<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 000-28782
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NEOTHERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 788-6700
--------------
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:
Class Outstanding at October 30, 1998
- --------------------------- -------------------------------
Common Stock, $.001 par value 5,848,275
Page 1 of 19 Pages
Exhibit Index on Page 20
<PAGE> 2
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statement regarding financial information............................... 3
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997....................................................... 4
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997....................................... 5
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 and for the period from inception
(June 15, 1987) to September 30, 1998................................... 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 and for the period from inception
(June 15, 1987) to September 30, 1998................................... 7
Notes to Condensed Consolidated Financial Statements.................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL POSITION.................................................. 12
PART II OTHER INFORMATION....................................................... 16
ITEM 2. CHANGES IN SECURITIES................................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 18
</TABLE>
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<PAGE> 3
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENT REGARDING FINANCIAL INFORMATION
The financial statements included herein have been prepared by NeoTherapeutics,
Inc. (the "Company"), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information normally included in
the financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that the
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997 as filed with the Securities and Exchange
Commission.
Page 3
<PAGE> 4
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 903,631 $ 6,063,347
Restricted cash -- 935,000
Marketable securities and short-term investments 2,096,453 2,133,375
Notes and accounts receivable 102,651 221,829
Prepaid expenses and refundable deposits 177,454 127,259
------------ ------------
Total current assets 3,280,189 9,480,810
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment 2,150,169 1,952,262
Leasehold improvements 1,785,695 1,803,000
Accumulated depreciation and amortization (621,051) (279,913)
------------ ------------
Property and equipment, net 3,314,813 3,475,349
------------ ------------
DEFERRED CHARGES AND DEPOSITS 157,328 242,314
------------ ------------
TOTAL ASSETS $ 6,752,330 $ 13,198,473
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 850,000
Accounts payable and accrued expenses 1,100,932 975,339
Accrued payroll and related taxes 80,469 --
Notes payable to related party 558,304 558,304
Current portion of long-term debt 432,867 94,886
------------ ------------
Total current liabilities 2,172,572 2,478,529
LONG-TERM DEBT, net of current portion 1,242,272 176,549
DEFERRED RENT 34,732 --
------------ ------------
Total liabilities 3,449,576 2,655,078
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value, 25,000,000 shares
authorized:
Issued and outstanding, 5,682,203 and 5,465,807
shares at September 30, 1998 and December 31,
1997, respectively 24,016,165 23,188,363
Unrealized gains on available-for-sale securities 41,713 20,256
Deficit accumulated during the development stage (20,755,124) (12,665,224)
------------ ------------
Total stockholders' equity 3,302,754 10,543,395
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,752 ,330 $ 13,198,473
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
Page 4
<PAGE> 5
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1998 1997
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<S> <C> <C>
REVENUES $ -- $ --
----------- -----------
OPERATING EXPENSES:
Research and development 2,264,926 1,372,040
General and administration 718,792 604,782
----------- -----------
Total operating expenses 2,983,718 1,976,822
----------- -----------
LOSS FROM OPERATIONS (2,983,718) (1,976,822)
----------- -----------
OTHER INCOME (EXPENSE):
Interest, net (10,552) 165,291
Other expense (5,851) (1,599)
----------- -----------
Total other income (expense) (16,403) 163,692
----------- -----------
NET LOSS $(3,000,121) $(1,813,130)
=========== ===========
NET LOSS PER SHARE $ (0.54) $ (0.33)
=========== ===========
Weighted average shares outstanding 5,569,768 5,433,194
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 5
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Period from
Inception
Nine Months Nine Months (June 15, 1987)
Ended Ended Through
September 30, September 30, September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES, from grants $ -- $ -- $ 497,128
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 5,939,141 2,757,061 13,414,208
General and administrative 2,216,303 1,673,103 7,986,685
------------ ------------ ------------
Total operating expenses 8,155,444 4,430,164 21,400,893
------------ ------------ ------------
LOSS FROM OPERATIONS (8,155,444) (4,430,164) (20,903,765)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income, net 84,810 579,720 570,207
Other income (expense) (19,265) 6,755 27,435
------------ ------------ ------------
Total other income 65,545 586,475 597,642
------------ ------------ ------------
NET LOSS $ (8,089,899) $ (3,843,689) $(20,306,123)
============ ============ ============
NET LOSS PER SHARE $ (1.47) $ (0.71)
============ ============
Weighted Average Shares Outstanding 5,511,130 5,397,698
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
Page 6
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Period from
Inception
Nine Months Nine Months (June 15, 1987)
Ended Ended Through
September 30, September 30, September 30,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (8,089,899) $ (3,843,689) $(20,306,123)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 341,138 117,850 746,540
Issuance of Common Stock for services 234,323 60,000 503,273
Amortization of deferred compensation -- -- 93,749
Increase in deferred rent 34,731 -- 34,731
Compensation expense for extension of
Debt Conversion Agreements, net -- -- 503,147
Gain on sale of assets -- -- (5,299)
Decrease (increase) in other receivables 119,178 (21,787) (102,405)
Decrease (increase) in prepaid
expenses deferred charges and
refundable deposits 34,790 (160,642) (284,780)
Increase in accounts payable and
accrued expenses 125,593 314,698 1,261,032
Increase (decrease) in accrued payroll
and related payroll taxes 80,468 (265,521) 719,162
Increase (decrease) in employee
expense reimbursement and accrued
interest to related parties -- (205,113) 300,404
------------ ------------ ------------
Net cash used in operating activities (7,119,678) (4,004,204) (16,536,569)
------------ ------------ ------------
</TABLE>
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (CONTINUED)
<TABLE>
<CAPTION>
Period from
Inception
Nine Months Nine Months (June 15, 1987)
Ended Ended Through
September 30, September 30, September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $ (180,602) $ (3,112,802) $ (4,016,167)
Proceeds from sale of equipment -- -- 29,665
Purchases of marketable securities
and short-term investments, net 36,922 (2,742,687) (2,096,453)
Unrealized gains from investments 21,457 -- 41,713
Payment of organization costs -- -- (66,093)
Issuance of notes receivable -- -- 100,000
------------ ------------ ------------
Net cash used in investing
activities (122,223) (5,855,489) (6,007,335)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Stock issuance
including Revenue Participation Units
converted to Common Stock 593,481 2,600 20,813,884
(Repayment) issuance of bank line of
credit (850,000) 550,000 --
Issuance of installment notes payable 1,500,000 326,625 1,826,625
Repayment of installment notes payable (96,296) (32,662) (151,486)
Decrease in restricted cash 935,000 -- --
Proceeds from notes payable to related
parties, net -- -- 757,900
Cash at acquisition -- -- 200,612
------------ ------------ ------------
Net cash provided by financing
activities 2,082,185 846,563 23,447,535
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (5,159,716) (9,013,130) 903,631
Cash and cash equivalents, beginning
of period 6,063,347 9,995,062 --
------------ ------------ ------------
Cash and cash equivalents, end of
period $ 903,631 $ 981,932 $ 903,631
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements
Page 8
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Nature of Business
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of its consolidated financial position at September 30, 1998, and consolidated
results of operations and cash flows for the periods presented. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Accordingly, the accompanying financial statements and notes should be read in
conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997 as filed with the Securities and Exchange Commission. Results of operations
for the nine months ended September 30, 1998 are not necessarily indicative of
results to be expected for a full year.
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to "NeoTherapeutics, Inc." and in June 1997, the Company was
reincorporated in the state of Delaware. The Company has two wholly-owned
subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"), incorporated in
California in June 1987, and NeoTherapeutics, GmbH, incorporated in Switzerland
in April 1997. All references to the "Company" hereinafter refer to
NeoTherapeutics, Inc. and its subsidiaries as a consolidated entity.
The Company is a development-stage biopharmaceutical enterprise engaged
in the discovery and development of novel therapeutic drugs intended to treat
neurodegenerative diseases and conditions such as memory deficits associated
with Alzheimer's disease and aging, stroke, spinal cord injuries and Parkinson's
disease.
2. Debt
Long-Term Debt:
Effective September 1998, the Company entered into a $2 Million Master
Note and Security Agreement with a finance company affiliated with its bank.
Through September 30, 1998, the Company received $1,500,000 to finance prior
equipment and computer software purchases and has an additional $500,000
available over the next year for similar purchases. The Company has pledged
substantially all of its assets, exclusive of its patents and other intellectual
properties, to the bank and the aforementioned finance company as collateral for
this borrowing. Borrowings are to be repaid over a 42 month period and bear
interest at approximately 12%. Monthly principal and interest payments at
September 30, 1998 aggregate $41,277 and are payable through February 2002, with
a final installment of $150,000 payable in March 2002. The Company has also
granted to the finance company a warrant to purchase up to 13,459 shares of its
Common Stock at $7.43 a share.
Page 9
<PAGE> 10
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has financed the premium for a three year insurance policy.
The loan is payable through August 2000 in monthly installments of $9,475,
bearing 8.25% annual interest.
3. Commitments and Contingencies
Research and Fellowship Grants:
The Company periodically makes non-binding commitments to various
universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of September 30, 1998, the Company had committed to pay, through September
1999, approximately $426,000 for such grants and fellowships. Grant expense for
the nine-month periods ended September 30, 1998, and 1997 amounted to
approximately $373,000 and $250,000, respectively.
4. Common Stock
Line of Equity Agreement:
On March 27, 1998, the Company executed a $15 million Private Equity
Line of Credit Agreement (the "Agreement") with a private investor expiring in
February 2001. The Agreement provides for the Company, at its sole discretion,
and subject to certain restrictions, to periodically sell ("put") shares of its
Common Stock to the investor. Puts can be made every 15 days in amounts ranging
from $250,000 to $2,000,000, depending on the trading volume and the market
price of the stock at the time of each put, subject to aggregate minimum puts of
$1 million over the life of the Agreement. At the time of each put, the investor
receives a discount of 12% from the then current average market price, as
determined under the Agreement. Pursuant to the Agreement, the Company also
issued to the investor warrants to purchase 25,000 shares of Common Stock at
$11.62 per share. As of September 30, 1998, the Company had put a total of
41,398 shares of its Common Stock to the investor pursuant to the Agreement for
a total price of $250,000.
Notes Receivable From Stock Sales:
On August 31, 1998, certain officers and directors of the Company
exercised non-qualified stock options for 62,000 shares of Common Stock. The
exercise price of the stock options was at $4.50 per share for 50,000 shares and
$5.13 per share for 12,000 shares for an aggregate purchase price of $286,560,
represented by notes issued by the purchasers. The notes are full recourse
promissory notes bearing interest at 7% and are collateralized by the stock
issued upon the exercise of the stock options. Interest and principal are
payable two years after the issue dates. The notes have been offset against the
underlying Common Stock in the accompanying financial statements.
Page 10
<PAGE> 11
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A Development-Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Stock Options:
Stock option activities for the nine month period ended September 30,
1998 were as follows:
Option Price
Shares per Share
-------- --------------
Outstanding at December 31, 1997 658,173 $0.025-$12.875
Granted 183,300 5.625- 8.875
Exercised (134,000) 0.025- 5.13
Expired/forfeited (1,300) 8.875
-------- --------------
Outstanding at September 30, 1998 706,173 $0.025-$12.875
======== ==============
During the nine month periods ended September 30, 1998 and 1997, the
Company recognized compensation expense for vested consultant options pursuant
to SFAS 123 of $234,323 and $60,000, respectfully. Options granted to
consultants consist of options that vest both immediately and upon the
occurrence of certain events as specified in the related agreements.
Page 11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL POSITION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed below under "Factors Affecting Future Operating Results."
RESULTS OF OPERATIONS
Overview:
From the inception of the Company in 1987 through September 30, 1998,
the Company incurred a cumulative net loss of approximately $20.3 million. The
Company expects its operating expenses to increase over the next several years
as it continues to expand its research and development and commercialization
activities and operations. The Company expects to incur significant additional
operating losses for at least the next several years unless such operating
losses are offset, if at all, by licensing revenues under strategic alliances
with larger pharmaceutical companies which the Company is currently seeking.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997:
There were no revenues during the three months ended September 30, 1998
or the three months ended September 30, 1997.
Research and development expenses for the three months ended September
30, 1998 increased approximately $893,000 or 65% over the same period in 1997.
Current period increases were due primarily to costs and expenses associated
with the conduct of clinical trials and preclinical testing, personnel
additions, research grants made by the Company and increased depreciation due to
additions of equipment and leasehold improvements. The Company expects its
research and development expenses to continue to increase as it expands its
laboratories in its new facility and increases its product development and
clinical trial activities.
General and administrative expenses increased approximately $114,000 or
19% from the same period in 1997 due to the addition of personnel, increases in
investor relation activities, travel and professional and consulting fees. These
cost and expense increases were partially offset by a reduction in employee
relocation expense during the current period. The Company expects general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities as well as sales and marketing
activities should the Company successfully bring one or more of its products to
market. Net interest income decreased by approximately $176,000 due to the
reduction of invested funds remaining from the Company's public offering in
September 1996 and increased interest expense on borrowings. The Company expects
its interest earnings to continue to decrease over the next year due to the use
of its funds in current operations.
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<PAGE> 13
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997:
There were no revenues during the nine months ended September 30, 1998
or the nine months ended September 30, 1997.
Research and development expenses for the nine months ended September
30, 1998 increased approximately $3,182,000 or 115% over the same period in
1997. Current period increases were due primarily to costs and expenses
associated with the conduct of clinical trials, rent and operating costs of the
Company's new facility, depreciation and personnel additions. In the same period
in 1997, the Company did not occupy its new facility until late June 1997 and
was conducting most of its research at offsite facilities with fewer personnel.
The Company expects its research and development expenses to continue to
increase as it expands its laboratories in its new facility and increases its
product development and clinical trial activities.
General and administrative expenses increased approximately $543,000 or
32% from the same period in 1997 due to increases in rent and operating costs of
the Company's new facility, the addition of personnel, depreciation, and
professional and consulting fees. These cost increases were partially offset by
a reduction in travel expense during the current period. The Company expects
general and administrative expenses to increase in future periods in support of
the expected increases in research and development activities as well as sales
and marketing activities should the Company successfully bring one or more of
its products to market. Net interest income decreased by approximately $495,000
due to the reduction of invested funds remaining from the Company's public
offering in September 1996 and increased interest expense on borrowings. The
Company expects its interest earnings to continue to decrease over the next year
due to the use of its funds in current operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1998, the Company financed its
operations primarily through grants, sales of equity securities, borrowings and
deferred payment of salaries and other expenses from related parties. During
September and October 1996, the Company effected the public sale of a total of
2,700,000 units of its Common Stock and attached warrants to the public. Each
unit consisted of one share of Common Stock and one warrant to purchase one
share of Common Stock. The aggregate net proceeds of this offering amounted to
approximately $18,176,000
At September 30, 1998, working capital amounted to approximately $1.1
million. This amount included cash and cash equivalents of approximately $0.9
million and marketable securities and short-term investments of approximately
$2.1 million. In comparison, at December 31, 1997, the Company had working
capital of approximately $7 million, which included cash and cash equivalents of
approximately $7 million (of which approximately $0.9 million was restricted)
and marketable securities and short-term investments of approximately $2.1
million. The $5.9 million decrease in working capital during the nine months is
attributable primarily to the operating loss for the period of approximately
$8.1 million, offset, among other things, by long-term debt financing of $1.5
million and proceeds of approximately $0.6 million from sales of Common Stock.
Page 13
<PAGE> 14
The Company is in the development stage devoting substantially all of
its efforts to research and development. During its development stage, the
Company has incurred cumulative losses of approximately $20.3 million through
September 30, 1998, and expects to incur substantial losses over the next
several years. In addition to the funds derived from its public offering, the
Company will require substantial additional funds in order to complete the
research and development activities currently contemplated and to commercialize
its proposed products. The Company's future capital requirements and
availability of capital will depend upon many factors, including continued
scientific progress in research and development programs, the scope and results
of preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in filing, prosecuting and
enforcing patent claims, competing technological developments, the cost of
manufacturing scale-up, the cost of commercialization activities and other
factors which may not be within the Company's control. While the Company
believes that its existing capital resources including the recently obtained $2
million Master Note and Security Agreement and the $15 million Private Line of
Equity Agreement will be adequate to fund its capital needs for at least 12
months, the Company also believes that ultimately it will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize its proposed products.
Without additional funding, the Company may be required to delay, reduce
the scope or eliminate one or more of its research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require the Company to relinquish rights to certain technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize on its own.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of the Company are highly uncertain, and
the following factors should be carefully reviewed in addition to the other
information contained in this quarterly report on Form 10-QSB:
The Company has incurred losses in every year of its existence and
expects to continue to incur significant operating losses for the next several
years. The Company has never generated revenues from product sales and there is
no assurance that revenue from product sales will ever be achieved. In addition,
there is no assurance that any of the Company's proprietary products will ever
be successfully developed, receive and maintain required governmental regulatory
approvals, become commercially viable or achieve market acceptance.
The Company has no experience in manufacturing, procuring products in
commercial quantities or marketing, and only limited experience in negotiating,
setting up or maintaining strategic relationships and conducting clinical trials
or other late stage phases of the regulatory approval process, and there is no
assurance that the Company will successfully engage in any of these activities.
The Company's need for additional funding is expected to be substantial
and will be determined by the progress and cost of the development and
commercialization of its products and other activities. The Company believes
that its existing capital resources including the recently obtained $2 million
Master Note and Security Agreement and the $15 million Private Line of Equity
Agreement will be sufficient to satisfy its current and projected funding
requirements for at least the next twelve months. However, if the Company
experiences unanticipated cash requirements during the interim period or fails
to obtain sufficient funding under its Private Equity Line of Credit Agreement,
the Company could require additional funds sooner. The source, availability, and
terms of such funds have not been determined. Although funds may be received
from the sale of equity securities or the exercise of outstanding warrants and
options to acquire Common Stock of the Company, there is no assurance any such
funding will occur.
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<PAGE> 15
Factors impacting the future success of the Company include, among other
things, the ability to develop products which will be safe and effective in
treating neurological diseases and the ability to obtain government approval.
The Company faces numerous other risks in the operation of its business,
including, but not limited to, protecting its proprietary technology and trade
secrets and not infringing those of others; attaining a competitive advantage;
entering into agreements with others to source, manufacture, market and sell its
products; attracting and retaining key personnel in research and development,
manufacturing, marketing, sales and other operational areas; managing growth, if
any; and avoiding potential claims by others in such areas as product liability
and environmental matters.
The above factors are not intended to be inclusive. A more comprehensive
list of factors which could affect the Company's future operating results can be
found in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, in "Item 1. Description of Business" under the caption
"Factors Which May Affect Future Performance." Failure to satisfactorily achieve
any of the Company's objectives or avoid any of the above or other risks would
likely have a material adverse effect on the Company's business and results of
operations.
Page 15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the
quarter ended September 30, 1998 involving sales of the Company's securities
that were not registered under the Securities Act of 1933 (the "Securities
Act"):
1. Effective September 10, 1998, in connection with the
finalization of the Company's equipment financing with Leasing
Technologies International, Inc. ("LTI"), the Company issued a warrant
to LTI to purchase a maximum of 13,459 shares of the Company's Common
Stock at an exercise price of $7.43 per share. The Warrant is
exercisable at any time or from time to time up to and including
September 9, 2003.
2. On September 11, 1998, the Company issued and sold 41,398
shares of the Company's Common Stock to Kingsbridge Capital Limited for
a total purchase price of $250,000. The shares were sold pursuant to the
Private Equity Line of Credit Agreement entered into between the Company
and Kingsbridge Capital Limited on March 27, 1998 described in Note 4 of
the Notes to Condensed Consolidated Financial Statements in Part I, Item
1 of this Report.
In the transactions described above, exemption from the registration
requirements of the Securities Act was claimed under Section 4(2) of the
Securities Act and/or Rule 506 of Regulation D promulgated thereunder. The
foregoing transactions did not involve any public offering and the investors
either received or had access to adequate information about the Company in order
to make an informed investment decision. In the foregoing transactions, the
Company reasonably believed that the investors were "sophisticated" within the
meaning of Section 4(2) of the Securities Act.
USE OF PROCEEDS FROM REGISTERED SECURITIES
The following information is provided pursuant to Rule 463 of the
Securities Act and Item 701(f) of Regulation S-B in connection with the
Company's Registration Statement on Form SB-2 filed under the Securities Act:
(1) Effective date of Registration Statement: September 26, 1996
Commission file number: 333-05342-LA
(2) Date offering commenced: September 26, 1996
(3) Offering terminated before securities sold: Not applicable
(4) Disclosures:
(i) Has offering terminated: No
(ii) Managing underwriter(s): Paulson Investment Company, Inc.
First Colonial Securities
Group, Inc.
(iii) Title of each class of securities
registered: Common Stock
Common Stock purchase Warrants*
Page 16
<PAGE> 17
* Each Common Stock purchase warrant entitles the holder to purchase one share
of Common Stock at an exercise price of $11.40 per share. The Common Stock
purchase warrants expire 5 years from September 26, 1996. Outstanding Common
Stock purchase warrants may be redeemed by the Company, in whole or in part,
at any time upon at least 30 days prior written notice to the registered
holders thereof, at a price of $0.25 per warrant, provided that the closing
bid price of the Common Stock has been at least $22.80 for the 20
consecutive trading days immediately preceding the date of the notice of
redemption.
(iv) Information regarding each class of securities:
<TABLE>
<CAPTION>
Common Stock
Common Purchase
Stock Warrants
----------- ------------
<S> <C> <C>
Amount registered 2,875,000 2,875,000
Aggregate offering price of
amount registered $21,850,000 $ 0
Amount sold 2,700,000 2,700,000
Aggregate offering price of amount sold $20,520,000 $ 0
(v) Expenses of offering: A* B*
----------- -----------
Underwriting discounts and commissions $ 0 $ 1,436,400
Finders fees $ 0 $ 50,000
Expenses paid to or for underwriter $ 0 $ 331,317
Other expenses $ 0 $ 525,502
-----------
Total expenses $ 2,343,219
===========
(vi) Net offering proceeds $18,176,781
===========
(vii) Use of Net Proceeds through
September 30, 1998:
A* B*
----------- -----------
Construction of plant, building and
facilities $ 1,785,695
Purchase and installation of machinery
and equipment $ 2,150,169
Repayment of indebtedness $ 533,613 9,000
Working capital $13,698,304
TEMPORARY INVESTMENT
Money market and short-term investments $ 3,000,084
</TABLE>
- -------------------
* A: Direct or indirect payments to directors, officers, general partners of the
issuer or their associates; to persons owning ten percent or more of any
class of equity securities of the issuer; and to affiliates of the issuer.
* B: Direct or indirect payments to others.
Page 17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4. Master Note and Security Agreement between the Company and Leasing
Technologies International, Inc. dated as of July 10, 1998.
27. Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on July 28, 1998 to report a press
release of the Company dated July 27, 1998.
Page 18
<PAGE> 19
SIGNATURES
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.
NEOTHERAPEUTICS, INC.
Date: November 6, 1998 By /s/ Alvin J. Glasky, Ph.D.
-------------------------------------
Alvin J. Glasky, Ph.D., President
Date: November 6, 1998 By /s/ Samuel Gulko
-------------------------------------
Samuel Gulko, Chief Financial Officer
Secretary and Treasurer
(Principal Accounting Officer)
Page 19
<PAGE> 20
EXHIBIT INDEX
(a) Exhibits
4. Master Note and Security Agreement between the Company and Leasing
Technologies International, Inc. dated as of July 10, 1998
27. Financial Data Schedule
Page 20
<PAGE> 1
EXHIBIT 4
MASTER NOTE AND SECURITY AGREEMENT
----------------------------------
Wilton, Connecticut
July 10, 1998
1. MASTER AGREEMENT.
(a) This Agreement sets forth the basic terms and conditions upon which
LEASING TECHNOLOGIES INTERNATIONAL, INC. (together with its successors and
assigns, collectively, the "Lender"), shall, in its sole and absolute
discretion, subject to the terms and conditions of this Agreement, lend to
NeoTherapeutics, Inc., a Corporation organized under the laws of the State of
Delaware (the "Borrower"), and the Borrower shall borrow from the Lender, funds
to purchase (or refinance the purchase of) the items of "Equipment" specified
(and as defined in) one or more loan schedules hereto to be entered into from
time to time (each, a "Loan Schedule"). Each Loan Schedule shall reference this
Master Note and Security Agreement (this "Agreement") and shall be deemed to
incorporate therein all of the terms and conditions hereof, unless and to the
extent any provisions hereof are expressly excluded or modified therein, and
shall contain such additional terms as the Lender and the Borrower shall, in
their sole discretion, agree upon. Each Loan Schedule, together with the terms
and conditions of this Agreement so incorporated therein, shall constitute a
separate promissory note that evidences a separate loan with respect to the
Equipment specified in such Loan Schedule. Each Loan Schedule may be assigned by
the Lender and/or reassigned by any assignee(s) thereof separate and apart from
any other Loan Schedule(s) hereunder. With respect to each Loan Schedule, the
Lender or its respective assignee(s) shall have all of the rights of the
"Lender" thereunder and with respect to the Equipment and other Collateral
covered thereby, and such rights shall be separately exercisable by the Lender
or such assignee(s), as the case may be, collectively with all of the other Loan
Schedules then held by the Lender or such assignee(s), but exclusively and
independently of the rights of the Lender or such assignee(s) with respect to
any other Loan Schedule(s) not then held by the Lender or such assignee(s).
(b) The term "Loan" as used in this Agreement shall mean any and all of
the liabilities and obligations of the Borrower under a loan evidenced by a
particular Loan Schedule, which is entered into by the Lender and the Borrower
under this Agreement with respect to the Equipment specified in such Loan
Schedule. Capitalized terms used in this Agreement and not otherwise defined
shall have the meanings ascribed to them in the relevant Loan Schedule.
2. TERMS OF PAYMENT.
(a) FOR VALUE RECEIVED, the Borrower hereby promises to pay to the order
of the Lender, the "Principal Sum" set forth in each Loan Schedule, in the
"Total Number of Monthly Installments" set forth in such Loan Schedule,
consisting of the "Number of Consecutive Monthly Installments" of principal and
interest set forth in such Loan Schedule, each payable in advance, and the
"Final Payment" of principal and interest set forth in such Loan Schedule,
together with all other sums then owing thereunder, payable on the "Final
Payment Date" set forth in such Loan Schedule; the first such consecutive
monthly installment shall be in the "First Monthly Installment Amount" set forth
in such Loan Schedule and shall be due and payable on the "First Monthly
Installment Date" set forth in such Loan Schedule; the remaining consecutive
monthly installments shall each be in the "Remaining Consecutive Monthly
Installment Amount" set forth in such Loan Schedule and shall thereafter be due
and payable on the same day of each month in each year as
<PAGE> 2
such First Monthly Installment Date and ending on the "Last Consecutive Monthly
Installment Date" set forth in such Loan Schedule; and the Final Payment and
shall be due and payable on the Final Payment Date, except as otherwise
expressly provided in Sections 2(b), 2(c), 2(d) or 17(b) hereof.
(b) Notwithstanding anything to the contrary set forth in Section 2(a)
hereof, if at least 120 days prior to the Final Payment Date under a Loan
Schedule, the Borrower gives the Lender written notice requesting that the
Lender extend and finance the repayment of the relevant Final Payment over an
additional 12-month term commencing on such Final Payment Date (the "Refinancing
Request"), and provided that no Event of Default (as hereinafter defined) and no
event or circumstance that, with the giving of notice or the passage of time, or
both, would constitute an Event of Default, including (without limitation) the
nonpayment or nonperformance of any outstanding liability or obligation under
this Agreement (each, a "Default"), shall have occurred and be continuing as of
(i) the date such Refinancing Request is given, or (ii) the relevant Final
Payment Date, then such Final Payment shall not be due and payable on such Final
Payment Date but instead shall be payable in 12 equal monthly installments of
principal and interest, each in the "Refinanced Monthly Installment Amount" set
forth in the relevant Loan Schedule and due and payable on the same day of each
month as such Final Payment Date, commencing on such Final Payment Date.
(c) Notwithstanding anything to the contrary set forth in Section 2(a)
hereof, so long as no Default or Event of Default has occurred and is continuing
on the Final Payment Date under a Loan Schedule and if, at least 120 days prior
to the relevant Final Payment Date, the Borrower notifies the Lender in writing
(the "Return Option Exercise Notice") of the Borrower's desire to transfer title
to the related Equipment to the Lender in partial satisfaction of the Borrower's
obligation to pay the relevant Final Payment (the "Return Option"), the Borrower
shall receive a credit in an amount equal to the "Return Option Credit" set
forth in such Loan Schedule against such Final Payment by unconditionally and
irrevocably transferring and assigning to the Lender or its designee on such
Final Payment Date all of the Borrower's right, title and interest in and to the
related Equipment; provided, however, that the Borrower pays the entire
remaining "Return Option Balance Amount" set forth in such Loan Schedule to the
Lender on the relevant Final Payment Date. If a Return Option Exercise Notice is
duly given as provided above, the relevant Return Option shall be exercised by
the Borrower delivering each of the following to the Lender, at the Borrower's
sole cost and expense, on or before the relevant Final Payment Date: (i) a duly
executed bill of sale in favor of the Lender with respect to all of the
Equipment covered by the relevant Loan Schedule, in form and substance
satisfactory to the Lender and its counsel; (ii) payment in full of the relevant
Return Option Balance Amount; and (iii) the relevant Equipment, at a location
within the continental Untied States designated by the Lender, in the same
operating order, repair, condition and appearance as on the date hereof,
reasonable wear and tear only excepted, and with all engineering and safety
changes prescribed by the manufacturer or approved maintenance organization to
accept such Equipment under contract maintenance at its then standard rates. The
Borrower shall promptly pay any and all costs of repair, replacement,
deinstallation, packing, shipping and delivery of the relevant Equipment to the
Lender upon the Borrower's exercise of such Return Option. If the Borrower duly
satisfies all of the terms and conditions of this Section 2(c), the Borrower
shall have fully satisfied all of its obligations under the related Loan
Schedule.
(d) Notwithstanding anything to the contrary set forth in Section 2(a)
hereof, if the Borrower believes that the "Fair Market Value" (as hereinafter
defined) of the Equipment covered by a Loan Schedule as of the relevant Final
Payment Date will be less than the amount of the Final Payment under such Loan
Schedule, the Borrower may notify the Lender in writing at least 120
<PAGE> 3
days prior to such Final Payment Date of the Borrower's election to have the
amount of such Final Payment adjusted (the "Final Payment Adjustment Option
Notice") to an amount equal to the greater of (i) Fair Market Value of the
relevant Equipment as of such Final Payment Date, or (ii) the "Adjusted Final
Payment" set forth in the such Loan Schedule. If such Final Payment Adjustment
Option Notice is so given, and so long as no Default or Event of Default has
occurred and is continuing as of (A) the date such Final Payment Adjustment
Option Notice is given, or (B) the relevant Final Payment Date, then unless the
amount of such Adjusted Final Payment is greater than the amount of such Final
Payment, such Final Payment shall automatically be deemed changed to such
Adjusted Final Payment and the Borrower irrevocably and unconditionally agrees
to pay such Adjusted Final Payment on the relevant Final Payment Date in lieu of
such Final Payment. "Fair Market Value" of any Equipment shall mean the amount
as of the relevant Final Payment Date that would obtain for such Equipment in a
retail arms'-length transaction between an informed and willing buyer in
possession under no compulsion to buy and an informed and willing seller under
no compulsion to sell. The Lender shall initially determine the Fair Market
Value of any Equipment by notifying the Borrower thereof in writing at least 75
days prior to the relevant Final Payment Date. If the Borrower does not accept
such determination of Fair Market Value by the Lender, the Borrower shall notify
the Lender of such non-acceptance in writing not less than 60 days prior to such
Final Payment Date. If the Borrower does not so notify the Lender of its
non-acceptance of the Lender's determination within such period, then the Fair
Market Value of such Equipment as initially determined by the Lender shall be
conclusive. If the Borrower does so notify the Lender of such non-acceptance
within such period, then the Fair Market Value of such Equipment shall
conclusively be established not less than 30 days prior to the relevant Final
Payment Date by an independent appraiser selected by the Lender and reasonably
acceptable to the Borrower. All costs for such appraiser shall be paid by the
Borrower within 10 days after its receipt of an invoice therefor.
(e) The installments described in Sections 2(a) and 2(b) hereof include
interest on the unpaid principal amount of the relevant Loan from time to time
outstanding, computed on the basis of a 360-day year at the "Annual Interest
Rate" set forth in the relevant Loan Schedule.
(f) The proceeds of the Loan evidenced by each Loan Schedule shall be
used solely to purchase (or refinance the purchase of) the Equipment described
in such Loan Schedule.
(g) The Borrower shall not have the right to prepay any Loan, in whole
or in part, at any time, except as set forth in the applicable Loan Schedule.
(h) Whenever any installment or other amount payable to the Lender by
the Borrower hereunder is not paid when due, the Borrower agrees to pay to the
Lender, on demand, as liquidated damages and not as a penalty: (i) a late charge
on such overdue amounts calculated at the interest rate stated in the relevant
Loan Schedule, or the maximum amount permitted under applicable law, whichever
is less, from the date such payment is due until the date such payment is made
in full to the Lender; and (ii) in addition, with respect to overdue installment
payments only, an administrative fee equal to five cents ($.05) for each one
dollar ($1.00) of such delayed installment payment overdue for more than twenty
(20) days, or the maximum amount permitted under applicable law, whichever is
less. The Borrower agrees to also reimburse the Lender on demand for any and all
costs and expenses (including the Lender's attorneys' fees and disbursements)
arising out of or caused by this Agreement or any breach by the Borrower
hereunder, including (without limitation) any enforcement by the Lender of its
rights and remedies hereunder.
<PAGE> 4
(i) All payments by the Borrower on account of principal, interest or
fees hereunder shall be made in lawful money of the United States of America, in
immediately available funds.
3. GRANT OF SECURITY INTEREST. The Borrower hereby pledges, assigns and
grants to the Lender a continuing first priority security interest in and lien
on the following properties, assets and rights (collectively, the "Collateral"):
(a) the Equipment as set forth (and defined) in each Loan Schedule hereunder,
together with all warranties thereon and all additions, improvements,
accessions, replacements and substitutions thereto and therefor, whether now
owned or hereafter acquired, and all proceeds and products thereof; (b) the
proceeds of any insurance payable to the Borrower with respect to the Equipment;
and (c) Subject only to the lien or security interest of Silicon Valley Bank,
Borrower also pledges, assigns and grants to the Lender a security interest and
lien on all of the "Other Personal Property," described in Exhibit A hereto and
all proceeds and products thereof (it being specifically understood that the
Other Personal Property shall secure the obligations arising under each and
every Loan Schedule). In addition, all other property of the Borrower now or
hereafter pledged to or held by the Lender to secure any Obligations (as
hereinafter defined), whether under this Agreement, any Loan Schedule or
otherwise, and all property now or hereafter leased by the Lender to the
Borrower, shall also serve as collateral security for the full payment and
performance of the Obligations.
4. OBLIGATIONS SECURED. The Collateral hereunder constitutes and will
constitute continuing security for the full payment, performance and observance
by the Borrower of the following obligations (collectively, the "Obligations"):
(a) "Liabilities," which shall mean all of the indebtedness evidenced
by this Agreement and each Loan Schedule hereunder, together with all other
indebtedness, liabilities and obligations of any kind of the Borrower (or any
partnership or other group of which the Borrower is a member) to the Lender,
whether (i) for the Lender's own account, (ii) acquired directly or indirectly
by the Lender from the Borrower or others, (iii) absolute or contingent, joint
or several, secured or unsecured, liquidated or unliquidated, due or not due,
contractual or tortious, now existing or hereafter arising, or (iv) incurred by
the Borrower as principal, surety, endorser, guarantor, borrower, lessee or
otherwise, and including (without limitation) all expenses and attorneys' fees
incurred by the Lender in connection with any such indebtedness, liabilities or
obligations or any of the Collateral (including any sale or other disposition of
the Collateral);
(b) the prompt payment, when due, of all present and future obligations
and indebtedness of the Borrower to the Lender under this Agreement and/or any
Loan Schedule, as the same may hereafter be amended or modified, and under any
other agreement or instrument executed by the Borrower in favor of the Lender,
whether direct or indirect, absolute or contingent; and
(c) the strict performance and observance by the Borrower of all
warranties, covenants and agreements contained in this Agreement or any Loan
Schedule and any instrument or other agreement delivered by the Borrower to the
Lender.
5. BORROWER SELECTED EQUIPMENT; WARRANTY DISCLAIMER. THE BORROWER
REPRESENTS AND ACKNOWLEDGES THAT IT HAS SELECTED BOTH THE EQUIPMENT AND THE
VENDOR OF THE EQUIPMENT (THE "VENDOR") AND THAT THE EQUIPMENT SUITS THE
BORROWER'S PARTICULAR NEEDS. THE LENDER MAKES NO REPRESENTATIONS OR WARRANTIES
OF ANY KIND OR NATURE DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, AS TO THE
<PAGE> 5
EQUIPMENT OR ANY OTHER MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION, TITLE TO
THE EQUIPMENT OR THE EQUIPMENT'S CONDITION, THE SUITABILITY OF THE EQUIPMENT,
ITS DURABILITY, CAPACITY, OPERATION, PERFORMANCE, DESIGN, MATERIALS, WORKMANSHIP
AND/OR QUALITY, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. THE
BORROWER AGREES TO LOOK SOLELY TO THE MANUFACTURER, VENDOR OR CARRIER OF THE
EQUIPMENT FOR ANY CLAIM ARISING FROM ANY DEFECT, BREACH OF WARRANTY, FAILURE OR
DELAY IN DELIVERY, MISDELIVERY OR INABILITY TO USE THE EQUIPMENT FOR ANY REASON
WHATSOEVER, AND THE BORROWER'S OBLIGATIONS TO THE LENDER HEREUNDER SHALL NOT IN
ANY MANNER BE AFFECTED THEREBY. THE LENDER SHALL NOT BE LIABLE FOR ANY LOSS,
DAMAGE, INJURY OR EXPENSE CAUSED DIRECTLY OR INDIRECTLY BY ANY ITEM OF
EQUIPMENT, THE USE, MAINTENANCE, REPAIR, DEFECT OR SERVICING THEREOF, BY ANY
DELAY OR FAILURE TO PROVIDE SAME, BY ANY INTERRUPTION OF SERVICE OR LOSS OF
SERVICE OR LOSS OF USE, OR FAILURE TO PROVIDE SAME, OR FOR ANY LOSS OF BUSINESS
HOWEVER CAUSED. NO REPRESENTATION OR WARRANTY AS TO THE EQUIPMENT OR ANY OTHER
MATTER BY THE VENDOR OF THE EQUIPMENT SHALL BE BINDING ON THE LENDER, NOR SHALL
THE BREACH OF SUCH RELIEVE THE BORROWER OF, OR IN ANY WAY AFFECT, ANY OF THE
BORROWER'S OBLIGATIONS TO THE LENDER AS SET FORTH HEREIN.
6. REPRESENTATIONS AND WARRANTIES. The Borrower represents, warrants,
covenants and agrees that:
(a) If the Borrower is a corporation or a partnership, it is duly
organized, existing and in good standing under the laws of its state of
incorporation, is duly qualified and in good standing under the laws of each
jurisdiction where the character of its properties or the transaction of its
business makes such qualification necessary, and has full power to own its
properties and assets and to carry on its business as now being conducted.
(b) The Borrower has full power and authority to execute, deliver and
perform this Agreement and each Loan Schedule, which has been duly authorized by
all necessary and proper corporate or partnership action. No consent of
stockholders, if any, or of any public authority is required as a condition to
the validity of this Agreement and each Loan Schedule. The making and
performance by the Borrower of this Agreement and each Loan Schedule will not
violate any provision of law and will not conflict with or result in a breach of
any order, writ, injunction or decree of any court or government
instrumentality, or its charter or by-laws or partnership agreement, if any, or
create a default under any agreement, note or indenture to which it is a party
or by which it is bound or to which any of its property is subject, or result in
the imposition of any lien, charge or encumbrance of any nature whatsoever upon
any of its properties or assets, except for the liens created under this
Agreement or any Loan Schedule.
(c) This Agreement and each Loan Schedule have been duly executed and
delivered, and constitutes the valid and legally binding obligation of the
Borrower, enforceable in accordance with its terms.
(d) The Borrower has good title to and is the lawful owner of the
Collateral free from all claims, liens, encumbrances, charges or security
interests whatsoever, except for the liens granted by this Agreement or any Loan
Schedule, and the lien or security interest of Silicon Valley
<PAGE> 6
Bank the Collateral is and will be kept at the location(s) set forth in the
relevant Loan Schedule hereto.
(e) The provisions of this Agreement and each Loan Schedule create a
valid and perfected first priority security interest in the Collateral,
enforceable in accordance with their respective terms, subject to no prior or
equal lien, charge, encumbrance or security interest, except for the lien or
security interest of Silicon Valley Bank upon the filing of appropriate Uniform
Commercial Code financing statements or equivalent instruments, and notation and
issuance of appropriate certificates of title, with respect to the Collateral.
Appropriate Uniform Commercial Code financing statements or equivalent
instruments and certificates of title with the Lender's security interest duly
noted thereon, with respect to the Collateral, have been executed by the
Borrower and delivered to the Lender for filing at the appropriate offices.
(f) There are no judgments outstanding against the Borrower and there
are no actions or proceedings before any court or administrative agency pending
or, to the knowledge of the Borrower, threatened against the Borrower which, if
determined adversely to the Borrower, would affect the Collateral.
(g) The Borrower's principal office and place of business where it
maintains its records concerning the Collateral is at its address stated on the
relevant Loan Schedule. The Borrower has no other office or place of business,
except as indicated on the relevant Loan Schedule.
(h) Borrower represents and warrants that it will not grant a security
interest in Borrower's intellectual property (as described in Exhibit A hereto)
so long as any amounts remain unpaid under this Agreement and any Loan Schedule.
7. INSURANCE. The Borrower shall keep and maintain the Equipment and
other Collateral insured against all risks of loss or damage from every cause
whatsoever, for not less than the replacement cost thereof or, if greater, the
maximum insurable value thereof. The Borrower shall also provide, for the
benefit of the Lender, public liability insurance (both personal injury and
property damage) covering the Equipment and other Collateral. The amount of any
such insurance shall be sufficient so that neither the Borrower nor the Lender
will be considered a co-insurer. Such insurance shall be in form, issued by
insurance companies and in amounts satisfactory to the Lender. Each insurer
shall agree, by endorsement upon the policy or policies issued by it or by
independent instrument furnished to the Lender, that it will give at least ten
(10) days' prior written notice of the effective date of any alteration or
cancellation of such policy and that coverage under such policy shall not be
affected by any default, misrepresentation or other breach by the Borrower or
the Lender under this Agreement or any Loan Schedule or such policy. The Lender
shall have the option but not the obligation, to pay the premiums to continue
any such canceled insurance policy in effect or to obtain like coverage. The
Borrower agrees that any payment made by the Lender pursuant to the foregoing
authorization (and interest thereon at the rate stated in the relevant Loan
Schedule from the date of such payment) shall become part of the Obligations and
be secured by the Collateral. The proceeds of all insurance payable as a result
of loss or damage to any item of the Equipment shall be applied to satisfy the
Obligations. The Borrower hereby irrevocably appoints the Lender as the
Borrower's attorney-in-fact to make claim for, receive payments of and execute
and endorse all documents, checks or drafts received in payment for loss or
damage under any such insurance policy. In all events, the Borrower shall be
liable for any loss, damage, expense or costs suffered or incurred by the Lender
relating to or in any manner pertaining to this Agreement or any Loan Schedule,
the Collateral or the use or operation of the Collateral.
<PAGE> 7
8. MAINTENANCE; LOSS OF COLLATERAL. The Borrower acknowledges that, in
making its decision to extend the credit evidenced by this Agreement and each
Loan Schedule to the Borrower, the Lender is depending heavily upon the
realizable value of the Collateral at all times during the term of this
Agreement and each Loan Schedule, and the Borrower hereby represents and
warrants to the Lender that the purchase price paid by the Borrower for the
Collateral represents the retail fair market value thereof. Accordingly, the
Borrower agrees at all times to maintain the Collateral in good operating
condition, repair and appearance, and protect the same from deterioration, other
than normal wear and tear, keep the Collateral in its exclusive possession and
control at the location specified in the relevant Loan Schedule and use the
Collateral only in the regular course of its business within its normal
capacity, without abuse and in a manner contemplated by the Vendor, shall comply
with all laws, ordinances, regulations, requirements and rules with respect to
the use, maintenance and operation of the Collateral, shall not make any
modification, alteration or addition to the Collateral (other than normal
operating accessories or controls which, when added to the Collateral, shall not
impair the operation or reduce the value of the Collateral) without the prior
written consent of the Lender, and all modifications, alterations, accessories,
parts, replacements and additions to the Collateral shall become part of the
Collateral and be included within the term "Collateral" as used herein. For the
purpose of assuring the Lender that the Collateral will be properly serviced,
the Borrower agrees, in the event that the Lender so requests, to cause the
Collateral to be maintained by the Vendor (or another maintenance organization
approved by the Lender in writing) pursuant to Vendor's standard preventive
maintenance contract or comparable maintenance contract, in each case covering
at least prime shift maintenance of each item of Collateral. The Borrower hereby
assumes the entire risk of loss, damage or destruction of the Collateral from
any and every cause whatsoever. The Borrower agrees that any such loss, damage
or destruction of the Collateral shall not relieve the Borrower of its
obligations hereunder, which obligations shall remain absolute, unconditional
and not subject to any claim, defense, set-off, counterclaim, reduction or
abatement of any kind whatsoever. In the event of any loss, damage or
destruction of any item of Collateral, the Borrower shall give the Lender
immediate written notice thereof and shall, at the Borrower's sole expense
(except to the extent of any proceeds of insurance maintained by the Borrower
which shall have been received by the Borrower as a result of such loss, damage
or destruction) and at the Lender's sole option, either (a) repair such item,
returning it to its previous condition, unless damaged beyond repair, or (b)
replace such item with a like item acceptable to the Lender, in good condition
and of equivalent value, which shall be included within the term "Collateral" as
used herein.
9. BOOKS AND RECORDS. The Borrower shall give the Lender full and free
access to the Collateral and to all books, correspondence and records of the
Borrower with respect thereto, permit the Lender and its representatives to
examine the same and to make copies and extracts therefrom, all at the
Borrower's expense.
10. TAXES AND ENCUMBRANCES. The Borrower shall promptly pay and
discharge or cause to be paid and discharged all its obligations and
liabilities, including (without limitation) all taxes, assessments and
governmental charges upon it and its income or properties, when due unless and
to the extent only that the same shall be contested in good faith and by
appropriate proceedings and then only to the extent that a bond is filed in
cases where the filing of a bond is necessary to avoid the creation of a lien
against any of the Collateral or any of its other assets. The Borrower covenants
and agrees to keep the Collateral free and clear of all levies, liens, claims,
security interests and encumbrances (including, without limitation, any lease or
sublease thereof) and to promptly pay all charges, taxes and fees which may now
or hereafter be imposed upon the ownership, sale, purchase, possession or use of
the Collateral, except those in favor of the Lender.
<PAGE> 8
In addition, the Borrower shall timely file all tax returns required in
connection with the use, operation or possession of the Collateral, and shall
promptly furnish copies thereof to the Lender.
11. CORPORATE EXISTENCE. If the Borrower is a corporation or
partnership, the Borrower shall do, or cause to be done, all things necessary to
preserve and keep in full force and effect its corporate or partnership
existence and all franchises, rights and privileges necessary for the proper
conduct of its business, and continue to engage in the business of the same type
as now conducted by it.
12. NOTICE OF EVENTS OF DEFAULT. The Borrower shall give notice in
writing promptly to the Lender of the occurrence of any event which constitutes,
or which with notice or lapse of time or both would constitute, an Event of
Default (as hereinafter defined).
13. DELIVERY OF FINANCIAL DATA. The Borrower warrants that all credit
applications, statements, financial reports and other information submitted by
it to the Lender are material inducements to the execution by the Lender of this
Agreement and each Loan Schedule and the financing provided hereunder. The
Borrower warrants that all such credit applications, statements, reports and
other information are and all information hereafter furnished by the Borrower to
the Lender will be, true and correct in all material respects as of the date
submitted, that no such credit application, statement, report or other
information contains any untrue or misleading information or omits any material
fact necessary to make such application, statement, report or other information
not misleading and that the Borrower is in no way affiliated with any Vendor of
any of the Equipment. The Borrower agrees to obtain for the Lender such estoppel
certificates, landlord's and mortgagee's waivers or other similar documents as
the Lender may reasonably request. The Borrower agrees to deliver to the Lender:
(a) within 120 days after the end of each fiscal year, financial statements for
such fiscal year prepared by its certified public accountant ("CPA") in
accordance with generally accepted accounting principles ("GAAP"), (b) within 45
days after the end of each fiscal quarter, financial statements for such fiscal
quarter prepared by its CPA in accordance with GAAP, and (c) at any time and
from time to time, within 15 days after the Borrower's request, federal tax
returns and other information regarding the Borrower and/or any Obligors (as
hereinafter defined).
14. PRINCIPAL OFFICE. The Borrower shall not change its principal office
or the place where it maintains its records pertaining to the Collateral, as
specified in Sections 6(d) and 6(g) hereof, without giving the Lender at least
thirty (30) days' prior written notice thereof.
15. LOCATION OF COLLATERAL; INSPECTION; LABELS. The Borrower shall not
remove or permit the removal of the Collateral from its present location as set
forth on the relevant Loan Schedule, without the prior written consent of the
Lender. The Lender and its representatives shall have the right to enter the
Borrower's premises from time to time during business hours to inspect, observe
or remove the Collateral and to confirm its existence, condition and proper
maintenance or otherwise protect the Lender's interest therein. The Borrower
shall comply with all laws, ordinances, regulations or requirements of any
governmental authority, official, board or department relating to the
Collateral's installation, possession, use or maintenance. The Collateral shall
remain personal property regardless of its affixation to any realty. Upon the
Lender's request, the Borrower shall affix and keep in a prominent place on each
item of Collateral labels, plates or other markings indicating the Lender's
security interest in the Collateral.
16. OPTION TO PERFORM OBLIGATIONS OF THE BORROWER IN RESPECT OF THE
COLLATERAL. If the Borrower fails or refuses to make any payment, perform any
covenant or obligation, or take any
<PAGE> 9
other action which the Borrower is obligated hereunder to perform, observe, take
or do hereunder, then the Lender may, at its option, without notice or demand
upon the Borrower and without releasing the Borrower from any obligation or
covenant hereof, perform, observe, take or do the same in such manner and to
such extent as the Lender may deem necessary or appropriate to protect any of
the Collateral and its rights hereunder, including (without limitation)
obtaining insurance and the payment of any taxes and the payment of any sums
necessary to discharge liens or security interests at any time levied or placed
on the Collateral. The Borrower agrees that any payment or expense incurred by
the Lender pursuant to the foregoing authorization (and interest thereon at the
rate stated in the relevant Loan Schedule from the date of incurring of any such
expense) shall become part of the Obligations and be secured by the Collateral
set forth in this Agreement and each Loan Schedule.
17. EVENTS OF DEFAULT; REMEDIES. (a) If any one of the following events
(each, an "Event of Default") shall occur, then to the extent permitted by
applicable law, the Lender shall have the right to exercise any one or more of
the remedies set forth in Section 17(b) hereof: (i) the Borrower fails to make
any payment when due hereunder or any Obligor fails to pay when due any of the
Obligations; or (ii) an Obligor fails to observe or perform (A) any other
agreement or obligation to be observed or performed hereunder or under any Loan
Schedule or other agreement, document or instrument delivered to the Lender by
or on behalf of an Obligor or otherwise relating to any of the Obligations
(collectively, the "Other Documents"), or (B) any other obligation of an Obligor
to the Lender; or (iii) any representation or warranty made by or on behalf of
any Obligor in this Agreement or any Loan Schedule or in any of the Other
Documents shall at any time prove to have been incorrect or untrue in any
material respect when made; or (iv) an Obligor makes any material
misrepresentation to the Lender or fails to disclose to the Lender any material
fact in connection with this Agreement or any Loan Schedule or otherwise, either
contemporaneously herewith or at any time prior or subsequent to the execution
hereof; or (v) an Obligor breaches any warranty or agreement contained herein or
in any of the Other Documents, including, without limitation, the Borrower's
failure to obtain or maintain any insurance required by the Lender hereunder; or
(vi) a default occurs in the payment of any indebtedness owed to any individual
or entity other than the Lender, or a default occurs in the performance or
observance of the terms of any agreement, document or instrument pursuant to
which such indebtedness was created, secured or guaranteed, the effect of which
default is to cause or permit the holder of any such indebtedness in an amount
exceeding $100,000 to cause the same to be due prior to its stated maturity
(whether or not such default is waived by the holder thereof); or (vii) an
Obligor fails to pay, withhold, collect or remit when asserted or due any tax,
assessment or other sum payable with respect to the Collateral or any security
for any of the Obligations (including, without limitation, any premium on any
insurance policy with respect to any of the Collateral or any security for any
of the Obligations, or any insurance policy assigned to the Lender as security
for any of the Obligations), or the making of any tax assessment against any
Obligor by the United States or any state or local government; or (viii) a final
judgment is entered against an Obligor and not timely appealed or any
attachment, levy or execution is made against any property of an Obligor and not
stayed, or any part of any property of an Obligor is condemned or seized by any
governmental authority or court at the instance of such governmental authority;
or (ix) the death of an Obligor, if an individual, or the death of any
individual member of an Obligor, if a partnership or joint venture; or (x) a
change in the control, management, ownership or operations of an Obligor, or a
suspension of the usual business of an Obligor, or the dissolution, liquidation
or other termination of existence of an Obligor, or the adoption of any
resolution for the dissolution, liquidation or other termination of existence of
an Obligor; or (xi) an Obligor fails (or an Obligor admits in writing its
inability) to generally pay its debts as they become due or the insolvency or
business failure of an Obligor; or (xii) the filing of an application for
appointment of a trustee, custodian or receiver for an Obligor or
<PAGE> 10
of any part of an Obligor's property, or an assignment for the benefit of
creditors by an Obligor, or the making or sending of notice of any intended bulk
transfer by an Obligor; or (xiii) the filing of a petition in bankruptcy by or
against an Obligor, or the commencement by or against an Obligor of any
proceeding under any bankruptcy or insolvency law or statute, or any law or
statute relating to the relief of debtors or arrangement of debt, readjustment
of indebtedness, reorganization, receivership or composition, or the extension
of indebtedness; or (xiv) a change in the condition or affairs (financial or
otherwise) of an Obligor or any other event or circumstance occurs that (A)
materially increases the Lender's risk with respect to this Agreement or any
Loan Schedule, the Collateral or any of the Obligations or any security
therefor, or (B) materially impairs the prospects of full and prompt payment or
performance by an Obligor of any of its Obligations; or (xvi) the Borrower
shall, at any time without the prior written consent of the Lender, enter into
an agreement to change the location of the Collateral or permit any change in
such location of the Collateral, as specified in Section 6(d) hereof. For
purposes of this Agreement, the term "Obligor" shall mean the Borrower and any
guarantor, pledgor or hypothecator with respect to any of the Obligations, and
any other party liable for any of the Obligations of the Borrower in addition to
the Borrower.
(b) Upon the occurrence of an Event of Default, at the Lender's sole
option, all or any part of the entire unpaid total amount of the Obligations
then owed to the Lender for the balance of the term thereof shall be at once due
and payable and the Lender may, without demand or legal process, enter upon the
premises where any or all of the Collateral securing such Obligations is
located, take possession of and remove same, and exercise any one or more of the
following rights and remedies, without liability to the Borrower therefor and
without affecting the Borrower's obligations hereunder: (i) sell, lease or
otherwise dispose of any or all of such Collateral or any part thereof at one or
more public or private sales, leases or other dispositions, at wholesale or
retail, for such consideration, on such terms, for cash or on credit, as the
Lender may deem advisable, and the Lender may immediately, without demand of
performance and without intention of notice to sell or of the time or place of
sale or of redemption or of advertisement or other notice or demand whatsoever
to the Borrower, all of which are hereby expressly waived (if notice of any sale
or other disposition is required by law to be given, the Borrower hereby agrees
that a notice sent at least five (5) days before the time of any intended public
sale or of the time after which any private sale or other disposition of such
Collateral is to be made, shall be reasonable notice of such sale or other
disposition); or (ii) retain such Collateral or any part thereof, crediting the
Borrower with the reasonable fair market or rental value thereof for the balance
of the term of the related Loan Schedule; and/or (iii) require the Borrower to
assemble such Collateral at the Borrower's sole expense, for the Lender's
benefit, at a place designated by the Lender; and/or (iv) pursue any other
remedy granted by any existing or future document executed by the Borrower or by
law, including, without limitation, the rights and remedies of a secured party
under the Uniform Commercial Code as enacted in any jurisdiction in which any of
such Collateral may be located. At any public sale, the Lender may be the
purchaser of all or any part of such Collateral, free from any right of
redemption on the part of the Borrower, which right is hereby waived and
released. The Borrower agrees to pay all of the Lender's expenses, including but
not limited to the costs of repossessing, storing, repairing and preparing such
Collateral for sale or lease, any commissions payable in connection with any
such sale or lease, and reasonable attorney's fees and disbursements, if an
attorney shall be consulted. The net proceeds realized from any such sale, lease
or other disposition or the exercise of any other remedy, after deducting
therefrom all related expenses, shall be applied toward payment of the unpaid
Obligations due and to become due to the Lender hereunder, the Borrower to
remain personally liable for any deficiency. The Lender's recovery shall in no
event exceed the maximum amount permitted by law. If any of such Collateral is
leased by the Lender to a third party, the present value of such lease
receivable discounted at an interest rate of 12% per annum shall be credited to
the Borrower's liability to the Lender after deducting all expenses
<PAGE> 11
associated with the lease of such Collateral and the Borrower shall remain
liable for any deficiency thereof. It is understood that facility of
repossession in an Event of Default is a basis for the financial accommodation
reflected by this Agreement and each Loan Schedule. Any late charges payable to
the Lender under Section 2(h) hereof shall be payable in addition to all amounts
payable by the Lender as a result of exercise of any of the remedies herein
provided. The Borrower agrees to also reimburse the Lender for any expenses
(including the Lender's attorneys' fees and expenses) arising out of or caused
by this Agreement or any Loan Schedule. Notwithstanding anything to the contrary
contained herein, if any one or more Loan Schedules are assigned by the Lender
to one or more assignees, the Collateral securing the Obligations under each
Loan Schedule shall be limited to the Collateral securing the Obligations under
each Loan Schedule then held by the Lender or such assignee, as the case may be.
18. POWER OF ATTORNEY. The Borrower authorizes the Lender and does
hereby make, constitute and appoint the Lender and any officer, employee or
agent of the Lender with full power of substitution, as the Borrower's true and
lawful attorney-in-fact with power, in its own name or in the name of the
Borrower: (a) upon the occurrence of an Event of Default, (i) to endorse any
notes, checks, drafts, money orders, or other instruments of payment (including
payments under or in respect of any policy of insurance) in respect of the
Collateral that may come into possession of the Lender, (ii) to sign and endorse
any documents relating to the Collateral, (iii) to pay or discharge taxes,
liens, security interests or other encumbrances at any time levied or placed on
or threatened against the Collateral, and/or (iv) to grant, collect, receipt
for, compromise, settle and sue for monies due in respect of the Collateral; and
(b) at any time, or from time to time, (i) generally to do, at the Lender's
option, all acts and things that the Lender reasonably deems necessary or
desirable to protect, preserve and realize upon the Collateral and the Lender's
security interests therein, or (ii) in order to otherwise effectuate the intents
of this Agreement and each Loan Schedule, in each case as fully and effectually
as the Borrower might or could itself do; and the Borrower hereby ratifies all
that such attorney-in-fact shall lawfully do or cause to be done by virtue
hereof. THIS POWER OF ATTORNEY IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE FOR AS LONG AS ANY OF THE OBLIGATIONS SHALL BE OUTSTANDING. The
Borrower agrees that any expense incurred by the Lender pursuant to the
foregoing authorization, and interest thereon at the highest rate permitted by
law from the date of incurring any such expense, shall become part of the
Obligations and be secured by the Collateral.
19. ASSIGNMENT, ETC. The Borrower shall not assign, pledge, mortgage,
lease, transfer, encumber or otherwise dispose of any of its rights in the
Collateral or any part thereof, nor permit its use by anyone other than its
regular employees, without the Lender's prior written consent. Any such
purported transfer, assignment or other action without the Lender's prior
written consent shall be void. The Lender may, without notice to or consent by
the Borrower, transfer or assign this Agreement and each Loan Schedule or any
interest herein and may mortgage, pledge, encumber or transfer any of its rights
or interest in and to the Collateral or any part thereof and, without
limitation, each assignee, transferee, pledgee and mortgagee (which may include
any affiliate of the Lender) shall have the right to further transfer or assign
its interest. Each such assignee, transferee, pledgee and mortgagee shall have
all of the rights (but none of the obligations) of the Lender under this
Agreement and each Loan Schedule. The Borrower hereby acknowledges notice of the
Lender's intended assignment of this Agreement and each Loan Schedule and, upon
such assignment, the Borrower agrees not to assert against any such assignees,
transferees, pledgees and mortgagees any defense, claim, counterclaim,
recoupment or set-off that the Borrower may have against the Lender, whether
arising under this Agreement or any Loan Schedule or otherwise. Any assignee,
transferee, pledgee or mortgagee of the Lender's rights under this Agreement or
any Loan Schedule shall be considered a third party beneficiary of all of the
Borrower's representations,
<PAGE> 12
warranties and obligations hereunder to the Lender. The Borrower agrees (a) in
connection with any such transfer or assignment, to provide such instruments,
documents, acknowledgments and further assurances as the Lender or any assignee,
transferee, mortgagee or pledgee may deem necessary or advisable to effectuate
the intents of this Agreement or any Loan Schedule or any such transfer or
assignment, with respect to such matters as the Agreement, any Loan Schedule,
the Collateral, the Borrower's obligations to such assignee, transferee,
mortgagee or pledgee and such other matters as may be reasonably requested, and
(b) that after receipt by the Borrower of written notice of assignment from the
Lender or from the Lender's assignee, transferee, pledgee or mortgagee, all
principal, interest and other amounts which are then and thereafter become due
under this Agreement or any Loan Schedule shall be paid to such assignee,
transferee, pledgee or mortgagee, at the place of payment designated in such
notice. This Agreement and each Loan Schedule shall be binding upon the Borrower
and its successors and shall inure to the benefit of the Lender and its
successors and assigns.
20. NO WAIVER. No failure on the part of the Lender to exercise, and no
delay in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Lender of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. No course of dealing between the Borrower and the
Lender nor any delay or omission on the part of the Lender shall operate as a
waiver of any rights of the Lender. Each and every right, remedy or power hereby
granted to the Lender or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Lender
from time to time. Waiver of any particular Event of Default shall not be deemed
to be a waiver of any other or subsequent Event of Default.
21. FURTHER ASSURANCES; FILING. The Borrower from time to time, at its
sole expense, will promptly execute and deliver all further instruments,
documents and assurances, and take all further action, that may be necessary or
desirable, or that the Lender may request, and hereby authorizes the Lender to
take all action (including the filing of any financing statements, continuation
statements or amendments thereto without the signature of the Borrower) as the
Lender may deem necessary, proper or desirable in order to perfect and protect
any security interest granted or purported to be granted hereby or to enable the
Lender to exercise and enforce its rights and remedies hereunder with respect to
any of the Collateral. The Borrower hereby authorizes the Lender to file one or
more financing or continuation statements, and amendments thereto, relative 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 Loan Schedule or any financing statement covering the Collateral or any
part thereof shall be sufficient as a financing statement where permitted by
law. The Borrower agrees to pay the Lender the actual fees for such filing,
recording or stamp fees or taxes arising from the filing or recording of any
such instrument or statement.
22. INDEMNITY AND EXPENSES. The Borrower shall and does hereby indemnify
and save the Lender, its directors, officers, employees, agents, attorneys,
servants, successors and assigns, harmless from any and all liabilities
(including, without limitation, negligence, tort and strict liability), damages,
expenses, claims, actions, proceedings, judgments, settlements, losses, liens
and obligations (each, an "Indemnified Claim"), including (without limitation)
attorneys' fees and expenses, arising out of the ordering, purchase, delivery,
rejection, non-delivery, ownership, selection, possession, leasing, renting,
financing, operation (regardless of where, how and by whom operated), control,
use, condition (including but not limited to latent and other defects, whether
or not discoverable by the Borrower), maintenance, delivery, transportation,
storage, repair, furnishing of specifications with respect to, and the return or
other disposition of, the Equipment or any other
<PAGE> 13
Collateral, and any claims of patent, trademark or copyright infringement or, in
the event that the Borrower shall be in default hereunder, arising out of the
condition of any item of Equipment or any other Collateral sold or disposed of
after use by the Borrower, including (without limitation) claims for injury to
or death of persons and for damage to property. The indemnities and obligations
herein provided shall continue in full force and effect notwithstanding the
expiration, termination or cancellation of this Agreement or any Loan Schedule
for any reason whatsoever and irrespective of whether the Borrower ever accepts
the Equipment or any other Collateral. The Borrower shall give the Lender prompt
written notice of any Indemnified Claim and, at the Lender's sole option, shall
defend the Lender against any Indemnified Claim at the Borrower's sole expense
with attorney(s) selected by the Lender. The Borrower is an independent
contractor and nothing contained herein shall authorize the Borrower or any
other person to operate any item of Equipment or any other Collateral so as to
incur any liability or obligation for or on behalf of the Lender. The Borrower
will upon demand pay to the Lender the amount of any and all expenses, including
the fees and disbursements of its counsel and of any experts and agents, which
the Lender may incur in connection with (a) the administration of this Agreement
or any Loan Schedule, (b) the custody, preservation, use or operation of, or the
sale of, collection from, or other realization upon, any of the Collateral, (c)
the exercise, enforcement or protection of any of the rights of the Lender
hereunder, or (d) the failure by the Borrower to perform or observe any of the
provisions hereof. The foregoing amounts shall become part of the Obligations
and secured by the Collateral as set forth in this Agreement or any Loan
Schedule and the Lender may at any time apply to the payment of all such costs
and expenses all proceeds arising from the possession or disposition of all or
any portion of the Collateral.
23. MODIFICATIONS, ETC. Neither this Agreement nor any Loan Schedule,
nor any provision hereof or thereof, may be changed, waived, discharged, or
terminated orally, but only by an instrument in writing signed by a duly
authorized representative of the party against whom enforcement of the change,
waiver, discharge or termination is sought.
24. TERMINATION. Upon the non-defeasible payment in full of all
Obligations, the Lender shall execute and deliver to the Borrower all such
documents and instruments as shall be necessary to evidence termination of this
Agreement or any Loan Schedule and the security interests created hereunder.
25. ENTIRE AGREEMENT: PARTIAL INVALIDITY. This Agreement and each Loan
Schedule constitutes the entire agreement of the Lender and the Borrower with
respect to the transactions covered hereby, and supersedes any and all prior
agreements, understandings and negotiations with respect thereto. If any
provision of this Agreement or any Loan Schedule is held to be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate this
Agreement or any Loan Schedule as a whole, but this Agreement or such Loan
Schedule shall be construed as though it did not contain the particular
provision or provisions held to be invalid or unenforceable and the rights and
obligations of the parties shall be construed and enforced to such extent as
shall be permitted by law.
26. MISCELLANEOUS. (a) Any notice or other communication to a party
hereunder shall be sufficiently given if in writing and personally delivered or
mailed to said party by certified mail, return receipt requested, at its address
set forth herein or such other address as either may designate for itself in
such a notice to the other and such notice shall be deemed to have been given
when received if personally delivered or served by overnight delivery or three
(3) days after being sent by mail. Whenever the sense of this Agreement or any
Loan Schedule requires, words in the singular shall be deemed to include the
<PAGE> 14
plural and words in the plural shall be deemed to include the singular. If more
than one Borrower is named herein, the liability of each shall be joint and
several. The headings set forth in this Agreement or any Loan Schedule are for
convenience of reference only, and shall not be given substantive effect.
(b) To the extent that any Loan Schedule evidencing a Loan hereunder
would constitute "chattel paper," as such term is defined under the New York
Uniform Commercial Code, a security interest therein may be created only through
the transfer or possession of the original of Counterpart No. 1 of such Loan
Schedule executed pursuant to this Agreement. Transfer or possession of an
original counterpart of this Agreement shall not be necessary to perfect such
security interest and no security interest in any such Loan Schedule may be
created by the transfer or possession of any other counterpart of such Loan
Schedule or by the transfer or possession of any counterpart of this Agreement.
27. CHOICE OF LAW AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT AND
EACH LOAN SCHEDULE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF
CONNECTICUT, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW.
THE BORROWER HEREBY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING DIRECTLY OR
INDIRECTLY FROM OR IN CONNECTION WITH THIS AGREEMENT OR ANY LOAN SCHEDULE OR ANY
OF THE COLLATERAL SHALL, AT THE LENDER'S SOLE OPTION, BE LITIGATED ONLY IN THE
CONNECTICUT STATE COURTS OR THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
CONNECTICUT SITTING IN FAIRFIELD COUNTY, CONNECTICUT. The Borrower consents to
the jurisdiction and venue of the foregoing courts and consents that any process
or notice of motion or other application to either of such courts or a judge
thereof may be served inside or outside the State of Connecticut or the District
of Connecticut by registered mail, return receipt requested, directed to the
Borrower at its address set forth in this Agreement or any Loan Schedule (and
service so made shall be deemed complete five (5) days after the same has been
posted as aforesaid) or by personal service, or in such other manner as may be
permissible under the rules of said courts. THE LENDER AND THE BORROWER EACH
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY COURT WITH RESPECT TO, IN CONNECTION
WITH, OR ARISING OUT OF THIS AGREEMENT OR ANY LOAN SCHEDULE, OR THE VALIDITY,
PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF, OR ANY OTHER
CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE BORROWER AND THE LENDER. The
Borrower hereby waives the right to interpose any set-off or counterclaim or
cross-claim in any such litigation; provided, however, that nothing in this
Section 27 shall prevent the Borrower from asserting, in a separate and
independent proceeding, any claim it may have against the Lender.
IN WITNESS WHEREOF, the parties hereby have caused these presents to be
duly executed by their authorized representatives on the date first above
written.
NEOTHERAPEUTICS, INC. LEASING TECHNOLOGIES
INTERNATIONAL, INC.
BY: /S/ ALVIN J. GLASKY BY: /S/ ARNOLD J. HOEGLER
-------------------------------- ---------------------------
PRESIDENT (TITLE) EXECUTIVE VICE PRESIDENT
(TITLE)
ATTEST: /S/ SAMUEL GULKO
--------------------------------
CHIEF FINANCIAL OFFICER, (TITLE)
SECRETARY AND TREASURER
<PAGE> 15
EXHIBIT A TO
MASTER NOTE AND SECURITY AGREEMENT
DATED JULY 10,1998 (THE "AGREEMENT")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. (THE "LENDER")
AND NEOTHERAPEUTICS, INC. (THE "BORROWER")
OTHER PERSONAL PROPERTY
-----------------------
All of the assets of the Borrower, wherever located and whether now owned or
hereafter acquired or arising, and all proceeds therefrom, including but not
limited to:
(i) all of the Borrower's inventory, goods, wares, merchandise, raw
materials, software, supplies, work in process, finished goods, and other
personal property of every kind and description held for sale or lease or
furnished or to be furnished under any contract of service, and all goods which
are in transit, and all returned, repossessed and rejected goods of the
foregoing description, and any other tangible personal property held by the
Borrower for licensing, processing, sale or other business purpose or to be
used, licensed or consumed in the Borrower's business;
(ii) all machinery, equipment, motor vehicles, furniture, office
equipment and supplies, plant equipment, tools, dies, molds, fixtures and
leasehold improvements of Borrower, of every kind and description, wherever
located and including all additions, improvements, accessions and substitutions
thereto;
(iii) accounts receivable now owned or hereafter acquired and all
proceeds thereof. "Accounts Receivable" means all accounts receivable of
Borrower, including but not limited to (a) all notes, drafts, acceptances and
other instruments representing or evidencing a right to payment for goods sold
or leased, or services rendered, whether or not earned by performance; (b) all
general intangibles of Borrower that constitute debts, obligations or
liabilities owed to Borrower arising out of or in connection with such accounts
receivable; (c) all of Borrower's chattel paper of every kind and description
from account debtors including all additions thereto and substitutions therefor;
(d) all files, records (including, without limitation computer programs, disks,
tapes and related electronic data processing media) and writings of Borrower or
in which Borrower has an interest in any way relating to the foregoing property
and all rights of Borrower to the retrieval from third parties of electronically
processed and recorded information pertaining to any of such property; (e) all
of Borrower's documents and instruments constituting or evidencing the foregoing
and (f) all guaranties and securities for, and all proceeds of any of the
foregoing;
(iv) all insurance proceeds, whether arising out of any of the foregoing
or otherwise.
<PAGE> 16
EXHIBIT A TO
MASTER NOTE AND SECURITY AGREEMENT
DATED JULY 10,1998 (THE "AGREEMENT")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. (THE "LENDER")
AND NEOTHERAPEUTICS, INC. (THE "BORROWER")
OTHER PERSONAL PROPERTY
-----------------------
CONTINUED
Notwithstanding anything to the contrary, Lender shall not have a security
interest in Borrower's intellectual property, including but not limited to, all
past, present, and future trade secrets and other proprietary information;
trademarks, service marks, business names, designs, logos, indicia, and/or
business identifiers and the goodwill of the business relating thereto and all
registrations or applications for registration; copyrights and copyright
registrations or applications for registration; unpatented inventions (whether
or not patentable); patent applications and patents; industrial designs and
industrial design applications; and license agreements pertaining to same,
wherever existing, filed, issued or entered throughout the world.
LENDER: BORROWER:
LEASING TECHNOLOGIES INTERNATIONAL, INC. NEOTHERAPEUTICS, INC.
BY: /S/ ARNOLD J. HOEGLER BY: /S/ ALVIN J. GLASKY
--------------------------- ----------------------
NAME: ARNOLD J. HOEGLER NAME: ALVIN J. GLASKY
--------------------------- ----------------------
TITLE: EXECUTIVE VICE PRESIDENT TITLE: PRESIDENT
--------------------------- ----------------------
DATE: 9/9/98 DATE: SEPT. 8, 1998
--------------------------- ----------------------
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