage, waste
or other refuse on the Premises except in sanitary containers and agrees to
regularly and frequently remove same from the Premises. Tenant shall keep all
containers or other equipment used for storage of such materials in a clean and
sanitary condition. Tenant shall, at Tenant's sole cost and expense, properly
dispose of all sanitary sewage and shall not use the sewage disposal system for
the disposal of anything except sanitary sewage. Tenant shall keep the sewage
disposal system free of all obstructions and in good operating condition.
Tenant shall contract directly for all trash disposal services at Tenant's sole
cost and expense.
6.5 PARKING.
(a) TENANT'S PARKING PRIVILEGES. During the Term of this Lease, Landlord
shall lease to Tenant, and Tenant shall lease from Landlord, the number
of parking privileges specified in Section 1.14 of the Summary hereof
for use by Tenant's employees in the common parking areas for the
Premises within the Project, as designated by Landlord from time to
time. Landlord shall at all times have the right to reasonably
establish and modify the nature and extent of the parking areas for the
Premises and Project (including whether such areas shall be surface,
underground and/or other structures) as long as Tenant is provided the
number of parking privileges designated in Section 1.14 of the Summary.
In addition, Landlord may, in its sole discretion, assign any unreserved
and unassigned parking privileges, and/or make all or a portion of such
privileges reserved, or unreserved so long as Tenant is provided the
total number of parking privileges in Section 1.14 of the Summary.
(b) PARKING CHARGES; LOSS OF PRIVILEGES. Each of Tenant's parking
privileges set forth in Section 1.14 of the Summary hereof shall not be
subject to any additional charge to Tenant. In addition to such parking
privileges for use by Tenant's employees, Landlord shall permit access
to the parking areas for Tenant's visitors, subject to availability of
spaces.
(c) PARKING RULES. The use of the parking areas shall be subject to any
reasonable, non-discriminatory rules and regulations adopted by Landlord
and/or Landlord's parking operators from time to time, including any
system for controlled ingress and egress and charging visitors and
invitees, with appropriate provision for validation of such charges.
Tenant shall not use more parking privileges than its allotment and
shall not use any parking spaces specifically assigned by Landlord to
other tenants of the Project or for such other uses as visitor parking.
Tenant's parking privileges shall be used only for parking by vehicles
no larger than normally sized passenger automobiles or pick-up trucks.
Tenant shall not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, suppliers, shippers,
customers or invitees to be loaded, unloaded, or parked in areas other
than those designated by Landlord for such activities. If Tenant
permits or allows any of the prohibited activities described herein,
then Landlord shall have the right, without notice, in addition to such
other
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rights and remedies that it may have, to remove or tow away the vehicle
involved and charge the cost thereof to Tenant, which cost shall be
immediately payable by Tenant upon demand by Landlord.
7. PAYMENTS AND NOTICES. All Rent and other sums payable by Tenant to
Landlord hereunder shall be paid to Landlord at the address designated in
Section 1.1 of the Summary, or to such other persons and/or at such other places
as Landlord may hereafter designate in writing. Any notice required or
permitted to be given hereunder must be in writing and may be given by personal
delivery (including delivery by nationally recognized overnight courier or
express mailing service), facsimile transmission, or by registered or certified
mail, postage prepaid, return receipt requested, addressed to Tenant at the
address(es) designated in Section 1.2 of the Summary, or to Landlord at the
address(es) designated in Section 1.1 of the Summary. Either party may, by
written notice to the other, specify a different address for notice purposes.
Any such notice shall be deemed duly served or given when actually (i) delivered
or refused, if personally delivered or sent by registered or certified mail or
(ii) recorded as transmitted, if by facsimile transmission.
8. BROKERS. The parties recognize that the broker(s) who negotiated this
Lease are stated in Section 1.11 of the Summary. Each party represents and
warrants to the other, that, to its knowledge, no other broker, agent or finder
(a) negotiated or was instrumental in negotiating or consummating this Lease on
its behalf, and (b) is or might be entitled to a commission or compensation in
connection with this Lease. Any broker, agent or finder of Tenant whom Tenant
has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify,
protect, defend (by counsel reasonably approved in writing by Landlord) and hold
Landlord harmless from and against any and all claims, judgments, suits, causes
of action, damages, losses, liabilities and expenses (including attorneys' fees
and court costs) resulting from any breach by Tenant of the foregoing
representation, including, without limitation, any claims that may be asserted
against Landlord by any broker, agent or finder undisclosed by Tenant herein.
Landlord shall indemnify, protect, defend (by counsel reasonably approved in
writing by Tenant) and hold Tenant harmless from and against any and all claims,
judgments, suits, causes of action, damages, losses, liabilities and expenses
(including attorneys' fees and court costs) resulting from any breach by
Landlord of the foregoing representation, including, without limitation, any
claims that may be asserted against Tenant by any broker, agent or finder
undisclosed by Landlord herein. The foregoing indemnities shall survive the
expiration or earlier termination of this Lease.
9. SURRENDER; HOLDING OVER.
9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of
this Lease, Tenant shall surrender all keys for the Premises to Landlord, and
Tenant shall deliver exclusive possession of the Premises to Landlord broom
clean and in first-class condition and repair, reasonable wear and tear excepted
(and casualty damage excepted if this Lease is terminated as a result thereof
pursuant to Section 18), with all of Tenant's personal property (and those
items, if any, of Tenant Improvements and Tenant Changes identified by Landlord
pursuant to Section 12.2 below) removed therefrom and all damage caused by such
removal repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for
any reason, Tenant fails to surrender the Premises on the expiration or earlier
termination of this Lease, with such removal and repair obligations completed,
then, in addition to the provisions of Section 9.3 below and Landlord's rights
and remedies under Section 12.4 and the other provisions of this Lease, Tenant
shall indemnify, protect, defend (by counsel reasonably approved in writing by
Landlord) and hold Landlord harmless from and against any and all claims,
judgments, suits, causes of action, damages, losses, liabilities and expenses
(including attorneys' fees and court costs) resulting from such failure to
surrender, including, without limitation, any claim made by any succeeding
tenant based thereon. The foregoing indemnity shall survive the expiration or
earlier termination of this Lease.
9.2 HOLDING OVER. If Tenant holds over after the expiration or earlier
termination of the Lease Term, then, without waiver of any right on the part of
Landlord as a result of Tenant's failure to timely surrender possession of the
Premises to Landlord, Tenant shall become a tenant at sufferance only, upon the
terms and conditions set forth in this Lease so far as applicable (including
Tenant's obligation to pay all costs, expenses and any other additional rent
under this Lease), but at a Monthly Rent equal to one hundred fifty percent
(150%) of the Monthly Rent applicable to the Premises immediately prior to the
date of such expiration or earlier termination. Acceptance by Landlord of rent
after such expiration or earlier termination shall not constitute a consent to a
hold over hereunder or result in an extension of this Lease. Tenant shall pay
an entire month's Monthly Rent calculated in accordance with this Section 9.2
for any portion of a month it holds over and remains in possession of the
Premises pursuant to this Section 9.2.
9.3 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this
Section 9 are in addition to, and do not affect, Landlord's right of re-entry or
any other rights of Landlord hereunder or otherwise provided at law or in
equity.
10. TAXES.
10.1 REAL PROPERTY TAXES. Tenant agrees to pay the Building's Share of all
general and special real property taxes, assessments (including, without
limitation, change in ownership taxes or assessments), liens, bond obligations,
license fees or taxes and any similar impositions in-lieu of other impositions
now or previously within the definition of real property taxes or assessments
and any and all assessments under any covenants, conditions and restrictions
affecting the Project (collectively "REAL PROPERTY TAXES") which may be now or
hereafter levied or assessed against the Project applicable to the period from
the Early Occupancy Date, until the expiration or sooner termination of this
Lease. Notwithstanding the foregoing provisions, if the Real Property Taxes are
not levied and assessed against the entire Project by means of a single tax bill
(i.e., if the Project is separated into two (2) or more separate tax parcels for
purposes of levying and assessing the Real Property Taxes), then, at Landlord's
option, Tenant shall pay Tenant's pro rata share of all Real Property Taxes
which may be levied or assessed by any lawful authority against the land and
improvements of the separate tax parcel on which the Premises are located.
Tenant's pro rata share under such circumstances shall be apportioned according
to the floor area of the Premises as it relates to the total leasable floor area
of all of the buildings (including the Premises) situated in the separate tax
parcel in which the Premises is located. Notwithstanding anything in this
Section 10.1 to the contrary, "Real Property Taxes" shall not include Landlord's
federal or state income, franchise, inheritance or estate taxes. Upon Tenant's
request, Landlord shall, at Tenant's sole cost and expense, contest the
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amount of Real Property Taxes for the Project, which contest shall be undertaken
in a manner to be reasonably determined by Landlord.
All Real Property Taxes for the tax year in which the Early Occupancy Date
occurs and for the tax year in which this Lease terminates shall be apportioned
and adjusted so that Tenant shall not be responsible for any Real Property Taxes
for a period of time occurring prior to the Early Occupancy Date or subsequent
to the expiration of the Lease term.
The amount to be paid pursuant to the provisions of this Section 10.1 shall be
paid monthly in advance as part of Tenant's Monthly Operating Expense Charge as
estimated by Landlord based on the most recent tax bills and estimates of
reappraised values (if reappraisal is to occur), commencing with the month (or
partial month on a prorated basis if such be the case) that the Commencement
Date occurs. The initial estimated monthly charge for the Building's Share of
Real Property Taxes is included in the Monthly Operating Expense Charge as
provided in Section 4.
Notwithstanding anything in this Lease to the contrary, Tenant shall be solely
responsible for, and shall pay directly to Landlord (in addition to Tenant's
Monthly Operating Expense Charge pertaining to Real Property Taxes), any
increase in Real Property Taxes on account of any improvements made to the
Premises by Tenant including, but not limited to, the Tenant Improvements.
If at any time during the Term under the laws of the United States, or the
state, county, municipality, or any political subdivision thereof in which the
Premises is located, a tax or excise on rent or any other tax however described
is levied or assessed by any such political body against Landlord on account of
rent payable to Landlord hereunder or any tax based on or measured by
expenditures made by Tenant on behalf of Landlord, such tax or excise shall be
considered "Real Property Taxes" for purposes of this Section 10.1, and shall be
payable in full by Tenant. Such taxes or excises shall be payable within thirty
(30) days after Tenant's receipt of the tax bill therefor from Landlord.
10.2 PERSONAL PROPERTY TAXES. Tenant shall be liable for, and shall pay
before delinquency, all taxes and assessments (real and personal) levied against
(a) any personal property or trade fixtures placed by Tenant in or about the
Premises (including any increase in the assessed value of the Premises based
upon the value of any such personal property or trade fixtures); and (b) any
Tenant Improvements or alterations in the Premises (whether installed and/or
paid for by Landlord or Tenant). If any such taxes or assessments are levied
against Landlord or Landlord's property, Landlord may, after written notice to
Tenant (and under proper protest if requested by Tenant) pay such taxes and
assessments, and Tenant shall reimburse Landlord therefor within thirty (30)
days after demand by Landlord; provided, however, Tenant, at its sole cost and
expense, shall have the right, with Landlord's cooperation, to bring suit in any
court of competent jurisdiction to recover the amount of any such taxes and
assessments so paid under protest.
11. REPAIRS.
11.1 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations under
Section 11.2 and except for latent defects in the Premises not caused by Tenant
or Tenant's improvements to the Premises, Tenant shall at all times and at
Tenant's sole cost and expense, keep, maintain, clean, repair, renovate,
retrofit, replace and preserve the Premises and all parts thereof, structural
and non-structural, including, without limitation, utility meters, plumbing,
pipes and conduits, all heating, ventilating and air conditioning systems
located within the Premises, all fixtures, furniture and equipment, Tenant's
signs, if any, locks, closing devices, security devices, windows, window sashes,
casements and frames, floors and floor coverings, shelving, restrooms, ceilings,
interior walls, roof, skylights, interior and demising walls, doors, electrical
and lighting equipment, sprinkler systems, walkways, loading dock areas and
doors, rail spur areas, fences, signs, and any Tenant Improvements, Tenant
Changes or other alterations, additions and other property and/or fixtures
located within the Premises in good condition and repair, reasonable wear and
tear excepted. Tenant shall at all times during the Term make all structural
and non-structural changes, repairs and improvements to the Premises of every
kind and nature, whether ordinary or extraordinary, foreseen or unforeseen,
which may be required by any Laws or for the safety of the Premises Tenant
agrees to procure and maintain maintenance contracts for all heating,
ventilating and air conditioning systems with reputable contractors reasonably
approved by Landlord. Tenant agrees, at Tenant's sole cost and expense, to use
contractors designated or otherwise approved by Landlord for any repairs to, or
that will adversely affect, the Building's systems and equipment. Such
maintenance and repairs shall be performed with due diligence, lien-free and in
a good and workmanlike manner, by licensed contractor(s) which are selected by
Tenant and approved by Landlord, which approval Landlord shall not unreasonably
withhold or delay.
11.2 LANDLORD'S REPAIR RIGHTS AND OBLIGATIONS. Except as provided in this
Section 11.2, Landlord has no obligation whatsoever to alter, remodel, improve,
repair, renovate, retrofit, replace, redecorate or paint all or any part of the
Premises. Tenant waives the right to make repairs at Landlord's expense under
any law, statute or ordinance now or hereafter in effect (including the
provisions of California Civil Code Section 1942 and any successive sections or
statutes of a similar nature). If Tenant fails to perform Tenant's obligations
under Section 11.1 hereof, or under any other provision of this Lease, then
Landlord shall have the option (but not the obligation) to enter upon the
Premises after ten (10) days' prior written notice to Tenant, or in the case of
an emergency immediately without prior notice, to perform such obligations on
Tenant's behalf necessary to return the Premises to good order, condition and
repair, whereupon the costs incurred by Landlord shall become due and payable to
Landlord, upon demand, together with a fee of ten percent (10%) of the costs of
such work for Landlord's managing agent. In addition, Landlord shall, as part
of Operating Expenses (but subject, to the extent applicable, Section 4.4(xii)
hereof) for the Project, repair and maintain the Building shell, exterior walls,
foundations and structural portions of the roof; provided, however, to the
extent such maintenance or repairs are required as a result of any act, neglect,
fault or omission of Tenant or any of Tenant's Parties or otherwise made
necessary due to Tenant's use or occupancy of the Premises, Tenant shall pay to
Landlord upon demand, as additional rent, the costs of such maintenance and
repairs, together with a fee of ten percent (10%) of said costs.
11.3 AS-IS. Tenant acknowledges and agrees that, except to the extent
specifically set forth in this Lease and except for latent defects in the
Premises not caused by Tenant or Tenant's improvements to the Premises, Landlord
has not
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made, does not make and specifically negates and disclaims any representations,
warranties, promises, covenants, agreements or guarantees of any kind or
character whatsoever concerning or with respect to (a) the value, nature,
quality or condition of the Premises; (b) the suitability of the Premises for
any and all activities and uses which Tenant may conduct thereon; (c) the
compliance of the Premises with any laws, rules, ordinances or regulations of
any applicable governmental authority or body, including, without limitation,
environmental laws (collectively, "LAWS"); (d) the habitability,
merchantability, marketability, profitability or fitness for a particular
purpose of the Premises; (e) the manner or quality of the construction or
materials incorporated into the Premises; (f) the manner, quality, state of
repair or lack of repair of the Premises; or (g) any other matter with respect
to the Premises. Tenant further acknowledges and agrees that having been given
the opportunity to inspect the Premises, Tenant is relying solely on its own
investigation of the Premises and not on any information provided or to be
provided by Landlord. Tenant further acknowledges and agrees that any
information provided or to be provided by or on behalf of Landlord with respect
to the Premises, was obtained from a variety of sources and that Landlord has
not made any independent investigation or verification of such information and
makes no representations as to the accuracy or completeness of such information.
Tenant further acknowledges and agrees that, except to the extent specifically
set forth in this Lease, the leasing of the Premises as provided for herein is
made on an "AS-IS" condition and basis with all faults. Except as otherwise
expressly provided in this Lease, Landlord shall have no liability or
responsibility for any latent or patent defects in the Premises. Tenant and
anyone claiming by, through or under Tenant hereby fully and irrevocably
releases Landlord from any and all claims that it may now have or hereafter
acquire against Landlord for any cost, loss, liability, damage, expense, demand,
action or cause of action arising from or related to any construction defects,
errors, omissions or other conditions, including, but not limited to,
environmental matters (but subject to Landlord's indemnity set forth in
Section 6.3 hereof), now or hereafter affecting the Premises. This release
includes claims of which Tenant is presently unaware or which Tenant does not
presently suspect to exist in its favor which, if known by Tenant, would
materially affect Tenant's release of Landlord. Tenant specifically waives the
provision of California Civil Code Section 1542, which provides as follows: "A
general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor."
12. ALTERATIONS.
12.1 TENANT CHANGES; CONDITIONS.
(a) Tenant shall not make any alterations, additions, improvements or
decorations to the Premises (collectively, "TENANT CHANGES," and
individually, a "TENANT CHANGE") unless Tenant first obtains Landlord's
prior written approval thereof, which approval Landlord shall not
unreasonably withhold or delay. Notwithstanding the foregoing,
Landlord's prior approval shall not be required for any Tenant Change
which satisfies all of the following conditions (hereinafter a
"PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does not
exceed Twenty-Five Thousand Dollars ($25,000.00) individually; (ii) the
costs of such Tenant Change when aggregated with the costs of all other
Tenant Changes made by Tenant do not exceed One Hundred Thousand Dollars
($100,000.00) in any one (1) year period; (iii) Tenant delivers to
Landlord final plans, specifications and working drawings for such
Tenant Change at least ten (10) days prior to commencement of the work
thereof; (iv) Tenant and such Tenant Change otherwise satisfy all other
conditions set forth in this Section 12.1; and (v) the Tenant Change
does not affect the structural, mechanical, life-safety, the roof or the
exterior of the Premises.
(b) All Tenant Changes shall be performed: (i) in accordance with the
approved plans, specifications and working drawings; (ii) lien-free and
in a good and workmanlike manner; (iii) in compliance with all laws,
rules and regulations of all governmental agencies and authorities
including, without limitation, the provisions of Title III of the ADA;
and (iv) at such times, in such manner and subject to such rules and
regulations as Landlord may from time to time reasonably designate.
(c) Throughout the performance of the Tenant Changes, Tenant shall obtain,
or cause its contractors to obtain, workers compensation insurance and
commercial general liability insurance in compliance with the provisions
of Section 20 of this Lease.
12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant Changes
and the initial Tenant Improvements in the Premises (whether installed or paid
for by Landlord or Tenant), shall become the property of Landlord and shall
remain upon and be surrendered with the Premises at the end of the Term of this
Lease; provided, however, Landlord may, by written notice delivered to Tenant on
or before the expiration of the Lease Term (or upon any sooner termination of
this Lease) identify those items of the initial Tenant Improvements and Tenant
Changes which Landlord shall require Tenant to remove at the end of the Term of
this Lease. Landlord shall notify Tenant nine (9) months before the expiration
of the Lease Term of any Tenant Changes and Tenant Improvements that Landlord
shall require Tenant to remove at the end of the Term of this Lease. If
Landlord requires Tenant to remove any such items as described above, Tenant
shall, at its sole cost, remove the identified items on or before the expiration
or sooner termination of this Lease and repair any damage to the Premises caused
by such removal (or, at Landlord's option, shall pay to Landlord all of
Landlord's costs of such removal and repair). Notwithstanding anything above to
the contrary, Tenant shall have the right, at Tenant's sole cost and expense, to
remove any Tenant Improvements in the Premises that constitute Tenant's
biomedical manufacturing use improvements (as opposed to those Tenant
Improvements that are general office type improvements) (the "SPECIAL
IMPROVEMENTS"), which Special Improvements are more particularly described on
EXHIBIT "G", attached hereto; provided, however that Tenant shall remove such
Special Improvements on or before the expiration or sooner termination of this
Lease and repair any damage to the Premises caused by the removal of such
Special Improvements (or, at Landlord's option, shall pay to Landlord all of
Landlord's costs of such removal and repair).
12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned
by Tenant or installed by Tenant at its expense in the Premises (including
business and trade fixtures, furniture and movable partitions) shall be, and
remain,
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the property of Tenant, and shall be removed by Tenant from the Premises, at
Tenant's sole cost and expense, on or before the expiration or sooner
termination of this Lease. Tenant shall repair any damage caused by such
removal.
12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration
or sooner termination of this Lease all of its personal property, or any items
of Tenant Improvements or Tenant Changes identified by Landlord for removal
pursuant to Section 12.2 above, Landlord may, (without liability to Tenant for
loss thereof), at Tenant's sole cost and in addition to Landlord's other rights
and remedies under this Lease, at law or in equity: (a) remove and store such
items in accordance with applicable law; and/or (b) upon ten (10) days' prior
notice to Tenant sell all or any such items at private or public sale for such
price as Landlord may obtain as permitted under applicable law. Landlord shall
apply the proceeds of any such sale to any amounts due to Landlord under this
Lease from Tenant (including Landlord's attorneys' fees and other costs incurred
in the removal, storage and/or sale of such items), with any remainder to be
paid to Tenant.
13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other
liens to be filed against all or any part of the Premises, nor against Tenant's
leasehold interest in the Premises, by reason of or in connection with any
repairs, alterations, improvements or other work contracted for or undertaken by
Tenant or any other act or omission of Tenant or Tenant's agents, employees,
contractors, licensees or invitees. Tenant shall, at Landlord's request,
provide Landlord with enforceable, conditional and final lien releases (and
other reasonable evidence reasonably requested by Landlord to demonstrate
protection from liens) from all persons furnishing labor and/or materials with
respect to the Premises. Landlord shall have the right at all reasonable times
to post on the Premises and record any notices of non-responsibility which it
deems necessary for protection from such liens. If any such liens are filed,
Tenant shall, at its sole cost, immediately cause such lien to be released of
record or bonded so that it no longer affects title to the Premises. If Tenant
fails to cause such lien to be so released or bonded within thirty (30) days
after filing thereof, Landlord may, without waiving its rights and remedies
based on such breach, and without releasing Tenant from any of its obligations,
cause such lien to be released by any means it shall deem proper, including
payment in satisfaction of the claim giving rise to such lien. Tenant shall pay
to Landlord within thirty (30) days after receipt of invoice from Landlord, any
sum paid by Landlord to remove such liens, together with interest at the
Interest Rate from the date of such payment by Landlord.
14. ASSIGNMENT AND SUBLETTING.
14.1 RESTRICTION ON TRANSFER. Tenant will not assign or encumber this Lease
in whole or in part, nor sublet all or any part of the Premises, without the
prior written consent of Landlord, which consent Landlord will not unreasonably
withhold, except as provided in this Section 14. The consent by Landlord to any
assignment, encumbrance or subletting shall not constitute a waiver of the
necessity for such consent to any subsequent assignment or subletting. This
prohibition against assigning or subletting shall be construed to include a
prohibition against any assignment or subletting by operation of law. If this
Lease is assigned by Tenant, or if the Premises or any part thereof are sublet
or occupied by any person or entity other than Tenant, Landlord may collect rent
from the assignee, subtenant or occupant, and apply the net amount collected to
the rent herein reserved, but no such assignment, subletting, occupancy or
collection shall be deemed a waiver on the part of Landlord, or the acceptance
of the assignee, subtenant or occupant as Tenant, or a release of Tenant from
the further performance by Tenant of covenants on the part of Tenant herein
contained unless expressly made in writing by Landlord. Irrespective of any
assignment or sublease, Tenant shall remain fully liable under this Lease and
shall not be released from performing any of the terms, covenants and conditions
of this Lease. Without limiting in any way Landlord's right to withhold its
consent on any reasonable grounds, it is agreed that Landlord will not be acting
unreasonably in refusing to consent to an assignment or sublease if, in
Landlord's opinion, (i) the net worth or financial capabilities of such assignee
is less than that of Tenant at the date hereof, (ii) the proposed assignee or
subtenant does not have the financial capability to fulfill the obligations
imposed by the assignment, (iii) the proposed assignment or sublease involves a
change of use of the Premises from that specified herein, or (iv) the proposed
assignee or subtenant is not, in Landlord's reasonable opinion, of reputable or
good character. Any proposed assignee or subtenant which Landlord does not
disapprove shall be deemed a "PERMITTED BUSINESS." Except with respect to a
transfer of stock of Tenant if Tenant is a publicly-held corporation and such
stock is transferred publicly or through a recognized security exchange or
over-the-counter market, if Tenant is a corporation, or is an unincorporated
association or partnership, the transfer, assignment or hypothecation of any
stock or interest in such corporation, association or partnership in the
aggregate in excess of forty-nine percent (49%) shall be deemed an assignment
within the meaning and provisions of this Section 14.1.
14.2 TRANSFER NOTICE. If Tenant desires to effect an assignment, encumbrance
or subletting (a "TRANSFER"), then at least thirty (30) days prior to the date
when Tenant desires the Transfer to be effective (the "TRANSFER DATE"), Tenant
agrees to give Landlord a notice (the "TRANSFER NOTICE"), stating the name,
address and business of the proposed assignee, sublessee or other transferee
(sometimes referred to hereinafter as "TRANSFEREE"), reasonable information
(including references) concerning the character, ownership, and financial
condition of the proposed Transferee, the Transfer Date, any ownership or
commercial relationship between Tenant and the proposed Transferee, and the
consideration and all other material terms and conditions of the proposed
Transfer, all in such detail as Landlord may reasonably require.
14.3 LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of
any Transfer Notice, and any additional information requested by Landlord
concerning the proposed Transferee's financial responsibility, Landlord will
notify Tenant of its election to do one of the following: (i) consent to the
proposed Transfer subject to such reasonable conditions as Landlord may impose
in providing such consent; or (ii) refuse such consent, which refusal shall be
on reasonable grounds; or (iii) with respect to a Transfer (but not including a
Transfer to an Affiliate or to a Special Transferee) of more than fifty-one
percent (51%) of the Premises, terminate this Lease as to all of the Premises
or, in Landlord's sole and absolute discretion, such portion of the Premises
which is proposed to be sublet or assigned and recapture all or such portion of
the Premises for reletting by Landlord.
14.4 ADDITIONAL CONDITIONS. A condition to Landlord's consent to any
Transfer of this Lease will be the delivery to Landlord of a true copy of the
fully executed instrument of assignment, sublease, transfer or hypothecation, in
form and
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substance reasonably satisfactory to Landlord. Tenant agrees to pay to
Landlord, as additional rent, fifty percent (50%) of all sums and other
consideration payable to and for the benefit of Tenant by the assignee or
sublessee in excess of the rent payable under this Lease for the same period
and portion of the Premises. In calculating excess rent or other
consideration which may be payable to Landlord under this Section, Tenant
will be entitled to deduct commercially reasonable third party brokerage
commissions and attorneys' fees and other amounts reasonably and actually
expended by Tenant in connection with such assignment or subletting if
acceptable written evidence of such expenditures is provided to Landlord. No
Transfer will release Tenant of Tenant's obligations under this Lease or
alter the primary liability of Tenant to pay the Rent and to perform all
other obligations to be performed by Tenant hereunder. Landlord may require
that any Transferee remit directly to Landlord on a monthly basis, all monies
due Tenant by said Transferee, and each sublease shall provide that if
Landlord gives said sublessee written notice that Tenant is in default under
this Lease, said sublessee will thereafter make all payments due under the
sublease directly to or as directed by Landlord, which payments will be
credited against any payments due under this Lease. Tenant hereby
irrevocably and unconditionally assigns to Landlord all rents and other sums
payable under any sublease of the Premises; provided, however, that Landlord
hereby grants Tenant a license to collect all such rents and other sums so
long as Tenant is not in default under this Lease. Tenant shall, within ten
(10) days after the execution and delivery of any assignment or sublease,
deliver a duplicate original copy thereof to Landlord. Consent by Landlord
to one Transfer will not be deemed consent to any subsequent Transfer. In
the event of default by any Transferee of Tenant or any successor of Tenant
in the performance of any of the terms hereof, Landlord may proceed directly
against Tenant without the necessity of exhausting remedies against such
Transferee or successor. If Tenant effects a Transfer or requests the
consent of Landlord to any Transfer (whether or not such Transfer is
consummated), then, upon demand, and as a condition precedent to Landlord's
consideration of the proposed assignment or sublease, Tenant agrees to pay
Landlord a non-refundable administrative fee of Five Hundred Dollars
($500.00), plus Landlord's reasonable attorneys' fees and costs and other
costs incurred by Landlord in reviewing such proposed assignment or sublease.
Notwithstanding any contrary provision of this Lease, if Tenant or any
proposed Transferee claims that Landlord has unreasonably withheld or delayed
its consent to a proposed Transfer or otherwise has breached its obligations
under this Section 14, Tenant's and such Transferee's only remedy shall be to
seek a declaratory judgment and/or injunctive relief, and Tenant, on behalf
of itself and, to the extent permitted by law, such proposed Transferee
waives, unless Landlord's consent was withheld in bad faith, all other
remedies against Landlord, including without limitation, the right to seek
monetary damages or to terminate this Lease.
14.5 PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained
in this Article 14, Landlord consents to the Transfer of the Premises to an
adequately capitalized entity which is controlled by, controls, or is under
common control with, Tenant (an "AFFILIATE"), provided that Tenant notifies
Landlord of any such Transfer prior to the effective date thereof and promptly
supplies Landlord with any documents or information requested by Landlord
regarding such Transfer or such Affiliate (including an assumption of Tenant's
obligations under this Lease), and further provided that such Transfer is not a
subterfuge by Tenant to avoid its obligations under this Lease. "CONTROL," as
used in this Section 14.5, shall mean the ownership, directly or indirectly, of
greater than fifty percent (50%) of the voting interest in an entity.
15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all
reasonable times following prior notice to Tenant (which notice, except in the
case of emergencies and except with respect to ordinary services to be provided
by Landlord within the Premises, shall be no less than twenty-four (24) hours
prior notice), have the right to enter the Premises to inspect the same, to
exhibit the Premises to prospective lenders or purchasers (or during the last
twelve (12) months of the Term, to prospective tenants), to post notices of
non-responsibility, and/or to alter, improve or repair the Premises as
contemplated by Section 11.2 in the event Tenant fails to perform its
obligations under Section 11.1, all without being deemed guilty of or liable for
any breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant,
and without abatement of rent. In exercising such entry rights, Landlord shall
endeavor to minimize, as reasonably practicable, the interference with Tenant's
business, and shall provide Tenant with reasonable advance written notice of
such entry (except in emergency situations). Landlord shall have the means
which Landlord may deem proper to open Tenant's doors in an emergency in order
to obtain entry to the Premises. Any such entry (in accordance with the terms
hereof) to the Premises obtained by Landlord by any of said means or otherwise
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises or any portion thereof, or grounds for any abatement or
reduction of Rent and Landlord shall not have any liability to Tenant for any
damages or losses on account of any such entry by Landlord except, subject to
the provisions of Sections 21.1 and 23, to the extent of Landlord's gross
negligence or willful misconduct. Except for services (if any) required to be
provided by Landlord to the Premises under this Lease and except in the case of
emergencies, Landlord's entry rights are conditioned upon a representative of
Tenant (but only to the extent a representative is available) accompanying
Landlord during any other entry into the Premises.
16. UTILITIES AND SERVICES. Except for Landlord's Work (as such term is
defined in EXHIBIT "C"), Tenant shall be solely responsible for obtaining and
shall promptly pay all charges for heat, air conditioning, water, gas,
electricity or any other utility used, consumed or provided in, furnished to or
attributable to the Premises directly to the supplying utility companies.
Tenant shall reimburse Landlord within thirty (30) days of billing for fixture
charges and/or water tariffs, if applicable, which are charged to Landlord by
utility companies. Landlord will notify Tenant of this charge as soon as it
becomes known. This charge will increase or decrease with current charges being
levied against Landlord or the Premises by the local utility company, and will
be due as additional rent. In no event shall Rent abate or shall Landlord be
liable for any interruption or failure in the supply of any such utility
services to Tenant. Tenant acknowledges and agrees that Tenant shall be solely
responsible for providing security for the Premises and that Landlord shall not
be liable for, and Landlord is hereby released from any responsibility for, any
damage either to persons or property sustained by Tenant or any Tenant Parties
on account of any acts of third parties. Tenant may, at its own expense,
install its own security system ("TENANT'S SECURITY SYSTEM") in the Premises;
provided, however, that Tenant shall coordinate the installation and operation
of Tenant's Security System with Landlord to assure that Tenant's Security
System is compatible with the Building's systems and equipment and to the extent
that Tenant's Security System is not compatible
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with the Building's systems and equipment, Tenant shall not be entitled to
install or operate it. Tenant shall be solely responsible, at Tenant's sole
cost and expense, for the monitoring, operation and removal of Tenant's Security
System.
17. INDEMNIFICATION AND EXCULPATION.
17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent such
matter is not covered by the insurance required to be maintained by Tenant under
this Lease and such matter is attributable to the gross negligence or willful
misconduct of Landlord or Landlord's agent(s), Landlord shall not be liable to
Tenant, Tenant's employees, agents or invitees for: (i) any damage to property
of Tenant, or of others, located in, on or about the Premises, (ii) the loss of
or damage to any property of Tenant or of others by theft or otherwise,
(iii) any injury or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, rain or leaks from
any part of the Premises or from the pipes, appliance of plumbing works or from
the roof, street or subsurface or from any other places or by dampness or by any
other cause of whatsoever nature, or (iv) any such damage caused by other
persons in the Premises, occupants of adjacent property, or the public, or
caused by operations in construction of any private, public or quasi-public
work. Landlord shall in no event be liable for any consequential damages or
loss of business or profits and Tenant hereby waives any and all claims for any
such damages. All property of Tenant kept or stored on the Premises shall be so
kept or stored at the sole risk of Tenant and Tenant shall hold Landlord
harmless from any claims arising out of damage to the same, including
subrogation claims by Tenant's insurance carriers, unless such damage shall be
caused by the gross negligence or willful misconduct of Landlord or Landlord's
agent(s). Landlord or its agents shall not be liable for interference with the
light or other intangible rights.
17.2 INDEMNIFICATION. Tenant shall be liable for, and shall indemnify,
defend, protect and hold Landlord and Landlord's partners, officers, directors,
employees, agents, successors and assigns (collectively, "Landlord Indemnified
Parties") harmless from and against, any and all claims, damages, judgments,
suits, causes of action, losses, liabilities and expenses, including attorneys'
fees and court costs (collectively, "INDEMNIFIED CLAIMS"), arising or resulting
from (a) any act or omission of Tenant or any of Tenant's agents, employees,
contractors, subtenants, assignees, licensees or Tenant's invitees
(collectively, "TENANT PARTIES"); (b) the use of the Premises and conduct of
Tenant's business by Tenant or any Tenant Parties, or any other activity, work
or thing done, permitted or suffered by Tenant or any Tenant Parties, in or
about the Premises; and/or (c) any default by Tenant of any obligations on
Tenant's part to be performed under the terms of this Lease. In case any action
or proceeding is brought against Landlord or any Landlord Indemnified Parties by
reason of any such Indemnified Claims, Tenant, upon notice from Landlord, shall
defend the same at Tenant's expense by counsel approved in writing by Landlord,
which approval shall not be unreasonably withheld.
17.3 LANDLORD'S INDEMNIFICATION OF TENANT. Notwithstanding anything to the
contrary contained in Section 17.2 above, subject to the limitation on
Landlord's liability contained in Section 30 below and the mutual waivers
contained in Section 21.1 below, Landlord will be liable for, and agrees to
indemnify, protect, defend and hold harmless Tenant and Tenant's agents,
successors and assigns (collectively, "TENANT INDEMNIFIED PARTIES"), from and
against, any Indemnified Claims (as defined in Section 17.2 above) (but not for
injury to, or interference with, Tenant's or any Tenant Indemnified Parties'
business or for consequential damages), to the extent any such Indemnified Claim
arises or results from (a) any negligent or willful act or omission of Landlord;
(b) any default by Landlord of any obligations on Landlord's part to be
performed under the terms of this Lease; and (c) to the extent covered by the
insurance required to be maintained by Landlord under this Lease (or which would
have been covered if Landlord had carried such required insurance), any acts or
omissions of any third parties occurring in the Common Areas other than the
gross negligence or willful misconduct of Tenant or any Tenant's Parties;
provided, however, that Landlord's indemnity shall not apply or extend to any
such damage or injury which occurs within the Premises which is covered by any
insurance maintained by Tenant or any Tenant Indemnified Parties (or which would
have been covered had Tenant obtained the insurance required under this Lease).
In case any action or proceeding is brought against Tenant or any Tenant
Indemnified Parties by reason of any such injury or damage indemnified by
Landlord as set forth hereinabove, Landlord, upon notice from Tenant, agrees to
defend the same at Landlord's expense by counsel approved in writing by Tenant,
which approval Tenant will not unreasonably withhold.
17.4 SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligation
under Section 17.2, shall survive the expiration or earlier termination of this
Lease. Tenant's covenants, agreements and indemnification in Sections 17.1 and
17.2 above, are not intended to and shall not relieve any insurance carrier of
its obligations under policies required to be carried by Tenant, pursuant to the
provisions of this Lease.
18. DAMAGE OR DESTRUCTION.
18.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises are
damaged by fire or other casualty to an extent not exceeding forty percent (40%)
of the full replacement cost thereof, and Landlord's contractor estimates in a
writing delivered to the parties that the damage thereto is such that the
Premises may be repaired, reconstructed or restored to substantially its
condition immediately prior to such damage within two hundred ten (210) days
from the date of such casualty, AND Landlord will receive insurance proceeds
sufficient to cover the costs of such repairs, reconstruction and restoration
(including proceeds from Tenant and/or Tenant's insurance which Tenant is
required to deliver to Landlord pursuant to Section 18.2 below), then Landlord
shall commence and proceed diligently with the work of repair, reconstruction
and restoration and this Lease shall continue in full force and effect. If,
however, the Premises are damaged to an extent exceeding forty percent (40%) of
the full replacement cost thereof, or Landlord's contractor estimates that such
work of repair, reconstruction and restoration will require longer than two
hundred ten (210) days to complete, OR Landlord will not receive insurance
proceeds (and/or proceeds from Tenant, as applicable) sufficient to cover the
costs of such repairs, reconstruction and restoration, then Landlord may elect
to either:
(a) repair, reconstruct and restore the portion of the Premises damaged by
such casualty (including the Tenant Improvements and Tenant Changes to
the extent of insurance proceeds received from Tenant) to substantially
the same condition as existed before the damage or destruction, except
for modifications required by building
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codes and other laws and except for any reasonable modifications to the
common areas, in which case this Lease shall continue in full force and
effect; or
(b) terminate this Lease effective as of the date which is thirty (30) days
after Tenant's receipt of Landlord's election to so terminate.
Under any of the conditions of this Section 18.1, Landlord shall give written
notice ("ELECTION NOTICE") to Tenant of its intention to repair or terminate
within the later of sixty (60) days after the occurrence of such casualty, or
fifteen (15) days after Landlord's receipt of the estimate from Landlord's
contractor. Notwithstanding anything above to the contrary, in the event of a
damage or destruction of the Premises where Landlord has made the election in
Section 18.1(a) above, Tenant shall have the right to elect to perform the
reconstruction and restoration of the Tenant Improvements, which reconstruction
and restoration shall be performed in a diligent manner and in accordance with
the Work Letter Agreement attached hereto and otherwise in accordance with
Section 12 hereof.
18.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or
destruction of all or any part of the Premises, Tenant shall immediately: (a)
notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds
received by Tenant with respect to the Tenant Improvements and Tenant Changes in
the Premises (excluding proceeds for Tenant's furniture and other personal
property), whether or not this Lease is terminated as permitted in this Section
18, and Tenant hereby assigns to Landlord all rights to receive such insurance
proceeds. In the event Tenant has elected to reconstruct and restore the Tenant
Improvements pursuant to Section 18.1 above, then Landlord shall disburse such
insurance proceeds to Tenant on a progress payment basis during Tenant's
reconstruction and restoration of the Tenant Improvements. If, for any reason
(including Tenant's failure to obtain insurance for the full replacement cost of
any Tenant Changes which Tenant is required to insure pursuant to Sections 12.1
and/or 20.1(a) hereof), Tenant fails to receive insurance proceeds covering the
full replacement cost of such Tenant Improvements and Tenant Changes which are
damaged, Tenant shall be deemed to have self-insured the replacement cost of
such Tenant Improvements and Tenant Changes, and upon any damage or destruction
thereto, Tenant shall immediately pay to Landlord the full replacement cost of
such items, less any insurance proceeds actually received by Landlord from
Landlord's or Tenant's insurance with respect to such items.
18.3 ABATEMENT OF RENT. In the event that as a result of any such damage,
repair, reconstruction and/or restoration of the Premises, Tenant is prevented
from using, and does not use, the Premises or any portion thereof, then the rent
shall be abated or reduced, as the case may be, during the period that Tenant
continues to be so prevented from using and does not use the Premises or portion
thereof, in the proportion that the rentable square feet of the portion of the
Premises that Tenant is prevented from using, and does not use, bears to the
total rentable square feet of the Premises. Notwithstanding the foregoing to
the contrary, if the damage is due to the negligence or willful misconduct of
Tenant or any Tenant Parties, there shall be no abatement of rent. Except for
abatement of rent as provided hereinabove, Tenant shall not be entitled to any
compensation or damages for loss of, or interference with, Tenant's business or
use or access of all or any part of the Premises resulting from any such damage,
repair, reconstruction or restoration.
18.4 INABILITY TO COMPLETE. Notwithstanding anything to the contrary
contained in this Section 18, if Landlord is obligated or elects to repair,
reconstruct and/or restore the damaged portion of the Premises pursuant to
Section 18.1 above, but is delayed from completing such repair, reconstruction
and/or restoration beyond the date which is two hundred ten (210) days after the
date of the damage or destruction or the date specified in Landlord's Election
Notice, whichever is later, then any party who has not caused such delay may
elect to terminate this Lease upon thirty (30) days' prior written notice sent
to the other; provided, however, if Tenant terminates this Lease, Landlord may
rescind such termination by completing such work within twenty (20) days
following Landlord's receipt of Tenant's written notice to terminate. In no
event will Tenant have the right to terminate this Lease pursuant to this
Section 18.4 to the extent Tenant has elected to perform the reconstruction and
restoration of the Tenant Improvements pursuant to Section 18.1 above.
18.5 DAMAGE TO THE PROJECT. If there is a total destruction of the Project
or a partial destruction of the Project, the cost of restoration of which would
exceed one-third (1/3) of the then replacement value of the Project, by any
cause whatsoever, whether or not insured against and whether or not the Premises
are partially or totally destroyed, Landlord may within a period of one hundred
eighty (180) days after the occurrence of such destruction, notify Tenant in
writing that it elects not to so reconstruct or restore the Project, in which
event this Lease shall cease and terminate as of the date of such destruction.
18.6 DAMAGE NEAR END OF TERM. In addition to its termination rights in
Sections 18.1 and 18.4 above, Landlord shall have the right to terminate this
Lease if any damage to the Premises occurs during the last twelve (12) months of
the Term of this Lease and Landlord's contractor estimates in a writing
delivered to the parties that the repair, reconstruction or restoration of such
damage cannot be completed within the earlier of (a) the scheduled expiration
date of the Lease Term, or (b) sixty (60) days after the date of such casualty.
18.7 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and
conditions upon which this Lease may terminate in the event of any damage or
destruction. Accordingly, the parties hereby waive the provisions of California
Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any
successor statutes thereof permitting the parties to terminate this Lease as a
result of any damage or destruction).
19. EMINENT DOMAIN.
19.1 TOTAL OR PARTIAL TAKING. In case all of the Premises, or such part
thereof as shall materially and substantially interfere with Tenant's ability to
conduct its business upon the Premises, shall be taken for any public or
quasi-public purpose by any lawful power or authority by exercise of the right
of appropriation, condemnation or eminent domain, or sold to prevent such
taking, Tenant shall have the right to terminate this Lease effective as of the
date possession is required to be surrendered to said authority. Tenant shall
not assert any claim against Landlord or the taking authority for any
compensation because of such taking, and Landlord shall be entitled to receive
the entire amount of any award
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without deduction for any estate or interest of Tenant; provided, however, in
the event of such a taking, Tenant shall be entitled to such portion of the
award as shall be attributable to the loss of the unamortized cost of the
improvements to the Premises made and paid for by Tenant pursuant to EXHIBIT "C"
(such amortization being the same as that used by Tenant for federal income tax
purposes), goodwill and for damage to, or the cost of removal of, Tenant's
personal property. In the event the amount of property or the type of estate
taken shall not materially and substantially interfere with the ability of
Tenant to conduct its business upon the Premises, Landlord shall be entitled to
the entire amount of the award without deduction for any estate or interest of
Tenant, Landlord shall restore the Premises to substantially their same
condition prior to such partial taking to the extent of any award proceeds
received by Landlord, and a fair and equitable abatement shall be made to Tenant
for the Annual Rent corresponding to the time during which, and to the part of
the Premises of which, Tenant shall be so deprived on account of such taking and
restoration. If the award proceeds from the taking are insufficient to restore
the Premises as required by the preceding sentence and Landlord does not provide
its own funds to so restore the Premises, and if as a result thereof Tenant's
ability to use the Premises as contemplated by this Lease is materially and
substantially impaired, then Tenant may elect to terminate this Lease by giving
Landlord written notice thereof; provided, however, Landlord may rescind such
termination by giving Tenant written notice within ten (10) business days
following Landlord's receipt of such termination notice from Tenant that
Landlord will provide the necessary funds to so restore the Premises.
Notwithstanding anything above to the contrary, if any part of the Project shall
be taken (whether or not such taking substantially interferes with Tenant's use
of the Premises), Landlord may terminate this Lease upon thirty (30) days' prior
written notice to Tenant as long as Landlord also terminates leases of all other
tenants leasing comparably sized space within the Project for comparable lease
terms.
19.2 TEMPORARY TAKING. In the event of taking of the Premises or any part
thereof for temporary use, (i) this Lease shall be and remain unaffected thereby
and Rent shall not abate, and (ii) Tenant shall be entitled to receive for
itself such portion or portions of any award made for such use with respect to
the period of the taking which is within the Lease Term. For purposes of this
Section 19.2, a temporary taking shall be defined as a taking for a period of
one (1) year or less.
19.3 WAIVER OF TERMINATION. Tenant and Landlord waive any right to terminate
this Lease under Section 1265.130 of the California Code of Civil Procedure, or
any similar statute or law now or hereafter in force.
20. INSURANCE.
20.1 TYPES OF TENANT'S INSURANCE. On or before the earlier of the Early
Occupancy Date or the date Tenant commences or causes to be commenced any work
of any type in or on any portion of the Premises, and continuing during the
entire Term, Tenant shall obtain and keep in full force and effect respecting
the Premises, the following insurance:
(a) All Risk insurance, including fire and extended coverage, sprinkler
leakage (including earthquake sprinkler leakage), vandalism and
malicious mischief upon property of every description and kind located
on the Premises, including, without limitation, furniture, equipment and
any other personal property, any Tenant Changes and the Tenant
Improvements (but excluding any improvements previously existing in the
Premises) in an amount not less then the full replacement cost thereof.
In the event that there shall be a dispute as to the amount which
comprises full replacement cost, the decision of Landlord or the
mortgagees of Landlord shall be presumptive.
(b) Commercial general liability insurance coverage, including personal
injury, bodily injury (including wrongful death), broad form property
damage, operations hazard, owner's protective coverage, contractual
liability, liquor liability (if Tenant serves or stores alcohol on the
Premises), products and completed operations liability, and
owned/non-owned auto liability, with a general aggregate of not less
than Two Million Dollars ($2,000,000.00). The general aggregate amount
of such commercial general liability insurance shall be increased every
three (3) years during the Term of this Lease to an amount reasonably
required by Landlord but only to the extent such increase is required of
tenants comparable to Tenant by landlords of buildings comparable to the
Building.
(c) Worker's compensation and employer's liability insurance, in statutory
amounts and limits, covering all persons employed in connection with any
work done in, on or about the Premises for which claims for death or
bodily injury could be asserted against Landlord, Tenant or the
Premises.
(d) Any other form or forms of insurance as Tenant or Landlord or the
mortgagees of Landlord may reasonably require from time to time, in
form, amounts and for insurance risks against which a prudent tenant
would protect itself, but only to the extent such risks and amounts are
available in the insurance market at commercially reasonable costs and
is required of tenants comparable to Tenant by landlords of buildings
comparable to the Building.
20.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder
shall: (a) be issued by insurers authorized to do business in the state in which
the Premises is located and rated not less than financial class VII, and not
less than policyholder rating A- in the most recent version of Best's Key Rating
Guide (provided that, in any event, the same insurance company shall provide the
coverages described in Section 20.1(a) above); (b) be in form reasonably
satisfactory from time to time to Landlord; (c) name Tenant as named insured
thereunder and shall name Landlord and, at Landlord's request, Landlord's
mortgagees and ground lessors of which Tenant has been informed in writing, as
additional insureds (and with respect to the insurance described in
Section 20.1(a) above, as loss-payees) thereunder, all as their respective
interests may appear; (d) shall not have a property insurance deductible amount
exceeding Twenty-Five Thousand Dollars ($25,000.00); (e) specifically provide
that the insurance afforded by such policy for the benefit of Landlord and
Landlord's mortgagees and ground lessors shall be primary, and any insurance
carried by Landlord or Landlord's mortgagees and ground lessors shall be excess
and non-contributing; (f) except for worker's compensation insurance, contain an
endorsement that the insurer waives its right to subrogation as described in
Section 22 below; and
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(g) contain an undertaking by the insurer to notify Landlord (and the mortgagees
and ground lessors of Landlord who are named as additional insureds) in writing
not less than thirty (30) days prior to any change, reduction in coverage,
cancellation or other termination thereof. Tenant agrees to deliver to
Landlord, as soon as practicable after the placing of the required insurance,
but in no event later than ten (10) days after the date Tenant takes possession
of all or any part of the Premises, certificates from the insurance company
evidencing the existence of such insurance and Tenant's compliance with the
foregoing provisions of this Section 20). Tenant shall cause replacement
certificates to be delivered to Landlord not less than thirty (30) days prior to
the expiration of any such policy or policies. If any such initial or
replacement certificates are not furnished within the time(s) specified herein,
Tenant shall be deemed to be in material default under this Lease without the
benefit of any additional notice or cure period provided in Section 22.1 below,
and Landlord shall have the right, but not the obligation, to procure such
policies and certificates at Tenant's expense.
20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything
which (a) will violate or invalidate any insurance policy maintained by Tenant
or Landlord hereunder or (b) increase the costs of any insurance policy
maintained by Landlord pursuant to Section 20.4 below. If Tenant's occupancy or
conduct of its business in or on the Premises results in any increase in
premiums for any insurance carried by Landlord with respect to the Building
and/or the Project, Tenant shall pay such increase as additional rent within
thirty (30) days after being billed therefor by Landlord. If any insurance
coverage carried by Landlord shall be cancelled or reduced (or cancellation or
reduction thereof shall be threatened) by reason of the use or occupancy of the
Premises by Tenant or by anyone permitted by Tenant to be upon the Premises, and
if Tenant fails to remedy such condition within five (5) business days after
notice thereof, Tenant shall be deemed to be in default under this Lease,
without the benefit of any additional notice or cure period specified in Section
22.1 below, and Landlord shall have all remedies provided in this Lease, at law
or in equity, including, without limitation, the right (but not the obligation)
to enter upon the Premises and attempt to remedy such condition at Tenant's
cost.
20.4 LANDLORD'S INSURANCE. During the Term, Landlord shall insure the Common
Area improvements and the Premises (excluding, however, Tenant's furniture,
equipment, personal property, the Tenant Improvements and Tenant Changes)
against damage by fire and standard extended coverage perils and with vandalism
and malicious mischief endorsements, rental loss coverage, at Landlord's option,
earthquake damage coverage, and such additional coverage as Landlord deems
appropriate. Landlord shall also carry commercial general liability insurance,
in such reasonable amounts and with such reasonable deductibles as would be
carried by a prudent owner of a similar building in the state in which the
Building is located. At Landlord's option, all such insurance may be carried
under any blanket or umbrella policies which Landlord has in force for other
buildings and projects. In addition, at Landlord's option, Landlord may elect
to self-insure all or any part of such required insurance coverage. Landlord
may, but shall not be obligated to, carry any other form or forms of insurance
as Landlord or the mortgagees or ground lessors of Landlord may reasonably
determine is advisable. The cost of insurance obtained by Landlord pursuant to
this Section 20.4 (including self-insured amounts and deductibles) shall be
included in Operating Expenses.
21. WAIVER OF SUBROGATION.
21.1 WAIVER. Tenant and Landlord hereby waive their rights against each
other with respect to any claims or damages or losses which are caused by or
result from (a) damage insured against under any insurance policy carried by
Tenant or Landlord (as the case may be) pursuant to the provisions of this Lease
and enforceable at the time of such damage or loss, or (b) damage which would
have been covered under any insurance required to be obtained and maintained by
Tenant or Landlord (as the case may be) under Section 20 of this Lease had such
insurance been obtained and maintained as required therein. The foregoing
waiver shall be in addition to, and not a limitation of, any other waivers or
releases contained in this Lease.
21.2 WAIVER OF INSURERS. Tenant shall cause each insurance policy required
to be obtained by it pursuant to Section 20 to provide that the insurer waives
all rights of recovery by way of subrogation against Landlord in connection with
any claims, losses and damages covered by such policy. If Tenant fails to
maintain property insurance required hereunder, such insurance shall be deemed
to be self-insured with a deemed full waiver of subrogation as set forth in the
immediately preceding sentence.
22. TENANT'S DEFAULT AND LANDLORD'S REMEDIES.
22.1 TENANT'S DEFAULT. The occurrence of any one or more of the following
events shall constitute a default under this Lease by Tenant:
(a) the vacation or abandonment of the Premises by Tenant. "ABANDONMENT" is
herein defined to include, but is not limited to, any absence by Tenant
from the Premises for eight (8) business days or longer while in default
in the payment of Rent. "VACATION" shall mean vacating the Premises
without providing a reasonable level of security to minimize the
potential for vandalism, or where the coverage of the property insurance
under Section 20.1(a) is jeopardized as a result thereof;
(b) the failure by Tenant to make any payment of Rent or any other payment
required to be made by Tenant hereunder, within ten (10) days of written
notice from Landlord that such payment was not received;
(c) the failure by Tenant to observe or perform any of the express or
implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Sections 22.1(a) or (b)
above, where such failure shall continue for a period of thirty (30)
days after written notice thereof from Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that more than
thirty (30) days are reasonably required for its cure, then Tenant shall
not be deemed to be in default if Tenant shall commence such cure within
said thirty (30) day period and thereafter diligently prosecute such
cure to completion; and
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(d) (i) the making by Tenant of any general assignment for the benefit of
creditors, (ii) the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of
a petition filed against the Tenant, the same is dismissed within sixty
(60) days), (iii) the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days, or (iv) the attachment,
execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease
where such seizure is not discharged within sixty (60) days.
(e) Any notice given under this Section 22.1 shall be in lieu of, and not in
addition to, any notice required under California Code of Civil
Procedure, Section 1161.
22.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord shall have the immediate option to
terminate this Lease and all rights of Tenant hereunder. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) the worth at the time of award of any unpaid rent which had been earned
at the time of such termination; plus
(b) the worth at the time of the 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 that Tenant proves could
have been reasonably avoided; plus
(c) 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 that Tenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under
this Lease or which, in the ordinary course of things, would be likely
to result therefrom including, but not limited to: unamortized Tenant
Improvement costs; attorneys' fees; unamortized brokers' commissions;
the costs of refurbishment, alterations, renovation and repair of the
Premises; and removal (including the repair of any damage caused by such
removal) and storage (or disposal) of Tenant's personal property,
equipment, fixtures, Tenant Changes, Tenant Improvements and any other
items which Tenant is required under this Lease to remove but does not
remove.
As used in Sections 22.2(a) and 22.2(b) above, the "worth at the time of award"
is computed by allowing interest at the Interest Rate set forth in Section 1.12
of the Summary. As used in Section 22.2(c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
22.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default
by Tenant (with all applicable notice and cure periods having expired), in
addition to any other remedies available to Landlord under this Lease, at law or
in equity, Landlord shall also have the right as permitted by applicable law,
with or without terminating this Lease, to re-enter the Premises and remove all
persons and property from the Premises; such property may be removed, stored
and/or disposed of pursuant to Section 12.4 of this Lease or any other
procedures permitted by applicable law. No re-entry or taking possession of the
Premises by Landlord pursuant to this Section 22.3, and no acceptance of
surrender of the Premises or other action on Landlord's part, shall be construed
as an election to terminate this Lease unless a written notice of such intention
be given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction.
22.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord shall have the right to continue this
Lease in full force and effect, whether or not Tenant shall have abandoned the
Premises. The foregoing remedy shall also be available to Landlord pursuant to
California Civil Code Section 1951.4 and any successor statute thereof in the
event Tenant has abandoned the Premises. In the event Landlord elects to
continue this Lease in full force and effect pursuant to this Section 22.4, then
Landlord shall be entitled to enforce all of its rights and remedies under this
Lease, including the right to recover rent as it becomes due. Landlord's
election not to terminate this Lease pursuant to this Section 22.4 or pursuant
to any other provision of this Lease, at law or in equity, shall not preclude
Landlord from subsequently electing to terminate this Lease or pursuing any of
its other remedies.
22.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise
in this Lease, all covenants and agreements by Tenant under this Lease shall be
performed by Tenant at Tenant's sole cost and expense and without any abatement
or offset of rent. If Tenant shall fail to pay any sum of money (other than
Annual Rent) or perform any other act on its part to be paid or performed
hereunder and such failure shall continue for ten (10) days with respect to
monetary obligations (or thirty (30) days with respect to non-monetary
obligations) after Tenant's receipt of written notice thereof from Landlord,
Landlord may, without waiving or releasing Tenant from any of Tenant's
obligations, make such payment or perform such other act on behalf of Tenant.
All sums so paid by Landlord and all necessary incidental costs incurred by
Landlord in performing such other acts shall be payable by Tenant to Landlord
within five (5) days after demand therefor as additional rent.
22.6 INTEREST. If any monthly installment of Annual Rent, or any other
amount payable by Tenant hereunder is not received by Landlord by the date which
is ten (10) days from the date when due, it shall bear interest at the Interest
Rate set forth in Section 1.12 of the Summary from the date due until paid. All
interest, and any late charges imposed pursuant to Section 22.7 below, shall be
considered additional rent due from Tenant to Landlord under the terms of this
Lease.
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22.7 LATE CHARGES. Tenant acknowledges that, in addition to interest costs,
the late payments by Tenant to Landlord of any Annual Rent or other sums due
under this Lease will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and impractical
to fix. Such other costs include, without limitation, processing,
administrative and accounting charges and late charges that may be imposed on
Landlord by the terms of any mortgage, deed of trust or related loan documents
encumbering the Premises. Accordingly, if any monthly installment of Annual
Rent or any other amount payable by Tenant hereunder is not received by Landlord
by that date which is ten (10) days from the due date thereof, Tenant shall pay
to Landlord an additional sum of six percent (6%) of the overdue amount as a
late charge, but in no event more than the maximum late charge allowed by law.
The parties agree that such late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of any late payment as
hereinabove referred to by Tenant, and the payment of late charges and interest
are distinct and separate in that the payment of interest is to compensate
Landlord for the use of Landlord's money by Tenant, while the payment of late
charges is to compensate Landlord for Landlord's processing, administrative and
other costs incurred by Landlord as a result of Tenant's delinquent payments.
Acceptance of a late charge or interest shall not constitute a waiver of
Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease or at law or in equity now or hereafter in effect.
22.8 [INTENTIONALLY DELETED].
22.9 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of
Landlord contained in this Section 22 and elsewhere in this Lease shall be
construed and held to be cumulative, and no one of them shall be exclusive of
the other, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law or in
equity, whether or not stated in this Lease. Nothing in this Section 22 shall
be deemed to limit or otherwise affect Tenant's indemnification of Landlord
pursuant to any provision of this Lease.
23. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance
of any obligation required to be performed by Landlord under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's failure to
perform; provided however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed in default if it commences such performance within such
thirty (30) day period and thereafter diligently pursues the same to completion.
Upon any such uncured default by Landlord, Tenant may exercise any of its rights
provided in law or at equity; provided, however: (a) Tenant shall have no right
to offset or abate Rent in the event of any default by Landlord under this
Lease; and (b) Tenant's rights and remedies hereunder shall be limited to the
extent (i) Tenant has expressly waived in this Lease any of such rights or
remedies, and/or (ii) this Lease otherwise expressly limits Tenant's rights or
remedies, including the limitation on Landlord's liability contained in Section
30 hereof.
24. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this Lease
shall be subject and subordinate at all times to (a) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises and/or the land upon which the Premises and Project are situated, or
both and (b) any mortgage or deed of trust which may now exist or be placed upon
the Building, the Project and/or the land upon which the Premises or the Project
are situated and (c) any ground lease or underlying leases, or Landlord's
interest or estate in any of said items, which is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any such
liens to this Lease. In the event that any ground lease or underlying lease
terminates for any reason, or any mortgage or deed of trust is foreclosed or a
conveyance in lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of the
successor in interest to Landlord and Tenant shall not be disturbed in its
possession under this Lease by such successor in interest so long as Tenant is
not in default under this Lease. Within ten (10) days after request by
Landlord, Tenant shall execute and deliver any additional documents evidencing
Tenant's attornment or the subordination of this Lease with respect to any such
ground leases or underlying leases or any such mortgage or deed of trust, in the
form requested by Landlord or by any ground landlord, mortgagee, or beneficiary
under a deed of trust, subject to such nondisturbance requirement.
Notwithstanding anything above to the contrary, any subordination of this Lease
to any such future mortgage, ground lease or deed of trust is conditioned upon
any such future mortgagee, lessor or beneficiary providing Tenant with a
commercially reasonable form of non-disturbance agreement. Tenant hereby waives
its rights under any current or future law which gives or purports to give
Tenant any right to terminate or otherwise adversely affect this Lease and the
obligations of Tenant hereunder in the event of any such foreclosure proceeding
or sale. Should Tenant fail to sign and return any such additional documents
within the ten (10) day period referred to above, Tenant shall be in default
hereunder without the benefit of any additional notice or cure periods specified
in Section 22.1 above. Landlord agrees to cause the mortgagees existing as of
the date hereof to provide Tenant with a commercially reasonable non-disturbance
agreement within a commercially reasonable period of time after Tenant's request
therefor.
25. ESTOPPEL CERTIFICATE.
25.1 TENANT'S OBLIGATIONS. Within ten (10) business days following
Landlord's written request, Tenant shall execute and deliver to Landlord an
estoppel certificate, in a form substantially similar to the form of EXHIBIT "F"
attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that
this Lease is unmodified and in full force and effect (or, if modified, that
this Lease is in full force and effect as modified, and stating the date and
nature of such modifications); (c) the date to which the Rent and other sums
payable under this Lease have been paid; (d) that there are not, to the best of
Tenant's knowledge, any defaults under this Lease by either Landlord or Tenant,
except as specified in such certificate; and (e) such other matters as are set
forth in EXHIBIT "F" or are reasonably requested by Landlord. Any such estoppel
certificate delivered pursuant to this Section 25.1 may be relied upon by any
mortgagee, beneficiary, purchaser or prospective purchaser of any portion of the
Premises, as well as their assignees.
25.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such estoppel
certificate within such time shall constitute a default hereunder without the
applicability of notice and cure periods specified in Section 22.1 above and
shall be
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conclusive upon Tenant that: (a) this Lease is in full force and effect without
modification, except as may be represented by Landlord; (b) there are no uncured
defaults in Landlord's or Tenant's performance (other than Tenant's failure to
deliver the estoppel certificate); and (c) not more than one (1) month's rental
has been paid in advance.
26. INTENTIONALLY OMITTED.
27. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
27.1 MODIFICATIONS. If, in connection with Landlord's obtaining or entering
into any financing or ground lease for any portion of the Premises, the lender
or ground lessor shall request modifications to this Lease, Tenant shall, within
ten (10) days after request therefor, execute an amendment to this Lease
including such modifications, provided such modifications are reasonable, do not
increase the obligations of Tenant hereunder, or adversely affect the leasehold
estate created hereby or Tenant's rights hereunder.
27.2 CURE RIGHTS. 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 covering the Premises or ground lessor of Landlord
whose address shall have been furnished to Tenant, and shall offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession of the Premises, subject to this Lease and Tenant's rights
hereunder, by power of sale or judicial foreclosure, if such should prove
necessary to effect a cure).
28. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon
Tenant performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease (including payment of rent hereunder),
Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in
accordance with and subject to the terms and conditions of this Lease as against
all persons claiming by, through or under Landlord.
29. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this
Lease, so far as covenants or obligations on the part of the Landlord are
concerned, shall be limited to mean and include only the owner or owners, at the
time in question, of the fee title to, or a lessee's interest in a ground lease
of, the Premises. In the event of any transfer or conveyance of any such title
or interest (other than a transfer for security purposes only), the transferor
shall be automatically relieved of all covenants and obligations on the part of
Landlord contained in this Lease accruing after the date of such transfer or
conveyance. Landlord and Landlord's transferees and assignees shall have the
absolute right to transfer all or any portion of their respective title and
interest in the Premises and/or this Lease without the consent of Tenant, and
such transfer or subsequent transfer shall not be deemed a violation on
Landlord's part of any of the terms and conditions of this Lease.
30. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained
in this Lease to the contrary, the obligations of Landlord under this Lease
(including any actual or alleged breach or default by Landlord) do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord or Landlord's partners, and Tenant shall not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or Landlord's partners, or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that the liability of
Landlord for its obligations under this Lease (including any liability as a
result of any actual or alleged failure, breach or default hereunder by
Landlord), shall be limited solely to, and Tenant's and its successors' and
assigns' sole and exclusive remedy shall be against, Landlord's interest in the
Premises, and no other assets of Landlord.
31. MISCELLANEOUS.
31.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant
to, the laws of the state in which the Premises is located.
31.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 29 above,
and except as otherwise provided in this Lease, all of the covenants, conditions
and provisions of this Lease shall be binding upon, and shall inure to the
benefit of, the parties hereto and their respective heirs, personal
representatives and permitted successors and assigns; provided, however, no
rights shall inure to the benefit of any Transferee of Tenant unless the
Transfer to such Transferee is made in compliance with the provisions of Section
14, and no options or other rights which are expressly made personal to the
original Tenant or an Affiliate of Tenant or in any rider attached hereto shall
be assignable to or exercisable by anyone other than the original Tenant or an
Affiliate of Tenant.
31.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or
a mutual termination thereof shall not work as a merger and shall, at the option
of Landlord, either (a) terminate all or any existing subleases, or (b) operate
as an assignment to Landlord of Tenant's interest under any or all such
subleases.
31.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit
against the other with respect to this Lease, including for unlawful detainer or
any other relief against the other hereunder, then all costs and expenses
incurred by the prevailing party therein (including, without limitation, its
actual appraisers', accountants', attorneys' and other professional fees,
expenses and court costs), shall be paid by the other party.
31.5 WAIVER. The waiver by either party of any breach by the other party of
any term, covenant or condition herein contained shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant and
condition herein contained, nor shall any custom or practice which may become
established between the parties in the administration of the terms hereof be
deemed a waiver of, or in any way affect, the right of any party to insist upon
the
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<PAGE>
performance by the other in strict accordance with said terms. No waiver of any
default of either party hereunder shall be implied from any acceptance by
Landlord or delivery by Tenant (as the case may be) of any rent or other
payments due hereunder or any omission by the non-defaulting party to take any
action on account of such default if such default persists or is repeated, and
no express waiver shall affect defaults other than as specified in said waiver.
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 rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
31.6 TERMS AND HEADINGS; INTERPRETATION. The words "Landlord" and "Tenant"
as used herein shall include the plural as well as the singular. Words used in
any gender include other genders. The Section headings of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof. Any deletion of language from this Lease
prior to its execution by Landlord and Tenant shall not be construed to raise
any presumption, canon of construction or implication, including, without
limitation, any implication that the parties intended thereby to state the
converse of the deleted language.
31.7 TIME. Time is of the essence with respect to performance of every
provision of this Lease in which time or performance is a factor. All
references in this Lease to "days" shall mean calendar days unless specifically
modified herein to be "business" days.
31.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease, including the Summary and all
Exhibits and Riders attached hereto contains all of the covenants, provisions,
agreements, conditions and understandings between Landlord and Tenant concerning
the Premises and any other matter covered or mentioned in this Lease, and no
prior agreement or understanding, oral or written, express or implied,
pertaining to the Premises or any such other matter shall be effective for any
purpose. No provision of this Lease may be amended or added to except by an
agreement in writing signed by the parties hereto or their respective successors
in interest. The parties acknowledge that all prior agreements, representations
and negotiations are deemed superseded by the execution of this Lease to the
extent they are not expressly incorporated herein.
31.9 SEPARABILITY. The invalidity or unenforceability of any provision of
this Lease (except for Tenant's obligation to pay Rent) shall in no way affect,
impair or invalidate any other provision hereof, and such other provisions shall
remain valid and in full force and effect to the fullest extent permitted by
law.
31.10 RECORDING. Neither Landlord nor Tenant shall record this Lease. In
addition, neither party shall record a short form memorandum of this Lease
without the prior written consent (and signature on the memorandum) of the
other, and provided that prior to recordation Tenant executes and delivers to
Landlord, in recordable form, a properly acknowledged quitclaim deed or other
instrument extinguishing all of the Tenant's rights and interest in and to the
Premises, and designating Landlord as the transferee, which deed or other
instrument shall be held by Landlord and may be recorded by Landlord once this
Lease terminates or expires (but not prior thereto). If such short form
memorandum is recorded in accordance with the foregoing, the party requesting
the recording shall pay for all costs of or related to such recording,
including, but not limited to, recording charges and documentary transfer taxes.
31.11 EXHIBITS AND RIDERS. All Exhibits attached to this Lease are hereby
incorporated in this Lease for all purposes as though set forth at length
herein.
31.12 AUCTIONS. Tenant shall have no right to conduct any auction in, on or
about the Premises.
31.13 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of
a lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease. Tenant agrees that each of the foregoing
covenants and agreements shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by any statute or at common law.
31.14 FINANCIAL STATEMENTS. Upon ten (10) days prior written request from
Landlord (which Landlord may make at any time during the Term but no more often
than once in any calendar year), Tenant shall deliver to Landlord a current 10-Q
quarterly report and/or 10-K annual report ("STATEMENTS") of Tenant and any
guarantor of this Lease. Such Statements shall be prepared in accordance with
generally acceptable accounting principles and certified as true in all material
respects by Tenant (if Tenant is an individual) or by an authorized officer or
general partner of Tenant (if Tenant is a corporation or partnership,
respectively).
31.15 NO PARTNERSHIP. Landlord does not, in any way or for any purpose,
become a partner of Tenant in the conduct of its business, or otherwise, or
joint venturer or a member of a joint enterprise with Tenant by reason of this
Lease.
31.16 FORCE MAJEURE. In the event that either party hereto shall be delayed
or hindered in or prevented from the performance of any act required hereunder
by reason of strikes, lock-outs, labor troubles, inability to procure materials,
failure of power, governmental moratorium or other governmental action or
inaction (including failure, refusal or delay in issuing permits, approvals
and/or authorizations), injunction or court order, riots, insurrection, war,
fire, earthquake, flood or other natural disaster or other reason of a like
nature not the fault of the party delaying in performing work or doing acts
required under the terms of this Lease (but excluding delays due to financial
inability) (herein collectively, "FORCE MAJEURE DELAYS"), then performance of
such act shall be excused for the period of the delay and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay. The provisions of this
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<PAGE>
Section 31.16 shall not apply to nor operate to excuse Tenant from the payment
of Rent strictly in accordance with the terms of this Lease.
31.17 COUNTERPARTS. This Lease may be executed in one or more counterparts,
each of which shall constitute an original and all of which shall be one and the
same agreement.
31.18 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the
terms of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms could adversely affect the ability of
Landlord to negotiate other leases and impair Landlord's relationship with other
tenants. Accordingly, Tenant agrees that it, and its partners, officers,
directors, employees, agents and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any newspaper or
other publication or any other tenant or apparent prospective tenant of the
Building or other portion of the Premises, or real estate agent, either directly
or indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
31.19 NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be
no discrimination against, or segregation of, any person, group of persons, or
entity on the basis of race, color, creed, religion, age, sex, marital status,
national origin, or ancestry in the leasing, subleasing, transferring,
assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion
thereof.
32. LEASE EXECUTION.
32.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a partnership or
corporation, then Tenant and the persons and/or entities executing this Lease on
behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized and
existing partnership or corporation, as the case may be, and is qualified to do
business in the state in which the Premises are located; (b) such persons and/or
entities executing this Lease are duly authorized to execute and deliver this
Lease on Tenant's behalf in accordance with the Tenant's partnership agreement
(if Tenant is a partnership), or a duly adopted resolution of Tenant's board of
directors and the Tenant's by-laws (if Tenant is a corporation); and (c) this
Lease is binding upon Tenant in accordance with its terms.
32.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes
this Lease as Tenant: (a) each of them is and shall be jointly and severally
liable for the covenants, conditions, provisions and agreements of this Lease to
be kept, observed and performed by Tenant; and (b) the act or signature of, or
notice from or to, any one or more of them with respect to this Lease shall be
binding upon each and all of the persons and entities executing this Lease as
Tenant with the same force and effect as if each and all of them had so acted or
signed, or given or received such notice.
32.3 NO OPTION. The submission of this Lease for examination or execution by
Tenant does not constitute a reservation of or option for the Premises and this
Lease shall not become effective as a Lease until it has been executed by
Landlord and delivered to Tenant.
33. CANCELLATION OPTION. Provided Tenant fully and completely satisfies
each of the conditions set forth in this Section 33, Tenant shall have a
one-time option ("CANCELLATION OPTION") to terminate this Lease effective
between the period ("CANCELLATION PERIOD") commencing on January 1, 2003 to
March 31, 2003, with the exact cancellation date ("CANCELLATION DATE") to be the
date within the Cancellation Period specified by Tenant in Tenant's Cancellation
Notice (as defined below) but in no event earlier than nine (9) months after the
date of Tenant's Cancellation Notice. In order to exercise the Cancellation
Option, Tenant must fully and completely satisfy each and every one of the
following conditions: (a) Tenant must give Landlord written notice
("CANCELLATION NOTICE") of its intention to terminate this Lease, which
Cancellation Notice must be delivered to Landlord at least nine (9) months prior
to the expiration of the Cancellation Period, (b) at the time of the
Cancellation Notice, Tenant shall not be in material default under this Lease
after expiration of applicable notice and cure periods, (c) concurrently with
Tenant's delivery of the Cancellation Notice to Landlord, Tenant shall pay to
Landlord a cancellation fee ("CANCELLATION FEE") equal to the sum of (i) the
unamortized balance, as of the Cancellation Date, of the brokerage commissions
paid by Landlord in connection with this Lease, plus (ii) an amount equal to
four (4) months' Monthly Rent calculated at the rate payable at the time of the
Cancellation Date and (d) Tenant shall have satisfied all of Tenant's surrender
obligations under Section 9.1 of the Lease. On the Cancellation Date, the
parties shall be relieved of any further obligations under this Lease except for
those obligations in the Lease which survive the termination or expiration
thereof. Amortization pursuant to this Section 33 shall be calculated on a ten
(10) year amortization schedule commencing as of the Commencement Date based
upon equal monthly payments of principal and interest, with interest imputed on
the outstanding principal balance at the rate of ten percent (10%) per annum.
34. ARBITRATION. In the event of any dispute by Landlord of Tenant's audit
of the Building's Share of Operating Expenses as set forth in Section 4.9, such
dispute shall be resolved through binding arbitration pursuant to this
Section 34. If demand for arbitration is timely made as provided in
Subsection (a) below, such arbitration shall be conducted in accordance with
Title 9 of the California Code of Civil Procedure, Section 1280, ET SEQ., unless
otherwise specified herein. The arbitrator shall be selected from the
Commercial Arbitration panel of the American Arbitration Association and shall
have commercial real estate leasing and, with respect to a dispute under
Section 4.9 hereof, accounting expertise. Any such arbitration shall be held
and conducted, within thirty (30) days after the selection of an arbitrator, in
San Diego County, California. The provisions of the Commercial Arbitration
Rules of the American Arbitration Association shall apply and govern such
arbitration, subject, however, to the following:
(a) Any demand for arbitration shall be in writing and must be made and
served on Tenant within a reasonable time after the claim, dispute or
other matter in questions has arisen and in no event shall the demand
for arbitration be made after the date that institution of legal or
equitable proceedings based on such claim, dispute, or other matter
would be barred by the applicable statute of limitations.
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<PAGE>
(b) All proceedings involving the parties shall be reported by a certified
shorthand court reporter and written transcripts of the proceedings
shall be prepared and made available to the parties.
(c) A party can require the arbitrator to make specific rulings on specific
items or questions of fact. The arbitrator shall be bound by the
provisions of this Lease, and shall not add to, subtract from or
otherwise modify such provisions.
(d) Final decision by the arbitrator must be provided to the parties within
thirty (30) days from the date on which the matter is submitted to the
arbitrator.
(e) The prevailing party (as defined below) shall be awarded reasonable
attorneys' fees, expert and nonexpert witness costs and expenses
(including without limitation the fees and costs of the court reporter
described in Subsection (c) above), and other costs and expenses
incurred in connection with the arbitration, unless the arbitrator for
good cause determines otherwise.
(f) As used herein, the term "prevailing party" shall mean the party, if
any, that the arbitrator determines is "clearly the prevailing party."
(g) Costs and fees of the arbitrator shall be borne by the nonprevailing
party, unless the arbitrator for good cause determines otherwise. If
there is no prevailing party, the parties shall bear their own fees and
costs and split the fees and costs of the arbitrator and court reporter.
(h) The award or decision of the arbitrator, which may include equitable
relief, shall be final and judgment may be entered on it in accordance
with applicable law in any court having jurisdiction over the matter.
The provisions of this Section 34 are not intended to alter the
applicable provisions of law which provide the grounds on which a court
may vacate an arbitration award.
(i) The provisions of this Section 34 are not intended to require
(1) Landlord to arbitrate any matters relating to any monetary default
by Tenant under this Lease, which matters shall, at the election of
Landlord, be governed by the applicable provisions of this Lease and/or
applicable law, or (2) either party to arbitrate any matters arising
under this Lease which are not described in the first sentence of this
Section 34.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year
first above written.
"TENANT" ALLIANCE PHARMACEUTICAL CORP.,
a New York corporation
By: /s/ Duane J. Roth
---------------------------------------------
Name: Duane J. Roth
----------------------------------------
Title: Chief Executive Officer
---------------------------------------
By: /s/ Theodore D. Roth
---------------------------------------------
Name: Theodore D. Roth
----------------------------------------
Title: Executive Vice President
---------------------------------------
"LANDLORD" WHAMC REAL ESTATE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: WHAMC Gen-Par, Inc., a Delaware corporation
By: /s/ Brad E. Baker
----------------------------------------
Brad E. Baker
Its: Senior Vice President - Southern
California
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<PAGE>
EXHIBIT "A-1"
PROJECT SITE PLAN
AMCC BUILDING - 6175 & 6195 LUSK BLVD.
SITE PLAN
[MAP]
EXHIBIT "A-1"
<PAGE>
EXHIBIT "A-2"
PROJECT LEGAL DESCRIPTION
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF
SAN DIEGO AND IS DESCRIBED AS FOLLOWS:
LOT 15 OF PACIFIC CORPORATE CENTER UNIT NO. 2, IN THE CITY OF SAN DIEGO, COUNTY
OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 11561, FILED IN
THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, JULY 9, 1986.
<PAGE>
EXHIBIT "B"
DESCRIPTION OF PREMISES
[FLOOR PLATE]
EXHIBIT "B"
Page 1 of 2
<PAGE>
[FLOOR PLATE]
EXHIBIT "B"
Page 2 of 2
<PAGE>
WORK LETTER AGREEMENT
1. Tenant shall, at Tenant's sole cost and expense, improve the
Premises in accordance with plans and specifications approved in writing by
Landlord and in accordance with the requirements of all Laws. It is
contemplated by the parties that the improvements to the Premises will include
all interior and exterior improvements that are permanently affixed to the
Building (the "TENANT IMPROVEMENTS") as described or depicted on SCHEDULE 1
attached hereto (the "PRELIMINARY PLANS"), which Preliminary Plans are hereby
approved by Landlord and Tenant. As part of the material consideration to
Landlord entering into this Lease, Tenant covenants to expend between Four
Million Dollars ($4,000,000.00) and Six Million Dollars ($6,000,000.00) in the
design and construction of Tenant Improvements in the Premises and to provide
Landlord with evidence reasonably satisfactory to Landlord of such expenditure.
Within thirty (30) days following the Effective Date, Tenant shall provide to
Landlord working drawings for the Tenant's Improvements (including signage)
based upon and conforming with the Preliminary Plans and prepared by a licensed
architect or engineer. Within five (5) days of Landlord's receipt of such
working drawings, Landlord shall notify Tenant of any required changes to the
working drawings. Landlord's failure to so notify Tenant of any such required
changes to the working drawings within said five (5) day period shall be deemed
to constitute Landlord's approval thereof. Tenant shall revise the working
drawings in accordance with Landlord's comments and deliver the same to Landlord
within ten (10) days of Tenant's receipt of Landlord's comments. Tenant shall,
at its sole cost and expense, be responsible for obtaining all permits and
approvals from governmental authorities necessary for the construction of such
improvements and the operation of Tenant's business. Landlord will reasonably
cooperate with Tenant (at no cost to Landlord) in Tenant's efforts to obtain all
such permits and approvals. Landlord makes no representation concerning the
availability of such permits or approvals.
2. No improvement of any kind to the Premises shall be erected
or maintained unless and until the plans, specifications and proposed location
of such improvement have been approved in by Landlord, which approval shall not
be unreasonably withheld or delayed. Tenant shall not be charged for any
supervision by Landlord in connection with Tenant's design and construction of
the Tenant Improvements. Landlord's review and approval of the plans and
specifications for the improvements shall create no liability or responsibility
on the part of Landlord for the completeness of such plans or their design
sufficiency or compliance with Laws.
3. Landlord shall not be responsible for any costs associated
with Tenant's construction of any improvements and Tenant acknowledges that
Tenant is accepting the Premises in its "as-is" and "where-is" state, subject to
Landlord's obligations under Section 11.2 of the Lease.
4. No work of any kind shall be commenced on and no building or
other material shall be delivered until at least five (5) business days after
written notice has been given by Tenant to Landlord of the initial commencement
of such work or the delivery of such materials.
5. The improvements shall be constructed, and all work
performed on the Premises, shall be in accordance with all Laws. All work
performed on the Premises shall be done in a good, workmanlike and lien free
manner and only with new materials of good quality and high standards. All work
required in the construction of the improvements shall be performed only by
competent contractors duly licensed as such under the laws of the State of
California and approved by Landlord. The following contractors/subcontractors,
if used by Tenant, are hereby preapproved by Landlord: (i) DPR; (ii) Biostruct;
(iii) Ninteman; (iv) Neal Electric; (v) Dynalectric; (vi) Eickler; (vii) Weather
Eng.; (viii) Pacific Rim Eng.; (ix) AO Reed; and (x) Kinetic Systems. Tenant
will competitively bid the construction with contractors approved by Landlord.
Tenant shall then enter into a construction contract approved by Landlord (which
approval shall not be unreasonably withheld or delayed) with the selected
contractor to construct the Tenant Improvements and Tenant shall be responsible
for all aspects of coordinating the construction management.
6. Notwithstanding anything above to the contrary, Landlord
shall, prior to the Commencement Date, perform the following work in the
Premises ("LANDLORD'S WORK") in Landlord's standard manner using
building-standard materials:
(i) Modify existing HVAC system located in the Other
Building located in the Project to exclusively service the Premises; and
(ii) Install metering and/or submetering devices in the
Premises pertaining to water, gas and electricity services serving the
Premises as of the date of the Lease.
So long as Tenant has not exercised its Cancellation Option and subject to the
terms hereof, Landlord also agrees to retrofit the existing HVAC system located
in the Other Building to accommodate R123 (or equivalent) HVAC coolant
("ADDITIONAL LANDLORD'S WORK") but only to the extent that Tenant notifies
Landlord, on or before the last day of the third (3rd) annual anniversary of the
Commencement Date, that Tenant desires Landlord to perform such Additional
Landlord's Work; provided, however, that prior to performing such Additional
Landlord's Work (and as a condition precedent to Landlord's obligation to
perform such Additional Landlord's Work), Tenant shall pay to Landlord any costs
in excess of Fifty Thousand Dollars ($50,000.00) ("LANDLORD'S COST CAP") that is
required by Landlord to perform such Additional Landlord's Work, which excess
costs shall be (i) evidenced by a contractor's bid selected by Landlord, and
(ii) due and payable by Tenant to Landlord within thirty (30) days after
Landlord's request therefor (and prior to the performance of such Additional
Landlord's Work). In no event will Landlord be obligated to pay for any costs
in excess of Landlord's Cost Cap to cause such Additional Landlord's Work to be
performed, it being the intent of Landlord and Tenant that such excess cost
shall be borne solely by Tenant. In the event that Tenant fails to notify
Landlord on or before the last day of the third annual anniversary of the
Commencement Date that Tenant desires Landlord to perform
EXHIBIT "C"
<PAGE>
such Additional Landlord's Work, then Landlord shall have no obligation
whatsoever to perform such Additional Landlord's Work.
C-2
<PAGE>
SCHEDULE 1
PRELIMINARY PLANS
1. Those certain plans prepared by McGraw/Baldwin Architects as Project
No. 97006 and dated October 28, 1997; and
2. Those certain plans prepared by McGraw/Baldwin Architects as Project
No. 972928 and dated October 30, 1997.
SCHEDULE 1
<PAGE>
SAMPLE FORM OF NOTICE OF LEASE TERM DATES
To: Date:
------------------------- ------------------
-------------------------
Re: Lease dated ________________________, 19___ between
___________________________, Landlord, and ___________________________________,
Tenant, concerning premises located at __________________________ ("PREMISES").
Gentlemen:
In accordance with the above-referenced Lease, we wish to advise and/or confirm
as follows:
1. That the Premises have been accepted by Tenant in accordance with the
Lease.
2. That Tenant has accepted and is in possession of the Premises, and
acknowledges that under the provisions of the Lease, the Term of the Lease
expires on ________________ (subject to earlier termination as provided in the
Lease), with one option to renew for 5 years, and commenced upon ______________.
3 That in accordance with the Lease, rental payment has commenced.
4. If the Actual Commencement Date of the Lease is other than the first day
of the month, the first billing will contain a pro rata adjustment. Each
billing thereafter, with the exception of the final billing, shall be for the
full amount of the monthly installment as provided for in the Lease.
5. Monthly Rent is due and payable in advance on the first day of each and
every month during the Term of the Lease. Your rent checks should be made
payable to _________________________ at _______________________________.
AGREED AND ACCEPTED
TENANT: LANDLORD:
- ------------------------------ ------------------------------
By: By:
-------------------------- --------------------------
By:
--------------------------
SAMPLE ONLY [NOT FOR EXECUTION]
EXHIBIT "D"
<PAGE>
ENVIRONMENTAL QUESTIONNAIRE
The purpose of this form is to obtain information regarding the use or proposed
use of hazardous materials at the premises. Prospective tenants should answer
the questions in light of their proposed operations at the premises. Existing
tenants should answer the questions as they relate to ongoing operations at the
premises and should update any information previously submitted. If additional
space is needed to answer the questions, you may attach separate sheets of paper
to this form.
Your cooperation in this matter is appreciated.
1. GENERAL INFORMATION
Name of Responding Company: .
--------------------------------------------
Check the Applicable Status: Prospective Tenant __ Existing Tenant __
Mailing Address:
--------------------------------------------------------
Contact Person and Title:
-----------------------------------------------
Telephone Number: ( )
----- ------------------------
Address of Leased Premises:
---------------------------------------------
Length of Lease Term:
--------------------------------------------------
Describe the proposed operations to take place on the premises,
including principal products manufactured or services to be conducted.
Existing tenants should describe any proposed changes to ongoing
operations.
------------------------------------------------------------------------
------------------------------------------------------------------------
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes _____ No _____
Chemical Products Yes _____ No _____
2.2 Attach a list of any hazardous materials to be used or stored,
the quantities that will be on-site at any given time, and the
location and method of storage (e.g., 55-gallon drums on concrete
pad).
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel or other
hazardous substances in tanks or sumps proposed or currently
conducted at the premises?
Yes _____ No _____
If yes, describe the materials to be stored, and the type, size
and construction of the sump or tank. Attach copies of any
permits obtained for the storage of such substances.
-----------------------------------------------------------------
-----------------------------------------------------------------
3.2 Have any of the tanks or sumps been inspected or tested for
leakage?
Yes _____ No _____
If so, attach the results.
3.3 Have any spills or leaks occurred from such tanks or sumps?
Yes _____ No _____
If so, describe.
-----------------------------------------------------------------
-----------------------------------------------------------------
3.4 Were any regulatory agencies notified of the spill or leak?
Yes _____ No _____
If so, attach copies of any spill reports filed, any clearance
letters or other correspondence from regulatory agencies relating
to the spill or leak.
3.5 Have any underground storage tanks or sumps been taken out of
service or removed?
Yes _____ No _____
If yes, attach copies of any closure permits and clearance
obtained from regulatory agencies relating to closure and removal
of such tanks.
EXHIBIT "E"
<PAGE>
4. SPILLS
4.1 During the past year, have any spills occurred at the premises?
Yes _____ No _____
If yes, please describe the location of the spill.
-----------------------------------------------------------------
-----------------------------------------------------------------
4.2 Were any agencies notified in connection with such spills?
Yes _____ No _____
If yes, attach copies of any spill reports or other
correspondence with regulatory agencies.
4.3 Were any clean-up actions undertaken in connection with the
spills?
Yes _____ No _____
Attach copies of any clearance letters obtained from any
regulatory agencies involved and the results of any final soil or
groundwater sampling done upon completion of the clean-up work.
5. WASTE MANAGEMENT
5.1 Has your company been issued an EPA Hazardous Waste Generator
I.D. Number?
Yes _____ No _____
5.2 Has your company filed a biennial report as a hazardous waste
generator?
Yes _____ No _____
If so, attach a copy of the most recent report filed.
5.3 Attach a list of the hazardous wastes, if any, generated or to be
generated at the premises, its hazard class and the quantity
generated on a monthly basis.
5.4 Describe the method(s) of disposal for each waste. Indicate
where and how often disposal will take place.
_____ On-site treatment or recovery ____________________
_____ Discharged to sewer ____________________
_____ Transported and disposed of off-site ____________________
_____ Incinerator ____________________
5.5 Indicate the name of the person(s) responsible for maintaining
copies of hazardous waste manifests completed for off-site
shipments of hazardous waste.
-----------------------------------------------------------------
5.6 Is any treatment of processing of hazardous wastes currently
conducted or proposed to be conducted at the premises:
Yes _____ No _____
If yes, please describe any existing or proposed treatment
methods.
-------------------------------------------------------
-----------------------------------------------------------------
5.7 Attach copies of any hazardous waste permits or licenses issued
to your company with respect to its operations at the premises.
6. WASTEWATER TREATMENT/DISCHARGE
6.1 Do you discharge wastewater to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no industrial discharge
6.2 Is your wastewater treated before discharge?
Yes _____ No _____
If yes, describe the type of treatment conducted.
-----------------------------------------------------------------
-----------------------------------------------------------------
6.3 Attach copies of any wastewater discharge permits issued to your
company with respect to its operations at the premises.
E-2
<PAGE>
7. AIR DISCHARGES
7.1 Do you have any filtration systems or stacks that discharge into
the air?
Yes _____ No _____
7.2 Do you operate any of the following types of equipment or any
other equipment requiring an air emissions permit?
_____ Spray booth
_____ Dip tank
_____ Drying oven
_____ Incinerator
_____ Other (please describe) _________________________
_____ No equipment requiring air permits
7.3 Are air emissions from your operations monitored?
Yes _____ No _____
If so, indicate the frequency of monitoring and a description of
the monitoring results.
-----------------------------------------------------------------
7.4 Attach copies of any air emissions permits pertaining to your
operations at the premises.
8. HAZARDOUS MATERIALS DISCLOSURES
8.1 Does your company handle hazardous materials in a quantity equal
to or exceeding an aggregate of 500 pounds, 55 gallons, or 200
cubic feet per month?
Yes _____ No _____
8.2 Has your company prepared a hazardous materials management plan
pursuant to any applicable requirements of a local fire
department or governmental agency?
Yes _____ No _____
If so, attach a copy of the business plan.
8.3 Has your company adopted any voluntary environmental, health or
safety program?
Yes _____ No _____
If so, attach a copy of the program. No formal program. We
recycle paper, aluminum cans, and scrap aluminum.
9. ENFORCEMENT ACTIONS, COMPLAINTS
9.1 Has your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees?
Yes _____ No _____
If so, describe the actions and any continuing compliance
obligations imposed as a result of these actions.
-----------------------------------------------------------------
9.2 Has your company ever received requests for information, notice
or demand letters, or any other inquiries regarding its
operations?
Yes _____ No _____
9.3 Have there ever been, or are there now pending, any lawsuits
against the company regarding any environmental or health and
safety concerns?
Yes _____ No _____
9.4 Has an environmental audit ever been conducted at your company's
current facility?
Yes _____ No _____
If so, identify who conducted the audit and when it was
conducted.
-----------------------------------------------------------------
Company
By:
------------------------
Title:
------------------------
Date:
------------------------
E-3
<PAGE>
SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE
The undersigned ("TENANT") hereby certifies to _________________________________
("LANDLORD"), and ____________________________, as follows:
1. Attached hereto is a true, correct and complete copy of that certain
Lease dated _______________________, 19___ between Landlord and Tenant (the
"LEASE"), which demises Premises which are located at __________________________
___________________________________. The Lease is now in full force and effect
and has not been amended, modified or supplemented, except as set forth in
Section 6 below.
2. The term of the Lease commenced on ________________, 19__ (Office
Building), ________________, 19__ (Manufacturing Building, and ________________,
19__ (Parking Lot).
3. The term of the Lease is currently scheduled to expire on
________________, 19__.
4. Tenant has no option to renew or extend the Term of the Lease except:
________________________________.
5. Tenant has no preferential right to purchase the Premises.
6. The Lease has: (Initial One)
( ) not been amended, modified, supplemented, extended, renewed or assigned.
( ) been amended, modified, supplemented, extended, renewed or assigned by
the following described agreements, copies of which are attached hereto:
__________________________________________________________________.
7. Tenant has accepted and is now in possession of the Premises and has not
sublet, assigned or encumbered the Lease, the Premises or any portion thereof
except as follows: __________________________________.
8. The current Monthly Rent is $______________.
9. The amount of security deposit (if any) is $________________. No other
security deposits have been made.
10. All rental payments payable by Tenant have been paid in full as of the
date hereof. No rent under the Lease has been paid for more than thirty (30)
days in advance of its due date except as follows: ____________________________
________________________________________________________________________.
11. All work required to be performed by Landlord under the Lease has been
completed and has been accepted by Tenant, and all tenant improvement allowances
have been paid in full except as follows: _____________________________________
________________________________________________________________________.
12. To the best of Tenant's knowledge, as of the date hereof, there are no
defaults on the part of Landlord or Tenant under the Lease except as follows:
________________________________________________________________________________
_____________________________________.
13. Tenant has no defense as to its obligations under the Lease and claims
no set-off or counterclaim against Landlord except as follows: ________________
_________________________________________________________.
14. Tenant has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies, except as
expressly provided in the Lease except as follows: ____________________________
________________________________________________________________________.
15. All insurance required of Tenant under the Lease has been provided by
Tenant and all premiums have been paid except as follows: _____________________
________________________________________________________________________.
16. There has not been filed by or against Tenant a petition in bankruptcy,
voluntary or otherwise, any assignment for the benefit of creditors, any
petition seeking reorganization or arrangement under the bankruptcy laws of the
United States or any state thereof, or any other action brought pursuant to such
bankruptcy laws with respect to Tenant except as follows: _____________________
___________________________________________________________________________.
17. Tenant pays rent due Landlord under the Lease to Landlord and does not
have any knowledge of any other person who has any right to such rents by
collateral assignment or otherwise except as follows: _________________________
________________________________________________________________________________
_____.
EXHIBIT "F"
<PAGE>
The foregoing certification is made with the knowledge that
________________________ is about to [FUND A LOAN TO LANDLORD OR PURCHASE THE
PREMISES FROM LANDLORD], and that ________________________ is relying upon the
representations herein made in [FUNDING SUCH LOAN OR PURCHASING THE PREMISES].
Dated: ________________, 19__.
"TENANT"
- -------------------------
By:
---------------------
By:
---------------------
SAMPLE ONLY (NOT FOR EXECUTION)
F-2
<PAGE>
SPECIAL IMPROVEMENTS
List of Special Improvements to be provided by Tenant to Landlord within
thirty (30) days after the Commencement Date and from time to time
thereafter, which list shall be subject to Landlord's reasonable
approval.
EXHIBIT "G"
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-3 and S-8) of Alliance Pharmaceutical Corp. of our report dated July
31, 1998, except Note 8, as to which the date is August 14, 1998, with
respect to the consolidated financial statements of Alliance Pharmaceutical
Corp. included in the Annual Report (Form 10-K) for the year ended June 30,
1998.
ERNST & YOUNG LLP
San Diego, California
September 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 11,809,000
<SECURITIES> 38,046,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,396,000
<PP&E> 37,085,000
<DEPRECIATION> 13,998,000
<TOTAL-ASSETS> 93,677,000
<CURRENT-LIABILITIES> 8,666,000
<BONDS> 0
0
5,000
<COMMON> 320,000
<OTHER-SE> 75,765,000
<TOTAL-LIABILITY-AND-EQUITY> 93,677,000
<SALES> 0
<TOTAL-REVENUES> 21,209,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 57,970,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (33,003,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,003,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,003,000)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
