<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number 0-15847
SEQUUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3031834
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
960 Hamilton Court, Menlo Park, CA 94025 (Address of
principle executive offices)
(415) 323-9011
(Registrant's telephone number, including area code)
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
----- -----
As of October 17, 1997, the number of outstanding shares of the Company's common
stock, par value $.0001, was 30,545,435.
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SEQUUS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
ITEM 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets
September 30, 1997 and December 31, 1996............................ 1
Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1996............. 2
Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996....................... 3
Notes to Condensed Financial Statements ............................ 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 6
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to Stockholder................................ 20
ITEM 6. Exhibits and Reports on Form 8-K.................................... 20
Signature.................................................................... 21
</TABLE>
i
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,056 $ 9,997
Short-term marketable investments 20,755 22,949
Accounts receivable, net 5,109 8,972
Inventories 4,057 5,697
Prepaid expenses and other current assets 1,722 1,601
--------- ---------
Total Current Assets 38,699 49,216
Equipment and improvements, net 6,397 5,564
Other assets 280 188
--------- ---------
Total Assets $ 45,376 $ 54,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,106 $ 4,539
Accrued compensation 2,738 3,149
Accrued clinical costs 1,620 1,014
Other accrued liabilities 2,034 1,939
Deferred revenue 844 --
--------- ---------
Total Current Liabilities 11,342 10,641
Long term debt 5,000 --
Stockholders' Equity:
Common stock 3 3
Additional paid-in capital 199,663 194,948
Accumulated deficit (170,632) (150,624)
--------- ---------
Total Stockholders' Equity 29,034 44,327
--------- ---------
Total Liabilities and Stockholders' Equity $ 45,376 $ 54,968
========= =========
</TABLE>
See accompanying notes to condensed financial statements
1
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 9,208 $ 6,225 $ 23,612 $ 16,167
Royalties and fees 1,310 5,331 3,675 5,400
------- ------- -------- --------
Total Revenues 10,518 11,556 27,278 21,567
Expenses:
Cost of goods sold 1,847 1,048 4,818 2,269
Research and development 8,100 7,621 23,945 19,349
Selling, general and administrative 5,894 3,938 19,384 12,796
------- ------- -------- --------
Total Expenses 15,841 12,607 48,147 34,414
Net interest and other income 170 392 841 1,238
------- ------- -------- --------
Net Loss $(5,153) $ (659) $(20,019) $(11,609)
======= ======= ======== ========
Net loss per common share $ (0.17) $ (0.02) $ (0.66) $ (0.40)
======= ======= ======== ========
Common shares used in calculation of net
loss per share 30,476 29,280 30,292 28,710
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed financial statements
2
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(20,019) $(11,609)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,583 1,294
Issuance of common stock to 401(k) Plan 287 174
Changes in operating assets and liabilities:
Accounts receivable 3,863 (1,909)
Inventories 1,640 (2,511)
Prepaid expenses and other current assets (121) (5,004)
Other assets (151) (29)
Accounts payable (433) (1,170)
Accrued compensation (411) (275)
Accrued clinical costs 606 233
Other accrued liabilities 95 25
Deferred revenue 844 (716)
-------- --------
Net cash used in operating activities
(12,217) (21,497)
-------- --------
Cash flows from investing activities:
Available-for-sale securities:
Purchases (51,442) (39,707)
Sales 19,165 34,022
Maturities 34,482 23,424
Capital expenditures (2,357) (1,833)
-------- --------
Net cash (used in) provided by investing
activities (152) 15,906
-------- --------
Cash flows from financing activities:
Long term debt borrowingsSale of 5,000 --
common stock 4,428 8,784
-------- --------
Net cash provided by financing activities 9,428 8,784
-------- --------
Net (decrease) increase in cash and cash equivalents (2,941) 3,193
Cash and cash equivalents at beginning
of the period 9,997 6,770
-------- --------
Cash and cash equivalents at end
of the period $ 7,056 $ 9,963
======== ========
</TABLE>
See accompanying notes to condensed financial statements
3
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SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. BASIS OF PRESENTATION
SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company") is engaged in
the development, manufacture, marketing and sale of proprietary liposome
and lipid-based products primarily to treat cancer and certain fungal
infections. The Company's strategic emphasis is on injectable
pharmaceutical products designed to improve the efficacy and reduce the
toxicity of selected existing and new drugs used to treat cancer and
infectious diseases.
In the opinion of management, the accompanying unaudited condensed
financial statements of SEQUUS contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the
financial position as of September 30, 1997, and the results of
operations for the three and nine month periods ended September 30, 1997
and 1996, and the changes in cash flows for the nine month periods ended
September 30, 1997 and 1996, in accordance with generally accepted
accounting principles.
These condensed financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December
31, 1996, which were filed with the Securities and Exchange Commission
on Form 10-K/A.
Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
2. CASH AND CASH EQUIVALENTS AND MARKETABLE INVESTMENTS
The Company invests its excess cash principally in government securities
and high-grade investment paper. The Company maintains its cash, cash
equivalents and investments in several different instruments with
various banks and brokerage houses. The diversification of risk is
consistent with Company policy to maintain liquidity and ensure the
safety of principal.
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. At September 30, 1997, all investments are
classified as available-for-sale securities and are carried at fair
value, with the unrealized gains and losses reported as a component of
accumulated deficit. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in net income.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in net income.
The cost of securities sold is based on the specific identification
method.
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The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
As of September 30, 1997 AMORTIZED ---------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- --- --- -------
<S> <C> <C> <C>
United States government securities.... $ 9,965 $12 - $ 9,977
United States corporate securities..... 8,739 13 - 8,752
Foreign debt securities................ 2,024 2 - 2,026
------- --- --- -------
$20,728 $27 - $20,755
======= === === =======
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
As of December 31, 1996 AMORTIZED ---------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- --- --- -------
<S> <C> <C> <C>
United States government securities.... $ 7,434 $1 ($1) $ 7,434
United States corporate securities..... 7,399 1 - 7,400
Foreign debt securities................ 8,114 1 - 8,115
------- --- --- -------
$22,947 $3 ($1) $22,949
======= === === =======
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities were immaterial for the quarters ended September 30, 1997 and
1996. As of September 30, 1997 the average portfolio duration was
approximately 81 days.
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. The inventory detail is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials............. $2,703 $2,801
Work-in-process........... 62 2,223
Finished goods............ 1,292 673
------ ------
$4,057 $5,697
====== ======
</TABLE>
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of earnings per
share is not expected to be material due to the antidilutive nature of
the Company's common stock equivalents.
5. LONG TERM DEBT
During June 1997, the Company obtained $5.0 million from a total $10
million working capital loan with Silicon Valley Bank of Santa Clara,
California. Payment terms for the $5 million obtained in June, 1997 are
interest only for 12 months and principal and interest over the
remaining 44 months. The remaining $5 million can be drawn down against
eligible accounts receivable.
5
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that relate to future plans, events or performance
are forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
these forward-looking statements as a result of a variety of factors, including
those set forth under "Factors That May Affect Future Results, Events or
Performance" below. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company is a leader in developing and commercializing lipid-based
biopharmaceutical products primarily to treat cancer and infectious diseases.
The Company formulates its proprietary STEALTH(R) liposomes with existing drugs,
or with therapeutics under development, to develop new products with improved
safety and efficacy profiles. The Company developed and is marketing DOXIL(R),
an anticancer drug, and AMPHOTEC(R), an antifungal drug, in the United States
through its direct sales organization and internationally through its marketing
partners. The Company is currently conducting additional clinical trials for the
use of DOXIL in the treatment of certain solid tumors, including a Phase III
clinical trial in refractory ovarian cancer and a number of breast cancer
trials. In addition, SEQUUS is currently conducting a Phase I trial of its
STEALTH cisplatin formulation, SPI-077, for the treatment of cancer.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the United States Food and Drug Administration
("FDA") for DOXIL for the treatment of Kaposi's sarcoma ("KS") in people with
AIDS whose KS has progressed on prior chemotherapy or in patients who are
intolerant to such therapy. In December 1995, the Company launched DOXIL in the
United States, using its own marketing and sales team. In June 1996, the Company
was granted marketing authorization for DOXIL under the trade name CAELYX(TM) in
the 15 member states of the European Union ("EU") for the treatment of
first-line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca alkaloid,
bleomycin, and doxorubicin (or other anthracycline). In June 1997, the Company
was granted marketing authorization for DOXIL in Australia and New Zealand.
In September 1996, the Company entered into a distribution agreement
with Schering-Plough Corporation ("Schering-Plough") under which Schering-Plough
has rights to market and sell CAELYX worldwide, except for the United States,
Japan and certain other countries. As of September 30, 1997, Schering-Plough had
launched CAELYX in Germany, United Kingdom, Sweden, Austria, Denmark, Finland
and the Netherlands. Pricing discussions are underway with the appropriate
agencies in those European countries where pricing approval is required. In
addition, the Company and Schering-Plough are jointly planning the clinical
development of DOXIL for the treatment of solid tumors in the United States and
certain international markets. Schering-Plough will be responsible for
conducting certain of these clinical trials. The Company received fees of $5.3
million and $3.3 million from Schering-Plough through the first nine months of
1996 and 1997, respectively.
The Company used its first-generation lipid-based delivery technology to
develop AMPHOTEC, a proprietary formulation of a leading antifungal drug,
amphotericin B. In November 1996, SEQUUS received marketing clearance from the
FDA for AMPHOTEC for the treatment of invasive aspergillosis, a life-
6
<PAGE> 9
threatening fungal infection, in patients where renal impairment or unacceptable
toxicity precludes the use of conventional amphotericin B therapy in effective
doses and in patients where prior amphotericin B therapy has failed. In December
1996, the Company launched AMPHOTEC in the United States, using its own
marketing and sales organization. In April 1997, the Company elected to reduce
the contract price of AMPHOTEC in response to feedback from its hospital
customers that the relative cost of lipid-based amphotericin B therapy, compared
to generic amphotericin B therapy, limited the broad use of AMPHOTEC in managed
care environments. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of systemic fungal infections in patients for
whom conventional amphotericin B is contraindicated due to toxicity or renal
failure or for whom previous antifungal therapy was unsuccessful. The Company's
strategy is to commercialize AMPHOTEC in international markets, under the trade
name AMPHOCIL, through distribution partners. The Company has entered into a
number of distribution agreements, including agreements with Zeneca Limited
("Zeneca") and Bayer, Inc. ("Bayer") in selected countries. A liposome-based
amphotericin B product which targets indications similar to those targeted by
AMPHOCIL has been first to market and has captured a significant share of the
market in many foreign markets. This liposome-based amphotericin B product was
also recently launched in the United States joining a second competitor who
launched the first lipid-based antifungal agent in the United States.
Competition from these two competitors could have an adverse effect on the
market penetration and pricing of AMPHOTEC in both Europe and in the United
States.
The Company recognizes product sales upon shipment of product to its
distribution partners and agents internationally and to its distributors in the
United States. The Company's quarterly operating results depend upon a variety
of factors, including the price, volume and timing of sales of the Company's
approved products; variations in payments under collaborative agreements,
including royalties, fees and other contract revenues; the availability of
third-party reimbursement; and the regulatory approvals of new products, or
expanded labeling of existing products. The Company's quarterly operating
results may also fluctuate significantly depending on other factors, including
the timing of the expansion of clinical trials for DOXIL and the level of
clinical trials for SPI-077; changes in the Company's level of research and
development; changes in manufacturing capabilities; and variations in gross
margins of the Company's products which may be caused by cost increases from
third-party manufacturers, availability and cost of raw materials, competitive
pricing pressures and the mix between product sales in the United States and
sales to the Company's international marketing partners. In addition, sales of a
product in any given period, including the quarter in which a new product is
initially introduced to the market, may include a significant amount of orders
for inventory by distributors and wholesalers and may not necessarily be
indicative of actual demand for that product by physicians and patients. There
can be no assurance that distributors or wholesalers will be able to forecast
demand for product accurately. Fluctuations in operating results will occur to
the extent that demand by physicians and patients does not meet distributors' or
wholesalers' expectations. The Company expects quarter to quarter fluctuations
to continue in the future. In addition, the Company expects operating expenses
to increase in 1997, and there can be no assurance that the Company's revenues
will not decline or that the Company will ever achieve profitability.
The Company has incurred losses in each year since its inception and has
accumulated approximately $170.6 million in net losses through September 30,
1997, including a net loss of approximately $20.0 million in the first nine
months of 1997. Although the Company and its marketing partners have commenced
marketing DOXIL in the United States and certain international markets and
AMPHOTEC in the United States and 19 other countries, there can be no assurance
that revenues from product sales or other sources will be sufficient to fund
operations or that the Company will achieve profitability or positive cash flow.
The Company expects its research and development expenses to increase as
a result of expanded clinical trials of DOXIL in a variety of solid tumors and
expanded clinical trials of SPI-077. The Company expects its marketing and sales
expenses to increase as it proceeds with the commercialization of DOXIL and
AMPHOTEC through its United States direct sales and marketing organization. As
of September 30, 1997, SEQUUS had a United States sales team of 39 individuals
experienced in the sale of pharmaceutical and biopharmaceutical products, with
particular emphasis on oncology and infectious disease.
7
<PAGE> 10
The Company's business is subject to significant risks, including, but
not limited to, the risks inherent in seeking market acceptance of current and
future products; managing a marketing and sales organization; depending on
third-party distributors, manufacturers and sole-source suppliers; obtaining and
enforcing patents; uncertainties relating to product development, clinical
trials and the regulatory approval process; uncertainties relating to the patent
rights of others; and uncertainties relating to pharmaceutical pricing and
reimbursement.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
Revenues
Total revenues were $10.5 million, of which $9.2 million were product
sales, during the quarter ended September 30, 1997. By comparison, total
revenues were $11.6 million during the quarter ended September 30, 1996 of which
$6.2 million were product sales. DOXIL product sales represented 86% of total
product sales in the third quarter of 1997 compared to 94% in the third quarter
of 1996. In the third quarter of 1997, the Company recognized revenues of
approximately $ 1.0 million under its agreement with Schering-Plough and $0.3
million under its research and development agreement with Bayer. In the
comparative third quarter of 1996, the Company recognized revenues of
approximately $5.4 million which included a one-time distribution rights payment
from Schering-Plough of $5.3 million.
Operating Expenses
The Company's gross margin decreased to 80% of product sales in the
third quarter of 1997 from 83% of product sales in the comparable quarter of the
prior year. This decrease in the gross margin is due to the mix of products
sold. The Company anticipates that its gross margin will continue to fluctuate
or may decline depending on the proportion of product sales in the United States
relative to sales to the Company's international distribution partners and
agents and the product mix. The Company generally recognizes higher margins on
direct product sales in the United States than it does on sales to the Company's
international distribution partners and agents.
The principal items of research and development ("R&D") expense are
personnel costs, costs of clinical trials, clinical production and supplies. R&D
expense increased to $8.1 million in the third quarter of 1997, from $7.6
million in the comparable quarter of 1996. This increase in R&D expenses was
primarily due to expanded clinical trials of DOXIL in solid tumors, clinical
trial expenses for SPI-077 and increased spending on R&D projects. The Company
anticipates that future clinical trial expenses will increase due to expanded
clinical trials of DOXIL in a variety of solid tumors and to expanded clinical
trials of SPI-077.
Selling, general and administrative ("SG&A") expenses increased to $5.9
million in the third quarter of 1997 from $3.9 million in the third quarter of
1996. The increase in SG&A expenses was primarily due to the third full quarter
of marketing AMPHOTEC in combination with the expanded marketing of DOXIL which
included an additional seven sales personnel in 1997 over the comparable third
quarter of 1996. The Company anticipates continued efforts to expand the market
for DOXIL and AMPHOTEC in the United States.
Interest Income, net
Interest income decreased to $0.2 million in the third quarter of 1997
as compared to $0.4 million in the third quarter of 1996, due to interest
expense of $0.1 million and the decrease in cash available for investment.
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Net Loss
The Company's net loss increased to $5.2 million for the three month
period ended September 30, 1997 from $0.7 million for the same period of 1996,
an increase of $4.5 million. The net loss per share was $0.17 for the three
month period ended September 30, 1997 compared to a net loss of $0.02 per share
in the same period of 1996. The increase in net loss per share for the third
quarter of 1997 was due primarily to an increase in marketing and sales expenses
associated with the third full quarter of AMPHOTEC sales, an increase in
clinical trial expenses and the absence of a similar 1996 one-time upfront
payment under the Schering-Plough distribution agreement partially offset by an
increase in product sales and revenues recognized under the Bayer agreement.
Nine Months Ended September 30, 1997 and 1996
Revenues
Total revenues were $27.3 million, of which $23.6 million were product
sales, during the nine month period ended September 30, 1997. During the
comparable nine month period ended September 30, 1996, total revenues were $21.6
million of which $16.2 were product sales. DOXIL product sales represented 85%
of total product sales in the third quarter of 1997 compared to 94% in the same
period of 1996. For the nine month period ended September 30, 1997, the Company
recognized revenues of approximately $3.3 million under its agreement with
Schering-Plough and $0.3 under it agreement with Bayer. For the comparable nine
month period ended September 30, 1996, the Company recognized revenues of
approximately $5.4 million which included a one-time distribution rights payment
from Schering-Plough of $5.3 million.
Operating Expenses
The Company's gross margin decreased to 80% of product sales in the nine
month period ended September 30, 1997 from 86% of product sales in the
comparable period of the prior year. This decrease in the gross margin is due to
the increase in sales through distribution partners and the mix of products sold
in the first nine months of 1997 versus the same period of 1996. The Company
generally recognizes higher margins on direct product sales in the United States
than it does on sales to the Company's international distribution partners and
agents. Direct product sales were 87% of product sales in the first nine months
of 1997 and were 95% of product sales in the same period of 1996. The Company
anticipates that its gross margin will continue to fluctuate or may decline
depending on the proportion of product sales in the United States relative to
sales to the Company's international distribution partners and agents and the
product mix.
The principal items of R&D expense are personnel costs, costs of
clinical trials, clinical production and supplies. R&D expense increased to
$23.9 million for the nine months ended September 30, 1997, from $19.3 million
in the comparable period of 1996. This increase in R&D expenses was primarily
due to expanded clinical trials of DOXIL in solid tumors, clinical trial
expenses for SPI-077 and increased spending on R&D projects. The Company
anticipates that future clinical trial expenses will increase due to expanded
clinical trials of DOXIL in a variety of solid tumors and to expanded clinical
trials of SPI-077.
SG&A expenses increased to $19.4 million in the nine month period ended
September 30, 1997 from $12.8 million in the same period of 1996. This $6.6
million increase in selling, general and administrative expenses was primarily
due to the first full nine months of marketing AMPHOTEC in combination with
expanded marketing of DOXIL which required the hiring of 15 additional sales
personnel over the comparable nine month period of 1996. The Company anticipates
continued efforts to expand the market for DOXIL and AMPHOTEC in the United
States.
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Interest Income, net
Interest income decreased to $0.8 million in the nine month period ended
September 30, 1997 from $1.2 million in 1996, due to the decrease in cash
available for investment.
Net Loss
The Company's net loss increased to $20.0 million for the nine month
period ended September 30, 1997 from $11.6 million for the same period of 1996,
an increase of $8.4 million. The net loss per share was $0.66 for the nine month
period ended September 30, 1997 compared to a net loss of $0.40 per share in the
same period of 1996. The increase in net loss per share for the nine months
ended September 30, 1997 was due primarily to an increase in marketing and sales
expenses associated with the first full nine months of AMPHOTEC sales, an
increase in clinical trial expenses and the absence of a similar 1996 one-time
upfront payment under the Schering-Plough distribution agreement partially
offset by an increase in product sales and revenues recognized under the Bayer
agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at September 30, 1997 were $7.1
million, a decrease of $2.9 million from $10.0 million at December 31, 1996.
This decrease represents $11.7 million of cash provided by marketable
investments, debt and equity financing offset by $12.2 million of net cash used
by operating activities and $2.4 million in capital expenditures. Short Term
marketable investments decreased to $20.8 million as of September 30, 1997 as
compared to $22.9 million as of December 31,1996. In June 1997, the Company
obtained $5.0 million from a total $10 million working capital loan with Silicon
Valley Bank of Santa Clara, California. Payment terms for the $5 million
obtained in June, 1997 are interest only for 12 months and principal and
interest over the remaining 44 months. The remaining $5 million can be drawn
down against eligible accounts receivable. During the three months ended March
31, 1997, the Company received approximately $3.4 million from the exercise of
warrants issued to investors in private placements and employee stock options.
Of this, approximately $2.1 million was due to the exercise of warrants to
purchase approximately 500,000 shares of Common Stock at $4.25 per share.
The Company believes that the Company's existing cash balances, interest
income, revenues from operations will be adequate to fund its planned activities
at least through the next 12 months. The Company may decide to raise additional
financing sooner. There can be no assurance that adequate financing will be
available on satisfactory terms, if at all.
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FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
SEQUUS wishes to caution readers that the following important factors, among
others, may affect the Company's future results, events or performance and could
cause actual results, events or performance to differ materially from those
expressed in any forward-looking statements made by the Company in this report
or presented elsewhere by the Company from time to time.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future financial performance depends on revenues from and
market acceptance of DOXIL in the United States and international markets. To
date, DOXIL can only be promoted for KS and cannot be promoted for the treatment
of solid tumors. In order for the Company to promote DOXIL for any solid tumor
indications, it must establish the clinical benefit of DOXIL in clinical trials
for each tumor type and gain regulatory clearance to market for such use. The
Company does not expect sales of DOXIL to grow significantly, if at all, for KS
in the United States because the population of persons with KS is relatively
small and may decline, particularly if recent developments in the treatment of
AIDS are successful, and subsequently decrease the incidence of KS. In the
United States, the Company is prohibited from marketing DOXIL for indications
other than refractory KS. Physicians and patients are often limited in their use
of pharmaceutical products for indications that have not been cleared by the
FDA, as reimbursement by third-party payors for off-label use may be
unavailable. There can be no assurance that clinical trials will demonstrate
that DOXIL is safe and efficacious for the treatment of solid tumors, that the
Company will receive regulatory approval for any solid tumor indications or that
the Company will be able to achieve reimbursement for or market acceptance of
DOXIL in the treatment of solid tumors.
The Company is also dependent on market acceptance of AMPHOTEC in the
United States and in international markets. To date, the Company has had very
limited sales of AMPHOTEC in the United States and internationally. The Company
faces intense competition and price pressure in marketing and selling AMPHOTEC
and recently has elected to cut prices of AMPHOTEC in the United States. A
number of factors may limit the market acceptance of DOXIL and AMPHOTEC and any
other products developed by the Company, including the timing of regulatory
approval and market entry relative to competitive products, the availability of
alternate therapies, the price of the Company's products relative to alternative
therapies, the availability of third-party reimbursement and the extent of
marketing efforts by third-party distributors or agents retained by the Company,
as well as the success of the marketing efforts by the Company's sales team
which was organized within the last two years. In addition, therapeutic products
based on liposome or lipid-based technology have become commercially available
only in the last few years. As a result, unanticipated side effects or
unfavorable publicity concerning any product incorporating liposome or
lipid-based technologies could have an adverse effect on the Company's ability
to obtain physician, patient or third-party payor acceptance and to sell the
Company's products. There can be no assurance that physicians, patients or
third-party payors will accept liposome products or any of the Company's
products as readily as traditional forms of medication or at all.
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The Company's current and potential products compete with existing and
new drugs offered by or under development by pharmaceutical, biopharmaceutical
and biotechnology companies. Many of these companies, both in the United States
and international markets, are developing products based on improved drug
delivery technologies as well as novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of these
companies are active in liposome and lipid-based research and product
development, and many have financial and technical resources and production and
marketing capabilities substantially greater than those of the Company. In
addition, many of these companies have significantly greater experience than the
Company in preclinical and clinical development activities, in obtaining
regulatory approval, and in manufacturing and marketing biopharmaceutical
products.
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A number of large pharmaceutical companies, including Bristol-Myers
Squibb Company ("Bristol-Myers") and Pfizer Inc., have established strong market
positions for oncology and infectious diseases. For example, AMPHOTEC competes
with traditional amphotericin B therapy, which is currently produced and
marketed by Bristol-Myers and others. The Company also faces competition from
two companies specializing in liposome drug delivery, NeXstar Pharmaceuticals,
Inc. ("NeXstar") and The Liposome Company ("TLC"), both of which have received
regulatory approvals in the United States and internationally for products
competitive with the Company's products. In some cases, the competing liposomal
products have obtained significant market share in certain territories by being
the first to market, have been introduced at lower prices than the Company's
competing products, or have received marketing clearance covering a broader
range of indications than the Company's competing products. For example, TLC
recently received FDA clearance to market its amphotericin B lipid formulation
for treating a broader range of indications than the indications for which
AMPHOTEC has received marketing clearance.
SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may be
more effective, or be more effectively marketed and sold, than any that have
been or may be developed by the Company. Competitive products may render the
Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
LIMITED MARKETING AND SALES EXPERIENCE; DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
AND AGENTS
The Company has limited experience marketing and selling its products.
The Company currently markets and sells its products in the United States with a
sales team of 39 persons. The Company's ability to generate future revenue in
the United States is dependent on the success of its direct sales team in
marketing DOXIL and AMPHOTEC. Future development of its marketing and sales
organization may require significant additional expenditures, management
resources and time. In addition, the loss of certain key sales personnel could
adversely affect the sales effort and have a material adverse effect on the
Company's business, financial condition and results of operations. Several
biotechnology and pharmaceutical companies have recently expanded their sales
forces, particularly in the field of oncology, which has increased competition
for experienced personnel. Furthermore, if the Company enters into marketing
partnerships with other companies to augment its own sales organization, the
Company's margins on these products would be significantly reduced.
In September 1996, the Company announced an exclusive arrangement with
Schering-Plough under which Schering-Plough has rights to market and sell DOXIL
worldwide (except for the United States, Japan and certain other countries)
under the tradename CAELYX. The Company has also entered into distribution
agreements with a number of corporate partners covering the marketing and
distribution of AMPHOCIL in various international markets. The Company's future
sales of CAELYX and AMPHOCIL outside of the United States will depend upon the
success of marketing efforts by Schering-Plough and other distribution partners,
the continuation of existing distribution arrangements, market acceptance of the
products, availability of third-party reimbursement, as well as the timing of
additional approvals, including pricing approvals, in other countries, if any.
Schering-Plough has the right to terminate the agreement with the Company at any
time if certain clinical results relating to CAELYX are not achieved, if certain
adverse events occur regarding patent matters and in certain other
circumstances. If Schering-Plough or any other distributor were to terminate its
agreement with the Company or be unsuccessful in meeting its sales objectives,
the Company's business, financial condition and results of operations could be
materially adversely affected. There can be no assurance that the Company will
be able to successfully market its products through its sales team, partners,
agents or at all.
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DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS; MANUFACTURING
RISKS
The Company's internal manufacturing capabilities are limited to
producing products for preclinical development. The Company is dependent on Ben
Venue Laboratories, Inc. to manufacture commercial-scale quantities of AMPHOTEC
and DOXIL pursuant to supply agreements. There can be no assurance that Ben
Venue will continue to meet FDA or product specification standards or that the
Company's manufacturing requirements can be met in a consistent and timely
manner. Only a limited number of contract manufacturers are capable of
manufacturing AMPHOTEC and DOXIL, and any alternative manufacturer would require
regulatory approval to manufacture the product which would likely take several
months, if at all. The Company is in the process of developing additional
manufacturing capacity, but to-date has not sought approval of an additional
manufacturer for its products. The Company has in the past experienced batch
failures in the manufacturing process for AMPHOTEC and DOXIL. Any batch failures
in the future could result in a material increase in cost of goods sold or in
the Company's inability to deliver products on a timely basis. In addition, the
Company may be unable to obtain sufficient contract manufacturing capacity due
to competing demands on the contract manufacturer's capacity or other reasons.
In the event of any interruption of supply from the contract manufacturer due to
regulatory reasons, significant batch failures, capacity constraints or other
causes, there can be no assurance that the Company could make alternative
manufacturing arrangements on a timely basis, if at all. Such an interruption
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company relies on certain suppliers of key raw materials to provide
an adequate supply of such materials for production of finished products.
Certain materials are purchased from single sources. In particular, amphotericin
B and doxorubicin are currently each supplied to the Company by single sources,
and the number of alternative sources is limited. The Company has a sole-source
supply agreement with Meiji Seika Pharma International, Ltd., which expires in
1999, to supply the Company with doxorubicin for DOXIL. The Company also has a
sole-source supply agreement with A.L. Laboratories, Inc. which expires in 1999,
to supply the Company with amphotericin B for AMPHOTEC. There can be no
assurance that the doxorubicin or the amphotericin B supplied under these
agreements will continue to meet FDA requirements applicable to DOXIL or
AMPHOTEC, which could delay or prevent future sales of DOXIL or AMPHOTEC, if
any, by the Company. The number of alternative qualified suppliers of key raw
materials required for the manufacture of DOXIL and AMPHOTEC is limited. The
disqualification or loss of a sole-source supplier could have a material adverse
effect on the Company because of a delay or inability in obtaining and
qualifying an alternate supplier and the costs associated with such delay and in
finding and qualifying an alternate supplier. Regulatory requirements applicable
to pharmaceutical products tend to make the substitution of suppliers costly and
time consuming. The unavailability of adequate commercial quantities, the loss
of a supplier's regulatory approval, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of materials could impair the Company's ability to manufacture and market
its products which would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF PRODUCT DEVELOPMENT
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. The Company's clinical data
in treatment of solid tumors are derived from a limited number of patients and
are not necessarily predictive of future results obtained in subsequent clinical
trials. Moreover, even when a drug does demonstrate activity, it may not be
sufficiently efficacious to replace existing therapies. There can be no
assurance that the Company's research and development efforts will be
successful, that any given product will be approved by appropriate regulatory
authorities or that any product candidate under development will be safe,
effective or capable of being manufactured in commercial quantities at an
economical cost, will not infringe the proprietary rights of others or will
achieve market acceptance.
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There are a number of challenges the Company must address successfully
to develop commercial products in each of its development programs. The
Company's potential products will require significant additional research and
development efforts, including process development and significant additional
clinical testing, prior to any commercial use. There can be no assurance that
the Company will have sufficient resources or will successfully address any of
these technological challenges, or others that may arise in the course of
development.
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials and
approval by the FDA, by comparable agencies in other countries and by state
regulatory authorities prior to marketing. The process of conducting clinical
trials and obtaining regulatory approval for a product typically takes a number
of years and involves substantial expenditures. In addition, product approvals
may be withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company has
received regulatory clearance in the United States for the commercial sale of
only two of its products, DOXIL and AMPHOTEC, and such clearance is only for
limited indications. The Company may encounter significant delays or excessive
costs in its efforts to secure and maintain necessary approvals or licenses.
Future federal, state, local or foreign legislative or administrative acts could
also prevent or delay regulatory approval of the Company's products. There can
be no assurance that the Company will be able to obtain or maintain the
necessary approvals for manufacturing or marketing the Company's products for
current or expanded indications or that the data it obtains in clinical trials
will be sufficient to establish the safety and efficacy of its products. Even if
the Company obtains regulatory approval for any particular product, there can be
no assurance that it will be economically feasible for the Company to
commercialize its products. In addition, identification of certain side effects
after a drug is on the market or the occurrence of manufacturing problems could
cause subsequent withdrawal of approval, reformulation of the drug, additional
preclinical testing or clinical trials, and changes in labeling of the product.
Failure to obtain or maintain requisite governmental approvals, failure to
obtain approvals of the clinically intended uses or the identification of side
effects could delay or preclude the Company from further developing particular
products or from marketing its products, or could limit the commercial use of
its products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's regulatory clearances to market DOXIL in the United States
for refractory KS and in certain European countries and in Australia and New
Zealand for first-line and refractory KS were based on extensive clinical data.
In 1996, the Company submitted data from its two randomized clinical trials to
the FDA to obtain clearance to market DOXIL as a first-line therapy. The FDA has
informed the Company that it would require additional information that addresses
the methodology of assessing the response rates seen in the trials in order to
approve DOXIL for a first-line indication. The Company is currently re-analyzing
its existing clinical data, analyzing data not previously submitted, and
considering expanding ongoing trials, if necessary, to support a first-line
indication. There can be no assurance that the Company will provide such data to
the FDA or that any such submission would result in clearance for a KS
first-line indication. The marketing clearance for DOXIL in the United States
was provided in accordance with the FDA's procedures for Accelerated Approval of
New Drugs for Serious or Life-Threatening Illnesses. Accelerated approval
regulations require that an applicant study an investigational drug following
product launch to verify and describe the drug's clinical benefit. The Company
is conducting a post-marketing clinical trial designed to meet accelerated
approval requirements. Under FDA accelerated approval regulations, the FDA may
withdraw approval following product launch if the Company fails to show due
diligence in conducting the post-marketing clinical trial or if this clinical
trial fails to demonstrate clinical benefit to the FDA's satisfaction. There can
be no assurance that the Company will be able to conduct a satisfactory
post-marketing clinical trial or that the results will be satisfactory to the
FDA. If the Company is unable to successfully complete the post-marketing
clinical trials or if the results are not satisfactory to the FDA, the Company's
business, financial condition and results of operations could be materially
adversely affected.
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The Company is also subject to regulation under numerous federal, state
and local laws regarding, among other things, occupational safety, laboratory
practices, the use and handling of radioisotopes and hazardous chemicals,
prevention of illness and injury, environmental protection and hazardous
substance control. Failure to comply with such regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products. For example, the Company has only conducted clinical trials for the
use of DOXIL in certain solid tumors on a limited number of patients. The
Company must conduct additional clinical testing in larger patient populations
to expand the indications for DOXIL. Many pharmaceutical and drug delivery
companies have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. The Company is
dependent on third parties including hospitals and physicians to conduct the
clinical trials. In addition, the Company is reliant on Schering-Plough to
conduct certain clinical trials for the use of DOXIL in treatment of solid
tumors. There is substantial competition to enroll patients in clinical trials
for oncology products. Delays in planned patient enrollment can result in
increased costs and delays. If the Company is unable to successfully complete
its clinical trials, its business, financial condition and results of operations
could be materially adversely affected.
UNCERTAINTY OF FUTURE FINANCIAL RESULTS; FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results depend upon a variety of
factors, including the price, volume and timing of sales of the Company's
approved products; variations in payments under collaborative agreements,
including royalties, fees and other contract revenues; the availability of
third-party reimbursement; and the regulatory approvals of new products, or
expanded labeling of existing products. The Company's quarterly operating
results may also fluctuate significantly depending on other factors, including
the timing of the expansion of clinical trials for DOXIL and SPI-077; changes in
the Company's level of research and development; changes in manufacturing
capabilities; and variations in gross margins of the Company's products which
may be caused by cost increases from third-party manufacturers, availability and
cost of raw materials, competitive pricing pressures and the mix between product
sales in the United States and sales to the Company's international marketing
partners. In addition, sales of a product in any given period, including the
quarter in which a new product is initially introduced to the market, may
include a significant amount of orders for inventory by distributors and
wholesalers and may not necessarily be indicative of actual demand for that
product by physicians and patients. There can be no assurance that distributors
or wholesalers will be able to forecast demand for product accurately.
Fluctuations in operating results will occur to the extent that demand by
physicians and patients does not meet distributors' or wholesalers'
expectations. The Company expects quarter to quarter fluctuations to continue in
the future. In addition, the Company expects operating expenses to increase in
1997, and there can be no assurance that the Company's revenues will not decline
or that the Company will ever achieve profitability.
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<PAGE> 18
RISKS ASSOCIATED WITH INTERNATIONAL SALES
There are significant challenges and risks to the Company associated
with selling products and conducting business in international markets,
including, but not limited to, varying government regulation of pharmaceutical
products, varying third-party and government reimbursement policies, uncertain
intellectual property protections, delays in establishing international
distribution channels and difficulties in collecting international accounts
receivable. The Company does not have extensive experience in international
sales and is relying on third parties to address these markets. The Company's
international business and financial performance could also be adversely
affected by matters such as currency controls, tariff regulations, foreign
duties and taxes, pricing controls and regulations and difficulties in obtaining
export licenses. In addition, the Company's products are priced in the currency
of the country in which such products are sold. Accordingly, the prices of such
products in dollars will vary as the value of the dollar fluctuates against such
local currencies. Increases in the value of the dollar against such currencies,
therefore, will reduce the dollars realized by the Company on the sale of its
products. The Company does not presently engage in any hedging or other
transactions intended to manage the risks relating to foreign currency exchange
rates or interest rate fluctuations. However, the Company may in the future
undertake such transactions if it determines that it is advisable to offset such
risks, although no assurance can be given that these efforts will be successful.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most international markets, including markets the Company is seeking
to enter, pricing of prescription pharmaceuticals is subject to government price
controls. In these markets, once marketing approval is received, pricing
negotiation could take another six to 12 months or longer. In the United States
there have been, and there may continue to be, federal and state proposals to
implement similar government price controls. In addition, an increasing emphasis
on managed care and consolidation of hospital purchasing in the United States
has and will continue to put pressure on pharmaceutical pricing. Such proposals,
if adopted, and such initiatives could decrease the price that the Company
receives for any current or future products and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on pharmaceutical companies that are collaborators or prospective
collaborators for certain of the Company's products, the Company's ability to
commercialize its products may be materially adversely affected. In addition,
price competition may result from competing product sales, attempts to gain
market share or introductory pricing programs, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other
products may depend in part on the extent to which reimbursement for such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that any third-party insurance coverage will be available to
patients for any of the Company's products. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting the
level of reimbursement for new therapeutic products, and by refusing, in some
cases, to provide coverage or reimbursement for indications for which the FDA
has not granted marketing clearance. Moreover, reimbursement may be denied even
for FDA-approved indications. If adequate coverage and reimbursement levels are
not provided by the government and third-party payors for the Company's
products, the Company's business, financial condition and results of operations
would be materially adversely affected.
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PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's products will
entail substantial risk of product liability. The Company currently maintains
product liability insurance in an amount of $10 million per occurrence and $10
million in the aggregate. A single product liability claim could exceed the $10
million coverage limit, and there is a possibility of multiple claims. There can
be no assurance that the amount of insurance the Company has obtained against
the risk of product liability will be adequate, that the amount of such
insurance can be renewed at acceptable cost or at all, or that the amount and
scope of any coverage obtained will be adequate to protect the Company in the
event of a successful product liability claim. The Company's business, financial
condition and results of operations could be materially adversely affected by
one or more successful product liability claims.
In addition, with respect to the sale of products in the United States,
the Company believes it has significantly greater risk in connection with
product liability claims due to the greater frequency of lawsuits and higher
claims paid in courts in the United States as opposed to most other countries.
The Company is required by government regulations to test its products even
after they have been sold and used by patients. As a result of such tests, the
Company may be required to, or may determine that it should, recall products
when such products have already been sold. Such testing and any product recalls
could increase the Company's potential exposure to product liability claims and
may have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTIES REGARDING PATENTS AND TRADE SECRETS
There has been increasing litigation in the biomedical, biotechnology
and pharmaceutical industries with respect to the manufacture, use and sale of
new therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or are
controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, have filed
applications for, or have been issued patents or may obtain additional patents
and proprietary rights relating to products or processes competitive with those
of SEQUUS. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and drug delivery companies, including SEQUUS, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's existing patents will provide significant proprietary protection or
will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first inventor of
inventions covered by its pending patent applications or that it was the first
to file patent applications for such inventions. Moreover, the Company may have
to participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no assurance that any patents
owned or controlled by the Company will protect SEQUUS against infringement
litigation or afford commercially significant protection of the Company's
technology. Almost none of the Company's patents has been tested in court to
determine their validity and scope. Moreover, the patent laws of foreign
countries differ from those of the United States and the degree of protection,
if any, afforded by foreign patents may therefore be different.
The Company has in the past been a party to litigation regarding
intellectual property rights. In prior litigation in the Patents County Court in
the U.K., a suit brought by NeXstar alleging that the Company's anticancer drug,
DOXIL, infringes NeXstar's EPO Patent No. 0,179,444 was settled by the parties
dropping their respective claims against one another. The U.K. Patent Court
dismissed all claims in the case with prejudice.
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The Company has a practice of monitoring patents and other developments
in the liposome field. To the extent that the Company becomes aware of patents
of other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. With respect to DOXIL, SEQUUS is aware of TLC's United States Patent
No. 5,077,056 (the "056 Patent") relating to the loading of therapeutic drugs
into liposomes. The Company's patent counsel has rendered an opinion that DOXIL
would not infringe any valid claim of this patent. International equivalent
patents to the 056 Patent issued to TLC are now undergoing opposition
proceedings in the European and Japanese patent offices and the Company is party
to such proceedings. Adverse results in such opposition proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is also aware of recently issued United
States Patent No. 5,562,925 (the "925 Patent") covering therapeutic cisplatin
compositions held by Research Corporation Technologies Inc., which the Company
believes has been licensed exclusively to Bristol-Myers. The Company's patent
counsel has rendered an opinion that its STEALTH cisplatin formulation would not
infringe any valid claims of the 925 Patent. The Company is also aware of TLC's
United States Patent No. 5,008,050 relating to reducing liposome size by
extrusion, and NeXstar's United States Patent No. 5,435,989 relating to
targeting of liposomes to solid tumors. The Company's patent counsel has
rendered an opinion that DOXIL would not infringe any valid claim of either of
these patents. The Company is also aware of United States Patent Nos. 4,426,330
and 4,534,899 assigned to Lipid Specialties, Inc., relating to conjugates of
phospholipids and polyethyleneglycol. The Company's patent counsel has rendered
an opinion that DOXIL would not infringe any valid claims of these patents.
In November 1991, the Company received a letter from TLC bringing to the
Company's attention TLC's United States Patent No. 5,059,591 for "Reduced
Toxicity" (the "591 Patent") containing claims directed to amphotericin B/sterol
compositions and their method of use. Subsequently, the Company's patent counsel
delivered an opinion to the Company that, among other things, AMPHOTEC does not
infringe any valid claim of the 591 Patent. The Company has not received any
further written correspondence with respect to this issue. However, no assurance
can be given that TLC will not make a claim against SEQUUS with respect to the
591 Patent, which could have a material adverse effect on the Company's ability
to commercialize AMPHOTEC.
Even if the Company's patent counsel renders advice that the Company's
products do not infringe any valid claim under such patents, there can be no
assurance that any third party will not commence litigation to enforce such
patents. The Company has been required to defend itself in patent litigation in
the past and uncertainties inherent in any other lawsuit that may be commenced
in the future with respect to any alleged patent infringement by the Company
make the outcome of any such litigation difficult to predict. If another company
were to successfully bring legal actions against the Company claiming patent or
other intellectual property right infringements, in addition to any liability
for damages, the Company could be enjoined by a court from selling such products
or processes or might be required to obtain a license to manufacture or sell the
affected product or process. There can be no assurance that the Company would
prevail in any such action or that the Company could obtain any license required
under any such patent on acceptable terms, if at all. Any litigation, whether or
not resolved in favor of the Company, could be expensive and time-consuming,
could consume substantial management resources, could have a material adverse
effect on the Company's product distribution arrangements and could otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company relies on unpatented trade secrets and proprietary know-how
to protect certain aspects of its production and other technologies. Although
SEQUUS has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by others.
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HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $170.6 million in net losses through September 30,
1997, including a net loss of approximately $5.2 million in the quarter ended
September 30, 1997. There can be no assurance that revenues from product sales
or other sources will be sufficient to fund operations or that the Company will
achieve profitability or positive cash flow. Additional financing may be
required to fund the Company's continuing operations and product and business
development activities in the form of debt or equity securities or bank
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all. The unavailability of such financing could delay or
prevent the development, testing, regulatory approval, manufacturing or
marketing of some or all of the Company's products and could have a material
adverse effect on the Company's business, financial conditions or results of
operations.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION
The Company's success depends largely upon its ability to attract and
retain qualified scientific, medical, engineering, manufacturing, sales and
marketing and management personnel. The Company faces competition for such
personnel from other companies, academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining such personnel. Three of the key executive
officers of the Company have joined the management team in the past two years.
The new management team will face significant challenges in transitioning the
Company from research and development to manufacturing and marketing of the
Company's products that have received regulatory approval. There can be no
assurance that the management team can successfully manage the transition of the
Company's business.
HAZARDOUS MATERIALS
As with many biopharmaceutical companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these materials.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could materially adversely affect the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's securities, like the stock prices of
many publicly traded biopharmaceutical companies, has been and may continue to
be highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as the level of sales of the
Company's products, problems with clinical development of the Company's
potential products, announcements of technological innovations, regulatory
developments or new commercial products by the Company or its competitors,
government regulation, delays or other developments relating to regulatory
approvals, developments or disputes relating to patent or proprietary rights,
comments and reports by securities analysts, product liability claims, as well
as period-to-period fluctuations in the Company's financial results, may have a
significant negative impact on the market price of the Company's securities. Any
large sale of securities of the Company could have a significant adverse effect
on the market price Company's securities.
19
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 4.
Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting on June 4, 1997, which was adjourned with
respect to the stockholders' vote on a proposed Equity Incentive Plan. The
Annual Meeting was reconvened on June 18, 1997 at which time the Equity
Incentive Plan was considered. At the Annual Meeting, the matters discussed
below were considered.
Each of the nominees for election as a director was elected as follows:
<TABLE>
<CAPTION>
Number of Votes Cast
--------------------
Name For Withheld
---- --- --------
<S> <C> <C>
Robert G. Faris 23,364,284 1,005,017
I. Craig Henderson, M.D. 23,386,918 982,383
Scott Minick 23,362,677 1,006,624
Richard C. E. Morgan 23,390,625 978,676
E. Donnall Thomas 23,367,072 1,002,229
</TABLE>
The stockholders approved an amendment to the Company's Employee Stock Purchase
Plan to increase the number of shares reserved for issuance thereunder from
250,000 to 778,000. The amendment was approved by a vote of 14,869,360 shares
For, 3,257,960 shares Against, 468,301 shares Abstaining and 5,773,680 Broker
Non-Votes. The stockholders also approved the Company's Equity Incentive Plan.
The Plan was approved by a vote of 10,943,676 shares For, 480,238 shares
Abstaining, and 10,194,137 shares Against.
ITEM 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Loan and Security Agreement with Silicon Valley Bank
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
20
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUUS PHARMACEUTICALS, INC.
----------------------------------------
(Registrant)
Date: November 10, 1997 By: /s/ Anthony T. Hendrickson
------------------------------------
Anthony T. Hendrickson
Corporate Controller
(Principal Accounting Officer)
By: /s/ I Craig Henderson, M.D.
------------------------------------
Chairman and Chief Executive Officer
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.1 Loan and Security Agreement with Silicon Valley Bank
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.1
SEQUUS PHARMACEUTICALS, INC.
LOAN AND SECURITY AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Interest Rate Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Interest Rates, Payments, and Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.6 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.1 Conditions Precedent to Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Conditions Precedent to all Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Delivery of Additional Documentation Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Due Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 Name; Location of Chief Executive Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 No Material Adverse Change in Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 Financial Statements, Reports, Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.9 Debt-Net Worth Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
6.10 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.11 Minimum Liquidity/Debt Service Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.12 Monthly Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.13 Intellectual Property Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.14 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.8 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.11 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.9 FDA Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.10 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.11 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
ii
<PAGE> 4
This LOAN AND SECURITY AGREEMENT is entered into as of June 26, 1997,
by and between SILICON VALLEY BANK ("Bank") and SEQUUS PHARMACEUTICALS INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Account Audit" means an audit of the Collateral,
Borrower's Accounts and/or Borrower's Books prepared by Bank in accordance with
generally accepted business and accounting practices in form and substance
acceptable to Bank.
"Advance" or "Advances" means a Term Advance or a
Revolving Advance.
"Affiliate" means, with respect to any Person, any
Person that owns or controls directly or indirectly such Person, any Person
that controls or is controlled by or is under common control with such Person,
and each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement
of the Loan Documents; and Bank's reasonable attorneys' fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and
all computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" has the meaning set forth in Section
2.1 hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized
or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
1
<PAGE> 5
"Collateral" means the property described on Exhibit
A attached hereto.
"Committed Line" means Five Million Dollars
($5,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted
or sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to
the stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith; provided, however, that such amount shall not in any
event exceed the maximum amount of the obligations under the guarantee or other
support arrangement.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination
thereof unless such Indebtedness is renewable or extendable at the option of
Borrower or any Subsidiary to a date more than one year from the date of
determination, but excluding Subordinated Debt.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Debt Service Coverage" means, as measured quarterly
as of the last day of each fiscal quarter of Borrower (unless measured monthly
in accordance with Section 6.12 herein), on a consolidated income basis
determined in accordance with GAAP, the ratio of (a) an amount equal to the sum
of (i) net income, plus (ii) depreciation, amortization of intangible assets
and other non-cash charges to income to (b) an amount equal to the sum of all
scheduled repayments for such quarter (or month, as applicable) and mandatory
prepayment of principal on account of long-term debt.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrower's business that comply with all of
Borrower's representations and warranties to Bank set forth in Section 5.4;
provided, that standards of eligibility may be fixed and revised from time to
time by Bank in Bank's reasonable judgment and upon thirty (30) days prior
written notification thereof to Borrower in accordance with the provisions
hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not
include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to which the account
debtor is an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale on approval, bill
and hold, or other terms by reason of which the payment by the account
2
<PAGE> 6
debtor may be conditional;
(e) Accounts with respect to which the account
debtor is an Affiliate of Borrower;
(f) Accounts with respect to which the account
debtor does not have its principal place of business in the United States,
except for Eligible Foreign Accounts;
(g) Accounts with respect to which the account
debtor is the United States or any department, agency, or instrumentality of
the United States;
(h) Accounts with respect to which Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except that the concentration
limit shall be thirty-five percent (35%) for Accounts owing by McKesson,
Cardinal Health and Bergin-Brunswig, and except as approved in writing by Bank;
(j) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect thereto as to which
Bank believes, in its sole discretion, that there may be a basis for dispute
(but only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(k) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States or Canada and that are: (1) covered by credit
insurance in form and amount, and by an insurer satisfactory to Bank less the
amount of any deductible(s) which may be or become owing thereon; or (2)
supported by one or more letters of credit in favor of Bank as beneficiary, in
an amount and of a tenor, and issued by a financial institution, acceptable to
Bank; or (3) that Bank approves on a case-by-case basis and that are listed on
Schedule 1 attached hereto, as may be amended from time to time.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income
Security Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services,
including without limitation reimbursement and other obligations with respect
to surety bonds and letters of credit, (b) all obligations evidenced by notes,
bonds, debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in
which Borrower has any interest,
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including merchandise, raw materials, parts, supplies, packing and shipping
materials, work in process and finished products intended for sale or lease or
to be furnished under a contract of service, of every kind and description now
or at any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of
its custody or possession or in transit and including any returns upon any
accounts or other proceeds, including insurance proceeds, resulting from the
sale or disposition of any of the foregoing and any documents of title
representing any of the above, and Borrower's Books relating to any of the
foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower
to repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Net Cash Losses" means, with respect to any period
of determination, determined on a consolidated basis in accordance with GAAP
for such period for Borrower and its consolidated Subsidiaries, the sum of (i)
net income (loss), plus (ii) non-cash expenses, depreciation and amortization,
minus (iii) increases in gross fixed assets, plus (iv) increases (decreases) in
long term debt or capital leases excluding changes in deferred revenue.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may have
obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay
to Bank pursuant to the terms and provisions of any instrument, or agreement
now or hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness secured by a Lien described in
Subsection (c) of the definition of "Permitted Liens" below provided the
principal amount of such Indebtedness does not exceed the lesser of the cost or
fair market value of the Equipment financed;
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(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in
the ordinary course of business.
"Permitted Investment" means: (i) marketable direct
obligations issued or unconditionally guaranteed by the United States of
America or any agency or any State thereof maturing within one (1) year from
the date of acquisition thereof, (ii) commercial paper maturing no more than
one (1) year from the date of creation thereof and currently having the highest
rating obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., and (iii) certificates of deposit maturing no more
than one (1) year from the date of investment therein issued by Bank; and, (iv)
any Investments permitted by Borrower's investment policy, as amended from time
to time, provided that such investment policy (and such amendment thereto) has
been approved by Bank, which approval shall not be unreasonably withheld;
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in Schedule 2 or arising under the terms of this Agreement;
(a) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in
good faith by appropriate proceedings, provided the same have no priority over
any of Bank's security interests;
(b) Liens (i) upon or in any equipment acquired
or held by Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, provided that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;
(c) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely
for the purpose of financing the lease of such Equipment (including Liens
pursuant to leases permitted pursuant to Section 7.1 and Liens arising from UCC
financing statements regarding leases permitted by this Agreement);
(d) Leases or subleases and licenses and
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, and any interest or title of a lessor, licensor
or under any lease or license;
(e) Liens on assets (including the proceeds
thereof and accessions thereto) that existed at the time such assets were
acquired by Borrower or any Subsidiary (including Liens on assets of any
corporation that existed at the time it became or becomes a Subsidiary);
provided such Liens are not granted in contemplation of or in connection with
the acquisition of such asset by Borrower or a Subsidiary;
(f) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Section
8.8;
(g) Easements, reservations, rights-of-way,
restrictions, minor defects or irregularities in title and other similar
charges or encumbrances affecting real property not constituting a Material
Adverse Effect;
(h) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of customs duties in
connection with the importation of goods;
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(i) Liens that are not prior to the Lien of Bank
which constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered in to with banks in the
ordinary course of business;
(j) Earn-out and royalty obligations existing on
the date hereof or entered into in connection with an acquisition permitted by
Section 7.3;
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not
such announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the sum of : (i) unrestricted cash, (ii)
cash-equivalents, (iii) net, billed accounts receivable, and (iv) investments
with maturities not to exceed twelve (12) months, of Borrower determined in
accordance with GAAP.
"Remaining Months Liquidity" means, at any time of
determination, the ratio of (i) Unrestricted Cash Reserves at such time to (ii)
the average of Net Cash Losses for the immediately preceding three month
period.
"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Advances" means cash advances made
pursuant to Section 2.1.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Revolving Maturity Date" means the date immediately
preceding the first anniversary of the date of this Agreement.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by
Borrower that is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in
which (i) any general partnership interest or (ii) more than 50% of the stock
of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which
any determination is being made, be owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
"Term Advances" means cash advances made pursuant to
Section 2.1.1.
"Term Loan Facility" means the facility under which
Borrower may request Bank to
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issue cash advances, as specified in Section 2.1.1 hereof.
"Term Maturity Date" means December 26, 2001.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
"Unrestricted Cash Reserves" means, at any time of
determination, the sum of Borrower's (i) cash balance of deposit accounts and
investment accounts, plus (ii) market value of all readily marketable
securities beneficially owned by Borrower, minus (iii) cash value of any
certificates of deposit or securities encumbered and/or restricted by any Bank
or any other Persons.
1.2 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in accordance with GAAP. When used
herein, the terms "financial statements" shall include the notes and schedules
thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Revolving Facility.
(a) Advances. Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to Borrower in an
aggregate amount not to exceed the lesser of the Committed Line minus the Cash
Management Sublimit or the Borrowing Base, minus in each case the face amount
of all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit). For purposes of this Agreement, "Borrowing Base" shall mean an
amount equal to seventy-five percent (75%) of Eligible Accounts. Subject to
the terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time prior to the Revolving
Maturity Date.
(b) Procedures. Whenever Borrower desires an
Advance, Borrower will notify Bank by facsimile transmission or telephone no
later than 3:00 p.m. California time, on the Business Day that the Advance is
to be made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is
authorized to make Advances under this Agreement, based upon instructions
received from a Responsible Officer, or without instructions if in Bank's
discretion such Advances are necessary to meet Obligations which have become
due and remain unpaid. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss
suffered by Bank as a result of such reliance. Bank will credit the amount of
Advances made under this Section 2.1 to Borrower's deposit account.
(c) Revolving Maturity Date. The Revolving Facility
shall terminate on the Revolving Maturity Date, at which time all Advances
under this Section 2.1 shall be immediately due and payable.
2.1.1 Term Loan.
(a) Subject to and upon the terms and conditions
of this Agreement, Bank will make Term Advances from time to time to Borrower
in an aggregate amount not to exceed Five Million Dollars ($5,000,000). The
Term Loan Facility will be used to provide temporary working capital to
Borrower.
(b) Interest shall accrue on each Term Advance
from the date of such advance at the rate specified in Section 2.3(a), and
shall be payable monthly on the twenty-sixth day of each month through June 26,
1998. The aggregate Term Advances outstanding on June 30, 1998 shall be repaid
as follows: $100,000 per month beginning July 26, 1998 and continuing on the
twenty-sixth day of each month through June 26, 1999. Each such monthly
payment shall be applied first against accrued interest, then principal; the
principal balance
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outstanding on June 26, 1999 shall be payable in thirty (30) equal monthly
installments of principal, plus accrued interest, beginning July 26, 1999, and
continuing through the Term Maturity Date. All outstanding obligations under
this Agreement, including, but not limited to, any accrued and unpaid interest
and other unpaid charges or principal balances, shall be payable on the Term
Maturity Date.
(c) When Borrower desires a Term Advance,
Borrower will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. California time, on the Business Day that the Term Advance is to be
made. Such notification shall be promptly confirmed by a Payment/Advance Form
in substantially the form of Exhibit B hereto. Bank shall be entitled to rely
on any telephonic notice given by a person who Bank reasonably believes to be a
Responsible Officer, and Borrower shall indemnify and hold Bank harmless for
any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of each Term Advance to Borrower's deposit account.
2.1.2 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, Bank agrees to issue or cause to be issued letters of credit
("Letters of Credit") for the account of Borrower in an aggregate outstanding
face amount not to exceed (i) the lesser of the Committed Revolving Line or the
Borrowing Base, whichever is less, minus (ii) the then outstanding principal
balance of the Advances, provided that the face amount of outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit and any Letter of
Credit Reserve) shall not in any case exceed Five Hundred Thousand Dollars
($500,000). Each Letter of Credit shall have an expiry date no later than one
hundred eighty (180) days after the Revolving Maturity Date, provided that
Borrower's Letter of Credit reimbursement obligation shall be secured by cash
on terms acceptable to Bank at any time after the Revolving Maturity Date if
the term of this Agreement is not extended by Bank. All Letters of Credit
shall be, in form and substance, acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank's form of standard
Application and Letter of Credit Agreement.
(b) The obligation of Borrower to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrower shall indemnify, defend, protect and
hold Bank harmless from any loss, cost, expense or liability, including,
without limitation, reasonable attorneys' fees, arising out of or in connection
with any Letters of Credit.
(c) Borrower may request that Bank issue
a Letter of Credit payable in a currency other than United States Dollars. If
a demand for payment is made under any such Letter of Credit, Bank shall treat
such demand as an Advance to Borrower of the equivalent of the amount thereof
(plus cable charges) in United States currency at the then prevailing rate of
exchange in San Francisco, California, for sales of that other currency for
cable transfer to the country of which it is the currency.
(d) Upon the issuance of any Letter of
Credit payable in a currency other than United States Dollars, Bank shall
create a reserve under the Committed Revolving Line for Letters of Credit
against fluctuations in currency exchange rates, in an amount equal to ten
percent (10%) of the face amount of such Letter of Credit. The amount of such
reserve may be amended by Bank from time to time to account for fluctuations in
the exchange rate. The availability of funds under the Committed Revolving
Line shall be reduced by the amount of such reserve for so long as such Letter
of Credit remains outstanding.
2.1.3 Cash Management Sublimit. Subject
to the terms and conditions of this Agreement, Borrower may utilize up to an
aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) (the
"Cash Management Sublimit") for cash management services provided by Bank,
which services may include merchant services, PC-ACH, direct deposit of
payroll, business credit card, Firstax, and other related check cashing
services as defined in that certain Cash Management Services Agreement provided
to Borrower in connection herewith (a "Cash Management Service," or the "Cash
Management Services"). Any amounts actually
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paid by Bank in respect of a Cash Management Service or Cash Management
Services shall, when paid, constitute an Advance under the Revolving Facility.
2.2 Interest Rate Protection. Subject to the terms and
condition of this Agreement, Borrower may prepay the Term Advances, in whole or
in part, only upon payment in full of (i) all accrued but unpaid interest and
all outstanding obligations hereunder (or, if partial prepayment, an applicable
or proportionate amount of such obligations), and (ii), if Borrower has elected
the fixed rate option set forth in Section 2.3(a), a fee as shall be determined
by Bank in its reasonable discretion to provide for interest rate protection in
the event the then current Treasury Note rate is lower than the fixed interest
rate set forth in Section 2.3(a).
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in
Section 2.3(b), the Revolving Advances shall bear interest, on the average
daily balance thereof, at a rate equal to one half of one percentage point
(0.5%) above the Prime Rate. Except as set forth in Section 2.3(b), prior to
June 30, 1998 the Term Advances shall bear interest, on the average daily
balance thereof, at a rate equal to one (1.0) percentage point above the Prime
Rate. Term Advances outstanding on June 30, 1998 shall bear interest, at
Borrower's option, either (i) at a floating rate equal to the Prime Rate plus
one percent (1.0%) or (ii) at a fixed rate equal to three and one-half
percentage (3.50%) points above the yield of the 42 month Treasury Note as
reported in the Western edition of The Wall Street Journal, which rate shall be
fixed at the time of Borrower's election. Borrower shall give written notice
to Bank of its interest rate election two (2) Business Days prior to June 30,
1998. If Borrower fails to give such notice, then the applicable rate shall be
based on the 42 month Treasury Note fixed rate described herein.
(b) Default Rate. All Obligations shall bear
interest, from and after the occurrence of an Event of Default, at a rate equal
to five (5) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due
and payable on the twenty-sixth (26th) calendar day of each month during the
term hereof. Bank shall, at its option, charge such interest, all Bank
Expenses, and all Periodic Payments against any of Borrower's deposit accounts
or against the Committed Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable
hereunder.
(d) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of
a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an
Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as Borrower specifies.
After the occurrence of an Event of Default, the receipt by Bank of any wire
transfer of funds, check, or other item of payment shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the
Loan Documents would otherwise be due (except by reason of acceleration) on a
date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
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(a) Facility Fee. A Facility Fee equal to Sixty
Two Thousand Five Thousand Dollars ($62,500), which fee shall be due on the
Closing Date and shall be fully earned and nonrefundable;
(b) Financial Examination and Appraisal Fees.
Bank's customary fees and out-of-pocket expenses for Bank's audits of
Borrower's Accounts, and for each appraisal of Collateral and financial
analysis and examination of Borrower performed from time to time by Bank or its
agents;
(c) Bank Expenses. Upon the date hereof, all
Bank Expenses incurred through the Closing Date, including reasonable
attorneys' fees and expenses, and, after the date hereof, all Bank Expenses,
including reasonable attorneys' fees and expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force
of law), in each case after the date of this Agreement:
(a) subjects Bank to any tax with respect to
payments of principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated hereby
(except for taxes on the overall net income of Bank imposed by the United
States of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any
deposit insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
of hundred eight (180) days prior to the date of such certificate.
Notwithstanding the foregoing, if Borrower repays all outstanding Advances
within forty-five (45) days of the date of such certificate, no amount shall be
assessed by virtue of this Section 2.6.
2.7 Term. This Agreement shall become effective on the
Closing Date and, subject to Section 12.7, shall continue in full force and
effect for a term ending on the Term Maturity Date. Notwithstanding the
foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the
occurrence and during the continuance of an Event of Default. Notwithstanding
termination, Bank's Lien on the Collateral shall remain in effect for so long
as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The
obligation of Bank to make the initial Advance is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
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(b) a certificate of the Secretary of Borrower
with respect to incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) a negative pledge agreement in substantially
the same form as Exhibit E hereto;
(d) an Account Audit (condition to Revolving
Advance);
(e) financing statement (Form UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then
due specified in Section 2.5 hereof; and
(h) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation
of Bank to make each Advance, including the initial Advance, is further subject
to the following conditions:
(a) timely receipt by Bank of the Payment/Advance
Form as provided in Section 2.1; and
(b) the representations and warranties contained
in Section 5 shall be true and correct in all material respects on and as of
the date of such Payment/Advance Form and on the effective date of each Advance
as though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making of
each Advance shall be deemed to be a representation and warranty by Borrower on
the date of such Advance as to the accuracy of the facts referred to in this
Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and
pledges to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower
of each of its covenants and duties under the Loan Documents. Except as set
forth in the Schedule and Permitted Liens, such security interest constitutes a
valid, first priority security interest in the presently existing Collateral,
and will constitute a valid, first priority security interest in Collateral
acquired after the date hereof.
4.2 Delivery of Additional Documentation Required.
Borrower shall from time to time execute and deliver to Bank, at the request of
Bank, all Negotiable Collateral, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's
Books and to make copies thereof and to check, test, and appraise the
Collateral in order to verify Borrower's financial condition or the amount,
condition of, or any other matter relating to, the Collateral.
4.4 Requirement for Cash Collateral. If at any time
Borrower does not comply with Section 6.11, then Borrower shall pledge cash or
a certificate of deposit to the Bank on terms reasonably acceptable to Bank in
an amount equal to one hundred percent (100%) of the outstanding Obligations.
Bank shall release such
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pledge upon Borrower's compliance with Section 6.11.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and
each Subsidiary is a corporation duly existing and in good standing under the
laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its business
or its ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Articles of Incorporation or Bylaws,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except for
Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts
are bona fide existing obligations. The property giving rise to such Eligible
Accounts has been delivered to the account debtor or to the account debtor's
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor that is included in any Borrowing Base
Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all
material respects of good and marketable quality, free from all material
defects.
5.6 Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office
of Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower
does not have knowledge of any such pending or threatened actions or
proceedings.
5.8 No Material Adverse Change in Financial Statements.
All consolidated financial statements related to Borrower and any Subsidiary
that have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. The fair saleable value of Borrower's
assets (including goodwill minus disposition costs) exceeds the fair value of
its liabilities; Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is solvent and able
to pay its debts (including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary
has met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred
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resulting from Borrower's failure to comply with ERISA that is reasonably
likely to result in Borrower's incurring any liability that could have a
Material Adverse Effect. Borrower is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of the
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or
caused to be filed all tax returns required to be filed, and has paid, or has
made adequate provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.14 Government Consents. Borrower and each Subsidiary
has obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower's
business as currently conducted.
5.15 Full Disclosure. No representation, warranty or
other statement made by Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each
of its Subsidiaries' corporate existence and good standing in its jurisdiction
of incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and
shall cause each Subsidiary to meet, the minimum funding requirements of ERISA
with respect to any employee benefit plans subject to ERISA. Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
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6.3 Financial Statements, Reports, Certificates.
Borrower shall deliver to Bank: (a) as soon as available, but in any event
within thirty (30) days after the end of each month in which the Liquidity of
Borrower is less than (i) Fifteen Million Dollars ($15,000,000) or (ii) nine
(9) months Remaining Months Liquidity, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, certified by a Responsible Officer; (b) as soon as available, but
in any event within ninety (90) days after the end of Borrower's fiscal year,
audited consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank, provided that any "Big Six" accounting firm
shall be deemed acceptable to Bank; (c) within five (5) days upon becoming
available, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K and 10-Q filed with the Securities and
Exchange Commission; (d) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) or more; (e) within thirty 30 days after the end of
every alternating fiscal quarter, an Account Audit; and, (f) such budgets,
sales projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within fifteen (15) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default
has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all
Inventory in good and marketable condition, free from all material defects.
Returns and allowances, if any, as between Borrower and its account debtors
shall be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Fifty Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law,
and will execute and deliver to Bank, on demand, appropriate certificates
attesting to the payment or deposit thereof; and Borrower will make, and will
cause each Subsidiary to make, timely payment or deposit of all material tax
payments and withholding taxes required of it by applicable laws, including,
but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability,
and local, state, and federal income taxes, and will, upon request, furnish
Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary
has made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is contested in
good faith by appropriate proceedings and is reserved against (to the extent
required by GAAP) by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as ordinarily
insured against by other owners in similar businesses conducted in the
locations where Borrower's business is conducted on the date hereof. Borrower
shall also maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar to
Borrower's.
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(b) All such policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably satisfactory
to Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. All proceeds payable under any such policy shall, at the option of
Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its
principal depository and operating accounts with Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last
day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of
at least 1.25 to 1.00, and at least 1.50 to 1.00 from and after the date that
Borrower receives at least Ten Million Dollars ($10,000,000) of the proceeds
from the sale or issuance of its equity assurities.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of
the last day of each fiscal quarter, a ratio of Total Liabilities, excluding
deferred revenues, less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 1.00 to 1.00.
6.10 Tangible Net Worth. Borrower shall maintain, as of
the last day of each fiscal quarter, a Tangible Net Worth of not less than
Fifteen Million Dollars ($15,000,000) plus seventy-five percent (75%) of the
proceeds from the sale or issuance of Borrower's equity securities.
6.11 Minimum Liquidity/Debt Service Coverage. Borrower
shall maintain, as of the last day of each of Borrower's fiscal quarters, a
minimum Liquidity of (a) two (2) times the amount of outstanding Term Advances
and (b) six times (6x) the Average Monthly Cash Burn for the immediately
preceding three (3) month period. "Liquidity" means unrestricted cash, cash
equivalents and short term investments plus net availability under the
Revolving Facility. "Average Monthly Cash Burn" means the net change in
Borrower's cash per month, calculated on a three (3) month rolling average
basis, net of changes in debt and equity. Notwithstanding the foregoing, from
and after the time Borrower achieves a Debt Service Coverage Ratio of at least
1.50 to 1.00, Borrower shall not be subject to the minimum required liquidity
set forth above and, instead, Borrower shall maintain a Debt Service Coverage
Ratio of at least 1.50 to 1.00. "Debt Service Coverage Ratio" means the ratio
of (i) earnings after taxes plus non-cash expenses divided by (ii) current
portion of long-term debt.
6.12 Monthly Compliance. If at any time and during such
time Borrower's Liquidity is less than Fifteen Million Dollars ($15,000,000) or
nine (9) months Remaining Months Liquidity, Borrower shall comply with Sections
6.8, 6.9, 6.10 and 6.11 as of the last day of each calendar month.
6.13 Intellectual Property Security Agreement. Within
thirty (30) days of the Closing Date, Borrower will complete, execute and
deliver to Bank an Intellectual Property Security Agreement in a form
reasonably acceptable to Bank.
6.14 Further Assurances. At any time and from time to
time Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
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7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any
Advances, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or
obsolete Equipment.
7.2 Change in Business. Engage in any business, or
permit any of its Subsidiaries to engage in any business, other than the
businesses currently engaged in by Borrower and any business substantially
similar or related thereto (or incidental thereto), or suffer a material change
in Borrower's ownership. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person, except for a merger affected solely for the purpose of reincorporation
of Borrower and as to which Bank acknowledges and consents in advance, and
except for mergers, consolidations or acquisitions in which the consideration
is less than Five Million Dollars ($5,000,000) and as to which an Event of
Default does not exist before the consummation thereof or after giving effect
thereto.
7.4 Indebtedness. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, other than payments made in an aggregate amount not to
exceed $100,000 for the repurchase of stock effected in connection with the
termination of an employee.
7.7 Investments. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries
so to do, other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person.
7.9 Subordinated Debt. Make any payment in respect of
any Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the Subordinated
Debt without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing and described on Schedule 3, as amended from time to time,
Borrower shall keep the Inventory only at the location set forth in
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Section 10 hereof and such other locations of which Borrower gives Bank prior
written notice and as to which Borrower signs and files a financing statement
where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" or become
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the
principal of, or any interest on, any Advances when due and payable; or fails
to pay any portion of any other Obligations not constituting such principal or
interest, including without limitation Bank Expenses, within thirty (30) days
of receipt by Borrower of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and
Bank and as to any default under such other term, provision, condition,
covenant or agreement that can be cured, has failed to cure such default within
ten (10) days after Borrower receives notice thereof or any officer of Borrower
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure
period);
8.3 Material Adverse Change. If there occurs a material
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's
security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of its business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within ten (10) days after Borrower receives notice thereof,
provided that none of the foregoing shall constitute an Event of Default where
such action or event is stayed or an adequate bond has been posted pending a
good faith contest by Borrower (provided that no Advances will be required to
be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or
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stayed within ten (10) days (provided that no Advances will be made prior to
the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could have a Material Adverse
Effect;
8.7 Subordinated Debt. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the
payment of money in an amount, individually or in the aggregate, of at least
Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 FDA Determinations. If the FDA takes one or more of
the following actions with respect to all or substantially all of Borrower's or
a Subsidiary's products: (a) withdraws Investigational New Drug status for any
such product that is undergoing clinical trials as the result of a
determination by the FDA that such product exposes subjects or patients to an
unacceptable health risk; (b) suspends clinical trials of any such product as
the result of a determination that such product is not reasonably likely to be
demonstrated to be safe and efficacious; (c) withdraws product approval of any
such product as the result of any failure to comply with regulatory standards;
or (d) determines that such products are not safe or efficacious.
8.10 Change of Control. If any "person" or "group"
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient
number of shares of all classes of stock then outstanding of Borrower
ordinarily entitled to vote in the election of directors, empowering such
"person" or "group" to elect a majority of the Board of Directors of Borrower.
8.11 Misrepresentations. If any material
misrepresentation or material misstatement exists now or hereafter in any
warranty or representation set forth herein or in any certificate delivered to
Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to
enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during
the continuance of an Event of Default, Bank may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any other
agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Without notice to or demand upon Borrower,
make such payments and do such
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acts as Bank considers necessary or reasonable to protect its security interest
in the Collateral. Borrower agrees to assemble the Collateral if Bank so
requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any
of Borrower's owned premises, Borrower hereby grants Bank a license to enter
into possession of such premises and to occupy the same, without charge, in
order to exercise any of Bank's rights or remedies provided herein, at law, in
equity, or otherwise;
(e) Without notice to Borrower set off and apply
to the Obligations any and all (i) balances and deposits of Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure
to Bank's benefit, except to the extent that such license would result in a
breach of such agreement;
(g) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Borrower's
premises) as Bank determines is commercially reasonable, and apply any proceeds
to the Obligations in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any
public sale; and
(i) Any deficiency that exists after disposition
of the Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the
occurrence and during the continuance of an Event of Default, Borrower hereby
irrevocably appoints Bank (and any of Bank's designated officers, or employees)
as Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) make, settle, and adjust all claims under and
decisions with respect to Borrower's policies of insurance; and (e) settle and
adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;
provided Bank may exercise such power of attorney to sign the name of Borrower
on any of the documents described in Section 4.2 regardless of whether an Event
of Default has occurred. The appointment of Bank as Borrower's attorney in
fact, and each and every one of Bank's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid
and performed and Bank's obligation to provide advances hereunder is
terminated.
9.3 Accounts Collection. At any time from the date of
this Agreement, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank
in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts
or furnish any required proof of
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payment due to third persons or entities, as required under the terms of this
Agreement, then Bank may do any or all of the following: (a) make payment of
the same or any part thereof; (b) set up such reserves under the Revolving
Facility as Bank deems necessary to protect Bank from the exposure created by
such failure; or (c) obtain and maintain insurance policies of the type
discussed in Section 6.6 of this Agreement, and take any action with respect to
such policies as Bank deems prudent. Any amounts so paid or deposited by Bank
shall constitute Bank Expenses, shall be immediately due and payable, and shall
bear interest at the then applicable rate hereinabove provided, and shall be
secured by the Collateral. Any payments made by Bank shall not constitute an
agreement by Bank to make similar payments in the future or a waiver by Bank of
any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies
under this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of
any Event of Default on Borrower's part shall be deemed a continuing waiver.
No delay by Bank shall constitute a waiver, election, or acquiescence by it.
No waiver by Bank shall be effective unless made in a written document signed
on behalf of Bank and then shall be effective only in the specific instance and
for the specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees at any time held by Bank on which Borrower may in any way
be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: Sequus Pharmaceuticals, Inc.
960 Hamilton Court
Menlo Park, CA 94025
Attn: Mr. Donald Stewart
FAX: _____________________________
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Mr. John Dewey
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
20
<PAGE> 24
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard
to principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind
and inure to the benefit of the respective successors and permitted assigns of
each of the parties; provided, however, that except as provided in Section 7.3,
neither this Agreement nor any rights hereunder may be assigned by Borrower
without Bank's prior written consent, which consent may be granted or withheld
in Bank's sole discretion. Bank shall have the right without the consent of or
notice to Borrower to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
hereunder.
12.2 Indemnification. Borrower shall defend, indemnify
and hold harmless Bank and its officers, employees, and agents against: (a)
all obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by this Agreement;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential
to transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 Survival. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrower to
indemnify Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 12.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Bank have run.
21
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
SEQUUS PHARMACEUTICALS, INC.
By:
-----------------------------------
Title:
-------------------------------
SILICON VALLEY BANK
By:
-----------------------------------
Title:
-------------------------------
22
<PAGE> 26
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, claims, literature, reports, catalogs, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of technology
or the rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above
and all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; provided Collateral shall include
the proceeds of any disposition outside the ordinary course of Borrower's
business of any of the foregoing.
23
<PAGE> 27
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:______________________
FAX#: (408) 496-2426 TIME:______________________
FROM:_______________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:_______________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:_______________________________________________________
PHONE NUMBER:_______________________________________________________________
FROM ACCOUNT # __________________ TO ACCOUNT #__________________________
<TABLE>
<S> <C>
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $____________________________________
PRINCIPAL PAYMENT (ONLY) $____________________________________
INTEREST PAYMENT (ONLY) $____________________________________
PRINCIPAL AND INTEREST (PAYMENT) $____________________________________
PRINCIPAL INCREASE (ADVANCE) $____________________________________
</TABLE>
OTHER INSTRUCTIONS:_________________________________________________________
____________________________________________________________________________
All representations and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
24
<PAGE> 28
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- -------------------------------- -----------------
Authorized Requester Phone #
- --------------------------------- -----------------
Received By (Bank) Phone #
___________________________________
Authorized Signature (Bank)
25
<PAGE> 29
EXHIBIT C
BORROWING BASE CERTIFICATE
- -------------------------------------------------------------------------------
Borrower: Sequus Pharmaceuticals, Inc. Lender: Silicon Valley Bank
Commitment Amount: $5,000,000
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE (excluding Initial Shipment Accounts)
1. Accounts Receivable Book Value as of $
-------- ----------------------
2. Additions (please explain on reverse) $
----------------------
3. TOTAL ACCOUNTS RECEIVABLE $
----------------------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
----------------------
5. Balance of 50% over 90 day accounts $
----------------------
6. Concentration Limits* $
----------------------
7. Foreign Accounts $
----------------------
8. Governmental Accounts $
----------------------
9. Contra Accounts $
----------------------
10. Promotion or Demo Accounts $
----------------------
11. Initial Shipment Accounts $
----------------------
12. Intercompany/Employee Accounts $
----------------------
13. Other (please explain on reverse) $
----------------------
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------------------
15. Eligible Accounts (#3 minus #14) $
----------------------
16. LOAN VALUE OF ACCOUNTS (75% of #15) $
----------------------
BALANCES
17. Maximum Loan Amount $
----------------------
18. Total Funds Available (Lesser of #16 or #17) $
----------------------
19. Present balance owing on Line of Credit $
----------------------
20. RESERVE POSITION (#18 minus #19) $
----------------------
</TABLE>
*25%, except 35% for McKesson, Cardinal Health and Bergin-Brunswig
The undersigned represents and warrants that the foregoing is true, complete
and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations and warranties set forth in the
Loan and Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
Rec'd By: ___________________
Auth. Signer
Date: ________________________
Verified: ____________________
Auth. Signer
Date: ________________________
_________________________
- ---------------------------
By: _______________________
Authorized Signer
26
<PAGE> 30
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SEQUUS PHARMACEUTICALS, INC.
The undersigned authorized officer of Sequus Pharmaceuticals, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i)
Borrower is in complete compliance for the period ending ______________ with
all required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days(1) Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis(2)
Minimum Quick Ratio 1.25:1.00(3) ____:1.00 Yes No
Minimum Tangible Net Worth $15,000,000(4) $________ Yes No
Maximum Debt/Tangible Net Worth 1.00:1.00 ____:1.00 Yes No
Minimum Liquidity/RML/DSC 2x Term Advances or
6 months RM(5) Yes No
--------
</TABLE>
(1) Only if Liquidity <$15,000,000 or 9 months RML
(2) Monthly if Liquidity <$15,000,000 or 9 months RML
(3) 1.50:1.00 after $10,000,000 of new equity received
(4) Plus 75% of new equity
(5) Replaced by Debt Service Coverage of 1.50:1.00 after
two quarters of DSC of at least 1.50 to 1.00
27
<PAGE> 31
COMMENTS REGARDING EXCEPTIONS:
See Attached. BANK USE ONLY
Sincerely, Received by:________________________
____________________________ Date:_______________________________
SIGNATURE
Verified:___________________________
____________________________ AUTHORIZED SIGNER
TITLE Date:_______________________________
____________________________ Compliance Status: Yes No
DATE
28
<PAGE> 32
EXHIBIT E
FORM OF NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of June ___, 1997, by and
between SEQUUS PHARMACEUTICALS, INC. ("Borrower") and SILICON VALLEY BANK
("Bank").
In connection with the Loan and Security Agreement being concurrently
executed between Borrower and Bank, Borrower agrees as follows:
1. Except as permitted in the Loan and Security Agreement,
Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a
security interest in, or encumber any of Borrower's intellectual property,
including, without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not
the same also constitutes a trade secret, now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software
products now or hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like
protections, including, without limitation, improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same, including, without limitation, the patents and patent applications
(collectively, the "Patents");
e. Any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past,
present and future infringements of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for said use
or infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the
Copyrights, Patents or Trademarks and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions
of any of the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing,
including, without limitation, all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing.
The foregoing not withstanding, Borrower shall be able to grant
security interests or licenses of its intellectual property in connection with
corporate partnering arrangements entered into in the ordinary course of
business.
2. It shall be an Event of Default under the Loan Documents
between Borrower and Bank if there is a breach of any term of this Negative
Pledge Agreement.
3. Capitalized items used herein without definition shall have
the same meanings as set forth in the Loan and Security Agreement of even date
herewith.
SEQUUS PHARMACEUTICALS, INC. SILICON VALLEY BANK
By:___________________________ By:________________________________
Title:________________________ Title:_____________________________
29
<PAGE> 33
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Sequus Pharmaceuticals, Inc. Bank: Silicon Valley Bank
- -------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $5,000,000 and a Term Loan Facility of a principal amount up to
$5,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital and Product Development.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Loan Term Loan
-------------- ---------
<S> <C> <C>
Amount paid to Borrower directly: $ $
-------- --------
Undisbursed Funds $ $
-------- --------
Principal $ $
-------- --------
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Charges Paid in Cash:
$62,500 Loan Fee
$________ Accounts Receivables Audit
$________ UCC Search Fees
$________ UCC Filing Fees
$________ Patent Filing Fees
$________ Trademark Filing Fees
$________ Copyright Filing Fees
$________ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF JUNE 26, 1997.
BORROWER: SEQUUS PHARMACEUTICALS, INC.
______________________________
______________________________
Authorized Officer
- -------------------------------------------------------------------------------
<PAGE> 34
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Sequus Pharmaceuticals, Inc. BANK: Silicon Valley Bank
- -------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Sequus Pharmaceuticals, Inc. ("Grantor")
understands that insurance coverage is required in connection with the
extending of a loan or the providing of other financial accommodations to
Grantor by Bank. These requirements are set forth in the Loan Documents. The
following minimum insurance coverages must be provided on the following
described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and
liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be cancelled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on
or before closing, evidence of the required insurance as provided above, with
an effective date of June 26, 1997, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at
the option of Bank, shall be payable on demand or shall be added to the
indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT
IF BANK SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED
PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE
LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 26,
1997.
GRANTOR: SEQUUS PHARMACEUTICALS, INC.
x ________________________________
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
<PAGE> 35
CORPORATE RESOLUTIONS TO BORROW
- -------------------------------------------------------------------------------
Borrower: Sequus Pharmaceuticals, Inc.
- -------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Sequus
Pharmaceuticals, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation
is organized and existing under and by virtue of the laws of the State of
California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Articles of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- ------------------
<S> <C> <C>
________________ ______________ ---------------------------
________________ ______________ ---------------------------
________________ ______________ ---------------------------
________________ ______________ ---------------------------
</TABLE>
acting for an on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of June 26, 1997 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Bank's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion
of the notes.
GRANT SECURITY. To grant a security interest to Bank in the
Collateral described in the Loan Agreement, which security interest shall
secure all of the Corporation's Obligations, as described in the Loan
Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE> 36
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any and
all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or proper
in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect
at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names;
that the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have not
been modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 26, 1997 and
attest that the signatures set opposite the names listed above are their
genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X ________________________________
- -------------------------------------------------------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,056
<SECURITIES> 20,755
<RECEIVABLES> 5,109
<ALLOWANCES> 0
<INVENTORY> 4,057
<CURRENT-ASSETS> 38,699
<PP&E> 6,397
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,376
<CURRENT-LIABILITIES> 11,342
<BONDS> 5,000
0
0
<COMMON> 3
<OTHER-SE> 199,663
<TOTAL-LIABILITY-AND-EQUITY> 45,376
<SALES> 23,612
<TOTAL-REVENUES> 27,287
<CGS> 4,818
<TOTAL-COSTS> 4,818
<OTHER-EXPENSES> 43,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (20,019)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,019)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
