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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
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 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0255679
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(Zip Code)
TELEPHONE (760) 431-7080
(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 ___
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
As of NOVEMBER 2, 1999, 25,925,641 shares of common stock were outstanding.
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THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,409 $ 1,519
Marketable securities-available-for-sale 19,810 23,713
Other current assets 1,100 1,613
----------- -----------
Total current assets 23,319 26,845
Property and equipment, net 10,461 7,825
Deposits and other assets 996 956
----------- -----------
$ 34,776 $ 35,626
----------- -----------
----------- -----------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,703 $ 2,755
Other accrued expenses 4,373 1,198
Current portion of equipment notes payable 318 --
----------- -----------
Total current liabilities 8,394 3,953
Equipment notes payable 1,303 --
Deferred rent obligation 177 266
Convertible preferred stock 9,557 9,347
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; none issued -- --
Common stock, $.0025 par value, 65,000,000 shares authorized,
24,966,761 and 23,795,292 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 62 59
Warrants 2,144 2,144
Additional paid-in capital 197,635 191,317
Unrealized gain (loss) on marketable securities (67) 102
Accumulated deficit (184,429) (171,562)
----------- -----------
Total stockholders' equity 15,345 22,060
----------- -----------
$ 34,776 $ 35,626
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Contract research revenue $ 3,494 $ 1,488 $ 10,732 $ 2,488
Licensed research revenue 333 1,000 6,195 11,667
------------ ------------ ------------ ------------
3,827 2,488 16,927 14,155
Expenses:
Research and development 7,692 7,420 26,129 24,109
General and administrative 1,288 1,062 4,023 3,136
Restructuring costs -- -- 650 --
------------ ------------ ------------ ------------
8,980 8,482 30,802 27,245
Other revenue:
Investment income 304 513 1,007 1,196
------------ ------------ ------------ ------------
Net loss $ (4,849) $ (5,481) $ (12,868) $ (11,894)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (0.20) $ (0.24) $ (0.53) $ (0.52)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding 24,852,510 23,207,942 24,502,843 22,984,853
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $(12,868) $(11,894)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,144 1,112
Deferred rent expense (89) (67)
Changes in operating assets and liabilities:
Other current assets 513 (1,122)
Accounts payable 948 2,052
Accrued expenses 3,175 427
-------- --------
Net cash used in operating activities (7,177) (9,492)
Investing activities:
Sale of marketable securities, net 3,734 1,290
Purchase of property and equipment (3,779) (1,607)
Deposits and other assets (40) (603)
-------- --------
Net cash used in investing activities (85) (920)
Financing activities:
Proceeds from equipment notes payable 1,621 --
Net proceeds from sale of common stock 4,805 1,333
Net proceeds from the sale of convertible preferred stock -- 9,160
Net proceeds from exercise of stock options 1,726 907
-------- --------
Net cash provided by financing activities 8,152 11,400
-------- --------
Net increase in cash and cash equivalents 890 988
Cash and cash equivalents at beginning of period 1,519 4,872
-------- --------
Cash and cash equivalents at end of period $ 2,409 $ 5,860
-------- --------
-------- --------
Supplemental disclosure of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities $ (169) $ 141
-------- --------
-------- --------
Accretion of convertible preferred stock $ 210 $ 117
-------- --------
-------- --------
Payment of dividend on convertible preferred stock $ 561 $ --
-------- --------
-------- --------
Declared dividend on convertible preferred stock $ 189 $ 329
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
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THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation ("Immune Response" or the "Company") for the three and nine
month periods ended September 30, 1999 and 1998 are unaudited. These
financial statements reflect all adjustments consisting of only normal
recurring adjustments, which in the opinion of management are necessary
to fairly present the consolidated financial position as of September 30,
1999 and the consolidated results of operations for the three and nine
month periods ended September 30, 1999 and 1998. The results of
operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1999. For more complete financial information, these
financial statements, and the notes thereto, should be read in
conjunction with the consolidated audited financial statements for the
year ended December 31, 1998 included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified in order to conform to
current year presentation.
2. NET LOSS PER SHARE
Net loss per share for the three and nine months ended September 30, 1999
and 1998 is computed using the weighted average number of common shares
outstanding during the period. Outstanding stock options and warrants are
not included in the calculation of earnings per share because their
effect would be antidilutive. Therefore, there is no difference between
basic and diluted net loss per share.
3. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
<TABLE>
<CAPTION>
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (4,849) $ (5,481) $(12,868) $(11,894)
Net unrealized gain (loss)
on marketable securities (15) 191 (169) 141
-------- -------- -------- --------
Comprehensive loss $ (4,864) $ (5,290) $(13,037) $(11,753)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
4. EQUITY TRANSACTION
In February 1999, the initial conversion price of the Series F
Convertible Preferred Stock of $14.07 per share of common stock was
adjusted downward to $9.77 per share of common stock. In August 1999, the
conversion price was adjusted downward to $5.87 per share of common
stock. The conversion price may be further adjusted downward at the end
of November and at the end of each subsequent three-month period if the
Company's common stock does not trade at prices higher than the
conversion price over a period of time during the applicable three-month
period. The Series F Stock bears a dividend of 7.5% per annum. The
dividend is payable in shares of common stock or cash at the Company's
option.
5. COLLABORATIONS
In July, April and January of 1999, the Company received a $5 million
payment in each month from Agouron Pharmaceuticals, Inc., a
Warner-Lambert Company, ("Agouron") consisting of a $3 million payment
for research and development and a $2 million payment for the purchase of
292,078, 189,350 and 149,911 shares of unregistered common stock,
respectively, priced at a premium to the market. These represented the
second, third and fourth in a series of six quarterly payments that the
Company expects Agouron to make to fund research and development and to
purchase unregistered common stock under an agreement entered into in
June 1998. Also in conjunction with this agreement, the Company received
a $5 million milestone payment in February 1999. Under the agreement, the
Company agreed to exclusively license REMUNE, its immune-based therapy
under development for the treatment of HIV infection, to Agouron. Under
the terms of the agreement, the Company will
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manufacture commercial supplies of REMUNE and Agouron will have
exclusive rights to market REMUNE in North America, Europe and certain
other countries, if regulatory approvals are received. In June 1998,
the Company initially received a $10 million license fee and Agouron
purchased 118,256 shares of newly issued Immune Response common stock,
priced at a premium to market, for $2 million. Through September 1999,
the Company had received a total of $37 million from Agouron for
license fees, milestone and research and development payments and
stock purchases.
In September 1999, the Company received the first of two payments for
$494,000 each from Schering-Plough Corporation ("Schering-Plough") under
an amendment to extend the research collaboration and option agreement
entered into in July 1998 through the remainder of 1999. In March 1999,
the Company received a $988,000 payment to fund research under this
agreement. Under this research collaboration and option agreement, the
Company agreed to develop gene therapy products for the treatment of
hepatitis B and C; and as part of this agreement, Schering-Plough has the
option to license the Company's gene delivery system for additional
proprietary genes for other diseases for a royalty on future product
sales, if any. Through September 1999, the Company had received
approximately $3.5 million in payments from Schering-Plough.
6. RESTRUCTURING COSTS
In May 1999, the Company announced the conclusion of the Phase III
clinical endpoint trial for the immune-based therapy REMUNE based on the
recommendation of an independent Data Safety Monitoring Board. As a
result of this, in June 1999, the Company implemented a restructuring
plan primarily aimed at reducing expenses while focusing the majority of
the Company's resources on its late-stage programs of immune-based
therapeutics for HIV (REMUNE) and rheumatoid arthritis. The restructuring
plan included a reduction in the workforce of approximately 30%. The
Company took a one-time restructuring charge against earnings of
$650,000.
7. SUBSEQUENT EVENTS
In October 1999, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2
million payment for the purchase of 334,589 shares of unregistered common
stock priced at a premium to the market. This was the fifth in a series
of six quarterly payments that the Company expects Agouron to make to
fund development and to purchase unregistered common stock under the June
1998 agreement.
In October 1999, the Company sold $3 million of common stock to an
institutional investor at a price of $5.0625 per share. The final number
of shares to be issued to the institutional investor will be determined
by using a price equal to a six percent discount to the average trading
price of the Company's common stock during the 20 trading days
immediately following the sale of the shares. For every day during this
20 trading day period that the average trading price of the Company's
stock is below $4 per share, the institutional investor has agreed to
return one-twentieth of the shares and the Company has agreed to return
the purchase price of those returned shares. In addition, the Company has
agreed to sell to the institutional investor up to an additional $2.5
million of its common stock. The institutional investor is under no
obligation to purchase those shares.
In October 1999, the Company received the second $494,000 payment from
Schering-Plough under the amendment that extended the existing agreement
through the remainder of 1999.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
The Immune Response Corporation (the "Company") is a biopharmaceutical company
developing immune-based therapies to induce specific T cell responses for the
treatment of HIV and autoimmune diseases. In addition, the Company is working on
cancer vaccines and gene therapy.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could cause or contribute to such
differences include those discussed under "Risk Factors". The following should
be read in conjunction with the Condensed Consolidated Financial Statements and
Notes thereto included elsewhere in this Form 10-Q. These forward-looking
statements 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 made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
In May 1999, the Company announced the conclusion of the Phase III clinical
endpoint trial for the immune-based therapy REMUNE based on the recommendation
of an independent Data Safety Monitoring Board. As a result of this, in June
1999, the Company implemented a restructuring plan primarily aimed at reducing
expenses while focusing the majority of the Company's resources on its
late-stage programs of immune-based therapeutics for HIV (REMUNE) and rheumatoid
arthritis. The restructuring plan included a reduction in the workforce of
approximately 30%. The Company took a one-time restructuring charge against
earnings of $650,000. The total projected decrease in expenses as a result from
restructuring will phase in over several quarters.
In July, April and January of 1999, the Company received a $5 million payment in
each month from Agouron Pharmaceuticals, Inc., a Warner-Lambert Company,
("Agouron") consisting of a $3 million payment for research and development and
a $2 million payment for the purchase of 292,078, 189,350 and 149,911 shares of
unregistered common stock, respectively, priced at a premium to the market.
These represented the second, third and fourth in a series of six quarterly
payments that the Company expects Agouron to make to fund research and
development and to purchase unregistered common stock under an agreement entered
into in June 1998. Also in conjunction with this agreement, the Company received
a $5 million milestone payment in February 1999. Under the agreement, the
Company agreed to exclusively license REMUNE, its immune-based therapy under
development for the treatment of HIV infection, to Agouron. Under the terms of
the agreement, the Company will manufacture commercial supplies of REMUNE and
Agouron will have exclusive rights to market REMUNE in North America, Europe and
certain other countries, if regulatory approvals are received. Through September
1999, the Company had received a total of $37 million from Agouron for license
fees, milestone and research and development payments and stock purchases.
In September 1999, the Company received the first of two payments for $494,000
each from Schering-Plough under an amendment to extend the research
collaboration and option agreement entered into in July 1998 through the
remainder of 1999. The second payment was received in October 1999. In March
1999, the Company received a payment of $988,000 to fund research under this
agreement. Under this research collaboration and option agreement, the Company
agreed to develop gene therapy products for the treatment of hepatitis B and C;
and as part of this agreement, Schering-Plough has the option to license the
Company's gene delivery system for additional proprietary genes for other
diseases for a royalty on future product sales, if any. Through September 1999,
the Company had received approximately $3.5 million in payments from
Schering-Plough.
In September 1999, the Company entered into a $3 million equipment line of
credit, of which $1.6 million was utilized in the quarter to fund capital
improvements related to increasing the capacity of its manufacturing facility.
In October 1999, the Company received a $5 million payment from Agouron
consisting of a $3 million payment for research and development and a $2 million
payment for the purchase of 334,589 shares of unregistered common stock priced
at a premium to the market. This was the fifth in a series of six quarterly
payments that the Company expects Agouron to make to fund research and
development and to purchase unregistered common stock under the June 1998
agreement.
8
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In October 1999, the Company sold $3 million of common stock to an institutional
investor at a price of $5.0625 per share. The final number of shares to be
issued to the institutional investor will be determined by using a price equal
to a six percent discount to the average trading price of the Company's common
stock during the 20 trading days immediately following the sale of the shares.
For every day during this 20 trading day period that the average trading price
of the Company's stock is below $4 per share, the institutional investor has
agreed to return one-twentieth of the shares and the Company has agreed to
return the purchase price of those returned shares. In addition, the Company has
agreed to sell to the institutional investor up to an additional $2.5 million of
its common stock. The institutional investor is under no obligation to purchase
those shares.
The Company has not been profitable since inception and had an accumulated
deficit of $184.4 million as of September 30, 1999. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through
September 30, 1999 were earned in connection with contract research, licensing
of technology, milestone achievement and investment income. The Company expects
its operating losses to continue, as well as to have quarter-to-quarter
fluctuations, some of which could be significant, due to research, development
and clinical trial activities. There can be no assurance that the Company will
be able to generate sufficient product revenue to become profitable at all or on
a sustained basis.
RESULTS OF OPERATIONS
Revenue for the quarter ended September 1999 was $3.8 million as compared to
$2.5 million for the same period in 1998. The increase in revenue was primarily
attributable to the Agouron collaboration entered into in 1998 which provided
the Company with a $3 million research and development payment received in 1999
versus only $2.5 million from research collaborations with Schering-Plough and
Bayer for the same period in 1998.
Revenue for the nine months ended September 1999 was $16.9 million as compared
to $14.2 million for the same period in 1998. The increase in revenue was
primarily attributable to an increase in combined license, research and
development and milestone payments received in 1999 from Agouron which were
greater than the Agouron up-front license payment received during the same
period in 1998. None of the revenue received was from the commercial sale of
products and the Company does not expect to derive revenue from the sale of
products for the foreseeable future.
The Company incurred research and development expenses of $7.7 million and $7.4
million for the three months ending September 1999 and 1998, respectively. For
the nine months ended September 1999 and 1998, research and development expenses
were $26.1 million and $24.1 million, respectively. The increased spending in
research and development during the third quarter and nine months ended
September 1999 resulted primarily from expenses associated with scale-up of the
manufacturing process for REMUNE. Future spending associated with the HIV
clinical trials is expected to decrease as future pivotal studies will be
conducted by Agouron under the 1998 collaboration agreement. However, spending
associated with the Company's scale-up of the manufacturing process for REMUNE
and the cost of producing clinical supplies for ongoing and future REMUNE
studies could continue to increase in the foreseeable future. Research and
development expenses for gene therapy are expected to level off while spending
for the rheumatoid arthritis and cancer programs will remain somewhat constant.
Overall future research and development expenditures are expected to decline for
the next one to two quarters. Future spending for research and development may
increase if additional collaborations are completed, but there can be no
assurance that any will be completed.
General and administrative expenses for the three and nine months ended
September 1999 were $1.3 million and $4.0 million, respectively, as compared to
$1.1 million and $3.1 million for the same periods in 1998. The increase in
spending was attributable to higher support costs associated with its research
and development and public company activities. General and administrative
expenses for the remainder of 1999 are expected to remain level.
Restructuring costs of $650,000 for the nine months ended September 1999 were
associated with the Company's restructuring plan implemented in June 1999, which
reduced the work force by approximately 30%. Employee severance, health
benefits, placement services and other implementation costs were included in the
restructuring costs.
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Investment income decreased to $304,000 for the quarter ended September 1999
from $513,000 for the same period of 1998. This decrease was due primarily to a
decrease in the Company's average cash position in the third quarter of 1999
compared to the third quarter of 1998, which included the $10 million up-front
license payment from Agouron in 1998. For the nine months ended September 1999,
investment income was $1 million compared to $1.2 million for the same period in
1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had working capital of $14.9 million,
including $22.2 million of cash, cash equivalents and marketable securities.
This compares with working capital as of December 31, 1998 of $22.9 million,
including $25.2 million of cash, cash equivalents and marketable securities.
Working capital decreased as a result of the cost of operations, in particular,
the cost of the REMUNE HIV clinical trials, clinical trial materials and
manufacturing supplies, and the capital improvements incurred to increase the
capacity of the manufacturing facility producing REMUNE. As of September 30,
1999, the Company had $1.4 million remaining under a $3.0 million equipment line
of credit that was put in place during the quarter.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in 1999, the REMUNE clinical trials
and manufacturing costs will continue to represent a significant portion of the
Company's overall expenditures. The Company also anticipates that costs related
to the clinical trials of REMUNE will decrease as future pivotal studies will be
conducted by Agouron. However, spending associated with the Company's scale-up
of the manufacturing process for REMUNE and the cost of producing clinical
supplies for ongoing and future REMUNE studies could continue to increase in the
foreseeable future. Research and development expenses for gene therapy are
expected to level off while spending for the rheumatoid arthritis and cancer
programs will remain somewhat constant. Overall future research and development
expenditures are expected to decline for the next one to two quarters. Future
spending for research and development may increase if additional collaborations
are completed, but there can be no assurance that any will be completed. The
Company anticipates additional capital improvements of approximately $1.4
million for the remainder of 1999 related to increasing the capacity of its
manufacturing facility, some of which the Company anticipates it will fund with
debt financing. Other anticipated costs with respect to REMUNE, including
investment in inventory, will depend on many factors, including the results of
clinical trials, the continuation of the Company's collaboration with Agouron
and other factors which will influence the Company's determination of the
appropriate continued investment of the Company's financial resources in this
program.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
scope and results of preclinical studies and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing scale-up and inventories, effective
commercialization activities and arrangements and other factors not within the
Company's control. The Company intends to seek additional funding through
additional research and development agreements with suitable corporate
collaborators, extensions of existing corporate collaborations, and through
public or private financings if available. There can be no assurances, however,
that such collaboration arrangements, or any public or private financings, will
be available on acceptable terms, if at all. If funds are raised through equity
arrangements, further dilution to stockholders may result. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research or development programs or take other
measures to cut costs, which could have a material adverse effect on the
Company. The Company estimates that its existing capital resources, along with
funding under existing research and development collaborations, available
equipment financing and the commitment for equity funding from an existing
collaborative partner will be sufficient to fund its current and planned
operations into the second half of 2000. There can be no assurances, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses may result in the expenditure of such
resources before such time. In any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
IMPACT OF YEAR 2000
The Company has performed a review of its computer applications and equipment
related to their continuing functionality for the year 2000 and beyond. The
Company does not believe that it has material exposure with respect to the year
2000 issue concerning its computer applications and equipment. The Company has
completed its assessment of third parties with whom it has a material
relationship to assess its risk with respect to year 2000 issues. The Company is
not aware, at this time, of any material year 2000 issues with respect to
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its dealings with such third parties. The Company does have a contingency
plan in place to address material year 2000 issues. In the event that year
2000 issues were to disrupt the Company, such disruption may have a material
impact on the Company and its results of operations.
CERTAIN RISK FACTORS (For a discussion of additional Risk Factors applicable to
the Company, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)
THE FAILURE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE PRODUCTS MAY CAUSE US TO
CEASE OPERATIONS. We have not completed the development of any products. A
failure to successfully develop and commercialize products may cause us to cease
operations. Our potential therapies under development will require significant
additional research and development efforts and regulatory approvals prior to
potential commercialization.
The conclusion of the Phase III trial of REMUNE due to lack of efficacy has had
a material adverse effect on us. If Agouron fails to successfully initiate or
complete additional pivotal trials with REMUNE we may have to abandon REMUNE or
seek additional funding.
Our other therapies and technologies are at earlier stages of development than
REMUNE. Some of our technologies have not yet been tested in humans. Human
testing of potential products based on these technologies may not be permitted
by regulatory authorities. Even if human testing is permitted, the products
based on these technologies may not be successfully developed or be shown to be
safe and efficacious. Potential immune-based therapies based on some of our
technologies are at an early stage of clinical testing and may not be shown to
be safe or efficacious or ever receive regulatory approval.
The results of our preclinical studies and clinical trials may not be indicative
of future clinical trial results. A commitment of substantial resources to
conduct time-consuming research, preclinical studies and clinical trials will be
required if we are to develop any products. Delays in planned patient enrollment
in our clinical trials may result in increased costs, program delays or both.
None of our potential products may prove to be safe and effective in clinical
trials. FDA or other regulatory approvals may not be obtained and even if
successfully developed and approved, our products may not achieve market
acceptance. Any products resulting from our programs are not expected to be
successfully developed or commercially available for a number of years, if at
all.
Unacceptable toxicities or side effects may occur at any time in the course of
human clinical trials or, if any products are successfully developed and
approved for marketing, during commercial use of our products. The appearance of
any unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of our products or, if previously approved,
necessitate their withdrawal from the market.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS. We will need to raise
additional funds to conduct research and development, preclinical studies and
clinical trials necessary to bring our potential products to market and
establish manufacturing and marketing capabilities. A failure to raise
additional funds would require us to scale back or eliminate some or all of our
research and development programs or license to third parties products or
technologies that we would otherwise seek to develop ourselves. We believe that
our existing resources will enable us to maintain our current and planned
operations into the second half of 2000.
We anticipate that in 1999, the REMUNE clinical trials will continue to
represent a significant portion of our overall expenditures. We also anticipate
that costs related to the clinical trials of REMUNE will decrease in 2000. In
particular, we anticipate additional capital improvements of approximately $1.4
million to be made during 1999 related to increasing the capacity of our
manufacturing facility. Other anticipated costs with respect to REMUNE will
depend on many factors, in particular the continuation of our collaboration with
Agouron.
Our future capital requirements will depend on many factors, including:
- continued scientific progress in our research and development
programs,
- the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals,
- the costs involved in filing, prosecuting and enforcing patent
claims,
- competing technological and market developments,
11
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- the cost of manufacturing scale-up,
- effective commercialization activities and arrangements, and
- other factors not within our control.
We intend to seek additional funding through public or private financings,
arrangements with corporate collaborators or other sources. If funds are
acquired through additional collaborations, we will likely be required to
relinquish some or all of the rights to products that we may have otherwise
developed ourselves. If adequate funds are not available when needed or on terms
acceptable to us, we may be required to scale back some or all of our research
and development programs or license to third parties products or technologies
that we would otherwise seek to develop ourselves.
IF AGOURON TERMINATES ITS COLLABORATION WITH US WE MAY HAVE TO ABANDON REMUNE.
Our binding Letter of Intent with Agouron is the primary collaborative agreement
that provides us with contract revenue. The termination of our agreement with
Agouron might require us to abandon REMUNE. Agouron has been acquired by
Warner-Lambert Company and Warner-Lambert may be acquired. We do not know which
Agouron research products Warner-Lambert Company or any successor will continue
to fund in the future.
WE MAY NOT BE ABLE TO ENTER INTO ADDITIONAL COLLABORATIONS. We intend to seek
additional collaborative arrangements to develop and commercialize our products.
We may not be able to negotiate collaborative arrangements on favorable terms,
or at all, in the future and our current or future collaborative arrangements
may not be successful. This may cause us to abandon some of our products under
development.
OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND
THE PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM
COMMERCIALIZING PRODUCTS. A failure to obtain meaningful patent protection for
our potential products and processes would greatly diminish the value of our
potential products and processes.
In addition, whether or not our patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to our
products. We are aware that a group working with Connetics Corporation has
received a United States and European patent related to autoimmune disease
research that covers technology similar to that used by us. We are also aware
that AstraZeneca PLC has acquired the rights to a patent, which has been issued
in Europe and other countries, that may interfere with our ability to develop
some of our technologies related to autoimmune disease if the patent is upheld
after current opposition proceedings. These patents, and others that we are not
aware of, may adversely affect our ability to develop and commercialize
products.
The patent positions of biotechnology and pharmaceutical companies can be highly
uncertain, and involve complex legal and factual questions. Therefore, the
breadth of claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. We also rely upon unpatented trade secrets and know how, and others
may independently develop substantially equivalent trade secrets or know how.
We also rely on protecting our proprietary technology in part through
confidentiality agreements with our corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and we may
not have adequate remedies for any breach. In addition, our trade secrets may
otherwise become known or independently discovered by our competitors.
Our products and processes may infringe, or be found to infringe, patents not
owned or controlled by us, such as the patent rights owned by Connetics
Corporation and AstraZeneca PLC. If relevant claims of third-party patents are
upheld as valid and enforceable, we could be prevented from practicing the
subject matter claimed in the patents, or would be required to obtain licenses
to redesign our products or processes to avoid infringement. Licenses may not be
available at all or on terms commercially reasonable to us and we may not be
able to redesign our products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to us or to protect trade secrets. Litigation could result in
substantial costs and diversion of management efforts regardless of the results
of the litigation. An adverse result in litigation could subject us to
significant liabilities to third parties, require disputed rights to be licensed
or require us to cease using some technology.
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OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS. As of September 30, 1999, we had a
consolidated accumulated deficit of $184.4 million. We have not generated
revenues from the commercialization of any product. We expect to incur
substantial net operating losses over the next several years, which may imperil
our ability to continue operations. We may not be able to generate sufficient
product revenue to become profitable at all or on a sustained basis.
THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS. Clinical
testing, manufacture, promotion and sale of our products are subject to
extensive regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state and foreign regulatory agencies.
This regulation may delay or prevent us from commercializing products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, seizure of products, total or partial suspension of product
marketing, failure of the government to grant premarket approval, withdrawal of
marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the required
preclinical studies and clinical testing, is lengthy and expensive. We may not
receive necessary FDA clearances for any of our potential products in a timely
manner, or at all. The length of the clinical trial process and the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish the safety and efficacy of our products is uncertain.
Even if additional pivotal surrogate marker trials of REMUNE are successfully
completed, the FDA may not approve REMUNE for commercial sale. We may encounter
significant delays or excessive costs in our efforts to secure necessary
approvals. Regulatory requirements are evolving and uncertain. Future United
States or foreign legislative or administrative acts could also prevent or delay
regulatory approval of our products. We may not be able to obtain the necessary
approvals for clinical trials, manufacturing or marketing of any of our products
under development. Even if commercial regulatory approvals are obtained, they
may include significant limitations on the indicated uses for which a product
may be marketed.
In addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.
Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices
("GMP") requirements specifically for biological drugs, as well as for other
drugs. In complying with the FDA's GMP requirements, manufacturers must continue
to expend time, money and effort in production, recordkeeping and quality
control to assure that the product meets applicable specifications and other
requirements. Failure to comply with the FDA's GMP requirements subjects the
manufacturer to possible FDA regulatory action. We or our contract
manufacturers, if any, may not be able to maintain compliance with the FDA's GMP
requirements on a continuing basis. Failure to maintain compliance could have a
material adverse effect on us.
The FDA has not designated expanded access protocols for REMUNE as "treatment"
protocols. The FDA may not determine that REMUNE meets all of the FDA's criteria
for use of an investigational drug for treatment use. Even if REMUNE is allowed
for treatment use, third-party payers may not provide reimbursement for the
costs of treatment with REMUNE.
The FDA may not consider REMUNE or any other of the Company's products under
development to be an appropriate candidate for accelerated approval, expedited
review or fast track designation.
To market any drug products outside of the United States, we are also subject to
numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing the design and conduct of human clinical trials
and marketing approval. The approval procedure varies among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval set
forth above, and approval by the FDA does not ensure approval by the health
authorities of any other country.
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TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE.
The biotechnology industry continues to undergo rapid change, and competition is
intense and is expected to increase. Competitors may succeed in developing
technologies and products that are more effective or affordable than any which
are being developed by us, or which would render our technology and products
obsolete and noncompetitive. Many of our competitors have substantially greater
experience, financial and technical resources and production, marketing and
development capabilities than us. Accordingly, some of our competitors may
succeed in obtaining regulatory approval for products more rapidly or
effectively than us.
OUR LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE MAY PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. We have not manufactured our product
candidates in commercial quantities. We may not successfully make the transition
from manufacturing clinical trial quantities to commercial production quantities
or be able to arrange for contract manufacturing and this could prevent us from
commercializing products. Even if REMUNE is successfully developed and receives
FDA approval, we have not demonstrated the capability to manufacture REMUNE in
commercial quantities. Except for REMUNE, we have not demonstrated the ability
to manufacture our treatments in large-scale clinical or commercial quantities.
We have no experience in the sales, marketing and distribution of pharmaceutical
products. Thus, our products may not be successfully commercialized even if they
are developed and approved for commercialization.
The manufacturing of our products involves a number of steps and requires
compliance with stringent quality control specifications imposed by us and by
the FDA. Moreover, our products can only be manufactured in a facility that has
undergone a satisfactory inspection by the FDA. For these reasons, we would not
be able quickly to replace our manufacturing capacity, if we were unable to use
our manufacturing facilities as a result of a fire, natural disaster (including
an earthquake), equipment failure or other difficulty; or if such facilities are
deemed not in compliance with the FDA's GMP requirements, and the non-compliance
could not be rapidly rectified. Our inability or reduced capacity to manufacture
our products would prevent us from successfully commercializing products.
We may enter into arrangements with contract manufacturing companies to expand
our own production capacity in order to meet requirements for our products, or
to attempt to improve manufacturing efficiency. If we choose to contract for
manufacturing services and encounter delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute our finished
products, clinical trials, market introduction and subsequent sales of the
products would be delayed. Further, contract manufacturers must also operate in
compliance with the FDA's GMP requirements; failure to do so could result in,
among other things, the disruption of product supplies. Our potential dependence
upon third parties for the manufacture of our products may adversely affect our
profit margins and our ability to develop and deliver products on a timely and
competitive basis.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS. Our ability
to earn sufficient returns on our products will depend in part on the extent to
which reimbursement for the costs of the products and related treatments will be
available from government health administration authorities, private health
coverage insurers, managed care organizations and other organizations. Failure
to obtain appropriate reimbursement could prevent us from successfully
commercializing products. Third party payors are increasingly challenging the
price of medical products and services. If purchasers or users of our products
are not able to obtain adequate reimbursement for the cost of using the
products, they may forego or reduce their use. Significant uncertainty exists as
to the reimbursement status of newly approved health care products, and whether
adequate third-party coverage will be available.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY. We face an
inherent business risk of exposure to product liability and other claims in the
event that the development or use of our technology or prospective products is
alleged to have resulted in adverse effects. We may not avoid significant
liability exposure. We may not have sufficient insurance coverage and we may not
be able to obtain sufficient coverage, at a reasonable cost. An inability to
obtain product liability insurance at acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products developed by us. A product liability claim could
hurt our financial performance.
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HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS COULD EXPOSE US TO SIGNIFICANT COSTS.
Although we do not currently manufacture commercial quantities of our product
candidates, we produce limited quantities of these products for our clinical
trials. We may be required to incur significant costs to comply with current or
future environmental laws and regulations. Our research and development
processes involve the controlled storage, use and disposal of hazardous
materials, biological hazardous materials and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and some waste
products. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed our
resources. Our operations, business or assets may be materially and adversely
affected by current or future environmental laws or regulations.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK COULD HURT COMMON STOCKHOLDERS.
Our common stock is expressly subordinate to our Series F Convertible Preferred
Stock in the event of our liquidation, dissolution or winding up. If we were to
cease operations and liquidate our assets, there may not be any remaining value
available for distribution to the holders of common stock after providing for
the Series F Convertible Preferred Stock liquidation preference.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS MAY HURT COMMON STOCKHOLDERS.
The market price of our common stock, like that of the common stock of many
other biopharmaceutical companies, has been and is likely to be highly volatile.
Factors such as:
- the results of preclinical studies and clinical trials by us, our
collaborators or our competitors,
- other evidence of the safety or efficacy of our products or our
competitors,
- announcements of technological innovations or new products by us
or our competitors,
- governmental regulatory actions,
- changes or announcements in reimbursement policies,
- developments with our collaborators,
- developments concerning patent or other proprietary rights of ours
or our competitors (including litigation),
- concern as to the safety of our products,
- period-to-period fluctuations in our operating results,
- changes in estimates of our performance by securities analysts,
- market conditions for biopharmaceutical stocks in general, and
- other factors not within our control
could have a significant adverse impact on the market price of our common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future.
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EFFECT OF ANTI-TAKEOVER PROVISIONS COULD ADVERSELY AFFECT OUR COMMON
STOCKHOLDERS. Our Certificate of Incorporation and Bylaws include provisions
that could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult. The approval of 66-2/3 percent
of our voting stock is required to approve certain transactions and to take
certain stockholder actions, including the calling of special meetings of
stockholders and the amendment of any of the anti-takeover provisions contained
in our Certificate of Incorporation. Further, pursuant to the terms of our
stockholder rights plan, we have distributed a dividend of one right for each
outstanding share of common stock. These rights will cause substantial dilution
to the ownership of a person or group that attempts to acquire us on terms not
approved by the Board of Directors and may have the effect of deterring hostile
takeover attempts.
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PART II. OTHER INFORMATION
ITEM 2. -- CHANGES IN SECURITIES
During the third quarter of 1999, the Company sold 292,078 shares of newly
issued Immune Response common stock to Agouron, priced at a premium to market,
for $2 million. The common stock was sold under the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.69 Master Loan and Security Agreement dated as of September 30, 1999
between The Immune Response Corporation, I.R.C. Inc. and
Transamerica Business Credit Corporation.
27 Financial Data Schedule
b) Reports on Form 8-K
A report on Form 8-K dated May 14, 1999 was filed by The Immune Response
Corporation reporting under Item 5., Other Events, as follows:
(1) Announcement of the restructuring plan implemented June 21, 1999
to reduce expenses, which included a workforce reduction of
approximately 30%, while focusing the majority of the Company's
resources on its late stage programs.
(2) A summary of the Company's Principal Clinical Trials using Remune
and the status of each trial as a follow-up to the recommendation
of the independent Data Safety Monitoring Board that the Phase III
clinical endpoint trial evaluating Remune be concluded early.
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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.
THE IMMUNE RESPONSE CORPORATION
Date: NOVEMBER 15, 1999 /s/ HOWARD SAMPSON
---------------------- -----------------------------------------------
Howard Sampson
Vice President Finance, Chief Financial Officer
and Treasurer
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Exhibit 10.69
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of September 30, 1999, is
made by The Immune Response Corporation ("IMNR"), a Delaware corporation having
its principal place of business and chief executive office at 5935 Darwin Court,
Carlsbad, California 92008, and I.R.C Inc. ("IRC"), a Delaware corporation,
having its principal place of business and chief executive office at 5935 Darwin
Court, Carlsbad, California 92008, (individually and collectively, the
"Borrower") in favor of Transamerica Business Credit Corporation, a Delaware
corporation (the "Lender"), having its principal office at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans
to it from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms
and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce
the Lender to extend credit, the Borrower hereby agrees with the Lender as
follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following
meanings, and shall be equally applicable to both the singular and plural forms
of the terms defined:
AGREEMENT shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
APPLICABLE LAW shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
BUSINESS DAY shall mean any day other than a Saturday, Sunday, or public holiday
or the equivalent for banks in New York City.
CODE shall have the meaning specified in Section 8(d).
COLLATERAL shall have the meaning specified in Section 2.
COLLATERAL ACCESS AGREEMENT shall mean any landlord waiver, mortgagee waiver,
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession of any Equipment.
EFFECTIVE DATE shall mean the date on which all of
the conditions specified in Section 3.3 shall have been satisfied.
EQUIPMENT shall have the meaning specified in Section 2.
EVENT OF DEFAULT shall mean any event specified in Section 7.
FINANCIAL STATEMENTS shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United States of
America, as in effect from time to time.
<PAGE>
LOANS shall mean the loans and financial accommodations made by the Lender to
the Borrower in accordance with the terms of this Agreement and the Notes.
LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, and all
other present and future documents, agreements, certificates, instruments, and
opinions delivered by the Borrower under, in connection with or relating to this
Agreement, or any other present or future instrument or agreement between Lender
and Borrower, as each of the same may be amended, modified, extended, restated
or supplemented from time to time.
MATERIAL ADVERSE CHANGE shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
MATERIAL ADVERSE EFFECT shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
NOTE shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time, in
each case substantially in the form of Exhibit B.
OBLIGATIONS shall mean and include all loans (including the Loans), advances,
debts, liabilities, obligations, covenants and duties owing by Borrower to
Lender of any kind or nature, present or future, whether or not evidenced by the
Note or any note, guaranty or other instrument, whether or not arising under or
in connection with, this Agreement, any other Loan Document or any other present
or future instrument or agreement, whether or not for the payment of money,
whether arising by reason of an extension of credit, opening, guaranteeing or
confirming of a letter of credit, loan, guaranty, indemnification or in any
other manner, whether direct or indirect (including those acquired by
assignment, purchase, discount or otherwise), whether absolute or contingent,
due or to become due, now due or hereafter arising and however acquired
(including without limitation all loans previously made by Lender to Borrower).
The term includes, without limitation, all interest (including interest accruing
on or after a bankruptcy, whether or not an allowed claim), charges, expenses,
commitment, facility, closing and collateral management fees, letter of credit
fees, reasonable attorneys' fees, taxes and any other sum properly chargeable to
Borrower under this Agreement, the other Loan Documents or any other present or
future agreement between Lender and Borrower.
PERMITTED LIENS shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Equipment which do not materially impair either the use of the
Equipment in the operation of the business of the Borrower or the value of the
Equipment; and (d) attachment or judgment liens that do not constitute an Event
of Default.
PERSON shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
SCHEDULE shall mean each Schedule in the form of Schedule A hereto delivered by
the Borrower to the Lender from time to time.
SOLVENT means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
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(a) the fair saleable value of its assets is in excess of
the total amount of its liabilities (including contingent liabilities as valued
in accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business;
and
(c) it is able generally to meet its debts as they
mature.
TAXES shall have the meaning specified in Section 5.5.
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The
Borrower hereby assigns and grants to the Lender a continuing general, first
priority lien on, and security interest in, all the Borrower's right, title, and
interest in and to the collateral described in the next sentence (the
"Collateral") to secure the payment and performance of all the Obligations. The
Collateral consists of all equipment set forth on all the Schedules delivered
from time to time under the terms of this Agreement (the "Equipment"), together
with all present and future additions, parts, accessories, attachments,
substitutions, repairs, improvements, and replacements thereof or thereto, and
any and all proceeds thereof, including, without limitation, proceeds of
insurance and all manuals, blueprints, know-how, warranties, and records in
connection therewith, all rights against suppliers, warrantors, manufacturers,
sellers, or others in connection therewith, and together with all substitutes
for any of the foregoing.
SECTION 3. THE CREDIT FACILITY.
SECTION 3.1. BORROWINGS. Each Loan shall be in an
amount not less than $50,000, and in no event shall the sum of the aggregate
Loans made exceed the amount of the Lender's written commitment to the Borrower
in effect from time to time. Notwithstanding anything herein to the contrary,
the Lender shall be obligated to make the initial Loan and each other Loan only
after the Lender, in its sole discretion, determines that the applicable
conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied. The
timing and financial scope of Lender's obligation to make Loans hereunder are
limited as set forth in a commitment letter executed by Lender and Borrower,
dated as of September 23, 1999 and attached hereto as EXHIBIT A (the "Commitment
Letter").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower
shall not directly or indirectly use any proceeds of the Loans, or cause,
assist, suffer, or permit the use of any proceeds of the Loans, for any purpose
other than for the purchase, acquisition, installation, or upgrading of
Equipment or the reimbursement of the Borrower for its purchase, acquisition,
installation, or upgrading of Equipment.
SECTION 3.3. CONDITIONS TO INITIAL LOAN.
(a) The obligation of the Lender to make the initial Loan
is subject to the Lender's receipt of the following, each dated the date of the
initial Loan or as of an earlier date acceptable to the Lender, in form and
substance satisfactory to the Lender and its counsel:
(i) completed requests for information (Form
UCC-11) listing all effective Uniform Commercial Code
financing statements naming the Borrower as debtor and all tax
lien, judgment, and litigation searches for the Borrower as
the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements
(Form UCC-1) duly executed by the Borrower (naming the Lender
as secured party and the Borrower as debtor and in form
acceptable for filing in all jurisdictions that the Lender
deems necessary or desirable to perfect the security interests
granted to it hereunder) and, if applicable, termination
statements or other releases duly filed in all jurisdictions
that the Lender deems necessary or desirable to perfect and
protect the priority of the security interests granted to it
hereunder in the Equipment related to such initial Loan;
(iii) a Note duly executed by the Borrower
evidencing the amount of such Loan;
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(iv) a Collateral Access Agreement duly executed
by the lessor or mortgagee, as the case may be, of each
premises where the Equipment is located;
(v) certificates of insurance required under
Section 5.4 of this Agreement together with loss payee
endorsements for all such policies naming the Lender as lender
loss payee and as an additional insured;
(vi) a certificate of the Secretary or an
Assistant Secretary of the Borrower ("Secretary's
Certificate") certifying (A) that attached to the Secretary's
Certificate is a true, complete, and accurate copy of the
resolutions of the Board of Directors of the Borrower (or a
unanimous consent of directors in lieu thereof) authorizing
the execution, delivery, and performance of this Agreement,
the other Loan Documents, and the transactions contemplated
hereby and thereby, and that such resolutions have not been
amended or modified since the date of such certification and
are in full force and effect; (B) the incumbency, names, and
true signatures of the officers of the Borrower authorized to
sign the Loan Documents to which it is a party; (C) that
attached to the Secretary's Certificate is a true and correct
copy of the Articles or Certificate of Incorporation of the
Company, as amended, which Articles or Certificate of
Incorporation have not been further modified, repealed or
rescinded and are in full force and effect; (D) that attached
to the Secretary's Certificate of the Borrower is a true and
correct copy of the Bylaws, as amended, which Bylaws of the
Company have not been further modified, repealed or rescinded
and are in full force and effect; and (E) that attached to the
Secretary's Certificate is a valid Certificate of Good
Standing issued by the Secretary of the State of the
Borrower's state of incorporation;
(vii) the opinion of counsel for the Borrower
covering such matters incident to the transactions
contemplated by this Agreement as the Lender may reasonably
require; and
(viii) such other agreements and instruments as the
Lender may reasonably request.
(b) There shall be no pending or, to the knowledge of the
Borrower after reasonable inquiry, threatened litigation, proceeding, inquiry,
or other action (i) seeking an injunction or other restraining order, damages,
or other relief with respect to the transactions contemplated by this Agreement
or the other Loan Documents or thereby or (ii) which affects or could affect the
business, prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the good faith judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses
required to be paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to
the initial Loan granted in favor of the Lender under this Agreement shall have
been duly perfected and shall constitute first priority liens.
SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The
obligation of the Lender to make each Loan is subject to the satisfaction of the
following conditions precedent:
(a) the Lender shall have received the documents,
agreements, and instruments set forth in Section 3.3(a)(i) through (v)
applicable to such Loan, each in form and substance satisfactory to the Lender
and its counsel and each dated the date of such Loan or as of an earlier date
acceptable to the Lender;
(b) the Lender shall have received a Schedule of the
Equipment related to such Loan, in form and substance satisfactory to the Lender
and its counsel, and the security interests in such Equipment related to such
Loan granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens;
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(c) all representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all material
respects on and as of the date of such Loan as if then made, other than
representations and warranties that expressly relate solely to an earlier date,
in which case they shall have been true and correct in all material respects as
of such earlier date;
(d) no Event of Default or event which with the giving of
notice or the passage of time, or both, would constitute an Event of Default
shall have occurred and be continuing or would result from the making of the
requested Loan as of the date of such request; and
(e) the Borrower shall be deemed to have hereby
reaffirmed and ratified all security interests, liens, and other encumbrances
heretofore granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS.
The Borrower (a) is duly organized, validly existing, and in good standing under
the laws of the State of its organization, (b) has the power and authority to
own its properties and assets and to transact the businesses in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the Loan
Documents, or (iii) the rights of the Lender hereunder.
SECTION 4.2. DUE EXECUTION, ETC. The execution,
delivery, and performance by the Borrower of each of the Loan Documents to which
it is a party are within the powers of the Borrower, do not contravene the
organizational documents, if any, of the Borrower, and do not (a) violate any
law or regulation, or any order or decree of any court or governmental
authority, (b) conflict with or result in a breach of, or constitute a default
under, any indenture, mortgage, or deed of trust or any lease, agreement, or
other instrument binding on the Borrower or any of its properties, except as
would have a Material Adverse Effect upon the Borrower, or (c) require the
consent, authorization by, or approval of or notice to or filing or registration
with any governmental authority or other Person. This Agreement is, and each of
the other Loan Documents to which the Borrower is or will be a party, when
delivered hereunder or thereunder, will be, the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency, or similar laws affecting creditors' rights generally and by general
principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is
Solvent and will be Solvent upon the completion of all transactions contemplated
to occur hereunder (including, without limitation, the Loan to be made on the
Effective Date); the security interests granted herein constitute and shall at
all times constitute the first and only liens on the Collateral other than
Permitted Liens; and the Borrower is, or will be at the time additional
Collateral is acquired by it, the absolute owner of the Collateral with full
right to pledge, sell, consign, transfer, and create a security interest
therein, free and clear of any and all claims or liens in favor of any other
Person other than Permitted Liens.
SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments
are outstanding against the Borrower nor is there now pending or, to the best of
the Borrower's knowledge after reasonable inquiry, threatened any litigation,
contested claim, or governmental proceeding by or against the Borrower except
judgments and pending or threatened litigation, contested claims, and
governmental proceedings which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in
default or has not received a notice of default under any material contract,
lease, or commitment to which it is a party or by which it is bound. The
Borrower knows of no dispute regarding any contract, lease, or commitment which
could have a Material Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date
hereof, each item of the Collateral is located at the place of business
specified in the applicable Schedule.
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SECTION 4.7. NO EVENTS OF DEFAULT. No Event of
Default has occurred and is continuing nor has any event occurred which, with
the giving of notice or the passage of time, or both, would constitute an Event
of Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except
as permitted herein, none of the Collateral is subject to contractual
obligations that may restrict or inhibit the Lender's rights or abilities to
sell or dispose of the Collateral or any part thereof after the occurrence of an
Event of Default.
SECTION 4.9.PERFECTION AND PRIORITY OF SECURITY
INTEREST. This Agreement creates a valid and, upon completion of all required
filings of financing statements, perfected first priority and exclusive security
interest in the Collateral, securing the payment of all the Obligations.
SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules
set forth the true and correct model number and serial number of each item of
Equipment that constitutes Collateral.
SECTION 4.11. ACCURACY AND COMPLETENESS OF
INFORMATION. All data, reports, and information heretofore, contemporaneously,
or hereafter furnished by or on behalf of the Borrower in writing to the Lender
or for purposes of or in connection with this Agreement or any other Loan
Document, or any transaction contemplated hereby or thereby, are or will be true
and accurate in all material respects on the date as of which such data,
reports, and information are dated or certified and not incomplete by omitting
to state any material fact necessary to make such data, reports, and information
not misleading at such time (considered in the full context of all other
information provided to Lender). There are no facts now known to the Borrower
which individually or in the aggregate would reasonably be expected to have a
Material Adverse Effect and which have not been specified herein, in the
Financial Statements, or in any certificate, opinion, or other written statement
previously furnished by the Borrower to the Lender.
SECTION 4.12. PRICE OF EQUIPMENT. The cost of each
item of Equipment does not exceed the fair and usual price for such type of
equipment purchased in like quantity and reflects all discounts, rebates and
allowances for the Equipment (including, without limitation, discounts for
advertising, prompt payment, testing, or other services) given to the Borrower
by the manufacturer, supplier, or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a)
retain its existence and its current yearly accounting cycle, (b) maintain in
full force and effect all licenses, bonds, franchises, leases, trademarks,
patents, contracts, and other rights necessary or desirable to the profitable
conduct of its business unless the failure to do so could not reasonably be
expected to have a Material Adverse Effect on the Borrower, (c) continue in, and
limit its operations to, the same general lines of business as those presently
conducted by it, and (d) comply with all applicable laws and regulations of any
federal, state, or local governmental authority, except for such laws and
regulations the violations of which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as
possible, and in any event within five days after the Borrower obtains knowledge
of the following, the Borrower will give written notice to the Lender of (a) any
proceeding instituted or threatened to be instituted by or against the Borrower
in any federal, state, local, or foreign court or before any commission or other
regulatory body (federal, state, local, or foreign) involving a sum, together
with the sum involved in all other similar proceedings, which would reasonably
be expected to have a Material Adverse Effect on the Borrower, (b) any contract
that is terminated or amended and which has had or could reasonably be expected
to have a Material Adverse Effect on the Borrower, (c) the occurrence of any
Material Adverse Change with respect to the Borrower, and (d) the occurrence of
any Event of Default or event or condition which, with notice or lapse of time
or both, would constitute an Event of Default, together with a statement of the
action which the Borrower has taken or proposes to take with respect thereto.
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SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The
Borrower will maintain books and records pertaining to the Collateral in such
detail, form, and scope as the Lender shall require in its commercially
reasonable judgment. The Borrower agrees that the Lender or its agents may enter
upon the Borrower's premises at any time and from time to time during normal
business hours, and at any time upon the occurrence and continuance of an Event
of Default, for the purpose of inspecting the Collateral and any and all records
pertaining thereto.
SECTION 5.4. INSURANCE. The Borrower will maintain
insurance on the Collateral under such policies of insurance, with such
insurance companies, in such amounts, and covering such risks as are at all
times satisfactory to the Lender. All such policies shall be made payable to the
Lender, in case of loss, under a standard non-contributory "lender" or "secured
party" clause and are to contain such other provisions as the Lender may
reasonably require to protect the Lender's interests in the Collateral and to
any payments to be made under such policies. Certificates of insurance policies
are to be delivered to the Lender, premium prepaid, with the loss payable
endorsement in the Lender's favor, and shall provide for not less than thirty
days' prior written notice to the Lender, of any alteration or cancellation of
coverage. If the Borrower fails to maintain such insurance, the Lender may
arrange for (at the Borrower's expense and without any responsibility on the
Lender's part for) obtaining the insurance. Unless the Lender shall otherwise
agree with the Borrower in writing, the Lender shall have the sole right, in the
name of the Lender or the Borrower, to file claims under any insurance policies,
to receive and give acquittance for any payments that may be payable thereunder,
and to execute any endorsements, receipts, releases, assignments, reassignments,
or other documents that may be necessary to effect the collection, compromise,
or settlement of any claims under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due,
all taxes, assessments, claims, and other governmental charges ("Taxes")
lawfully levied or assessed against the Borrower or the Collateral other than
Taxes that are being currently contested in good faith by the Borrower by
appropriate proceedings instituted and for which an adequate reserve is being
maintained by the Borrower in accordance with GAAP. If any Taxes remain unpaid
after the date fixed for the payment thereof, or if any lien shall be claimed
therefor, then, with notice to the Borrower, but on the Borrower's behalf, the
Lender may pay such Taxes, and the amount thereof shall be included in the
Obligations.
SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST
CLAIMS; FEES ON COLLATERAL. The Borrower will defend the Collateral against all
claims and demands of all Persons at any time claiming the same or any interest
therein. The Borrower will not permit any notice creating or otherwise relating
to liens on the Collateral or any portion thereof to exist or be on file in any
public office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and Taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR
IDENTITY. The Borrower will not (a) change the location of its chief executive
office or establish any place of business other than those specified herein or
(b) move or permit the movement of any item of Collateral from the location
specified in the applicable Schedule, except that the Borrower may change its
chief executive office and keep Collateral at other locations within the United
States provided that the Borrower has delivered to the Lender (i) prior written
notice thereof and (ii) duly executed financing statements and other agreements
and instruments (all in form and substance satisfactory to the Lender) necessary
or, in the opinion of the Lender, desirable to perfect and maintain in favor of
the Lender a first priority security interest in the Collateral. Notwithstanding
anything to the contrary in the immediately preceding sentence, the Borrower may
keep any Collateral consisting of motor vehicles or rolling stock at any
location in the United States provided that the Lender's security interest in
any such Collateral is conspicuously marked on the certificate of title thereof
and the Borrower has complied with the provisions of Section 5.9.
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SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The
Collateral shall be operated by competent, qualified personnel in connection
with the Borrower's business purposes, for the purpose for which the Collateral
was designed and in accordance with applicable operating instructions, laws, and
government regulations, and the Borrower shall use every reasonable precaution
to prevent loss or damage to the Collateral from fire and other hazards. The
Collateral shall not be used or operated for personal, family, or household
purposes. The Borrower shall procure and maintain in effect all orders,
licenses, certificates, permits, approvals, and consents required by federal,
state, or local laws or by any governmental body, agency, or authority in
connection with the delivery, installation, use, and operation of the
Collateral. The Borrower shall keep all of the Equipment in a satisfactory state
of repair and satisfactory operating condition in accordance with industry
standards, and will make all repairs and replacements when and where necessary
and practical. The Borrower will not waste or destroy the Equipment or any part
thereof, and will not be negligent in the care or use thereof. The Equipment
shall not be annexed or affixed to or become part of any realty without the
Lender's prior written consent.
SECTION 5.9. FURTHER ASSURANCES. The Borrower will,
promptly upon request by the Lender, execute and deliver or use its best efforts
to obtain any document reasonably required by the Lender (including, without
limitation, warehouseman or processor disclaimers, mortgagee waivers, landlord
disclaimers, or subordination agreements with respect to the Obligations and the
Collateral), give any notices, execute and file any financing statements,
mortgages, or other documents (all in form and substance satisfactory to the
Lender), mark any chattel paper, deliver any chattel paper or instruments to the
Lender, and take any other actions that are reasonably necessary or, in the
opinion of the Lender, desirable to perfect or continue the perfection and the
first priority of the Lender's security interest in the Collateral, to protect
the Collateral against the rights, claims, or interests of any Persons, or to
effect the purposes of this Agreement. The Borrower hereby authorizes the Lender
to file one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Collateral without the signature of
the Borrower where permitted by law. A carbon, photographic, or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. To the extent required under this Agreement, the
Borrower will pay all costs incurred in connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The
Borrower will not in any way hypothecate or create or permit to exist any lien,
security interest, charge, or encumbrance on or other interest in any of the
Collateral, except for the lien and security interest granted hereby and
Permitted Liens which are junior to the lien and security interest of the
Lender, and the Borrower will not sell, transfer, assign, pledge, collaterally
assign, exchange, or otherwise dispose of any of the Collateral. In the event
the Collateral, or any part thereof, is sold, transferred, assigned, exchanged,
or otherwise disposed of in violation of these provisions, the security interest
of the Lender shall continue in such Collateral or part thereof notwithstanding
such sale, transfer, assignment, exchange, or other disposition, and the
Borrower will hold the proceeds thereof in a separate account for the benefit of
the Lender. Following such a sale, the Borrower will transfer such proceeds to
the Lender in kind.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The
Borrower will not enter into any contractual obligations which may restrict or
inhibit the Lender's rights or ability to sell or otherwise dispose of the
Collateral or any part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice
to the Borrower (provided that if an Event of Default has occurred and is
continuing the Lender need not give any notice), the Lender shall have the right
at any time to make any payments and do any other acts the Lender may deem
necessary to protect its security interests in the Collateral, including,
without limitation, the rights to satisfy, purchase, contest, or compromise any
encumbrance, charge, or lien which, in the reasonable judgment of the Lender,
appears to be prior to or superior to the security interests granted hereunder,
and appear in, and defend any action or proceeding purporting to affect its
security interests in, or the value of, any of the Collateral. The Borrower
hereby agrees to reimburse the Lender for all payments made and expenses
incurred under this Agreement including reasonable fees, expenses, and
disbursements of attorneys and paralegals (including the allocated costs of
in-house counsel) acting for the Lender, including any of the foregoing payments
under, or acts taken to protect its security interests in, any of the
Collateral, which amounts shall be secured under this Agreement, and agrees it
shall be bound by any payment made or act taken by the Lender hereunder absent
the Lender's gross negligence or willful misconduct. The Lender shall have no
obligation to make any of the foregoing payments or perform any of the foregoing
acts.
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SECTION 5.13. DELIVERY OF ITEMS. The Borrower will
(a) promptly (but in no event later than three Business Days) after its receipt
thereof, deliver to the Lender any documents or certificates of title issued
with respect to any property included in the Collateral, and any promissory
notes, letters of credit or instruments related to or otherwise in connection
with any property included in the Collateral, which in any such case come into
the possession of the Borrower, or shall cause the issuer thereof to deliver any
of the same directly to the Lender, in each case with any necessary endorsements
in favor of the Lender and (b) deliver to the Lender as soon as available copies
of any and all press releases and other similar communications issued by the
Borrower.
SECTION 5.14. SOLVENCY. The Borrower shall be and
remain Solvent at all times.
SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall
not (a) amend or modify its name, unless the Borrower delivers to the Lender
thirty days prior to any such proposed amendment or modification written notice
of such amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements (in
form and substance satisfactory to the Lender) or (b) merge or consolidate with
any other entity or make any material change in its capital structure, in each
case without the Lender's prior written consent which shall not be unreasonably
withheld.
SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower
shall take all such further actions and execute all such further documents and
instruments as the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and
satisfaction in full of all Obligations, the Borrower shall deliver to the
Lender the following financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as
available, but not later than 120 days after the end of each fiscal year of the
Borrower and its consolidated subsidiaries, the consolidated balance sheet,
income statement, and statements of cash flows and shareholders equity for the
Borrower and its consolidated subsidiaries (the "Financial Statements") for such
year, reported on by independent certified public accountants without an adverse
qualification; and
SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon
as available, but not later than 60 days after the end of each of the first
three fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter, together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five
days of when due any amount required to be paid by the Borrower under or in
connection with any Note and this Agreement;
(b) any representation or warranty made or
deemed made by the Borrower under or in connection with any Loan Document or any
Financial Statement shall prove to have been false or incorrect in any material
respect when made;
(c) the Borrower shall fail to perform or
observe (i) any of the terms, covenants or agreements contained in Sections 5.4,
5.7, 5.10, 5.14, or 5.15 hereof or (ii) any other term, covenant, or agreement
contained in any Loan Document (other than the other Events of Default specified
in this Section 7) and such failure remains unremedied for the earlier of
fifteen days from (A) the date on which the Lender has given the Borrower
written notice of such failure and (B) the date on which the Borrower knew or
should reasonably have known of such failure;
(d) any provision of any Loan Document to which
the Borrower is a party shall for
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any reason cease to be valid and binding on the Borrower, or the Borrower
shall so state;
(e) dissolution, liquidation, winding up, or
cessation of the Borrower's business, failure of the Borrower generally to pay
its debts as they mature, admission in writing by the Borrower of its inability
generally to pay its debts as they mature, or calling of a meeting of the
Borrower's creditors for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower
of any bankruptcy, insolvency, arrangement, reorganization, receivership, or
similar proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof, or any action by the
Borrower is taken authorizing any such proceedings;
(g) an assignment for the benefit of creditors
is made by the Borrower, whether voluntary or involuntary, the appointment of a
trustee, custodian, receiver, or similar official for the Borrower or for any
substantial property of the Borrower, or any action by the Borrower authorizing
any such proceeding;
(h) the Borrower shall default in (i) the
payment of principal or interest on any indebtedness in excess of $50,000 (other
than the Obligations) beyond the period of grace, if any, provided in the
instrument or agreement under which such indebtedness was created; or (ii) the
observance or performance of any other agreement or condition relating to any
such indebtedness or contained in any instrument or agreement relating thereto,
or any other event shall occur or condition exist, the effect of which default
or other event or condition is to cause, or to permit the holder or holders of
such indebtedness to cause, with the giving of notice if required, such
indebtedness to become due prior to its stated maturity and such default shall
not be remedied, cured, waived or consented to within the period of grace
thereto;
(i) the Borrower suffers or sustains a Material
Adverse Change;
(j) any tax lien, other than a Permitted Lien,
is filed of record against the Borrower and is not bonded or discharged within
five Business Days;
(k) any final judgment which has had or could
reasonably be expected to have a Material Adverse Effect on the Borrower and
such judgment shall not be stayed, vacated, bonded, or discharged within sixty
days;
(l) any material covenant, agreement, or
obligation, as determined in the sole discretion of the Lender, made by the
Borrower and contained in or evidenced by any of the Loan Documents shall cease
to be enforceable, or shall be determined to be unenforceable, in accordance
with its terms; the Borrower shall deny or disaffirm the Obligations under any
of the Loan Documents or any liens granted in connection therewith; or any liens
granted on any of the Collateral in favor of the Lender shall be determined to
be void, voidable, or invalid, or shall not be given the priority contemplated
by this Agreement; or
(m) there is a change in more than 35% of the
ownership of any equity interests of the Borrower on the date hereof or more
than 35% of such interests become subject to any contractual, judicial, or
statutory lien, charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have
occurred and be continuing:
(a) The Lender may, without prejudice to any of
its other rights under any Loan Document or Applicable Law, declare all
Obligations to be immediately due and payable (except with respect to any Event
of Default set forth in Section 7(f) hereof, in which case all Obligations shall
automatically become immediately due and payable without necessity of any
declaration) without presentment, representation, demand of payment, or protest,
which are hereby expressly waived.
(b) The Lender may take possession of the
Collateral and, for that purpose may
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enter, with the aid and assistance of any person or persons, any premises
where the Collateral or any part hereof is, or may be placed, and remove the
same.
(c) The obligation of the Lender, if any, to
make additional Loans or financial accommodations of any kind to the Borrower
shall immediately terminate.
(d) The Lender may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein (or in
any Loan Document) or otherwise available to it, all the rights and remedies of
a secured party under the applicable Uniform Commercial Code (the "Code")
whether or not the Code applies to the affected Collateral and also may (i)
require the Borrower to, and the Borrower hereby agrees that it will at its
expense and upon request of the Lender forthwith, assemble all or part of the
Collateral as directed by the Lender and make it available to the Lender at a
place to be designated by the Lender that is reasonably convenient to both
parties and (ii) without notice except as specified below, sell the Collateral
or any part thereof in one or more parcels at public or private sale, at any of
the Lender's offices or elsewhere, for cash, on credit, or for future delivery,
and upon such other terms as the Lender may deem commercially reasonable. The
Borrower agrees that, to the extent notice of sale shall be required by law, at
least ten days' notice to the Borrower of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. The Lender shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Lender may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned.
(e) All cash proceeds received by the Lender in
respect of any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the discretion of the Lender, be held by the
Lender as collateral for, or then or at any time thereafter applied in whole or
in part by the Lender against, all or any part of the Obligations in such order
as the Lender shall elect. Any surplus of such cash or cash proceeds held by the
Lender and remaining after the full and final payment of all the Obligations
shall be paid over to the Borrower or to such other Person to which the Lender
may be required under applicable law, or directed by a court of competent
jurisdiction, to make payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. NOTICES. Except as otherwise provided
herein, all notices, approvals, consents, correspondence, or other
communications required or desired to be given hereunder shall be given in
writing and shall be delivered by overnight courier, hand delivery, or certified
or registered mail, postage prepaid, if to the Lender, then to Transamerica
Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut
06032, Attention: Legal Department, with a copy to the Lender at Riverway II,
West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention:
Legal Department, and if to the Borrower, then to 5935 Darwin Court, Carlsbad,
California 92008, or such other address as shall be designated by the Borrower
or the Lender to the other party in accordance herewith. All such notices and
correspondence shall be effective when received.
SECTION 9.2. HEADINGS. The headings in this Agreement
are for purposes of reference only and shall not affect the meaning or
construction of any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. The Borrower shall not have
the right to assign any Note or this Agreement or any interest therein unless
the Lender shall have given the Borrower prior written consent and the Borrower
and its assignee shall have delivered assignment documentation in form and
substance satisfactory to the Lender in its sole discretion. The Lender may
assign its rights and delegate its obligations under any Note or this Agreement.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any
amendment or waiver of any provision of this Agreement and any consent to any
departure by the Borrower from any provision of this Agreement shall be
effective only by a writing signed by the Lender and shall bind and benefit the
Borrower and the Lender and their respective successors and assigns, subject, in
the case of the Borrower, to the first sentence of Section 9.3.
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SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of
the essence in each provision of this Agreement of which time is an element. All
terms not defined herein or in a Note shall have the meaning set forth in the
applicable Code, except where the context otherwise requires. To the extent a
term or provision of this Agreement conflicts with any Note, or any term or
provision thereof, and is not dealt with herein with more specificity, this
Agreement shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Agreement shall not be relevant in determining the meaning of this
Agreement even though the accepting or acquiescing party had knowledge of the
nature of the performance and opportunity for objection.
SECTION 9.6. CONTINUING SECURITY INTEREST. This
Agreement shall create a continuing security interest in the Collateral and
shall (i) remain in full force and effect until the indefeasible payment in full
of the Obligations, (ii) be binding upon the Borrower and its successors and
assigns and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its successors, transferees, and
assigns.
SECTION 9.7. REINSTATEMENT. To the extent permitted
by law, this Agreement and the rights and powers granted to the Lender hereunder
and under the Loan Documents shall continue to be effective or be reinstated if
at any time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All
representations, warranties, and covenants of the Borrower contained herein
shall survive the execution and delivery of this Agreement, and shall terminate
only upon the full and final payment and performance by the Borrower of the
Obligations secured hereby.
SECTION 9.9. INDEMNIFICATION. The Borrower agrees to
indemnify and hold harmless the Lender and its directors, officers, agents,
employees, and counsel from and against any and all costs, expenses, claims, or
liability incurred by the Lender or such Person hereunder and under any other
Loan Document or in connection herewith or therewith, unless such claim or
liability shall be due to willful misconduct or gross negligence on the part of
the Lender or such Person.
SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES.
This Agreement may be executed in counterparts, each of which when so executed
and delivered shall be an original, but both of which shall together constitute
one and the same instrument. This Agreement and each of the other Loan Documents
and any notices given in connection herewith or therewith may be executed and
delivered by telecopier or other facsimile transmission all with the same force
and effect as if the same was a fully executed and delivered original manual
counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in
or obligation under this Agreement or any Note or any other Loan Document shall
be invalid, illegal, or unenforceable in any jurisdiction, the validity,
legality, and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES.
No delay of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the
Lender agree that this Agreement, the Schedule hereto, and the Commitment Letter
are the complete and exclusive statement and
12
<PAGE>
agreement between the parties with respect to the subject matter hereof,
superseding all proposals and prior agreements, oral or written, and all
other communications between the parties with respect to the subject matter
hereof. Should there exist any inconsistency between the terms of the
Commitment Letter and this Agreement, the terms of this Agreement shall
prevail.
SECTION 9.14. SETOFF. In addition to and not in
limitation of all rights of offset that the Lender may have under Applicable
Law, and whether or not the Lender has made any demand or the Obligations of the
Borrower have matured, the Lender shall have the right to appropriate and apply
to the payment of the Obligations of the Borrower all deposits and other
obligations then or thereafter owing by the Lender to or for the credit or the
account of the Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND
THE LENDER IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY
OTHER LOAN DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY,
INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL
ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY,
OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND,
BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN
CONNECTION WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING,
WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS
OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT
TO INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE
BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES
THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE
ADDRESS FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH
RESPECT TO RIGHTS AND REMEDIES.
13
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower has
caused this Agreement to be duly executed and delivered by its proper and duly
authorized officer as of the date first set forth above.
THE IMMUNE RESPONSE CORPORATION
By: /s/ Howard Sampson
----------------------------------
Name: Howard Sampson
Title: Chief Financial Officer
Federal Tax ID No.: 33-0255679
I.R.C. INC.
By: /s/ Howard Sampson
----------------------------------
Name: Howard Sampson
Title: Chief Financial Officer
Federal Tax ID No.: 33-0324090
Accepted as of the
30th day of September, 1999
-----
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Gary P. Moro
- ----------------------------------------------
Name: Gary P. Moro
Title: Senior Vice President
14
<PAGE>
SCHEDULE A
TO
LOAN AND SECURITY AGREEMENT
Other Places of Business and Locations of Collateral (Section 4.16):
Prior Names of Obligor (Section 4.7):
Prior Trade Names of Obligor (Section 4.7):
Existing Trade Names of Obligor (Section 4.7):
Federal Tax ID (Section 4.7):
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
EXTRACTED FROM ITEM 1 OF FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999, FOR
THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,409
<SECURITIES> 19,810
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,319
<PP&E> 18,292
<DEPRECIATION> 7,831
<TOTAL-ASSETS> 34,776
<CURRENT-LIABILITIES> 8,394
<BONDS> 0
9,557
0
<COMMON> 62
<OTHER-SE> 15,350
<TOTAL-LIABILITY-AND-EQUITY> 34,776
<SALES> 0
<TOTAL-REVENUES> 16,927
<CGS> 0
<TOTAL-COSTS> 30,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,849)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,849)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,849)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
