SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998
Commission File No. 0-18399
FOUNTAIN PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1386759
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7279 Bryan Dairy Road, Largo, Florida 33777
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (727) 548-0900
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
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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 past 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.
(1) Yes X No
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(2) Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
<PAGE>
Registrant's revenues for the year ended September 30, 1998:
$1,542,868
The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of January 8, 1999 was approximately
$279,246, based upon the closing sales price of the Company's Common Stock as of
January 8, 1999 (see Footnote (1) below).
APPLICABLE ONLY TO REGISTRANTS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of shares outstanding of the Registrant's class of Common
Stock, par value $.001 per share, as of January 8, 1999, was 2,375,796.
The number of shares outstanding of the Registrant's Class B Common
Stock, par value $.001 per share, as of January 8, 1999, was 4,505.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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Transitional Small Business Disclosure Format:
Yes No X
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(1) The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is not an
affiliate or that any person whose holdings are included is an
affiliate and any such admission is hereby disclaimed. The information
provided is included solely for recordkeeping purposes of the
Securities and Exchange Commission.
2
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
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When used in this Annual Report on Form 10-KSB, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "intend," and similar
expressions are intended to identify 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 regarding events, conditions and financial
trends which may affect the Company's future plans of operations, business
strategy, operating results and financial position. Such statements are not
guarantees of future performance and are subject to risks and uncertainties and
actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors include,
among others: (i) the Company's ability to retain existing or obtain additional
licensees who act as distributors of its products; (ii) the Company's ability to
obtain additional patent protection for its encapsulation technology; and (iii)
other economic, competitive and governmental factors affecting the Company's
operations, market, products and services. Additional factors are described in
the Company's other public reports and filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
3
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PART I
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ITEM 1
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BUSINESS
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Background
The Company was organized during 1989 to develop and commercialize
certain proprietary compound encapsulation technologies. Following several years
of continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, introduce
branded products in certain markets and develop strategic associations with
pharmaceutical companies.
From inception through 1994, the Company remained in the development
stage while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and liabilities. Consequently, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division on November 30, 1994. Upon successfully reorganizing its operations and
finances, the Company emerged from bankruptcy in July 1996.
In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. As a result of this
private placement (the "Private Placement"), the Company obtained additional
working capital of $2.5 million, which it utilized to enhance the expansion of
the Company's sales and marketing program, as well as to further the Company's
research and development efforts. As a result of significant increases in
marketing costs associated with the expansion of existing product lines and the
introduction of new products during fiscal 1998, which were not offset by sales
revenues during the period, the Company substantially utilized its working
capital resources. Accordingly, the Company initiated a program to obtain
additional working capital. In order to provide working capital in the near
term, as of December 31, 1998, the Company entered into a secured credit
arrangement with Mr. Schuchert. The credit agreement provides for a two-year
line of credit of up to $1,500,000 subject to the Company satisfying certain
agreed upon quarterly operating budget guidelines. In order to fund operations
in the long term and pursue its business strategy, the Company intends to
continue to seek additional sources of capital, including debt and equity
financing. However, there can be no assurances that such financing will be
available or that it will be available upon terms advantageous to the Company.
See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Liquidity and Capital Resources."
4
<PAGE>
The Technology and its Applications
The Company's base of proprietary technologies involves the creation of
compound encapsulation and delivery systems of subcellular size designated by
the Company as "Solvent Dilution MicroCarriers" ("SDMCs"). SDMCs are microscopic
man-made spheres that can be engineered to entrap pharmaceuticals or other
biologically active molecules.
These technologies are intended to enable the Company to create SDMC
formulations with defined biochemical and biological properties which are
designed to permit the production of stable delivery systems. The SDMCs are
intended to provide enhanced compound delivery through entrapment and
encapsulation of a wide variety of compounds or chemical formulations which are
designed to be released in a manner that should enhance localized delivery. Once
the contents of the SDMC are released, the constituent materials used to form
the micro-carriers are utilized by living cells and degraded. The SDMCs are
principally intended for use in connection with dermal applications,
solubilization of compounds, parenteral and oral formulations and
non-pressurized aerosol preparations.
Since inception, the Company's focus has been upon the creation of new
proprietary products through the application of its encapsulation technologies
to existing compounds, thereby in the process creating a new and enhanced
product which offers advantages over a non-encapsulated format. The Company has
also undertaken test encapsulations on products that are proprietary to other
companies with the goal of securing appropriate licensing or other joint venture
arrangements for such products.
The Company has developed a number of proprietary products utilizing
its SDMC technologies. These include non-regulated consumer goods and
dermatologic products consisting of sunscreens, lotions and moisturizers. These
products have been marketed by the Company under the Octazome(R), LyphaZome(R)
and Daylong(R) names and under other proprietary names of licensees.
The Company has also in the past pursued the development of other
non-regulated products for use in a variety of applications as well as other
proprietary products that are subject to FDA regulation, such as certain burn
care compounds, vaccines and topical steroids.
The Company will continue to pursue collaborative efforts with other
companies to develop additional regulated compounds.
5
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Business Strategy
The Company intends to continue to leverage the strengths of its SDMC
technology to develop products for the following key business sectors:
o Continue to expand the Company's OTC (Over the Counter) sunscreen
franchise by expanding its distribution base to physicians and
developing innovative new products in this category.
o Aggressively develop new products that may be candidates for entry into
the expanding `cosmeceutical product sector. (A "cosmeceutical" is
generally defined as a product that has biological activity, but is not
regulated as a drug by the FDA).
o Continue to pursue clinical investigation of existing pharmaceutical
compounds that may be administered to humans more efficiently and
potentially with less side effects utilizing the Company's patented
SDMC technology.
o Continue to expand OTC, cosmecutical and prescription products through
its international strategic partner relationships.
o The Company will pursue joint venture, merger and acquisition
candidates to expand its business base. However, there can be no
assurances that any such transactions will be successfully completed by
the Company.
Long term operation of the Company and the execution of any of the
Company's expansion plans will require additional sources of financing beyond
the current resources of the Company. Management is actively pursuing additional
sources of financing. However, there can be no assurances to that such financing
will be available or that it will be available upon terms advantageous to the
Company. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- - Liquidity and Capital Resources."
Additionally, the Company will continue to pursue arrangements with
third parties whereby the Company can expand its markets and the costs of
marketing and distribution of its products are not borne by the Company.
Generally, in its licensing arrangements, the Company provides the raw materials
or finished product for distribution and sale by the third party licensee. The
licensee remains responsible for all marketing and sales efforts.
On a case by case basis in the United States, the Company will
determine its interest in collaborative arrangements with larger pharmaceutical
companies in the advancement of new regulated products through the approval
process and into the marketplace. In general, for international approvals and
marketing, the Company intends to rely on such larger organizations.
Currently, the Company principally licenses and supplies moisturizers
and sunscreen products through its licensing arrangements with pharmaceutical
companies. See "Sales and Marketing." While the Company's sales currently focus
upon its line of sunscreen and moisturizer products, management believes that
expansion of the Company's licensing arrangements and the scope of product
development activities may offer marketing opportunities for additional consumer
products. However, there can be no assurances to that effect.
6
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Sales and Marketing
From inception through 1994, the Company had undertaken its marketing
activities principally through the efforts of management and independent sales
and marketing consultants who initiated sales efforts with certain retail
department stores, hospitals and health care institutions, retail pharmaceutical
chains and scientific organizations. However, over the past three years, in view
of the Company's limited financial resources, it has focused its marketing
efforts on the sale of products through licensing arrangements with certain
pharmaceutical companies. Management believes that these licensing arrangements
have offered significant marketing opportunities without imposing material
operating expenses upon the Company, and that these types of arrangements should
be expanded. Additionally, the Company now intends to participate directly in
markets where such efforts are deemed appropriate.
The Company has three principal licensing arrangements with major
European licensees. Under such arrangements the Company realizes revenues from
the sale of products to the licensees who act as distributors and from royalties
which are earned as the result of subsequent sales of these products by such
licensees. Of its licensees, Spirig AG and Nycomed Amersham represent in the
aggregate more than 74% of the sales of the Company's products. The Nycomed
Pharma license covers markets in Norway, Denmark, Belgium, Holland and
Luxembourg. Spirig AG is the Company's licensee for Switzerland, Germany and
certain markets in Eastern Europe.
Governmental Regulations
The Company had undertaken the development of a number of products
which incorporate its SDMC technologies in regulated fields. These products
remain in various stages of development, from preliminary laboratory research,
pre-clinical testing to human clinical testing and are being considered for
further developmental efforts by the Company to the extent additional funds are
available, or with the collaboration of a corporate sponsor or joint venture
participant.
Regulation by governmental authorities in the United States and other
countries is a significant factor in the production and marketing of regulated
products. In order to clinically test, produce and market products for human
therapeutic use, mandatory procedures and safety standards established by the
FDA and comparable agencies in foreign countries must be followed. The procedure
for seeking and obtaining the required governmental approvals for a new product
in a regulated field involves many steps, including animal testing to determine
safety, efficacy and potential toxicity and, eventually, clinical testing on
humans which is likely to continue several years and involves the expenditure of
substantial resources.
Certain of the products previously developed or targeted for
development by the Company are largely unregulated and do not require any
regulatory approvals or filings with any regulatory agencies. This principally
entails the Company's moisturizer products. Certain other products of the
Company are regulated as over-the-counter drugs. These products are required to
receive additional testing for stability purposes and must consist of "approved
materials." These products are subject to stringent recordkeeping requirements.
However, no filing or pre-approval process with any regulatory agency must be
complied with in connection with these products.
7
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Patents and Proprietary Technology
The Company has obtained and is continuing to actively pursue patent
protection for certain component elements of its proprietary encapsulation
technologies, both in the United States and abroad.
The Company has obtained patents for its novel method for making
lipid-based carrier vehicles or "SDMCs": U.S. Patent 5,133,965 issued on July
28, 1992, and U.S. Patent 5,269,979 issued on December 14, 1993. These patents
relate to unique methodology for making relatively small-sized, homogenous
populations of lipid-based carrier vehicles. A shelf-stable precursor solution
containing a drug or other substance can be converted into the vehicles by
simple aerosolization or dilution with water. The precursor solution can also be
dried onto a surface, such as a bandage material, and rehydrated upon contact
with fluids at the wound site to deliver medicaments to the wound. Counterpart
patents have issued in Australia, Norway, Israel, Spain and EPC (European Patent
Convention). The European patent was validated in Austria, Belgium, France,
Great Britain, Germany, Italy, Luxembourg, Netherlands, Sweden, and
Switzerland-Liechtenstein. The Company has counterpart applications in Canada,
Japan, Hong Kong, and Singapore. The granting fees have been paid in Canada and
Singapore, and issuance is expected in the near future.
The Company is pursuing additional patent coverage in the United States
on other aspects of its SDMC technology. This application relates to
shelf-stable precursor solutions. A Notice of Allowance has been received in the
U.S. application, and a patent has been granted in Australia. The Company has
counterpart applications pending in Canada, the EPC, Hong Kong, Japan, and
Singapore.
Obtaining patents on the pending applications will add to the Company's
patent portfolio and will strengthen the Company's position with regard to
competitor's efforts to design around the Company's existing patents. Although
the Company continues to believe the pending applications contain patentable
claims, there is no assurance that the PTO will ultimately grant these claims.
Further, there are no assurances that the Company's issued patents will not be
designed around, infringed upon, or successfully challenged by others in
litigation. No assurance can be given that the Company will have sufficient
resources to either institute or defend any action by or against the Company
with respect to such patents. While the Company believes that the protection
afforded by a patent would be important to its business, the Company would
continue operations by relying upon trade-secrets, know-how and continuing
technological advancements in order to maintain its competitive position. Trade
secret protection, however, may be limited by foreign publication of the patent
application and by the issuance of the patents mentioned above.
There can be no assurance the patents the Company may obtain will
afford the Company commercially significant protection of its proprietary
technology, provide the Company with any significant competitive advantages, or
that challenges will not be instituted against the validity or enforceability of
such patents, or if instituted that any such challenges will not be successful.
The cost of litigation to uphold the validity and prevent infringement of a
patent can be substantial. In addition, no assurance can be given that the
Company will have sufficient resources to either institute or defend any action,
suit or other proceeding by or against the Company with respect to any claimed
infringement of a patent or other proprietary rights. In the event that the
Company shall in the near future lose the protection afforded by a patent, such
event could have material adverse effect on the
8
<PAGE>
Company's operations. There can be no assurance that the Company's technologies
will not infringe patents or other rights owned by others, license to which may
not be available to the Company.
Competition
Competition for the development and sale of non-regulated
pharmaceutical and consumer goods products is intense. The Company and its
licensees will be competing against consumer goods and other companies that have
substantial resources and are well positioned to subsidize the cost of product
development, establish distribution channels, develop marketing plans and hire
sales persons. Notwithstanding that management believes that the Company's
encapsulated products provide benefits over existing products, there can be no
assurances that the Company's marketing and sales efforts, either directly or
through licensees, will be successful in light of such intense competition.
Competition in the drug delivery and microencapsulation industries is
based upon such factors as safety of products, competitive product advantages,
performance, ease of application, acceptance by ultimate consumers and health
care professionals, and the marketing and distribution of products. The
Company's competitive position will be based upon the development of alternative
approaches using new or improved formulations to accomplish desired results.
Existing alternatives to the Company's technologies include conventional
formulations for compounds, biodegradable polymeric systems and liposomes.
Application of the Company's technologies to certain products remains in an
early phase of development and no assurances can be given that any of the
Company's potential products will gain sufficient competitive advantages to
generate meaningful commercial demands.
The Company will be competing in an area in which there is potential
for extensive technological innovation in a relatively short period of time.
Competition will be based upon the Company's ability to commercialize
technological developments.
Other public and private companies are engaged directly or indirectly
in drug encapsulation and drug delivery research activities both for therapeutic
and consumer goods applications. Many of these companies have substantially
greater financial and technical resources than the Company. There can be no
assurances that the Company's competitors will not succeed in developing
products which are more effective or safer than those to be developed by the
Company, or that such competitors may obtain government approval in less time
than the Company.
Human Resources
The Company conducts its operations and implements its business
strategy through the use of employees and consultants engaged as independent
contractors. Consultants are generally engaged to assist in scientific matters
or in connection with sales and marketing endeavors.
As of January 8, 1999, the Company employed sixteen (16) persons
including its chief executive officer, a vice president of operations, a
director of finance and administration, a technical director, an aesthetic
marketing and sales director, warehouse, sales and administrative personnel.
9
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ITEM 2
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PROPERTIES
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The Company owns no real property. The Company leases approximately
6,000 square feet of office, laboratory, production and warehouse facilities
located in Largo, Florida. The lease, dated December 18, 1997 as amended March
20, 1998, provides for a monthly rental of $6,950 for a term of five years,
ending December 31, 2003. This facility is adequate for the Company's current
and foreseeable needs.
ITEM 3
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LEGAL PROCEEDINGS
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The law firm of Blank, Rome, Comisky and McCauley, LLP represents the
Company with regard to disputes against Dermik Laboratories, Inc. and Rhone
Poulenc Rorer ("RPR") relating to damages allegedly suffered by the Company as a
result of, among other things, Dermik's termination of a supply and distribution
agreement (the "Agreement"). Dermik is a subsidiary of RPR. The Agreement called
for Dermik to be the licensee of the Company's sunscreen product for a period of
10 years and for Dermik to distribute the product in the United States and
certain territories outside the United States.
On or about October 28, 1996 Dermik notified the Company that, in its
opinion, the Company had not been able to demonstrate compliance with certain
contractual and regulatory requirements by October 31, 1996 and that, on this
basis, that Dermik was exercising an alleged right under the contract to
terminate it on that basis.
The Company instituted a lawsuit in November 1997 against Dermik
alleging a cause of action for breach of the Agreement. Later, in November 1998,
the Company filed court documents seeking permission to amend the Dermik lawsuit
to assert further claims of tortuous breach of contract and civil conspiracy
with RPR. Dermik is expected to oppose this and the Court will render a decision
sometime in the future. At the same time, the Company filed a separate lawsuit
against RPR alleging causes of action of breach of contract, tortuous breach of
contract, civil conspiracy with Dermik, and tortuous interference by RPR with
the contractual relationship between Dermik and the Company. The current Case
Scheduling Order governing the Dermik case calls for discovery to continue
through the middle of February 1999 at which time dispositive motion practice is
to commence. If the case goes through motion practice, it is to enter the trial
pool on August 1, 1999.
RPR has not yet answered or otherwise responded to the complaint
against it. It is anticipated that RPR will move to have the complaint dismissed
for failure to state a legally cognizable claim. The Company intends to oppose
any such motion.
10
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The Company's various complaints seek damages from Dermik Laboratories,
Inc. and RPR in excess of $10,000,000 each. These matters are currently pending
in the Philadelphia County Court of Common Pleas, Trial Division under the
following case captions.
Fountain Pharmaceuticals, Inc. vs. Dermik Laboratories, Inc.
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C.C.P. Philadelphia County, November Term, 1997, No. 3611
Fountain Pharmaceuticals, Inc. vs. Dermik Laboratories, Inc.
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C.C.P. Philadelphia County, October Term, 1998, No. 2549
Fountain Pharmaceuticals, Inc. vs./ Rhone Poulenc Rorer, Inc.
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C.C.P. Philadelphia County, October Term, 1998, No. 2551
Dermik, like RPR, will likely move for summary judgment as to the
complaint against it once discovery is closed with the aim of having the case
dismissed before trial. The Company intends to oppose any such motion.
ITEM 4
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
11
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PART II
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ITEM 5
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MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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A. Market Information
------------------
The Company's Common Stock presently trades on the OTC Bulletin Board
under the symbol "FPHI". Until May 31, 1994, the Company's Units, Common Stock,
Class A Warrants and Class B Warrants were listed on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ").
Effective May 31, 1994, the Company's securities were delisted from The
NASDAQ SmallCap MarketSM because, as a result of declining equity and assets,
the Company no longer satisfied the quantitative listing standards required for
continued listing. During May 1995, the Company's Units, and Class A and Class B
Warrants expired.
The following table sets forth certain information with respect to the
high and low market prices of the Company's Common Stock for the fiscal years
ended September 30, 1997 and 1998, and for the first quarter of its fiscal year
ended September 30, 1999. No trading market exists for shares of the Company's
Class B Common Stock.
Fiscal 1997 HIGH LOW
----------- ---- ---
First Quarter .20 .05
Second Quarter .17 .063
Third Quarter .25 .06
Fourth Quarter .40 .15
Fiscal 1998 HIGH LOW
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First Quarter 1.50 1.0625
Second Quarter 2.0625 .875
Third Quarter 1.625 .875
Fourth Quarter 1.1875 .4375
Fiscal 1999 HIGH LOW
----------- ---- ---
First Quarter .625 .1875
Second Quarter .4375 .25
(January 1-January 8, 1999)
The closing price of the Company's Common Stock on January 8, 1999 was $.25.
The high and low prices (based on the average bid and ask prices) for
the Company's Common Stock, as reported by The NASDAQ SmallCap MarketSM and the
OTC Bulletin Board, as applicable. Such prices are inter-dealer prices without
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
12
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B. Reverse Stock Split
-------------------
In order to facilitate the conversion of the Company's Preferred Stock
and to enhance the market price and liquidity of the Company's Common Stock, the
Company effectuated a one for twenty reverse stock split, specifically, a
conversion of every twenty issued and outstanding shares into one share of the
same class of Common Stock as of December 11, 1997 (the "Reverse Stock Split").
As of January 8, 1999, the Company had 2,380,301 shares of Common Stock
outstanding.
C. Holders
-------
Records of the Company's stock transfer agent indicate that as of
January 8, 1999, the Company had 435 record holders of its Class B Common Stock
and Common Stock. Since a significant number of the shares of the Company are
held by financial institutions in "street name," it is likely that the Company
has significantly more stockholders than indicated above. The Company estimates
that it has approximately 2,155 record holders, including such shares held in
"street name."
D. Dividends
---------
The Company has not paid any cash dividends, to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for working
capital of the Company.
13
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ITEM 6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
Background
----------
The Company was organized during 1989 to develop and commercialize
certain proprietary compound encapsulation technologies. Following several years
of continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, introduce
branded products in certain markets and develop strategic associations with
pharmaceutical companies.
From inception through 1994, the Company remained in the development
stage while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and liabilities. Consequently, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division on November 30, 1994. Upon successfully reorganizing its operations and
finances, the Company emerged from bankruptcy in July 1996.
In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. See "ITEM 11 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." As a result of
this private placement (the "Private Placement"), the Company obtained
additional working capital of $2.5 million, which it utilized to enhance the
expansion of the Company's sales and marketing program, as well as to further
the Company's research and development efforts. As a result of significant
increases in marketing costs associated with the expansion of existing product
lines and the introduction of new products during fiscal 1998, which were not
offset by sales revenues during the period, the company substantially utilized
its working capital resources. Accordingly, the Company initiated a program to
obtain additional working capital. In order to provide working capital in the
near term, as of December 31, 1998, the Company entered into a secured credit
arrangement with Mr. Schuchert. The credit agreement provides for a two year
line of credit of up to $1,500,000 subject to the Company satisfying certain
agreed upon quarterly operating budget guidelines. In order to fund operations
in the long term and pursue its business strategy, the Company intends to
continue to seek additional sources of capital, including debt and equity
financing. However, there can be no assurances that such financing will be
available or, that it will be available upon terms advantageous to the Company.
See "Liquidity and Capital Resources."
14
<PAGE>
Results of Operations
---------------------
During the fiscal year ended September 30, 1998, the Company realized a
net loss of $1,629,141 on revenues of $1,542,868, compared to a net loss of
$296,602 on revenues of $1,317,994 for the fiscal year ended September 30, 1997.
This increase in net losses is attributable primarily to expenses relating to
increased sales and marketing efforts in connection with the Company's new
sunscreen brand in the golf market, Daylong(R) and legal fees relating to the
Dermik Laboratories, Inc. lawsuit. See "ITEM 3 - LEGAL PROCEEDINGS."
Revenues for fiscal 1998 of $1,542,868 represented an increase of
$224,874 or 17.1% from revenues of $1,317,994 during fiscal 1997. The increase
in revenues was a result, primarily, of expanding acceptance of the Company's
products by dermatologists in northern Europe, telemarketing efforts of the
Company's LyphaZome(R) brand to the podiatrists' market, and the launch of the
Company's new sunscreen brand in the golf market, Daylong(R).
During the fiscal year ended September 30, 1998, the Company incurred
operating expenses of $2,367,857, a 159.5% increase over operating expenses of
$912,326 for the prior year ending September 30, 1997. This increase in expenses
was primarily due to increased sales and marketing efforts relating to existing
and new markets, research and development relating to new projects and
formulations, legal fees relating to Dermik Laboratories, Inc. lawsuit, and
additional personnel.
Liquidity and Capital Resources
-------------------------------
From inception through the quarter ended June 30, 1994, the Company's
principal sources of working capital were derived from a series of private
financing transactions and an initial public offering in 1990. As a result of
the Company's declining equity and assets, the Company's securities were
delisted from The NASDAQ SmallCap Market during May 1994 and the securities have
since traded on the less liquid market of the OTC Bulletin Board.
During the period from the quarter ended June 30, 1994 throughout the
bankruptcy proceedings, the Company's operations were funded primarily through
sales of products and from royalties, as well as the sale of 25,000,000 shares
(pre-split) of the Company's Common Stock to its then Chief Executive Officer at
a purchase price of $250,000 in December 1995. Since emerging from bankruptcy,
the Company's primary source of working capital have been sales revenues, short
term advances from the Company's then Chief Executive Officer and proceeds of
$2.5 million generated from a private placement offering in July 1997.
As of September 30, 1998, the Company had working capital of $645,204,
a decrease of $1,677,544 from the level of working capital of $2,322,748 as of
September 30, 1997. The decrease in working capital from September 30, 1997,
reflects increased expenses associated with sales and marketing efforts relating
to existing and new markets, research and development relating to new projects
and formulations, legal fees relating to Dermik Laboratories, Inc. lawsuit and
additional personnel. As a result of such significant increase in marketing
costs and legal fees, which were not offset by sales revenues, the Company had
substantially utilized its working capital resources by December 1998.
Accordingly, the Company initiated a program to obtain additional working
capital. In order to provide working capital in the near term, as of December
31, 1998, the Company entered into a secured credit arrangement with Mr.
Schuchert. The Credit Agreement
15
<PAGE>
provides for a secured line of credit of up to $1,500,000, the principal and
unpaid interest of which is due on the earlier of December 31, 2000, 180 days
from written demand of the lender or upon an event of default under the
agreement. The line of credit bears interest at an adjustable monthly rate equal
to the greater of (i) the prime rate quoted in the Wall Street Journal, plus 1
1/2% or (ii) 9%, which is payable monthly or may be accrued. The facility is
secured by all of the assets of the Company (subject to any existing liens). The
facility is subject to the Company satisfying certain agreed upon quarterly
operating budget guidelines. As of January 8, 1999, the Company had $400,000
outstanding under this facility. Under the terms of the Agreement, Mr. Schuchert
receives warrants to purchase 1.6 shares of Common Stock for each dollar
advanced under the facility at a purchase price of $.65 per share with an
expiration date of December 31, 2003. As of January 8, 1999, Mr. Schuchert has
been granted warrants to purchase an aggregate 640,000 shares of Common Stock.
The Company's sales revenues during fiscal 1998 and the first quarter
of fiscal 1999 were not adequate to offset expenses. Based upon the Company's
current budget guidelines as agreed to with Mr. Schuchert as lender, management
believes that the funds available under the line of credit would be sufficient
to enable the Company to meet its anticipated operating expenses through
December 31, 1999. However, in order to continue longer term operations and to
pursue its business strategy, the Company will require additional financing
unless and until sales revenues provide sufficient working capital. The Company
is in the process of pursuing such additional sources of financing. There can be
no assurances that such financing will be available or that it will be available
upon terms advantageous to the Company. Failure to obtain such additional
financing or the earlier termination of the line of credit would have a material
adverse effect on the Company's ability to operate beyond December 1999.
During Fiscal 1998, the Company's other principal sources of working
capital were derived from revenues, a $100,000 line of credit and equipment
financing arrangements from First Union National Bank of Florida ("First
Union"). The line of credit bears interest at a rate of prime plus .5%, payable
upon demand. Pursuant to the equipment financing arrangement, First Union loaned
the Company $66,110 at an interest rate of 9% for a 48 month term beginning June
1998. As of January 8, 1999 the Company has an outstanding balance due under its
line of credit of $100,000. The balance due on the equipment financing as of
January 8, 1999 is $58,688.
Year 2000 Compliance
--------------------
As has been widely reported, many computer systems process dates based
on two digits for the year of a transaction and are unable to process dates in
the year 2000 and beyond. In connection with its ongoing information system
management efforts, financial and operational systems have been assessed, and
detailed plans have been developed and are being implemented to make the
necessary modifications to ensure year 2000 compliance. The financial impact of
making the required system changes for year 2000 compliance are not expected to
have a material effect on the Company's financial statements.
Effects of Inflation
--------------------
The Company does not expect inflation to materially effect its results
of operations, however, it does expect that its operating costs and the cost of
capital equipment to be acquired in the future may
16
<PAGE>
be subject to general economic and inflationary pressures.
ITEM 7
- ------
FINANCIAL STATEMENTS
--------------------
Financial statements are included under Item 13(A) and may be
found at pages F-1 through F-20.
ITEM 8
- ------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None.
17
<PAGE>
PART III
--------
ITEM 9
- ------
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------------------
A. Identification of Executive Officers and Directors
--------------------------------------------------
The following table sets forth certain information with respect to each
of the executive officers and directors of the Company. Each of the directors
named below will serve until the next annual meeting of the stockholders or
until their successors are elected or appointed and qualified.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- ---- --- ----------------
<S> <C> <C>
Gerald T. Simmons 54 Chief Executive Officer and President
James E. Fuchs 71 Secretary and Director
Dr. Christopher Brown 45 Director
Carol Rae 52 Director
Joseph S. Schuchert, Jr. 68 Director
John C. Walsh 58 Chairman and Director
</TABLE>
B. Business Experience
-------------------
Gerald T. Simmons
Mr. Simmons has served as Chief Executive Officer and President since
December 1, 1998. He most recently held the position of President, CEO and
Director of MantiCore Pharmaceuticals, Inc., a development stage drug delivery
company from December 1996 to December 1998. Prior to MantiCore, Mr. Simmons was
President, CEO and Director of Cellegy Pharmaceuticals, Inc. (NASDAQ-CLGY), a
dermatology and drug delivery company from December 1992 to January 1996. Prior
to senior business development assignments with two biotechnology companies, Mr.
Simmons was employed by Schering-Plough Corp. as Director of Marketing for OTC
consumer products and as Vice President, New Ventures with responsibility for
new product development as well as mergers and acquisitions for consumer
operations. Mr. Simmons will remain a Director of MantiCore Pharmaceuticals,
Inc. He received his MBA from the University of Buffalo and a BA from Canisius
College.
18
<PAGE>
James E. Fuchs
Mr. Fuchs has been a member of the Company's Board of Directors since
November 1990 and assumed the office of Treasurer of the Company in April 1992.
Mr. Fuchs is Chairman and Chief Executive Officer of The Grenfox Group, Inc., a
company in the business of developing environmentally friendly products for the
ink and coatings market. He was Chairman and Chief Executive Officer of Fuchs,
Cuthrell & Co., Inc., an international human resources consulting firm
specializing in corporate executive outplacement and post-career planning from
1970 to 1994. Among the executive positions he has held are managerial and
account executive positions for the National Broadcasting Company; Vice
President and Senior Corporate Marketing Officer of Curtis Publishing Company;
Vice President, Marketing and Communications, and Director of Mutual
Broadcasting Systems; President and Director of Mutual Sports, Inc., and Senior
Vice President, Marketing, and a Director for a specialized executive consulting
firm. From 1982 through 1996, Mr. Fuchs was Chairman and, as of 1997, is now
Executive Director of the Silver Shields Foundation, which supports the
education of children and widows of New York/New Jersey area law enforcement
officers and firefighters that are killed in the line of duty. Mr. Fuchs is a
Yale graduate and a two-time U.S. Olympic medallist and gold medallist in the
shot put and discus in the first Pan American Games. He is a member of the Board
of Directors of the United States Olympic Committee.
Dr. Christopher Brown
Dr. Brown has been a member of the Company's Board of Directors since
July 1997. Dr. Brown is board certified in both internal medicine and infectious
diseases and currently practices internal medicine in Sheridan, Wyoming. Dr.
Brown also consults for Eaglestone Capital, a venture capital group, with
responsibilities including the evaluation of medical and biotechnology companies
with investment potential. Previously, Dr. Brown was employed at the National
Institutes of Health (NIH) in Bethesda, Maryland, for ten years, where he was
involved in basic and clinical research in HIV immunology as well as neutrophil
biology. For three of the ten years, he directed the Diagnostic and Immunology
Research Laboratory in Kinshasa, Zaire. This laboratory was part of an
international HIV research project jointly funded and directed by NIH, CDC,
Institute of Tropical Medicine, Tufts University, and the Armed Forces Institute
of Pathology. His research has been published in peer-reviewed journals and his
work has been presented at a number of international meetings.
Carol Rae
Ms. Rae has been a member of the Company's Board of Directors since
December 11, 1997. Ms. Rae is President and Chief Executive Officer of
Integrated Media and Marketing, LLC, a multi-media production and marketing
company based in Rapid City, South Dakota. Ms. Rae also serves as President of
MedVal Technologies International, Inc., a manufacturer of orthopedic splints
headquartered in Rapid City, South Dakota. Between 1989 and 1995, she was
President and Chief Executive Officer of Magnum Diamond Corporation of Rapid
City, South Dakota, a manufacturer of ophthalmic surgical instruments. Ms. Rae
currently serves as a Director for Homestake Mining Company, a gold mining
company based in San Francisco, California with operations throughout the world.
Ms. Rae also serves as a Director of VanKoevering Company of Des Moines, Iowa, a
manufacturer of interactive pianos. Ms. Rae has over twenty years experience in
the sales and marketing of emerging medical and computer technologies and has
held a variety of executive positions with such companies.
19
<PAGE>
Joseph S. Schuchert, Jr.
Mr. Schuchert has been a member of the Company's Board of Directors
since July 1997. He is Chairman, CEO and co-founder of Kelso & Company, Inc.,
one of the oldest and most established firms specializing in private equity
investing and in leveraged acquisitions both as a principal and as financial
advisor since 1971. Kelso makes equity investments on behalf of investment
partnerships, which it manages; and, since 1980 has acquired more than 51
companies for more than $10 billion of aggregate acquisition price. Prior to
joining Kelso, Mr. Schuchert specialized in corporate, securities and tax law
before his involvement in ESOP corporate finance techniques. Mr. Schuchert
received a B.S. in electrical engineering from Carnegie Mellon University and an
L.L.B. from the University of Pittsburgh Law School. Mr. Schuchert serves as a
Trustee at Carnegie Mellon University and is a member of the Board of Directors
of American Standard, Inc., Earle M. Jorgensen Company and the United States
Chamber of Commerce. Mr. Schuchert is active in and serves as a director of Four
Winds Ministries, Inc., a ministry which supports and directs homes for unwed
mothers and abused women, and a national Christian radio broadcast known as
"Come Up Higher."
John C. Walsh
John C. Walsh was the President, Chief Executive Officer from 1992
until his resignation as of December 1, 1998. He will continue to serve as a
director of the Company, which he has been since 1992, and Chairman of the Board
since 1994. From 1989 to 1992, Mr. Walsh was an investor in several private
business interests. Prior to 1989, Mr. Walsh held various positions with Merck &
Co., Inc., a leading international pharmaceutical company, for over twenty
years. Among the positions held, Mr. Walsh served as Senior Vice-President,
Europe, with responsibility for operations representing approximately 25% of
Merck's business, and as Vice-President, Latin-America with responsibility for
regional operations. He served as Managing Director of Merck, Sharpe & Dohme,
Brazil and Merck, Sharpe & Dohme, Venezuela, subsidiaries of Merck. He also has
broad experience in the financial management and accounting fields. Mr. Walsh
holds a bachelor of science degree from Villanova University and is a Certified
Public Accountant.
Board Committee
---------------
The Company has an Audit Committee of the Board of Directors which was
created at a meeting of the Board of Directors on October 9, 1997. The Committee
consists of Mr. Fuchs, Mr. Schuchert and Ms. Rae. The Audit Committee held one
meeting during Fiscal 1998 with representatives of the Company's accounting firm
of Aidman, Piser and Company, P.A., Certified Public Accountants. The Audit
Committee is the Company's principal liaison with the Company's independent
auditors and is primarily responsible for the review of accounting procedures
and methods employed in connection with the Company's audit programs and related
management policies. The Board of Directors has no other committees.
Directors' Compensation
-----------------------
The Company has a policy of not granting fees to directors who
attend a regularly scheduled or special meeting of its Board of
Directors. However, the Company may reimburse out-of-state directors
for their cost of travel and lodging to attend such meetings.
20
<PAGE>
Involvement in Certain Legal Proceedings
----------------------------------------
None.
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors and certain officers of the Company, as well as persons who
own more than 10% of a registered class of the Company's equity securities
("Reporting Persons"), to file reports with the Securities and Exchange
Commission. The Company believes that during Fiscal 1998, all Reporting Persons
timely complied with all filing requirements applicable to them.
ITEM 10
- -------
EXECUTIVE COMPENSATION
----------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
=================================================================================================================
Long Term
Annual Compensation Compensation
=================================================================================================================
Fiscal Year
Ended
Name and Principal Position September 30 Salary ($) Options/SARS (#)
=================================================================================================================
<S> <C> <C> <C>
John C. Walsh(1) (2) 1998 $181,731 -0-
Chairman, Former Chief Executive Officer 1997 $118,269 -0-
and President 1996 $137,308 -0-
=================================================================================================================
</TABLE>
(1) Pursuant to the Company's Plan of Reorganization, Mr. Walsh was
entitled to receive aggregate payments of $21,615 payable
commencing February 1996 and ending August 1998 as accrued and
unpaid salary and expenses.
As of September 30, 1998, the obligation was satisfied in full.
Mr. Walsh resigned from his position as Chief Executive Officer
and President as of December 1, 1998, but remains the Company's
Chairman of the Board and a Director. As part of his severance
arrangement, Mr. Walsh will continue to receive full salary and
accompanying benefits through August 3, 1999. See "ITEM - 12
CERTAIN RELATIONSHIP AND RELATED TRANSACTONS."
(2) As of December 1, 1998, Mr. Simmons was appointed Chief Executive
Officer and President pursuant to an employment agreement. See
"Employment Arrangements and Change of Control."
21
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS TABLE
Option/SAR Grants in the Last Fiscal Year
=================================================================================================================
Individual Grants
=================================================================================================================
% of Total
Options/SARs
Granted to Exercise or
Fiscal Options/SARs Employees in Base Price
Name Year Granted (#) Fiscal Year ($/Sh) Expiration Date
=================================================================================================================
<S> <C> <C> <C> <C> <C>
John C. Walsh 1998(1) -0- -0- -0- -0-
Chairman,
Chief Executive Officer and
President
=================================================================================================================
</TABLE>
(1) No options were granted during Fiscal Year 1998.
<TABLE>
<CAPTION>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
=================================================================================================================
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Value
=================================================================================================================
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
=================================================================================================================
Shares Value
Fiscal Acquired on Realized Exercisable/ Exercisable/
Name Year Exercise (#) ($) Unexercisable Unexercisable
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
John C. Walsh 1998(1) -0- -0- (U)0/(E)-0- (E)$0/(U)-0-
Chairman,
Chief Executive Officer,
and President
=================================================================================================================
</TABLE>
(1) Mr. Walsh does not have any stock options.
Employment Arrangements and Change of Control
---------------------------------------------
As of December 1, 1998, the Company entered into an Employment
Agreement with Mr. Gerald T. Simmons to serve as President and Chief
Executive Officer of the Company. Mr. Simmons is provided with an
annual salary of $130,000. The Agreement provides for a term of
22
<PAGE>
one year with successive year-to-year renewals unless either party shall elect
not to renew upon thirty days prior written notice. The Agreement contains a
non-competition and non-solicitation provision that survives his actual
employment for a term of two years. Mr. Simmons was also granted options to
purchase 173,121 shares of common stock (5% of the outstanding common stock of
the Company including outstanding options and warrants) at an exercise price of
$.56 per share. The options include certain anti-dilution protection provisions
for securities issued by the Company prior to December 31, 1999, including the
conversion, if at all, of the outstanding Series A Convertible Preferred Stock
held by Holdings. Provided that Mr. Simmons continues to be employed by the
Company, the options vest 20% each year commencing on the date of grant. All
options vest in the event of a change in control of the Company as set forth in
the Agreement.
In the event of a change in control prior to the end of the initial
term, Mr. Simmons may elect to receive a severance payment of six months salary
and insurance premiums, and the term of the non-compete and non-solicitation
provision would be reduced to six months from the date of termination. The
Agreement also provides Mr. Simmons with various benefits including medical,
dental, life and disability insurance and reimbursement of expenses including up
to $6,000 per month of commuting expenses during the initial six months of the
Agreement and certain relocation expenses thereafter, as applicable.
23
<PAGE>
Stock Options
-------------
The Company's Stock Option Plan adopted in 1989 provides for the
issuance of incentive stock options, non-qualified options and stock
appreciation rights which may be issued to officers, directors, key employees
and consultants. An aggregate of 25,000 shares of Common Stock are reserved for
issuance under this plan. As of January 8, 1999 there were no options
outstanding under this plan. This plan expires by its term on June 11, 1999.
As of December 8, 1998, the Company adopted the "Fountain
Pharmaceuticals, Inc. 1998 Stock Option Plan" (the "1998 Plan"). Nonqualified
and incentive stock options may be granted under the 1998 Plan. The term of
options granted under the 1998 Plan will be fixed by the plan administrator
provided, however, that the maximum option term may not exceed ten (10) years
from the grant date and the exercise price per share may not be less than the
fair market value per share of the Common Stock on the grant date. Under the
1998 Plan, all full-time employees of the Company or its subsidiaries, including
those who are officers and directors, non-employee directors and consultants are
eligible to receive options pursuant to the 1998 Plan, if selected. Directors
and consultants will also be eligible. The 1998 Plan will provide for the
authority to issue options covering up to 750,000 shares of the Company's Common
Stock; provided, however, that option to purchase no more than 500,000 shares
shall be granted to any one participant.
The 1998 Option Plan is administered by a committee of the Board of
Directors or the full Board of Directors. The Board of Directors may modify,
amend, or terminate the 1998 Plan at any time except that, to the extent then
required by applicable law, rule, or regulation, approval of the holders of a
majority of the Common Stock represented in person or by proxy at a meeting of
the shareholders will be required to increase the maximum number of shares of
Common Stock available for grant under the 1998 Plan (other than increases due
to adjustments in accordance with the 1998 Plan). No modification, amendment, or
termination of the 1998 Plan shall adversely affect the rights of a participant
under a grant previously made to him without the consent of such participant.
On December 8, 1998 the Company granted options to purchase 204,000
shares of Common Stock under the 1998 Plan to directors and employees at an
exercise price of $.56 per share. In addition, the Company granted to Mr.
Simmons, the Chief Executive Officer, options to purchase an aggregate of
173,121 shares of Common Stock pursuant to his Employment Agreement. See
"Employment Arrangements and Change of Control."
24
<PAGE>
ITEM 11
-------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
The following table sets forth, as of January 8, 1999,
information with respect to the securities holdings of all persons
which the Company, pursuant to filings with the Securities and Exchange
Commission, has reason to believe may be deemed the beneficial owners
of more than 5% of the Company's outstanding Common Stock and Class B
Common Stock. The following table indicates the beneficial ownership of
such individuals numerically calculated based upon the total number of
shares of Common Stock and Class B Common Stock outstanding and
alternatively calculated based upon the percentage voting power
allocated to such share ownership taking into account the
disproportionate voting rights attributed to the Class B Common Stock.
Also set forth in the table is the beneficial ownership of all shares
of the Company's outstanding stock, as of such date, of all officers
and directors, individually and as a group.
<TABLE>
<CAPTION>
Amount of Percent of Percent of
Name and Address Beneficial Ownership(1) Beneficial Ownership Voting Power(3)
---------------- ----------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Gerald T. Simmons
7279 Bryan Dairy Road 34,624(2) 1.4% 1.4%
Largo, FL 33777
James Fuchs 25,000(4) 1.0% 1.0%
565 Park Avenue
New York, NY 10021
Dr. Christopher Brown 12,218(5) * *
240 Keystone Road
Sheridan, WY 82801
Carol Rae 0 0 0
13117 North Creekview Road
Rapid City, SD 57702
Joseph S. Schuchert, Jr./ 1,906,403(6) 44.5% 44.4%(7)
Fountain Holdings, LLC
c/o Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, CA 90802
John C. Walsh 1,251,100 52.6% 52.2%
9 North Pelican Drive
Avalon, NJ 08202
All Directors and Officers as a Group 3,229,345 74.3% 74.1%
(6 Persons)
</TABLE>
---------------------
* Represents less than 1%
(1) Except as otherwise indicated, includes total number of shares
outstanding and the number of shares which each person has the
right to acquire within 60 days through the exercise of warrants or
the conversion of Preferred Stock pursuant to Item 403 of
Regulation S-B and Rule 13d-3(d)(1), promulgated under the
Securities Exchange Act of 1934. Also reflects 2,380,301 shares of
the Company's Common Stock (including Class B Common Stock)
outstanding as of January 8, 1999.
25
<PAGE>
(2) Does not include common stock purchase options to purchase 138,497
shares at an exercise price of $.56 per share which was granted
December 8, 1998 but which have not vested.
(3) This column takes into account the disproportionate voting rights
granted to the holders of the Class B Common Stock. Holders of
Class B Common Stock are entitled to five (5) votes for every
share held.
(4) Includes 25,000 shares of Common Stock issuable upon the exercise
of options at an exercise price of $.56 per share.
(5) Includes 1,363 shares of Common Stock held by Dr. Brown's spouse,
Elizabeth G. Brown, and 3,196 shares of Common Stock held by
Dr. Brown as custodian for his children.
(6) Includes 1,264,151 shares of Common Stock and 2,252 shares of Class
B Common Stock issuable upon conversion of the Preferred Stock held
by Holdings. Holdings is held 50% by Mr. Schuchert and 50% by his
spouse, Ms. Karalyn R. Schuchert. Mr. Schuchert is the managing
member of Holdings. Also includes 640,000 shares of common stock
issuable upon the exercise of common stock purchase warrants at an
exercise price of $.65 per share.
(7) Assumes the conversion of the Preferred Stock into shares of Common
Stock and Class B Common Stock. See "Voting Rights of Preferred
Stock."
Voting Rights of Preferred Stock
--------------------------------
As of December 5, 1997, there are 2,000,000 shares of
Preferred Stock, $.001 par value per share, authorized and outstanding,
all of which is held by Holdings. Prior to the conversion of the
Preferred Stock, the holders of the Preferred Stock are entitled to the
number of votes to be cast by the holders of all of the then issued and
outstanding Common Stock and Class B Common Stock plus seven (7) votes
in all elections of directors, which enables such holders to elect a
majority of the Board of Directors. In all other matters presented to
stockholders for a vote, whether required by applicable corporate law
or otherwise, the holders of Preferred Stock vote as a class and no
vote of the stockholders will be effective without the approval of the
holders of a majority of the shares of the Preferred Stock. Dr.
Christopher Brown, Mr. Joseph S. Schuchert, Jr. and Ms. Carol Rae were
appointed to the Board of Directors as nominees of Holdings. As of
January 8, 1999, the shares of Preferred Stock are convertible into
approximately 1,264,151 shares of Common Stock and 2,252 shares of
Class B Common Stock.
26
<PAGE>
ITEM 12
-------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Employment Arrangement
----------------------
As of December 1, 1998, the Company entered into an employment
agreement with Mr. Simmons, to serve as Chief Executive Officer and
President of the Company. See "ITEM 10 - EXECUTIVE COMPENSAT1ON -
Employment Arrangements and Change of Control."
Line of Credit Agreement and Grant of Warrants
----------------------------------------------
As of December 31, 1998, the Company entered into a credit
arrangement with Mr. Schuchert. The Credit Agreement provides for a
secured line of credit of up to $1,500,000, the principal and unpaid
interest of which is due on the earlier of December 31, 2000, 180 days
from written demand of the lender or upon an event of default under the
agreement. As of January 8, 1999, the Company had $400,000 outstanding
under this facility. Under the terms of the Agreement, Mr. Schuchert
receives warrants to purchase 1.6 shares of Common Stock for each
dollar advanced under the facility at a purchase price of $.65 per
share with an expiration date of December 31, 2003. As of January 8,
1999, Mr. Schuchert has been granted warrants to purchase an aggregate
640,000 shares of Common Stock. See "ITEM 6 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION - Liquidity of Capital Resources."
Grant of Options to Director
----------------------------
As of December 8, 1998, the Company granted to Mr. Fuchs, a
director, incentive stock options to purchase 25,000 shares of Common
Stock under the 1998 Plan at $.56 per share with an expiration date of
December 20, 2000, subject to the surrender of 25,000 outstanding
warrants.
Severance Arrangement
---------------------
In conjunction with the resignation of Mr. Walsh as Chief
Executive Officer as of December 1, 1998, the Company agreed to
continue to pay Mr. Walsh his salary and benefits through August 3,
1999.
Purchase of Securities
----------------------
On July 17, 1997, the Company completed the sale of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred
Stock in a private transaction. The Preferred Stock was sold for $2.5
million in a private transaction to Fountain Holdings, LLC, a Wyoming
limited liability company controlled by Mr. Joseph S. Schuchert, Jr.
Mr. Schuchert joined the Company's Board of Directors in connection
with this transaction. The Preferred Stock was sold pursuant to the
terms of a Stock Purchase and Subscription Agreement dated July 11,
1997 (the "Stock Purchase Agreement").
27
<PAGE>
Under the terms of the Stock Purchase Agreement, the holders
of the Preferred Stock may convert their Preferred Stock into shares of
the Company's Common Stock and Class B Common Stock, representing
one-half of the approximately 50,656,149 (pre-split) issued and
outstanding shares of stock as of July 17, 1997 (which included for
that purpose 3,050,000 (pre-split) shares reserved for issuance
pursuant to certain outstanding common stock purchase warrants). On a
post-split basis, the Preferred Stock is currently convertible into
1,264,151 shares of Common Stock at 2,252 shares of Class B Common
Stock. The conversion rate of the Preferred Stock is adjustable for
certain events such as a reclassification, reorganization, combination
and stock-split.
Payment of Accrued Salary and Expenses
--------------------------------------
In accordance with the Company's Plan of Reorganization, Mr.
Walsh is entitled to receive from the Company $21,615 payable
commencing February 1996 and ending August 1998 as unpaid salary and
expenses that were accrued during the period from October 1994 through
November 1994. As of September 30, 1998, the obligation was paid in
full. See "ITEM 10 - EXECUTIVE COMPENSATION."
Line of Credit Guaranty
-----------------------
The line of credit obtained by the Company with First Union
National Bank of Florida on October 17, 1996, is secured by the
Company's accounts receivable and inventory, and is further secured by
an unconditional guaranty by Mr. Walsh, the Company's Chairman of the
Board and a Director. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."
Officer Loans
-------------
During Fiscal 1997, the Company obtained funding from three
short-term loans in the total amount of $80,000 from the Company's
President at an interest rate of 10% per annum. As of January 16, 1998,
the obligation had been paid in full.
Directors' Fees
---------------
The Company has adopted a policy of granting fees and
reimbursing expenses of outside directors who attend regularly
scheduled or special meetings of its Board of Directors. See "ITEM 9 -
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT."
28
<PAGE>
ITEM 13
-------
EXHIBITS, LIST AND REPORTS ON FORM 8-K
--------------------------------------
A. Financial Statements filed as part of this Report:
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
Report of Independent Auditors on Financial F-1
Statements of Fountain Pharmaceuticals, Inc.
Balance Sheet as of September 30, 1998 F-2
Statements of Operations for the years ended F-3
September 30, 1998 and 1997
Statements of Stockholders' Equity for the F-4
years ended September 30, 1998 and 1997
Statements of Cash Flows for the years ended F-5 thru F-6
September 30, 1998 and 1997
Notes to Financial Statements of Fountain F-7 thru F-20
Pharmaceuticals, Inc. for the years ended
September 30, 1998 and 1997
</TABLE>
B. Financial Statement Schedules:
None.
C. The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C>
2.1 Amended Plan of Reorganization dated August 14,
1995 (Incorporated by reference to the Company's
Current Report on Form 8-K filed on March 28, 1996
("March 1996 Form 8-K"))
2.2 Amended Disclosure Statement dated August 14, 1995
(Incorporated by reference to the March 1996 Form
8-K)
3.1 Certificate of Incorporation of the Registrant, filed
March 23, 1989 (Incorporated by reference to Exhibit
3.1 of the Registration Statement on Form S-1 filed
on January 4, 1990, Registration Number 33-32824 (the
"Form S-1"))
3.2 Certificate of Amendment of Certificate of
Incorporation, filed April 10, 1989 (Incorporated by
reference to Exhibit 3.2 of the Form S-1)
29
<PAGE>
3.3 Restated Certificate of Incorporation of the
Registrant, filed November 13, 1989 (Incorporated by
reference to Exhibit 3.3 of the Form S-1)
3.4 By-Laws of the Registrant (Incorporated by reference
to Exhibit 3.4 of the Form S-1)
3.5 Certificate of Designation, Preference and Rights of
Series A Preferred Stock (Incorporated by reference
to Exhibit 3.5 of the Company's Current Report on
Form 8-K filed on July 31, 1997 ("July 1997 Form
8-K"))
4.1 Copy of Specimen Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Form S-1)
4.2 Form of Warrant Agreement granted to James Goddard,
Weldon Crow, Francis Werner, James Fuchs and James
Vatell (Incorporated by reference to Exhibit 4.2 to
the July 1997 Form 8-K)
4.3 Copy of Specimen Stock Certificate of Series A
Preferred Stock (Incorporated by reference to Exhibit
4.3 to the July 1997 Form 8-K)
4.4 Registration Rights Agreement between the Registrant
and Fountain Holdings, LLC, dated July 11, 1997
(Incorporated by reference to Exhibit 4.4 to the July
1997 Form 8-K)
4.5 Registration Rights Agreement between the Registrant
and John C. Walsh dated July 11, 1997 (Incorporated
by reference to Exhibit 4.5 to the July 1997 Form
8-K)
4.6 Warrant Agreement dated December 31, 1998 between the
Registrant and Joseph S. Schuchert, Jr. (Filed
herewith).
10.1 Transfer of Technology Agreement (Incorporated by
reference to Exhibit 10.3 of the Form S-1)
10.2 Stock Option Plan (Incorporated by reference to
Exhibit 10.4 of the Form S-1)
10.3 Loan Agreement by and between Registrant and First
Union National Bank of Florida dated October 17, 1996
(Incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
September 30, 1996)
10.4 Stock Purchase and Subscription Agreement between the
Registrant and Fountain Holdings, LLC, dated July 11,
1997 (Incorporated by reference to Exhibit 10.4 to
the July 1997 Form 8-K)
10.5 Employment Agreement by and between the Registrant
and Gerald T. Simmons dated December 1, 1998 (File
herewith)
10.6 Credit and Security Agreement dated December 31, 1998
between the Registrant and Joseph S. Schuchert, Jr.
(File herewith)
30
<PAGE>
10.7 Promissory Note dated December 31, 1998 between the
Registrant and Joseph S. Schuchert, Jr. (File
herewith)
10.8 Patent, Trademark and License Mortgage Agreement
dated December 31, 1998 between the Registrant and
Joseph S. Schuchert, Jr. (Filed herewith)
10.9 Facility Lease Agreement as amended March 20, 1998
between the Registrant and Highwoods
Properties/Florida Holdings, L.P./Highwoods Realty GP
Corporation its Authorized Agent. (Filed herewith)
27 Financial Data Schedule (Edgar format only)
</TABLE>
31
<PAGE>
D. Reports on Form 8-K
-------------------
None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form 10-KSB, and has duly caused this Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized
on the 13th day of January, 1999.
FOUNTAIN PHARMACEUTICALS, INC.
Date: January 13, 1999 By: /s/ Gerald T. Simmons
----------------- -------------------------------------------
Gerald T. Simmons, President and
Chief Executive Officer
(Principal Executive and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Directors Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John C. Walsh Chairman and Director January 13, 1999
- ----------------------------
John C. Walsh
/s/ James E. Fuchs Secretary and Director January 13, 1999
- ----------------------------
James E. Fuchs
/s/ Joseph S. Schuchert, Jr. Director January 13, 1999
- ----------------------------
Joseph S. Schuchert, Jr.
/s/ Dr. Christopher Brown Director January 13, 1999
- --------------------------
Dr. Christopher Brown
/s/ Carol A. Rae Director January 13, 1999
- ---------------------------
Carol A. Rae
</TABLE>
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors' F-1
Balance Sheets as of September 30, 1998 F-2
Statements of Operations for the Years Ended
September 30, 1998 and 1997 F-3
Statements of Stockholders' Equity for the Years
Ended September 30, 1998 and 1997 F-4
Statements of Cash Flows for the Years Ended
September 30, 1998 and 1997 F-5
Notes to Financial Statements for the Years Ended
September 30, 1998 and 1997 F-7
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors
Fountain Pharmaceuticals, Inc.
Largo, Florida
We have audited the accompanying balance sheet of Fountain Pharmaceuticals, Inc.
(the "Company"), as of September 30, 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company has experienced
continuing losses. Management's plans to address this matter, which include a
$1,500,000 loan from a related party, are also described in Note 1.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Fountain Pharmaceuticals, Inc., as
of September 30, 1998, and the results of its operations and its cash flows for
each of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
/S/ AIDMAN, PISER & COMPANY, P.A.
November 19, 1998, except for Notes 1 and 11
for which the date is January 7, 1999.
Tampa, Florida
F-1
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS (Note 5)
Current assets:
Cash and cash equivalents (Note 6) $ 452,099
Accounts receivable, net of allowance for
uncollectible accounts of $16,000 (Note 2) 205,194
Inventories (Note 3) 195,240
Prepaid expenses 32,723
-----------------
Total current assets 885,256
Property and equipment, net (Notes 4 and 6) 101,343
Patent costs, less accumulated amortization
of $26,705 139,525
Other assets 6,595
-----------------
$ 1,132,719
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of:
Liabilities not subject to compromise $ 2,584
Long-term debt (Note 6) 14,497
Accounts payable and accrued expenses 222,971
-------------------
Total current liabilities 240,052
-------------------
Long-term debt, less current maturities (Note 6) 47,677
-------------------
Commitment (Note 10)
Stockholders' equity (Note 7):
Series A Preferred stock, par value $.001, 2,000,000 shares
authorized, issued and outstanding
(liquidation preference $2,498,000 in excess of par) 2,000
Common stock, par value $.001, 50,000,000
shares authorized; 2,375,796 issued 2,376
Class B common stock; par value $.001, 5,000,000 shares
authorized; 4,505 shares issued and outstanding 5
Additional paid-in capital 17,056,449
Accumulated deficit ( 16,215,816)
Treasury stock at cost (12 shares) ( 24)
-------------------
Total stockholders' equity 844,990
-------------------
$ 1,132,719
===================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Revenue (Note 2) $1,542,868 $ 1,317,994
Cost of sales 867,568 689,169
--------------- ---------------
Gross profit 675,300 628,825
--------------- ---------------
Operating expenses:
Research and development 394,174 230,323
General and administrative 574,601 369,309
Selling 1,374,916 281,942
Depreciation and amortization 24,166 30,752
--------------- ---------------
2,367,857 912,326
--------------- ---------------
Loss from operations (1,692,557) ( 283,501)
--------------- ----------------
Other income (expenses):
Interest income 86,249 24,835
Interest expense ( 10,521) ( 27,327)
Other expense ( 12,312) ( 10,609)
--------------- ----------------
63,416 ( 13,101)
--------------- ----------------
Loss before income taxes ( 1,629,141) ( 296,602)
Income taxes (Note 9) - -
--------------- ---------------
Net loss ($ 1,629,141) ($ 296,602)
=============== ================
Earnings per share:
Basic and diluted earnings per common share:
Net loss ($ .68) ($ 0.12)
=============== ================
Weighted average number of shares outstanding:
Basic 2,380,301 2,380,301
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 7)
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Class B Additional
Common Stock Common Stock Preferred Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------- ------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
October 1, 1996 2,375,808 $ 2,376 4,505 $ 5 - $ - $ 14,574,327
Issuance of preferred
stock - - - - 2,000,000 2,000 2,498,000
Stock offering costs - - - - - - ( 39,278)
Compensation costs
for vested warrants - - - - - - 23,400
Net loss for
the year - - - - - - -
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balances,
September 30, 1997 2,375,808 2,376 4,505 5 2,000,000 2,000 17,056,449
Repurchase of treasury
stock ( 12) - - - - - -
Net loss for the year - - - - - - -
------------- ------------- -------------- ------------- ------------- -------------- -------------
Balances,
September 30, 1998 2,375,796 $ 2,376 4,505 $ 5 2,000,000 $ 2,000 $ 17,056,449
============= ============= ============== ============= ============= ============== =============
(TABLE CONTINUED)
Treasury
Accumulated Stock
Deficit Shares Amount Total
------------- ------------- ------------- -------------
Balances,
October 1, 1996 ($14,290,073) - $ - $ 286,635
Issuance of preferred
stock - - - 2,500,000
Stock offering costs - - - ( 39,278)
Compensation costs
for vested warrants - - - 23,400
Net loss for
the year ( 296,602) - - ( 296,602)
------------- ------------- ------------- -------------
Balances,
September 30, 1997 ( 14,586,675) - - 2,474,155
Repurchase of treasury
stock - 12 ( 24) ( 24)
Net loss for the year ( 1,629,141) - - ( 1,629,141)
------------- ------------- ------------- -------------
Balances,
September 30, 1998 ($16,215,816) 12 ($ 24) $ 844,990
============= ============= ============= =============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 1,629,141) ($ 296,602)
Adjustments to reconcile net loss to
net cash used in operating activities:
Director compensation resulting from issuance of warrants - 23,400
Depreciation 15,214 22,563
Amortization 8,952 8,189
Increase (decrease) in cash due to changes in:
Accounts receivable ( 96,176) 126,225
Inventories ( 99,562) 9,188
Prepaid expenses ( 1,363) 15,214
Other assets 790 ( 345)
Accounts payable and accrued expenses 99,567 15,312
----------------- ----------------
Net cash used in operating activities ( 1,701,719) ( 76,856)
---------------- -----------------
Cash flows from investing activities:
Deferred patent costs incurred ( 10,441) ( 7,650)
Acquisition of property and equipment ( 41,085) -
----------------- ----------------
Net cash used in investing activities ( 51,526) ( 7,650)
----------------- -----------------
Cash flows from financing activities:
Repurchase of treasury stock ( 24)
Proceeds from issuance of preferred stock - 2,500,000
Stock offering costs incurred - ( 39,278)
Repayment of:
Amounts not subject to compromise ( 29,469) ( 26,809)
Amounts subject to compromise ( 92,298) ( 84,983)
Proceeds from officer loan - 80,000
Repayment of officer loan ( 40,000) ( 40,000)
Payments on note payable, bank ( 3,936) -
----------------- ----------------
Net cash provided by (used in) financing activities ( 165,727) 2,388,930
----------------- ----------------
Increase (decrease) in cash and cash equivalents ( 1,918,972) 2,304,424
Cash and cash equivalents,
at beginning of year 2,371,071 66,647
----------------- ----------------
Cash and cash equivalents,
at end of year $ 452,099 $ 2,371,071
================= ================
</TABLE>
(Continued)
F-5
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Supplemental schedule of cash flow information
----------------------------------------------
Interest paid was $12,388 and $23,017 for the years ended September 30, 1998 and
1997, respectively.
Supplemental schedule of non-cash financing activity
----------------------------------------------------
During 1998, the Company obtained third party financing of $66,110 for the
purchase of equipment.
See notes to financial statements.
F-6
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies:
Nature of business:
Fountain Pharmaceuticals, Inc. (the "Company"), incorporated in the State
of Delaware on March 23, 1989, was organized to develop and commercialize
certain proprietary compound encapsulation technologies for use in health
care, agricultural, veterinary and consumer market items using
technologies developed privately and assigned to the Company. These
technologies involve development of man-made spheres composed of soybean
lipids that are engineered to entrap pharmaceuticals or other
biologically active molecules within the membranes of the soybean lipids,
hence a compound delivery encapsulation system known as "Solvent Dilution
Micro Carriers" ("SDMC's"). The SDMC's are principally intended for use
in connection with dermal applications, solubilization of compounds,
parenteral and oral formulations and non-pressurized aerosol
preparations. Following several years of continued developmental efforts,
the Company was able to secure patents on several aspects of its
technologies in the United States and Europe, initiate certain marketing
programs and develop strategic associations with several pharmaceutical
companies.
The Company has developed a number of proprietary products utilizing its
SDMC technologies. These include non-regulated consumer goods and
dermatologic products consisting of sunscreens, lotions and moisturizers.
These products have been marketed by the Company under the Octazome(R),
LyphaZome(R) and Daylong(R) names and under other proprietary names of
licensees.
The principal source of the Company's current revenues are from sales of
these products to distributors and royalties which are earned as the
result of the subsequent sale of these products by the distributors.
The Company intends to continue to leverage the strengths of its SDMC
technology to successfully develop products for the following key
business sectors in 1999:
o Continue to expand the Company's OTC (Over the Counter) sunscreen
franchise by expanding its distribution base to physicians and
developing new products in this category.
o Aggressively develop new products that may be candidates for entry
into the expanding cosmeceutical product sector. (A cosmeceutical is
generally defined as a product that has biologocal activity, but is
not regulated as a drug by the FDA.)
F-7
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Nature of business (continued):
o Continue to pursue clinical investigation of existing
pharmaceutical compounds that may be administered to humnas more
efficiently and potentially with less side effects utilizing the
Company's patented SDMC technology.
o Continue to expand OTC, cosmeceutical and prescription products
through its international strategic partner relationships.
Additionally, the Company will continue to persue arrangements with third
parties whereby the Company can expand its markets and the costs of
marketing and distribution of its products are not borne by the Company.
Generally, in its licensing arrangements, the Company provides the raw
materials or finished product for distribution and sale by the third
party licensee. The licensee remains responsible for all marketing and
sales efforts.
Based on the Company's revised marketing strategy, management expects
that the Company's revenue levels will continue to increase during 1999
and that the Company will generate positive operating cash flow by
December 1999. However, no assurance can be given that the Company will
be successful in these efforts.
Management's plans regarding liquidity and capital resources:
During 1998 and 1997 the Company substantially increased revenues but has
continued to experience significant losses which were primarily caused by
substantial selling expenses for a new product which did not generate
revenues to the extent expected. Additionally, the Company has continued
to experience losses through the first quarter of fiscal 1999. The
Company's losses have been historically funded by capital contributions,
but management expects available cash to be fully utilized by January
1999. In that regard, the principal stockholder of the Company's
controlling entity has agreed to fund operating deficits through December
1999 and, in that regard, has subsequently agreed to loan the Company
$1,500,000 under a line of credit agreement, which is secured by
substantially all Company assets and subject to compliance with certain
budget guidelines. The Company borrowed the first $400,000 under this
agreement in January 1999.
F-8
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Management's plans regarding liquidity and capital resources (continued):
Based upon the Company's current budget guidelines as agreed to with
lender, management believes that the $1,500,000 available under the line
of credit would be sufficient to enable the Company to meet its
anticipated operating expenses through December 31, 1999. However, in
order to continue longer term operations and to pursue its business
strategy, the Company will require additional financing unless and until
sales revenues provide sufficient working capital. The Company is in the
process of pursuing such additional sources of financing. There can be no
assurances that such financing will be available or that it will be
available upon terms advantageous to the Company. Failure to obtain such
additional financing or the earlier termination of the line of credit
would have a material adverse effect on the Company's ability to operate
beyond December 1999.
Chapter 11 reorganization:
On November 30, 1994, the Company filed a voluntary petition for
reorganization under Chapter 11 of Title II of the United States Code.
The Chapter 11 filing resulted primarily from historical losses incurred
by the Company and judgments entered against the Company associated with
default under a lease agreement and default of a settlement of a breach
of employment contract claim. The Reorganization Plan became effective on
December 20, 1995 and on July 25, 1996 the U.S. Bankruptcy Court issued a
final decree. As such, the court no longer has jurisdiction over matters
in connection with the bankruptcy. Remaining prepetition liabilities at
September 30, 1998, which consist of liabilities not subject to
compromise, are classified in the accompanying September 30, 1998 balance
sheet based upon the terms of the confirmed Reorganization Plan. At the
date of the effectiveness of the Plan and thereafter, the Company
continued to account for its assets at their historical cost basis (did
not adopt "Fresh Start" accounting). Subsequent to September 30, 1998,
the Company paid off all prepetition liabilities.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
generally on a first-in, first-out method.
F-9
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Property and equipment:
Furniture and equipment are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets,
which range from 3 to 7 years.
Patent costs:
Patent costs are deferred pending the outcome of patent applications
including the appeals process. Successful patent costs are amortized over
the legal life of the patent. Unsuccessful or abandoned patent costs are
charged to expense when determined to be worthless.
Advertising costs:
The costs associated with producing and communicating advertising are
expensed in the period incurred. Advertising costs were $310,000 and
$28,000 during 1998 and 1997, respectively.
Research and development:
Expenses for the design and development of the Company's products were
$394,174 and $230,323 during 1998 and 1997, respectively.
Cash and cash equivalents:
For purposes of the statements of cash flows, cash and cash equivalents
are defined as all highly liquid unrestricted investments purchased with
an original maturity of three months or less. In addition, the Company
considers certain secured debt instruments, which can be liquidated upon
demand, to be cash equivalents.
Use of estimates:
Preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
F-10
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Stock-based compensation:
The Company accounts for compensation costs associated with stock options
and warrants issued to employees under the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25") whereby compensation is
recognized to the extent the market price of the underlying stock exceeds
the exercise price of the option granted. During the year ended September
30, 1997 the Company adopted the disclosure provisions of Financial
Accounting Standard No. 123 - Accounting for Stock-Based Compensation
("FAS 123"), which requires disclosure of compensation expense that would
have been recognized if the fair-value based method of determining
compensation had been used for all arrangements under which employees and
others receive shares of stock or equity instruments. Stock-based
compensation to non-employees is accounted for using a fair value
approach.
Net loss per share:
Net loss per share was computed based on the weighted average number of
shares outstanding during the periods presented.
Diluted earnings per share is considered to be the same as basic earnings
per share since the effect of the issuance of common stock options is
anti-dilutive.
New accounting pronouncements:
In 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for the
Company's 1999 fiscal year.
SFAS 130 presents standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses)
including those currently required to be accounted for as direct charges
or credits to the statement of stockholders' equity in a full set of
general-purpose financial statements. SFAS No. 131 requires that public
companies report financial and descriptive information about its
reportable operating segments, which are defined as those components that
are evaluated regularly by the chief operating officer in determining
resource allocations and performance assessments.
F-11
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
New accounting pronouncements (continued):
Adoption of SFAS No. 130 is not anticipated to have a material impact on
the Company's financial statements. Management has not yet determined the
effects of adoption of SFAS No. 131 on items reported in its financial
statements.
2. Major customer information, fair value of financial instruments and
concentrations of credit risk:
Major customer information:
During the years ended September 30, 1998 and 1997 the Company derived
revenues from two customers which individually exceeded 10 percent of
total revenues as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Customer 1 (European) $ 991,000 $ 854,000
Customer 2 (European) $ 191,000 $ 219,000
</TABLE>
Approximately 70% of accounts receivable at September 30, 1998 was due
from a single customer.
Total export sales were approximately as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Europe $ 1,220,000 $ 1,109,000
Asia - 6,000
South America 29,000 40,000
------------------ -----------------
$ 1,249,000 $ 1,155,000
================== =================
</TABLE>
Fair value of financial instruments:
All financial instruments are held or issued for purposes other than
trading. The carrying amount of cash and cash equivalents, accounts
receivable, and accounts payable approximates fair value because of the
short maturity of those investments. The carrying amount of long-term
debt approximates the fair value based on current market rates offered to
the Company.
F-12
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
2. Major customer information, fair value of financial instruments and
concentrations of credit risk (continued):
Concentrations of credit risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable and cash and cash equivalents. Cash and cash equivalents
include $400,000 in variable rate demand (par put) bonds, secured by a
$2,000,000 letter of credit from a reputable financial institution.
The Company sells its products principally to companies in the medical
field located primarily in Europe. Management assesses the financial
stability of each of its major customers prior to contract negotiations
and establishes credit limits for smaller customers to limit its risk.
The Company does not require collateral or other security to support
customer receivables. Because the Company sells a significant portion of
its products and maintains individually significant receivables balances
with major customers, if the financial condition and operations of these
customers deteriorate below critical levels, the Company's operating
results could be adversely affected.
3. Inventories:
Inventories at September 30, 1998 consist of the following:
Raw materials $ 174,484
Finished goods 79,756
Less allowance for obsolescence ( 59,000)
------------------
$ 195,240
==================
4. Property and equipment:
Property and equipment at September 30, 1998 consists of the following:
Machinery and equipment $ 192,624
Office equipment 141,795
Leasehold improvements 35,298
-----------------
369,717
Accumulated depreciation ( 268,374)
------------------
$ 101,343
==================
F-13
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
5. Note payable, bank:
The Company has available a $100,000 line of credit from a bank to be
used to fund working capital needs. There were no borrowings against the
line of credit at September 30, 1998. Borrowings will bear interest at
the prime rate plus 1/2% and will be secured by substantially of the
Company's assets and guaranteed by a related party.
6. Long-term debt:
Long-term debt consists of two 48-month equipment loans entered into
during 1998. The loans bear interest at 9% and are collateralized by the
equipment and cash equivalents.
Future maturities of long-term debt are as follows:
Year ending September 30,
-------------------------
1999 $ 14,497
2000 16,068
2001 17,810
2002 13,799
-----------------
$ 62,174
=================
7. Stockholders' equity:
Series A Preferred stock:
In 1997, the Company issued 2,000,000 shares of voting convertible
participating preferred stock for $2.5 million. The Preferred stock has a
liquidation preference of $1.25 per share. (This equates to a potential
restriction of retained earnings resulting from the involuntary
liquidation preference of $2,498,000 in excess of par value of such
preferred stock.) The Preferred shares may be converted into 1,264,151
shares of Common stock and 2,252 shares of Class B Common stock, which
equates to a conversion price of approximately $.10 per share, the market
value per share of the common stock at the date of issuance of the
preferred stock.
F-14
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
7. Stockholders' equity (continued):
Voting rights:
Shareholders of Common Stock and Class B Common Stock are entitled to one
and five votes per share, respectively. Holders of shares of Series A
Preferred Stock shall be entitled to a number of votes in total that
equal the total number of votes to be cast by holders of all then issued
and outstanding shares of Common Stock and Class B Common Stock, plus
seven votes in all elections of directors.
Common stock warrants:
As disclosed in Note 1 to the financial statements, the Company adopted
the disclosure provisions only of FAS 123 during 1997. During December
1995, the Company issued warrants to purchase 152,500 shares of common
stock to its existing officers, directors and employees which were to
vest over a three-year period commencing in July 1996. In 1997, the
Company amended the warrant agreements to provide for 100% vesting of
these warrants if a major change in capital structure or the Board of
Directors occurred. These warrants, therefore, became 100% vested upon
the issuance of the preferred stock and subsequent change of control of
the Board of Directors in July 1997. The Company recognized compensation
expense to directors of $23,400 in 1997 associated with 65,575 of these
warrants. The fair value of the balance of 86,925 of these warrants which
were issued to employees in December 1995 aggregated approximately
$32,000 as determined using the "Black-Scholes" option-pricing model.
Since these warrants became fully vested upon issuance of preferred
shares in July 1997, compensation costs of $28,875 would have been
recognized in 1997 had the Company adopted the accounting provisions of
FAS 123. Proforma net loss and loss per share would have been ($325,477)
and ($0.14) in 1997, if the accounting provisions of FAS 123 had been
adopted.
The "Black-Scholes" option-pricing model assumptions are as follows:
Underlying stock price at grant date $ 1.50
Exercise price $ 1.475
Dividend yield 0%
Risk free interest rate 6%
Volatility 10%
F-15
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
7. Stockholders' equity (continued):
Common stock warrants (continued):
Common stock warrants issued, redeemed and outstanding during the years
ended September 30, 1998 and 1997 (retroactively adjusted for 1 for 20
reverse split) are as follows:
<TABLE>
<CAPTION>
Number
of
Description Warrants
----------- --------
<S> <C>
Warrants issued and outstanding at September 30, 1996
(weighted average exercise price of $13.60) 232,500
Less warrants expired in 1997 (weighted average exercise price of $45.40) ( 60,000)
--------------
Warrants issued and outstanding at September 30, 1997
(weighted average exercise price $1.80) 172,500
Less warrants expired in 1998 (weighted average exercise price $15.60) ( 10,000)
--------------
Warrants issued and outstanding at September 30, 1998
(weighted average exercise price $1.71) 162,500
==============
</TABLE>
These common stock warrants were issued to current or former officers,
directors, shareholders and employees. All are fully vested and
currently exercisable. Those that remain outstanding at September 30,
1998 are as follows:
<TABLE>
<CAPTION>
Exercise Expiration Remaining Number of
Issue Date Price Date Life Warrants
---------- ----- ---- ---- --------
<S> <C> <C> <C> <C>
December 1995 $ .80 December 2000 2.25 Yrs 152,500
December 1993 $ 15.60 December 1998 .25 Yrs 10,000
-----------------
162,500
=================
</TABLE>
F-16
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
7. Stockholders' equity (continued):
Stock option plan:
The Company has adopted a stock option and rights plan in 1989 (the
"Plan") covering 25,000 shares of the Company's common stock, pursuant to
which officers, directors, key employees and consultants of the Company
are eligible to receive qualified incentive as well as non-qualified
stock options and stock appreciation rights ("SAR's"). Incentive stock
options granted under the Plan are exercisable up to 10 years from the
date of grant at an exercise price not less than the fair market value of
the common stock on the date of the grant.
Notwithstanding, the term of an incentive stock option granted under the
Plan to a shareholder owning more than 10 percent of the voting rights
may not exceed five years, and the exercise price of an incentive stock
option granted to such shareholder may not be less than 110 percent of
the fair market value of the common stock on the date of the grant.
Certain stock options and SAR's, which give holders participation in the
appreciation of the Company common stock, may be granted on terms
determined by the Board of Directors or a committee designated by the
Board. At September 30, 1998, no SAR's had been granted.
8. Employee benefit plan:
The Company has implemented a 401(k) profit sharing plan covering
substantially all employees. The plan does not provide for employer
contributions.
F-17
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
9. Income taxes:
Deferred tax assets consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryover $ 1,238,000
Obsolete inventory allowance 22,000
Other 14,000
Valuation allowance ( 1,274,000)
-----------------
$ -
=================
</TABLE>
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Current:
Federal $ - $ -
-------------- --------------
Deferred:
Deferred 4,000 70,000
Benefit of net operating loss carryover (a) ( 622,000) ( 311,000)
Change in valuation allowance 618,000 241,000
-------------- --------------
- -
-------------- --------------
$ - $ -
============== ==============
</TABLE>
The expected income tax benefit at the statutory tax rate differed from
income taxes in the accompanying statements of operations as follows:
<TABLE>
<CAPTION>
Percentage of loss before
income taxes
--------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
State tax 3.5% 3.5%
Change in deferred tax asset
valuation allowance ( 37.5%) ( 37.5%)
-------------------- --------------------
Effective tax rate in accompanying
statement of operations 0% 0%
==================== ====================
</TABLE>
(a) Under Section 382 and 383 of the Internal Revenue Code of 1986, if an
ownership change occurs with respect to a "loss corporation", as
defined, there are annual limitations on the amount of net operating
loss and research and development tax credit carryovers which are
available to the Company. The taxable income of a loss corporation
for any tax year ending after an ownership change may be offset by
pre-change loss carryovers only to the extent of the section 382 and
383 limitation for that year. Events occurred in 1996 which created
an ownership change in excess of fifty percent for income tax
purposes; therefore, the Company believes that the availability of
the pre-change net operating loss carryover ($12,700,000) and
research and development credit carryover ($250,000) will be
substantially limited in the future and, as such, the Company has
previously accounted for the loss of such carryover. The post-change
net operating loss carryover of $3,300,000 will begin to expire in
2012.
F-18
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
10. Commitment:
The Company leases its office and warehouse facilities under a five-year,
non-cancelable operating lease for approximately $6,000 per month plus
taxes and nominal operating expenses. Rent expense under all leases
approximated $83,000 and $58,000 for 1998 and 1997, respectively.
Obligations under the non-cancelable operating lease are as follows:
Year ending September 30,
-------------------------
1999 $ 74,000
2000 76,000
2001 79,000
2002 81,000
2003 20,000
-----------------
$ 330,000
=================
11. Subsequent events:
Stock option plan:
In December 1998, the Company adopted the "Fountain Pharmaceuticals, Inc.
1998 Stock Option Plan" (the "1998 Plan"). Nonqualified and incentive
stock options may be granted under the 1998 Plan. The term of options
granted under the 1998 Plan will be fixed by the Pan Administrator
provided, however, that the maximum option term may not exceed ten (10)
years from the grant date and the exercise price per share may not be
less than the fair market value per share of the Common Stock on the
grant date. Under the 1998 Plan, all full-time employees of the Company
or its subsidiaries, including those who are officers and directors,
non-employee directors and consultants are eligible to receive options
pursuant to the 1998 Plan, if selected. Directors and consultants will
also be eligible. The Plan will provide for the authority to issue
options covering up to 750,000 shares of the Company's Common Stock;
provided, however, that option to purchase no more than 500,000 shares
shall be granted to any one participant.
The Company, simultaneous with adoption of the plan, granted options to
purchase 204,000 shares of Common Stock under the 1998 Plan to directors
and employees at an exercise price of $.56 per share which will vest in
three equal annual installments. In addition, the Company granted the
Chief Executive Officer options to purchase an aggregate of 173,121
shares of Common Stock under the Plan, also exercisable at $.56 per
share, which vest 20 percent immediately and the balance over four years.
Furthermore, on December 8, 1998, all warrants previously issued and
outstanding were repriced at $.56 per share.
F-19
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
11. Subsequent events (continued):
Subsequent financing:
As discussed in Note 1, on December 31, 1998 the Company executed a loan
agreement with a director of the Company which provides for maximum
funding of $1,500,000. The facility is subject to satisfaction of certain
agreed upon quarterly operating guidelines. The loan bears interest at
the greater of 9% or the prime rate plus 1 1/2%, is secured by
substantially all assets and matures December 31, 2000. In conjunction
therewith, the Company also granted the lender the right to purchase
shares of common stock at $.65 per share. These warrants entitle the
lender to acquire 1.6 shares of common stock for each dollar of principal
advanced and 1.6 shares for each dollar of accrued interest unpaid when
due. These warrants expire December 31, 2003.
F-20
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
4.6 Warrant Agreement dated December 31, 1998 between the
Registrant and Joseph S. Schuchert, Jr. (Filed
herewith).
10.5 Employment Agreement by and between the Registrant
and Gerald T. Simmons dated December 1, 1998 (File
herewith)
10.6 Credit and Security Agreement dated December 31, 1998
between the Registrant and Joseph S. Schuchert, Jr.
(File herewith)
10.7 Promissory Note dated December 31, 1998 between the
Registrant and Joseph S. Schuchert, Jr. (File
herewith)
10.8 Patent, Trademark and License Mortgage Agreement
dated December 31, 1998 between the Registrant and
Joseph S. Schuchert, Jr. (Filed herewith)
10.9 Facility Lease Agreement as amended March 20, 1998
between the Registrant and Highwoods
Properties/Florida Holdings, L.P./Highwoods Realty GP
Corporation its Authorized Agent. (Filed herewith)
27 Financial Data Schedule
THIS WARRANT AND THE SHARES OF COMMON STOCK OF FOUNTAIN PHARMACEUTICALS, INC. TO
BE ISSUED UPON ANY EXERCISE OF THE WARRANT HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
APPLICABLE STATE SECURITIES LAWS AND THIS WARRANT MAY NOT BE TRANSFERRED UNLESS
REGISTERED UNDER THE SECURITIES ACT AND ANY SUCH STATE LAWS OR AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE.
WARRANT
This Warrant is issued as of the 31st day of December, 1998, by
Fountain Pharmaceuticals, Inc. a Delaware corporation (the "Company"), to Joseph
Schuchert ("Schuchert"), an individual, together with any assignee of this
Warrant, the "Holder."
WITNESSETH:
1. Issuance of Warrant; Term. For and in consideration of providing the
advances necessary to support the working capital needs of the Company,
represented by that certain Secured Promissory Note dated as of December 31,
1998 (the "Note"), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder, subject to the provisions hereinafter set forth, the right to purchase
shares of Common Stock, $.001 par value, of the Company (the "Common Stock") at
a price of $.65 per share. This Warrant shall entitle the Holder to purchase 1.6
shares of Common Stock for each one dollar advanced as principal under the Note
by Schuchert, and 1.6 shares of Common Stock for each one dollar of accrued
interest that is unpaid when due under the Note. The shares of Common Stock
issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares." This Warrant shall be exercisable at any time and from time to time
from the date hereof until December 31, 2003 (the "Expiration Date").
2. Reservation of Shares; Preservation of Rights of Holder. The Company
hereby represents and agrees that there is and shall be reserved for issuance or
delivery upon exercise of these Warrants, such number of Shares as shall be
required for issuance or delivery upon exercise of these Warrants. The Warrants
surrendered upon exercise shall be canceled by the Company. After the Expiration
Date, no shares of Common Stock shall be subject to reservation in connection
with these Warrants. The Company further agrees (I) that it will not, by
amendment of its Certificate of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observation or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
the Company, (ii) promptly to take all action as may from time to time be
required in order to permit the Holder to exercise these Warrants and the
Company duly and effectively to issue shares of its Common Stock or other
securities as provided herein upon the exercise hereof, and (iii) promptly to
take all commercially reasonable action required or provided herein to protect
the rights of the Holder
1
<PAGE>
granted hereunder against dilution. Without limiting the generality of the
foregoing, should the Shares at any time consist in whole or in part of shares
of capital stock having a par value, the Company agrees that before taking any
action which would cause an adjustment of the Exercise Price so that the same
would be less than the then par value of such Shares, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
shares of such Common Stock at the Exercise Price as so adjusted. The Company
further agrees that it will not establish a par value for its Common Stock while
this Warrant is outstanding in an amount greater than the Exercise Price.
3. Exercise Price. The Exercise Price per share for which all or any of
the Shares may be purchased pursuant to the terms of these Warrants shall be
determined as provided in Section 1 above, subject to adjustments set forth
herein.
4. Exercise. These Warrants may be exercised by the holder hereof as to
all or any increment or increments of 10,000 Shares (or the balance of the
Shares if less than such number), upon delivery of written notice of intent to
exercise to the Company at the following address: 7279 Bryan Dairy Road, Largo,
Florida 33777 or such other address as the Company shall designate in a written
notice to the Holder hereof, together with the Warrant and a certified or
cashier's check (or such other check as agreed to by the Holder and the Company)
payable to the Company for the aggregate purchase price of the Shares so
purchased. Upon exercise of any Warrants as aforesaid, the Company shall as
promptly as practicable, and in any event within 15 days thereafter, execute and
deliver to the holder of the Warrant a certificate or certificates for the total
number of Shares for which the Warrant is being exercised in such names and
denominations as are requested by such holder. The Exercise Price may, at the
election of any Holder, also be paid by setting off a dollar for dollar amount
against any obligation owing to the Holder or its assigns by the Company, in
which case the notice of exercise shall identify such election and the
obligation and amount to which the set-off applies. If any Warrant shall be
exercised with respect to less than all of the Shares, the holder shall be
entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in all
other respects be identical to this Warrant. The Company covenants and agrees
that it will pay when due any and all state and federal issue taxes owed by the
Company which may be payable in respect of the issuance of this Warrant or the
issuance of any Shares upon exercise of this Warrant.
5. Covenants and Conditions. The above provisions are subject to the
following:
(a) Neither these Warrants nor the Shares have been registered
under the Securities Act of 1933 ("Securities Act") or any state
securities laws ("Blue Sky Laws"). These Warrants have been acquired
for investment purposes and not with a view to distribution or resale
and may not be made subject to a security interest, pledged,
hypothecated, sold or otherwise transferred without (I) an effective
registration statement for such Warrants under the Securities Act and
such applicable Blue Sky Laws, or (ii) an opinion of counsel selected
by the Holder that registration is not required under the Securities
Act or under any applicable Blue Sky Laws. In such event, the opinion
of counsel shall be in a form acceptable to the Company and such
2
<PAGE>
counsel shall be paid for by Holder requesting such opinion. Transfer
of the Shares issued upon the exercise of these Warrants shall be
restricted in the same manner and to the same extent as the Warrants
and the certificates representing such Shares shall bear substantially
the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAW
AND MAY NOT BE TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT
UNDER THE ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
The holder hereof and the Company agree to execute such other documents
and instruments as counsel for the Company reasonably deems necessary
to effect the compliance of the issuance of these Warrants and any
shares of Common Stock issued upon exercise hereof with applicable
federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may
be issued upon exercise of these Warrants will, upon issuance and
payment therefor, be legally and validly issued and outstanding, fully
paid and nonassessable, free from all taxes, liens, charges and
pre-emptive rights, if any, with respect thereto or to the issuance
thereof.
6. Transfer of Warrant. Subject to the provisions of Section 5, these
Warrants may be transferred by the Holder. Upon receipt of a reasonably
acceptable form of assignment and a delivery of the required legal opinion, if
applicable, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the assignee or assignees and in the
denominations specified in such instructions. The Company shall pay all expenses
(other than the costs of Holder's counsel) incurred in connection with the
preparation, issuance and delivery of Warrants under this Section.
7. Warrant Holder Not Shareholder. These Warrants do not confer upon
the Holder hereof, as such, any right whatsoever as shareholders of the Company.
8. Adjustment Upon Changes in Stock. If all or any portion of these
Warrants shall be exercised subsequent to any stock dividend, split-up,
recapitalization, merger, consolidation, combination or exchange of shares,
separation, reorganization or liquidation of the Company occurring after the
date hereof, as a result of which shares of any class shall be issued in respect
of outstanding shares of Common Stock (or shall be issuable in respect of
3
<PAGE>
securities of securities convertible into shares of Common Stock) or upon
exercise of rights (other than these Warrants) to purchase shares of Common
Stock or shares of such Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes, the Holder
exercising Warrants shall receive, for the aggregate price paid upon such
exercise, the aggregate number and class of shares which such Holder would have
received if the Warrants had been exercised immediately prior to such stock
dividend, split-up, recapitalization, merger, consolidation, combination or
exchange of shares, separation, reorganization or liquidation. If any adjustment
under this Section 8 would create a fractional share of Common Stock or a right
to acquire a fractional share of Common Stock, such fraction share shall be
disregarded and the number of shares subject to the Warrants shall be the next
lower number of shares, rounding all fractions downward. Whenever there shall be
an adjustment pursuant to this Section 8, the Company shall immediately notify
the Holder of the Warrants of such adjustment, setting forth in reasonable
detail the event requiring the adjustment and the method by which such
adjustment was calculated.
9. Certain Notices. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in
stock or make any special dividend or other distribution to the holders
of its Common Stock;
(c) reorganize, or reclassify or issue any subscription rights
affecting the capital stock of the Company, or consolidate, merge or
otherwise combine with, or sell or transfer all or substantially all of
its assets to, another person or entity; or
(d) voluntary or involuntary dissolve, liquidate or wind up
the affairs of the Company;
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, (I) at least 20 days' prior written notice of the date on which
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, at least 20 days' prior written
notice of the date when the same shall take place. Any notice required by class
(I) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the Holder of Common Stock shall be
entitled thereto, and any notice required by (ii) shall specify the date on
which the Holder of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
4
<PAGE>
In addition, so long as the Warrants shall be outstanding, (a) if the
Company shall offer generally to the holders of Common Stock the right to
subscribe to or purchase any shares of any class of Common Stock or securities
convertible into Common Stock or any other similar rights, or (b) if the Company
shall give to its stockholders any notice, report, or other communication
respecting any significant or special action or event, then in such event, the
Company shall give to the Holder, at least ten days prior to the relevant date
described below (or such shorter period as is reasonably possible if ten days is
not reasonably possible), a notice containing a description of the proposed
action or event and stating the date or expected date on which a record of the
Company's stockholders is to be taken for any of the foregoing purposes, and the
date or expected date on which any such event is to take place. In such event,
the Holder shall have the right to subscribe or participate to the same
proportionate extent of Common Stockholders, as though then a stockholder of any
of the Shares purchasable upon exercise of the Warrants.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
FOUNTAIN PHARMACEUTICALS, INC.
[SEAL] By: /s/ Gerald T. Simmons
---------------------------
Title: President/CEO
---------------------------
Attested as recorded in the books of the Company:
- -------------------------------------------------
Secretary of Fountain Pharmaceuticals, Inc.
5
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is by and between Fountain
Pharmaceuticals, Inc. (the "Company"), and Gerald T. Simmons ("Executive"), and
is dated December 1, 1998 (the "Effective Date").
R E C I T A L S
A. As of the Effective Date, the Company is engaged primarily in the
pharmaceutical and cosmetic development and manufacturing business, primarily
through the exploitation of proprietary and other liposome technology (the
"Business").
B. Executive has represented his experience in businesses that are
comparable to that of the Company and, based on that experience, the Company
desires to retain Executive as its Chief Executive to manage the Business.
C. Executive is being employed by the Company in a confidential
relationship pursuant to which Executive has become and will continue to become
familiar with and aware of information as to the Company's products and
formulae, customers, specific manner of doing business (including the processes,
techniques and trade secrets utilized by the Company), and future plans with
respect thereto, all of which have been and will be established and maintained
at significant expense to the Company. This information includes trade secrets
and constitutes a valuable asset of the Company.
D. The parties desire to agree to the various matters described herein
and to memorialize their agreements as so set forth.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, it is hereby agreed as follows:
A G R E E M E N T
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Executive as President and Chief
Executive Officer of the Company. Executive shall have responsibilities, duties
and authority reasonably accorded to, expected of, and consistent with such
position and will report directly to the Board of Directors of the Company (the
1
<PAGE>
"Board") or its designee. Executive hereby accepts this employment upon the
terms and conditions herein contained and agrees to devote substantially all of
his business time, attention and efforts to promote and further the business of
the Company. Executive shall not, during the term of his employment hereunder,
be engaged in any other business activity pursued for gain, profit or other
pecuniary advantage if such activity interferes in any material respect with
Executive's duties and responsibilities hereunder. The foregoing limitations
shall not be construed as prohibiting Executive from making passive personal
investments in such form or manner as will neither require his services in the
operation or affairs of the companies or enterprises in which such investments
are made nor violate the terms of paragraph 3 hereof.
(b) Executive shall faithfully adhere to, execute and fulfill all
lawful policies established from time to time by the Company.
(c) Executive may retain Executive's residence in Salt Lake City.
However, Executive shall be required to perform Executive's duties for not less
than two weeks per month in the area in which the Company is headquartered on
the date of this Agreement (specifically, Largo, Florida) unless otherwise
agreed by Executive and the Company. Executive shall be entitled to commute on
the foregoing basis for six months. At the expiration of six months, Executive
and Company shall meet to determine whether Executive may continue commuting or
whether Executive shall then be required to relocate permanently to the Largo
area. The Company shall pay up to $6,000 per month to reimburse Executive for
certain expenses associated with Executive's commute between Salt Lake and
Largo, specifically reasonable out-of-pocket expenses for: (I) room in Largo or
its environs at a rate not exceeding $100.00 per night , (ii) rental car and car
insurance, (iii) two round trip air fares each month from Salt Lake to Tampa,
Florida, one of which may be for the Executive's spouse. Executive shall
undertake to minimize such commuting expenses. If required to permanently
relocate to Largo, Florida, the Company shall pay all reasonable and customary
relocation expenses for the Executive, excluding however specifically any loss
associated with the value of Executive's Salt Lake residence. Relocation
expenses shall include the reasonable expenses of two four-day trips to Largo by
Executive's spouse.
2. COMPENSATION. For all services rendered by Executive, the Company
shall compensate Executive as follows:
(a) BASE SALARY. Commencing on the Effective Date or, at the option of
the Company, the first day of the month during which the Effective Date occurs,
the base salary payable to Executive shall be $130,000 per year, payable on a
regular basis in accordance with the Company's standard payroll procedures but
not less frequently than monthly. At the expiration of six months following the
Effective Date, and then on an annual basis commencing eighteen months after the
Effective Dave, the Board will review Executive's performance and may make
increases, but not decreases, to such base salary if, in its discretion, any
such increase is warranted.
(b) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive,
during the Term or until earlier termination of this Agreement, shall be
entitled to receive additional benefits and compensation from the Company in
such form and to such extent as specified below:
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(i) Coverage, subject to contributions required of executives of the
Company generally, for Executive and his dependent family members under health,
hospitalization, disability, dental, life and other insurance plans that the
Company may have in effect from time to time for the benefit of its executives;
provided, however, that the Company shall not modify the plans in effect on the
date hereof in a manner that would decrease the benefits afforded thereby to the
Executive in any material respect unless the Executive consents to such changes.
(ii) In addition to the expenses to be paid under Section 1(c) above,
reimbursement for all business travel and other out-of-pocket expenses
reasonably incurred by Executive in the performance of his services pursuant to
this Agreement. All reimbursable expenses shall be appropriately documented in
reasonable detail by Executive upon submission of any request for reimbursement,
and in a format and manner consistent with the Company's expense reporting
policy. Because reimbursement shall only be made for expenses related to the
Executive's performance of duties hereunder upon proof that such expenses were
so incurred, it is not anticipated that any tax liability will arise for such
payments. However, if any tax is imposed on Executive for such reimbursed
amounts, the amount will be "grossed-up" to result in the after-tax equivalent.
(iii) The Company shall reimburse premium payments for certain life and
disability coverage obtained by the Executive. Specifically, Executive shall be
reimbursed for an amount up to $1,200 per year for $250,000 of term life
insurance. Additionally, Executive shall be reimbursed for up to $4,000 per year
for premiums paid to acquire disability coverage of 80% of employee's prior year
earned income. Executive represents and warrants that the premiums described for
those policies previously obtained by the Executive and affording Executive with
such coverages, are reasonably related to the market rates for such coverage
with comparable insurance carriers. The Company reserves the right to provide
similar coverage with comparable carriers in lieu of providing reimbursement of
such premiums, however, the Company has no foreseeable intention of doing so.
(iv) Upon execution and delivery of this Agreement, the Company agrees
to pay a $5,000 bonus to cover certain expenses associated with establishing an
effective means of communication between Executive's office in Salt Lake City
and Largo, Florida, as well as legal costs and other miscellaneous expenses
associated with entering into this Agreement. Other bonuses shall only be paid
at the discretion of the Board of Directors. From time to time, the Board of
Directors may, but is not required to establish certain performance criteria for
purposes of determining whether and the amount of any bonus payable to
Executive.
(v) Following the expiration of six months from the Effective Date, the
Board of Directors shall consider whether to expand the size of the Board to
create a vacancy for nominating Executive to the Board of Directors. Other
opportunities to consider the Executive for a position on the Board of Directors
may, but are not required to be considered by the Directors and Executive agrees
to serve as a Director during the term of this Agreement if nominated and
elected.
(vi) Notwithstanding the foregoing regarding reimbursement of expenses,
the Company shall also pay a non-accountable expense reimbursement of $150 per
month to pay office expenses of the Executive incurred to maintain an office in
Salt Lake City, Utah.
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(vii) Executive shall receive stock options to acquire shares of common
stock of the Company on the terms set forth in the form of Stock Option
Agreement approved by the Board of Directors of the Company. The number of
shares underlying options to be received by the Executive shall entitle the
Executive to acquire five percent of the common stock of the Company (a) issued
and outstanding as of the date hereof, (b) fully diluted for any options or
warrants exercisable for common stock granted by the Company that are currently
outstanding or are granted by the Company on or before December 31, 1999, and
(c) fully diluted for any common stock conversion rights of Eaglestone Capital
or any of its affiliates under any currently existing debt or convertible equity
instrument (including the Series A Preferred Stock which is currently issued and
outstanding) and, fully diluted for the conversion rights attributable to any
debt funded by Eaglestone Capital or any of its affiliates prior to December 31,
1999. The options shall not have any other dilution protection, but shall be
subject to the customary adjustment mechanisms for recapitalizations and like
transactions to be described in detail in the Stock Option Agreement. The stock
options shall have an exercise price equal to $0.56 per share, which price is
acknowledged to represent the reasonable market value on the Effective Date
approximately based on the over the counter market for the Company's common
stock. The stock options shall vest over a four year period, twenty percent
vesting upon the Effective Date and twenty percent on each anniversary thereof,
provided this Employment Agreement is not previously terminated or the Executive
otherwise terminates his employment relationship with the Company. All of the
options shall immediately vest in the event there is any "Change of Control" of
the Company as defined in Section 11 below.
(viii) Executive shall be entitled to three weeks paid vacation during
each 12 month period throughout the Term and each renewal term. Vacation shall
not accrue if unused nor shall any payment be made for any vacation that is not
used.
(ix) The Company shall provide Executive with such other executive
perquisites as may be deemed appropriate for Executive by the Board, and
Executive shall be entitled to participate in all other Company-wide employee
benefits as are available from time to time.
3. NON-COMPETITION AGREEMENT.
(a) Executive shall not, during the period of his employment by or with
the Company, and for a period of two (2) years immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
except as provided herein, directly or indirectly, for himself or on behalf of
or in conjunction with any other person, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner, joint
venturer, or in any other capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
in direct competition with the Company or any of their respective subsidiaries,
within [100 miles of Largo,] Florida, or any other place where the Company has a
physical location (the "Territory");
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(ii) call upon any person who is, at that time, an employee of the
Company (including the respective subsidiaries thereof) in a sales or managerial
capacity for the purpose or with the intent of enticing such employee away from
or out of the employ of the Company;
(iii) call upon any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of the Company for
the purpose of soliciting or selling products or services in direct competition
with the Company;
(iv) call upon any prospective acquisition candidate, on Executive's
own behalf or on behalf of any competitor, which candidate was, to Executive's
actual knowledge, either called upon by the Company or for which the Company
made an acquisition analysis, for the purpose of acquiring such entity or all or
substantially all of such entity's assets. Notwithstanding the foregoing,
Executive may after termination of this Agreement (other than termination for
cause or termination by Executive without cause) call on the following prospects
if the Company conducted an acquisition analysis and elected not to pursue a
business combination transaction: Lansinoh Laboratories, Parnell
Pharmaceuticals, Nortrade Medical, Cellegy Pharmaceuticals, and Pharmaceutical
Laboratories, Inc.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit Executive from (i) acting as a director of MantiCore
Pharmaceuticals, Inc. (provided such service does not materially interfere with
Executive's duties and such service shall not allow the disclosure of any
Company information), or (ii) acquiring as a passive investment not more than
two percent (2%) of the capital stock of a competing business the stock of which
is traded on a national securities exchange or on an over-the-counter or similar
market.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to the Company for which
the Company would have no other adequate remedy, Executive agrees that the
foregoing covenant may be enforced by the Company in the event of a breach or
threatened breach by Executive, by injunctions, restraining orders and other
appropriate equitable relief.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Executive in light of the
activities and business of the Company on the Effective Date. It is also the
intent of the Company and Executive that such covenants be construed and
enforced in accordance with the changing activities, business and locations of
the Company throughout the term of these covenants, whether before or after the
date of termination of the employment of Executive.
(d) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth
herein are unreasonable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems reasonable,
and this Agreement shall thereby be reformed.
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4. TERM; TERMINATION; RIGHTS ON TERMINATION.
(a) The term of this Agreement shall begin on the Effective Date and
continue for one year (the "Term"), unless terminated sooner as herein provided,
and shall continue thereafter on a year-to-year basis on the same terms and
conditions, unless either party hereto, by written notice not less than 30 days
prior to the anniversary date of the Effective Date or each successive
anniversary as to any renewal term, makes an election not to renew this
Agreement. All benefits and compensation hereunder shall cease and be terminated
upon termination, except as provided in this Section 4. This Agreement and
Executive's employment may be terminated in any one of the following ways:
(i) TERMINATION AS A RESULT OF EMPLOYEE'S DEATH. The death of
Executive shall immediately terminate this Agreement with no severance
compensation due to Executive's estate.
(ii) TERMINATION ON ACCOUNT OF DISABILITY. If, as a result of
incapacity due to physical or mental illness or injury, Executive shall have
been absent from his full-time duties hereunder for two (2) consecutive months,
then thirty (30) days after receiving written notice (which notice may occur
before or after the end of such two (2) month period, but which shall not be
effective earlier than the last day of such two (2) month period), the Company
may terminate Executive's employment hereunder, provided Executive is unable to
resume his full-time duties with or without reasonable accommodation at the
conclusion of such notice period. Also, Executive may terminate his employment
hereunder if his health should become impaired to an extent that makes the
continued performance of his duties hereunder hazardous to his physical or
mental health or his life, provided that Executive shall have furnished the
Company with a written statement from a qualified doctor to such effect. In the
event this Agreement is terminated as a result of Executive's disability,
Executive shall receive from the Company, payment of group medical and dental
insurance premiums for six months to enable Executive to remain covered under
the Company's policies and six months salary at the rate then in effect (such
six month payment of salary and premiums the "Severance Payment"), provided such
obligation shall be offset by amounts payable under any disability policy, and
no other payment from the Company.
(iii) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate this Agreement immediately for "Cause," which shall be: (1)
Executive's willful and material breach of this Agreement, which breach either
cannot be cured or, if capable of being cured, is not cured within ten (10) days
after receipt of written notice of the need to cure; (2) Executive's gross
negligence in the performance or intentional nonperformance of any of
Executive's material duties and responsibilities hereunder; (3) Executive's
willful dishonesty, fraud or misconduct with respect to the business or affairs
of the Company; or (4) Executive's conviction of a felony crime. In the event of
a termination for Cause, the provisions of paragraph 3 shall apply, Executive
shall have no right to any severance compensation and shall forfeit all other
benefits, except vested stock options.
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(iv) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. At any time
after commencement of employment, the Company may terminate Executive's
employment hereunder without Cause, and Executive may terminate his employment
hereunder for Good Reason (as defined below), in either case effective thirty
(30) days after written notice. If Executive is terminated by the Company
without Cause or if Executive terminates Executive's employment hereunder for
Good Reason, Executive shall receive from the Company, over a period of six (6)
months, in equal monthly installments, in arrears, commencing thirty-one (31)
days after the effective date of termination, the Severance Payment.
If Executive resigns or otherwise terminates his employment hereunder
without Good Reason, Executive shall receive no severance compensation, and the
provisions of paragraph 3 hereof shall apply.
(b) DEFINITION OF "GOOD REASON." Executive shall have "Good Reason" to
terminate this Agreement and his employment hereunder if the Company breaches
this Agreement in any material respect and fails to cure such breach within ten
days after Executive delivers written notice and a written description of such
breach to the Company, which notice shall specifically refer to this section of
this Agreement.
(c) EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason provided above, Executive shall be entitled to receive all compensation
earned and all benefits and reimbursements due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Executive only to the extent and in the manner expressly
provided above in this Section 4. All other rights and obligations of the
Company and Executive under this Agreement shall cease as of the effective date
of termination, except that the Company's obligations under paragraph 8 herein
and Executive's obligations under paragraphs 3, 5, 6, 7 and 9 herein shall
survive such termination in accordance with their terms.
(d) BREACH BY COMPANY. If termination of Executive's employment arises
out of the Company's failure to pay Executive on a timely basis the amounts to
which Executive is entitled under this Agreement or as a result of any other
breach of this Agreement by the Company, as determined by a court of competent
jurisdiction or pursuant to the provisions of paragraph 15 below, the Company
shall pay all amounts and damages to which Executive may be entitled as a result
of such breach, including interest thereon and all reasonable legal fees and
expenses and other costs incurred by Executive to enforce his rights hereunder.
Further, none of the provisions of paragraph 3 shall apply in the event this
Agreement is terminated by Executive as a result of a breach by the Company as
provided in Section 4(a)(iv) above.
5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, formulae, financial statements, manuals, memoranda, lists, equipment and
other personal property, and other property delivered to or compiled by
Executive by or on behalf of the Company, or its representatives, vendors or
customers which pertain to the business of the Company shall be and remain the
property of the Company, and be subject at all times to their discretion and
control. Likewise, all correspondence, reports, records, charts, advertising
materials and other similar data pertaining to the business, activities or
future plans of the Company which is collected by Executive shall be delivered
promptly to the Company without request by it upon termination of Executive's
employment.
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6. INVENTIONS. Executive shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by
Executive, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are directly related to the business
or activities of the Company. Executive hereby assigns and agrees to assign all
his interests therein to the Company or its nominee. Whenever requested to do so
by the Company, Executive shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. TRADE SECRETS. Executive agrees that Executive will not, during or
after the Term of this Agreement with the Company, disclose the terms of the
Company's relationships or agreements with their respective vendors or customers
or any other significant or material trade secret of the Company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever, except and only to the extent reasonably
necessary in Executive's course of employment with the Company or required by
law or legal process following notice to the Company.
8. INDEMNIFICATION. Executive shall be indemnified for any liabilities
of the Company that arise out of events occurring prior to the Effective Date.
Further, provided Executive acted in good faith and in a manner reasonably
believed to be in the best interests of the Company, in the event Executive is
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by the Company), by reason of the fact that Executive is or was performing
services under this Agreement, then the Company shall indemnify Executive
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, as actually and reasonably incurred by Executive in
connection therewith to the maximum extent permitted by applicable law. In the
event that both Executive and the Company are made a party to the same
third-party action, complaint, suit or proceeding, the Company agrees to engage
counsel, and Executive agrees to use the same counsel, provided that if counsel
selected by the Company shall have a conflict of interest that prevents such
counsel from representing Executive, Executive may engage separate counsel and
the Company shall pay all reasonable attorneys' fees of such separate counsel.
The Company shall not be required to pay the fees of more than one law firm
except as described in the preceding sentence, and shall not be required to pay
the fees of more than two law firms under any circumstances. Executive cannot be
held liable to the Company for errors or omissions made in good faith or where
Executive has not exhibited gross, willful, and wanton negligence in connection
with such conduct, error omission. Notwithstanding the foregoing, and without
limitation, Executive shall be entitled to the full benefits of indemnification
of officers and directors as provided by the Company's Articles of Incorporation
effective as of the date hereof.
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9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the
Company that the execution of this Agreement by Executive and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Executive hereby indemnifies the Company against any and all liability,
expenses and other costs and amounts incurred by the Company, including, but not
limited to, attorneys' fees and expenses of investigation, as a result of any
claim by any third party that such third party may now have or may hereafter
come to have against the Company based upon or arising out of any
non-competition agreement, invention or secrecy agreement between Executive and
such third party which was in existence as of the date of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that the Company
has selected Executive for employment by it on the basis of Executive's personal
qualifications, experience and skills. Executive agrees, therefore, that
Executive cannot assign all or any portion of Executive's performance under this
Agreement. Subject to the preceding two (2) sentences and the express provisions
of paragraph 12 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective heirs,
legal representatives, successors and assigns.
11. CHANGE IN CONTROL.
(a) Executive understands and acknowledges that the Company may be
merged or consolidated with or into another entity and that such entity shall
automatically succeed to the rights and obligations of the Company hereunder or
that the Company may undergo another type of Change in Control. In the event a
Change in Control is initiated prior to the end of the Initial Term, then the
provisions of this paragraph 11 shall be applicable.
(b) In the event of a pending Change in Control wherein the Company and
Executive have not received written notice at least five (5) business days prior
to the anticipated closing date of the transaction giving rise to the Change in
Control from the successor to all or a substantial portion of the Company's
business and/or assets that such successor is willing as of the closing to
assume and agree to perform the Company's obligations under this Agreement in
the same manner and to the same extent that the Company is hereby required to
perform, then Executive may elect to terminate his employment and shall be
entitled to receive in one lump sum on the effective date of such termination,
an amount equal to the Severance Payment, and the non-competition provisions of
paragraph 3 shall apply for a period of only six (6) months from the effective
date of termination.
(c) In the event of a Change of Control, all stock options shall
immediately vest and Executive will be given sufficient time and opportunity to
elect whether to exercise all or any of Executive's vested options to purchase
Company common stock, such that Executive may convert the options to shares of
Company common stock at or prior to the closing of the transaction giving rise
to the Change in Control, if Executive so desires.
(d) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than affiliates of Eaglestone Capital, acquires
directly or indirectly (including by merger, consolidation, recapitalization, or
reorganization of the Company)the beneficial ownership (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) of any voting security
of the Company and immediately after such acquisition such person
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is, directly or indirectly, the Beneficial Owner of voting securities
representing 50% or more of the total voting power of all of the
then-outstanding voting securities of the Company;
(ii) the stockholders of the Company shall approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of substantially all of the assets of the Company except transactions
with affiliates of Eaglestone Capital.
12. COMPLETE AGREEMENT. This Agreement sets forth the entire agreement
of the parties hereto relating to the subject matter hereof and supersedes any
other employment agreements or understandings, written or oral, between the
Company and Executive. This Agreement is not a promise of future employment.
Executive has no oral representations, understandings or agreements with the
Company or any of its officers, directors or representatives covering the same
subject matter as this Agreement. This written Agreement is the final, complete
and exclusive statement and expression of the agreement between the Company and
Executive an of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and
Executive, and no term of this Agreement may be waived except by writing signed
by the party waiving the benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Fountain Pharmaceuticals, Inc.
7279 Bryan Dairy Road
Largo, Florida 33777
with a copy to: Joseph S. Schuchert, Esq.
400 Oceangate, Suite 1125
Long Beach, California 90802
To the Executive: Gerald T. Simmons
837 4th Avenue
Salt Lake City, Utah 84103
with a copy to: Ronald S. Poelman, Esq.
Janes Waldo Holbrook & McDonough
170 S. Main St., Suite 1500
Salt Lake City, Utah 84101
Notice shall be deemed given and effective on the earlier of three (3)
days after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested, or when actually received
by means of hand delivery or delivery by Federal Express or other courier
service. Either party may change the address for notice by notifying the other
party of such change in accordance with this paragraph 13.
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14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
15. GOVERNING LAW. This Agreement shall in all respects be interpreted,
construed and enforced according to the laws of the State of Florida.
Jurisdiction and venue shall be in a court of competent subject matter
jurisdiction in Pinellas County, Florida; however any judgment therein rendered
may and shall be enforced in each other applicable jurisdiction of the United
States.
16. COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written, but effective as of the Effective Date.
FOUNTAIN PHARMACEUTICALS, INC.
By: /s/ JOSEPH S. SCHUCHERT
--------------------------------------
Its: Board Nominee Pursuant to Unanimous
-------------------------------------
Consent Action
-------------------------------------
EXECUTIVE
/s/ GERALD T. SIMMONS
------------------------------------------
GERALD T. SIMMONS
11
CREDIT AND SECURITY AGREEMENT
THIS CREDIT AND SECURITY AGREEMENT (the "Security Agreement") is made
and entered into as of December 31, 1998 by FOUNTAIN PHARMACEUTICALS, INC., a
Delaware corporation, having its principal place of business at 7279 Bryan Dairy
Road, Largo, Florida 33777 (the "Borrower"), in favor of JOSEPH SCHUCHERT
("Schuchert" or "Lender") whose address for the sole purpose of this notice is
c/o Eaglestone Capital Corporation, 1949 Sugarland Drive, Suite 250, Sheridan,
Wyoming 82801.
WHEREAS, the Borrower has obtained credit directly from Schuchert,
specifically, (I) working capital and other advances to pay third party lenders,
or advances to such third-party lenders or vendors as Schuchert elects to pay
upon request of Borrower, including advances made pursuant to that certain
Secured Promissory Note of even date herewith (the "Note"), and (ii) the
Borrower will be the beneficiary of other loans, guaranties or advances made by
Schuchert. All such obligations (including by way of example those represented
by the Note) shall be referred to herein, together with any and all other
obligations owing by the Borrower to the Lender, as the "Obligations;" and
WHEREAS, as a condition to the ongoing extension of credit and to the
provision of credit by the Lender to the Borrower under the Note and on the
terms hereof, and specifically, by way of example, to clarify the Obligations of
Borrower to the Lender and Lender's interest in the items of collateral
described in this Security Agreement, the Borrower has agreed to (I) grant to
the Lender a security interest in and to the "Collateral" (as defined herein)
and (ii) execute and deliver this Security Agreement and all other necessary
documents in order to secure and perfect the payment and performance by the
Borrower of the Obligations.
AGREEMENT
---------
NOW THEREFORE, in consideration of the promises and in order to induce
the Lender to extend credit under the Note and to continue or make other
extensions of credit and to secure those Obligations, the Borrower hereby agrees
with the Lender as follows:
SECTION 1. ADVANCES OF FUNDS AND CREATION OF SECURITY INTEREST.
Following the date hereof and continuing until September, 1999 (the Initial
Period"), the Borrower may request that the Lender make advances to Borrower in
order to fund capital shortfalls from the revenue and expense budget attached
hereto as Exhibit "A" and incorporated by reference herein (the "Initial
Budget"). Upon such request, Lender shall advance the funds (as debt owing under
the Note and only up to the full face amount of the Note) to enable the Borrower
to discharge Borrower's then current obligations, to the extent revenues from
operations are inadequate to pay the costs and expenses reflected by the Initial
Budget. Lender shall also advance under the Note other amounts during the
Initial Period reflected on the "Schedule of Anticipated Capital and Litigation
Expenses" attached hereto as Exhibit "B" and incorporated by reference herein
(the "Litigation/Capital Schedule") if and when requested by Borrower during the
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Initial Period. Following the Initial Period and until December 31, 2000, Lender
may advance other amounts, in Lender's sole discretion, as requested by the
Borrower to fund reasonable working capital needs.
The Borrower shall not request any such advance more frequently than
once monthly and the total of all advances shall not exceed One Million Five
Hundred Thousand Dollars ($1,500,000). Advances shall be funded only on the last
day of any given month, unless Lender agrees otherwise. Each request for an
advance under the Note shall be preceded by a current unaudited monthly and
year-to-date income statement, balance sheet and cash flow statement together
with an updated twelve month projected cash flow statement of Borrower
(presented on a month-to-month basis) and such other financial and other
information as Borrower may reasonably request to provide satisfactory
assurances of Borrower's capacity to repay prior to maturity the advance and all
other advances out of Borrower's operating income. The provisions of the Note
and this Security Agreement in no way obligate the Lender directly to any
third-party creditor or vendor of Borrower or any of its affiliates. Borrower
may request that the Lender advance funds to pay when due any obligation for
existing funded indebtedness of the Borrower or for trade payables. Each dollar
advanced to any creditor or vendor of the Borrower by Lender (whether requested
by Borrower or otherwise) shall be deemed an extension of credit to Borrower in
a corresponding dollar for dollar amount and shall be subject to this Security
Agreement and repayment of all amounts advanced shall be the unconditional
obligation of the Borrower payable in accordance with this Security Agreement
and the Note.
Any and all such advances described in this Section 1, and all
other obligations owing under the Note shall be referred to from time to time
herein as the "Obligations."
The Borrower hereby grants to the Lender a continuing first
priority, perfected security interest (subject to currently existing liens of
record) in all of the Borrower's right, title and interest in and to the
Collateral described in Section 2 hereof (the "Collateral") in order to secure
the payment and performance of all of the Obligations.
SECTION 2. COLLATERAL. The Collateral is:
(a) Accounts. All of the Borrower's accounts, whether now
existing or existing in the future, including, without limitation (I) all
accounts receivable, including, without limitation, all accounts created by or
arising from all of the Borrower's sales of goods or rendition of services made
under any of the Borrower's trade names, or through any of its divisions, (ii)
all unpaid seller's rights (including rescission, replevin, reclamation and
stopping in transit) relating to the foregoing or arising therefrom, (iii) all
rights to any goods represented by any of the foregoing, including returned or
repossessed goods, (iv) all reserves and credit balances held by the Borrower
with respect to any such accounts receivable or account debtors, (v) all letters
of credit, guaranties or collateral for any of the foregoing, and (vi) all
insurance policies or rights relating to any of the foregoing (all of the
foregoing property and similar property included as Collateral under Section
2(f) below being hereinafter referred to as "Accounts");
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(b) Inventory. All of the Borrower's presently existing or
hereafter acquired inventory including, without limitation: (I) all raw
materials, work in process, parts, components, assemblies, supplies and
materials used or consumed in the Borrower's business, wherever located and
whether in the possession of the Borrower or any other Person; (ii) all goods,
wares and merchandise, finished or unfinished, held for sale or lease or leased
or furnished or to be furnished under contracts of service, wherever located and
whether in the possession of the Borrower or any other Person; and (iii) all
goods returned to or repossessed by the Borrower (all of the foregoing property
and similar property included as Collateral under Section 2(f) below being
hereinafter referred to as "Inventory");
(c) Intangibles. All of the Borrower's presently existing and
future general intangibles and all other intangible or proprietary rights
(including, without limitation, any and all choses or things in action, patents,
patent applications, trademarks, trademark applications, trade names, trade
secrets, business names, service marks, licenses, copyrights, copyright
applications, literary and intellectual property rights, computer programs,
software, registration and franchise rights, and, in each case, all goodwill
associated therewith), instruments, securities, credits, claims, demands,
documents, letters of credit and letter of credit proceeds, chattel paper,
documents of title, certificates of title, certificates of deposit, warehouse
receipts, bills of lading, books and records, leases, deposit accounts, money,
tax refunds, tax refund claims, rents, contract rights, and other rights
(including all rights to the payment of money) (all of the foregoing property
and similar property included as Collateral under Section 2(f) below being
hereinafter referred to as "Intangibles"). In furtherance and not limitation of
the foregoing pledged Intangibles, simultaneously with the execution of this
Security Agreement, the Borrower is executing that certain Patent, Trademark and
License Mortgage in order to fully perfect in favor of the Lender, Lender's
security interest in any and all patents, trademarks and licenses owned by the
Borrower or in which the Borrower asserts any interest.
(d) Equipment. All of the Borrower's presently existing and
hereafter acquired equipment, including, without limitation, machinery,
equipment, office equipment and supplies, computers (including mainframe
processors and remote terminals) and related equipment, furniture, furnishings,
fixtures, parts, tools, tooling, jigs, dies, manufacturing implements, motors,
fork lifts, trucks, trailers, motor vehicles, and other equipment (all of the
foregoing property and similar property included as Collateral under Section
2(f) below being hereinafter referred to as "Equipment");
(e) Fixtures. All of the Borrower's fixtures which are now or
hereafter located on or affixed to real property or used or useful in the
operation or use of real property or any use or occupancy thereof or the
construction of any improvements thereon, including, without limitation, any and
all phone, heating, lighting, plumbing, ventilation, air conditioning,
refrigerating, incinerating and/or compacting plants, systems, fixtures and
equipment, elevators, escalators, stoves, ranges, vacuums, window washing and
other cleaning and building service systems, call systems, sprinkler systems and
other fire prevention and extinguishing apparatus and materials, motors,
machinery, pipes, ducts, conduits, dynamos, engines, compressors, generators,
boilers, stokers, furnaces, pumps, tanks, appliances and garbage and pest
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control systems (all of the foregoing property and similar property included as
Collateral under Section 2(f) below);
(f) After-acquired Collateral and Proceeds. The Collateral
includes all right, title and interest of the Borrower in all items described in
this Section 2, whether now owned or hereafter at any time acquired by the
Borrower and wherever located, or as to which the Borrower may have any right or
power, and includes all replacements, additions, accessions, improvements,
substitutions, repairs, proceeds and products relating thereto or therefrom, and
all documents, ledger sheets, computer programs, disc or tape files, printouts
and files of the Borrower relating thereto. Proceeds hereunder include (I)
whatever is now or hereafter received by the Borrower upon the sale, exchange,
collection or other disposition of any item of Collateral, whether such proceeds
constitute inventory, accounts, accounts receivable, general intangibles,
instruments, securities (including, without limitation, United States of America
Treasury Bills), credits, claims, demands, documents, letters of credit and
letter of credit proceeds, chattel paper, documents of title, certificates of
title, certificates of deposit, warehouse receipts, bills of lading, leases,
deposit accounts, money, tax refund claims, contract rights, goods or equipment,
(ii) any such items which are now or hereafter acquired by the Borrower with any
proceeds of Collateral hereunder and (iii) any insurance now or hereafter
payable by reason of loss or damage to any item of Collateral or any proceeds
thereof.
SECTION 3. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
---------- ----------------------------------------------
(a) The Borrower owns the Collateral free and clear of any and
all Liens in favor of third parties. Upon the proper filing of UCC financing
statements, notices with the Patent and Trademark Office (the "PTO"), and notice
to Borrower's account holders identified on Schedule 3(a) (which represent every
bank, brokerage firm or other depository with which funds or other intangible
property are held for the Borrower), the security interests granted pursuant to
this Security Agreement constitute valid and enforceable first, prior and
perfected Liens in the Collateral (other than liens identified on Schedule
3(a)(1).
(b) The address of the principal place of business and chief
executive office of the Borrower is set forth beneath Borrower's signature
below. The Borrower's Federal Employer Identification Number is 62-1386759. The
inventory, books and records of the Borrower, and all its chattel paper and
records of Accounts, are maintained exclusively at such location. There is no
jurisdiction in which the Borrower has any Collateral of a material nature
(except for vehicles and Inventory in transit for processing) other than the
jurisdiction where the principal place of business is located. None of the
receipts received by the Borrower from any warehouseman states that the goods
covered thereby are to be delivered to bearer or to the order of a named person
or to a named person and such named person's assigns.
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(c) None of the Collateral is subject to contractual
obligations that may restrict or inhibit the Lender's rights or abilities to
sell or dispose of the Collateral, or any part thereof, after the occurrence and
during the continuance of an Event of Default.
(d) The Borrower has not used any corporate or fictitious name
during the three (3) years preceding the date hereof, other than the corporate
name under which it has executed this Security Agreement.
(e) Each Account is based on an actual and bona fide sale and
delivery of goods or rendition of services to customers, made by the Borrower in
the ordinary course of its businesses; the Inventory being sold and the Accounts
created are its exclusive property and are not and shall not be subject to any
lien, consignment arrangement, encumbrance, security interest or financing
statement whatsoever; and the Borrower's customers have accepted the goods or
services, owe and are obligated to pay the full amounts stated in the invoices
according to their terms, without any dispute (other than non-material disputes
involving de minimis amounts arising in the ordinary course of business and
claims for returns of merchandise deemed by such customers to be unsalable or
defective), offset, defense, counterclaim or contra.
(f) The Intangibles are owned exclusively by Borrower and are
not subject to any claim of infringement or improper use.
(g) The Initial Budget is an accurate good faith estimate of
the anticipated revenue and expenses of the Borrower for the Initial Period.
SECTION 4. COVENANTS OF THE BORROWER.
-------------------------
(a) The Borrower will defend the Collateral against all claims
and demands of all persons at any time claiming the same or any interest
therein. The Borrower agrees to comply with the requirements of all state and
federal laws in order to grant to the Lender valid and perfected first priority
security interests in the Collateral. The Lender is hereby authorized by the
Borrower to file any financing statements or other notices covering the
Collateral whether or not the Borrower's signatures appear thereon. The Borrower
will not permit any notice of any lien with respect to the Collateral or any
portion thereof to exist or be on file in any public offices or any other
person, which is not removed or discharged within thirty (30) days.
(b) The Borrower will not (I) change the location of its chief
executive office and principal place of business or establish any place of
business, (ii) move or permit movement of the Collateral from the locations
specified in Section 3(b) (except inventory in transit from one such location to
another such location) or (iii) voluntarily or involuntarily change its identity
or corporate structure, unless in each case the Borrower shall have given the
Lender 30 days prior written notice thereof and shall have in advance executed
and caused to be filed and/or delivered to the Agent any financing statements or
other documents (including, without limitation, collateral access agreements)
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required by the Lender in accordance with Section 4(c) hereof, all in form and
substance satisfactory to the Lender.
(c) The Borrower will, promptly upon request by the Lender,
execute and deliver or use its best efforts to procure any document (including,
without limitation, collateral access agreements), give any notices, execute and
file any financing statements, mortgages or other documents, all in form and
substance satisfactory to the Lender, mark any chattel paper, deliver any
chattel paper or instruments to the Lender and take any other actions that are
necessary or, in the opinion of Lender, desirable to perfect or continue the
perfection and the first priority of the Lender's security interest in the
Collateral, to protect the Collateral against the rights, claims, or interests
of third persons or to effect the purposes of this Security Agreement. The
Borrower will pay all costs incurred in connection with any of the foregoing.
(d) Without the prior written consent of the Lender, the
Borrower will not in any way hypothecate or create or permit to exist any lien,
security interest, charge or encumbrance on or other interest in the Collateral,
and the Borrower will not sell, transfer, lease, assign, pledge, collaterally
assign, exchange or otherwise dispose of the Collateral other than the
disposition of obsolete and/or worn-out equipment that is replaced by equipment
of at least equivalent value and function, or otherwise in connection with the
normal operations of its business. If the proceeds of any such sale are notes,
instruments, documents of title, letters of credit or chattel paper, such
proceeds shall be promptly delivered to the Lender, to be held as Collateral
hereunder. If the Collateral, or any part thereof, is sold, transferred,
assigned, exchanged, or otherwise disposed of in violation of these provisions,
the security interests of the Lender shall continue in such Collateral or part
thereof notwithstanding such sale, transfer, assignment, exchange or other
disposition, and the Borrower will hold the proceeds thereof in a separate
account for the benefit of the Lender. Following such a sale, the Borrower will,
in accordance with the Credit Agreement, transfer such proceeds to the Lender in
kind.
(e) The Borrower will not enter into any contractual
obligations which may restrict or inhibit the Lender's rights or ability to sell
or otherwise dispose of the Collateral or any part thereof after the occurrence
and during the continuance of an Event of Default.
(f) Upon the occurrence and during the continuance of an Event
of Default, the Lender shall have the right at any time to make any payments and
do any other acts the Lender may deem necessary to protect their security
interests in the Collateral, including, without limitation, the rights to pay,
purchase, contest or compromise any encumbrance, charge or Lien which, in the
judgment of the Lender, appears to be prior to or superior to the security
interests granted hereunder, and appear in and defend any action or proceeding
purporting to affect its security interests in, and/or the value of, the
Collateral. The Borrower hereby agrees to reimburse the Lender for all payments
made and expenses incurred under this Security Agreement including fees,
expenses and disbursements of attorneys and paralegals (including the allocated
costs of inside counsel) acting for the Lender, including any of the foregoing
payments under or acts taken to protect its security interests in the
Collateral, which amounts shall be secured under this Security Agreement, and
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agrees it shall be bound by any payment made or act taken by the Lender
hereunder absent Lender's gross negligence or willful misconduct. The Lender
shall have no obligation to make any of the foregoing payments or perform any of
the foregoing acts.
(g) The Borrower shall promptly (but in no event later than
five (5) Business Days) after its receipt thereof, offer to deliver to the
Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case came into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender.
(h) In furtherance of the continuing assignment and security
interest in the Accounts of the Borrower granted pursuant to this Security
Agreement, upon the creation of Accounts and demand of the Lender, the Borrower
will execute and deliver to the Lender in such form and manner as the Lender may
reasonably require, solely for its convenience in maintaining records of
Collateral, such confirmatory schedules of Accounts, and other appropriate
reports (including, without limitation, valuations and appraisals) designating,
identifying and describing the Accounts as the Lender may require. In addition,
upon the Lender's reasonable request, the Borrower shall make available to the
Lender copies of agreements with, or purchase orders from, the customers of the
Borrower and copies of invoices to customers, proof of shipment or delivery and
such other documentation and information relating to said Accounts and other
Collateral as the Lender may require.
(I) The Borrower may and will, consistent with prior business
practices, enforce and collect all amounts owing on the Accounts, for the
benefit of the Lender, such privilege shall terminate automatically, however,
upon the occurrence of an Event of Default which has not been waived by the
Lender. Upon an Event of Default, any checks, cash, notes or other instruments
or property received by the Borrower with respect to any Accounts shall be held
by the Borrower in trust for the benefit of the Lender, separate from the
Borrower's own property and funds, and immediately (I) deposited as directed by
Lender, or (ii) if such property is not suitable for deposit, turned over to the
Lender, without proper assignments or endorsements. No checks, drafts or other
instruments received by the Lender shall constitute final payment unless and
until such instruments have actually been collected, and the Lender shall
promptly make presentment for payment.
(j) The Borrower agrees to promptly notify the Lender in
writing of any matters materially and adversely affecting the Borrower's
business or the value, enforceability or collectibility of any of the
Collateral.
(k) The Borrower will at all times keep the Collateral insured
against all insurable hazards in amounts equal to the full insurable value of
the Collateral. Such insurance shall be in such companies as may be acceptable
to Lender, with provisions satisfactory to Lender for payment of all losses
thereunder to Lender as its interests may appear. If required by Lender,
Borrower shall deposit the policies with Lender. Any money received by Lender
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under said policies may be applied to the payment of the Loans, whether or not
due and payable, or at Lender's option may be delivered by Lender to Borrower
for the purpose of repairing or restoring the Collateral. Borrower hereby
assigns to Lender all right to receive proceeds of insurance not exceeding the
aggregate amount of the Loans.
(l) The Borrower shall, at the Borrower's own expense, keep
the Equipment in good working order, repair, and operating condition, subject to
normal wear and tear. Borrower will pay and discharge all taxes, levies, and
other impositions levied thereon as well as the cost of repairs to or
maintenance of same, and will not permit anything to be done that may impair the
value of any such Collateral.
(m) The Borrower will not allow the Collateral to be attached
to real estate in such a manner as to become a fixture or a part of any real
estate (other than any real estate on which Lender have a first and prior
perfected fixture filing).
(n) The Borrower shall (I) use, store and maintain the
Inventory and the Equipment with all reasonable care and caution which is
consistent with good business practice, and (ii) use the Inventory and Equipment
for lawful purposes only and in conformity with applicable laws, ordinances and
regulations.
(o) The Borrower agrees to maintain books and records
pertaining to the Collateral in such detail, form and scope as is consistent
with good business practice, and agrees that such books and records will reflect
the Lender's interest in its Accounts. The Borrower agrees that the Lender or
its agents may enter upon the premises of the Borrower at any time and from time
to time, during normal business hours and upon reasonable notice under the
circumstances, and at any time at all on and after the occurrence of a Default
which continues beyond the expiration of any grace or cure period applicable
thereto, and which has not otherwise been waived by the Lender, for the purposes
of (I) inspecting and verifying the Collateral, (ii) inspecting and/or copying
any and all records pertaining thereto, and (iii) discussing the affairs,
finances and business of the Borrower with any officers, employees and directors
of the Borrower or with the auditors of Borrower.
(p) The Borrower agrees to execute and deliver to the Lender,
from time to time, solely for the Lender's convenience in maintaining a record
of the Collateral, such written statements and schedules as the Lender may
require, including all financial and other reports the Lender may from time to
time request. The Borrower's failure, however, to promptly give the Lender such
statements or schedules shall not affect, diminish, modify or otherwise limit
the Lender's security interests in the Collateral.
SECTION 5. REMEDIES UPON AN EVENT OF DEFAULT.
---------------------------------
For purposes of this Security Agreement and the related Note an "Event
of Default" shall include all of the following:
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(I) The failure to pay timely any monetary obligation of the
Borrower owing to the Lender (including the obligations represented by the
Note);
(ii) The filing of any bankruptcy petition or pursuit of any
other relief from creditors through any formal proceeding;
(iii) The failure to timely report any material event
adversely affecting the business, franchise or financial condition of the
Borrower;
(iv) The failure to timely satisfy any of the Obligations;
(v) The breach of or failure to fully perform any provision of
this Security Agreement, the Note or any document or instrument entered in
connection with the granting, attachment or perfection of the interest in the
Collateral created hereby;
(vi) Any material variance from any quarterly projected
revenue or expense item represented in the forecasted financial information
provided to Lender in connection with any request for an advance (any variance
of greater than (a) 20 percent from projected revenues; (b) 15 percent from
projected expenses; or (c) 25 percent from projected cash flow shall be deemed
material); or
(vii) The default in any other obligation of any kind or
character of the Borrower to the Lender not cured to Lender's reasonable
satisfaction within five (5) days of default.
Upon the occurrence and during the continuance of an Event of Default,
the Lender may, in addition to all other rights and remedies available under
applicable law, without notice to or demand upon the Borrower, do any one or
more of the following:
(a) Exercise any or all of the rights and remedies provided
for by the applicable Uniform Commercial Code, specifically including, without
limitation, the right to possession of the Collateral and to recover the fees
and expenses incurred by the Lender in the enforcement of this Security
Agreement or in connection with the Borrower's redemption of the Collateral,
including reasonable fees, expenses and the disbursements of attorneys and
paralegals (including the allocated costs of inside counsel);
(b) Require the Borrower to assemble the Collateral or any
part thereof and make it available at one or more places as the Lender may
designate and to deliver possession of the Collateral or any part thereof to the
Lender, who shall have full right to enter upon any or all of the Borrower's
premises and property to exercise the Lender's rights hereunder and to notify
all account holders of Lender's superior entitlement to the Collateral;
(c) Use, manage, operate and control the Collateral and the
Borrower's business and property to preserve the Collateral or its value,
including, without limitation, the rights to take possession of all of the
Collateral, to exclude any third parties, whether or not claiming under the
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Borrower, from the Borrower's premises and property, to complete any unfinished
Inventory, to make repairs, replacements, alterations, additions and
improvements to the Collateral, and to dispose of all or any portion of the
Collateral in the ordinary course of the Borrower's business;
(d) Use, in connection with any assembly, use or disposition
of the Collateral, any intellectual property, Intangibles or other technical
knowledge or process used or utilized from time to time by the Borrower;
(e) Enforce one or more remedies hereunder, successively or
concurrently, and such action shall not operate to estop or prevent the Lender
from pursuing any other or further remedy which it may have, and any
repossession or retaking or sale of the Collateral pursuant to the terms hereof
shall not operate to release the Borrower from its obligations hereunder;
(f) In connection with any public or private sale under the
applicable Uniform Commercial Code, the Lender shall give the Borrower at least
ten days' prior written notice of the time and place of any public sale of the
Collateral or of the time after which any private sale or other intended
disposition thereof may be made, which shall be deemed to be reasonable notice
of such sale or other disposition. Such notice may be given to the Borrower in
accordance with the provisions of Section 6.1 hereof;
(g) Proceed by an action or actions at law or in equity, or
without such action if permitted by applicable law, to foreclose this Security
Agreement and sell the Collateral, or any portion thereof, pursuant to a
judgment or decree of a court or courts of competent jurisdiction or without
such order if permitted by applicable law; and
(h) If the Lender recovers possession of all or any part of
the Collateral pursuant to a writ of possession or other judicial process,
whether prejudgment or otherwise, the Lender may thereafter retain, sell or
otherwise dispose of such Collateral in accordance with this Security Agreement
or the applicable Uniform Commercial code, and following such retention, sale or
other disposition, the Lender may voluntarily dismiss without prejudice the
judicial action in which such writ of possession or other judicial process was
issued. The Borrower hereby consents to the voluntary dismissal by the Lender of
such judicial action, and the Borrower further consents to the exoneration of
any bond that the Lender file in such action.
SECTION 6. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 6.1. Notices. All notices, approvals, consents or
other communications required or desired to be given hereunder shall be
delivered to each of the parties hereto at their respective addresses set forth
beneath their signatures below. Such notices shall be effective (I) when
delivered, if personally delivered, or (ii) two days after deposit in the United
States mail, certified mail, return receipt requested.
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SECTION 6.2. Headings. The headings in this Security Agreement
are for purposes of reference only and shall not affect the meaning or
construction of any provision of this Security Agreement.
SECTION 6.3. Severability. The provisions of this Security
Agreement are severable, and if any clause or provision shall be held invalid,
illegal or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect in that jurisdiction only such
clause or provision, or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
of this Security Agreement in any jurisdiction.
SECTION 6.4. Amendments, Waivers and Consents. Any amendment
or waiver of any provision of this Security Agreement and any consent to any
departure by the Borrower from any provision of this Security Agreement shall be
effective only if made or given in writing.
SECTION 6.5. Interpretation of Agreement. Time is of the
essence in each provision of this Security Agreement of which time is an
element. All terms not defined herein shall have the meaning set forth in the
applicable Uniform Commercial Code, except where the context otherwise requires.
Acceptance of or acquiescence in a course of performance rendered under this
Security Agreement shall not be relevant in determining the meaning of this
Security Agreement even though the accepting or acquiescing party had knowledge
of the nature of the performance and opportunity for objection.
SECTION 6.6. Continuing Security Interest; Transfer of Notes.
This Security Agreement shall create a continuing security interest in the
Collateral and shall (I) remain in full force and effect until payment in full
of the Obligations, (ii) be binding upon the Borrower, its successors and
assigns, and (iii) inure, together with the rights and remedies of the Lender
hereunder, to the benefit of the Lender and its respective successors,
transferees and assigns. Without limiting the generality of clause (iii) above,
the Lender may assign or otherwise transfer any Note or other evidence of the
Obligations held by it to any other person, and such other person shall
thereupon become vested with all the benefits in respect thereof granted to the
Lender herein or otherwise.
SECTION 6.7. Reinstatement. To the extent permitted by law,
this Security Agreement shall continue to be effective or be reinstated, as the
case may be, if at any time any amount received by the Lender in respect of the
Obligations is rescinded or must otherwise be restored or returned by the Lender
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 6.8. Survival of Provisions. All representations,
warranties and covenants of the Borrower contained herein shall survive the
execution and delivery of this Security Agreement, and shall terminate only upon
the full and final payment and performance by the Borrower of the Obligations
secured hereby.
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SECTION 6.9. Setoff. The Lender shall have the right of setoff
dollar for dollar against any amount owing by Lender to Borrower amounts
necessary to pay all or any part of the Obligations. The setoff right is in
addition to all other rights and remedies set forth herein.
SECTION 6.10. Power of Attorney.
(a) The Borrower hereby irrevocably authorizes and appoints
Schuchert, or any Person or agent Schuchert may designate, as the Borrower's
attorney-in-fact, at the Borrower's cost and expense, to exercise, subject to
the limitations set forth below, all of the following powers, which being
coupled with an interest, shall be irrevocable until all of the Obligations have
been paid and satisfied in full:
(1) To receive, take, endorse, sign, assign and deliver, all
in the name of the Lender or the Borrower, any and all checks, notes,
drafts, and other documents or instruments relating to the Collateral;
(2) To request, following notice to Debtor, at any time from
customers indebted on Accounts, verification of information concerning
the Accounts and the amounts owing thereon;
(3) Upon the occurrence and during the continuance of a
Default or an Event of Default, to receive, open and dispose of all
mail addressed to the Borrower and to notify postal authorities to
change the address for delivery thereof to such address as the Lender
may designate;
(4) Upon the occurrence and during the continuance of a
Default or an Event of Default, to give customers indebted on Accounts
notice of the Lender's interest therein, and/or to instruct such
customers to make payment directly to the Lender for the Borrower's
account; and
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(5) Upon the occurrence and during the continuance of a
Default or an Event of Default, to take or bring, in the name of the
Lender or the Borrower, all steps, actions, suits or proceedings deemed
by the Lender necessary or desirable to enforce or effect collection of
the Accounts.
(b) In addition to all of the powers granted to Schuchert
pursuant to subsection (a) above, the Borrower hereby appoints and constitutes
Schuchert as the Borrower's attorney-in-fact to exercise all of the following
powers upon and at any time after the occurrence and during the continuance of
an Event of Default: (I) collection of Accounts or proceeds of any Collateral,
(ii) conveyance of any item of Collateral to any purchaser thereof, (iii) giving
of any notices or recording any Liens under Section 4(c) hereof, and (iv) making
of any payments or taking any acts under Section 4(f) hereof. Schuchert's
authority hereunder shall include, without limitation, the authority to endorse
and negotiate, for the Lender' own account, any checks or instruments in the
name of the Borrower, execute and give receipt for any certificate of ownership
or any document, transfer title to any item of Collateral, send verifications of
Accounts to any customer, sign the Borrower's name on all financing statements
or any other documents deemed necessary or appropriate to preserve, protect or
perfect the security interest in the Collateral and to file the same, prepare,
file and sign the Borrower's name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with any Account and
prepare, file and sign the Borrower's name on a proof of claim in bankruptcy or
similar document against any customer of the Borrower, and to take any other
actions arising from or incident to the powers granted to the Lender in this
Security Agreement. This power of attorney is coupled with an interest and is
irrevocable by the Borrower, The Borrower hereby ratifies all that Schuchert
shall lawfully do or cause to be done by virtue of this Section 6.10.
SECTION 6.11. Authority of the Lender; Indemnification. The
Lender shall have and be entitled to exercise all powers hereunder which are
specifically granted to the Lender by the terms hereof, together with such
powers as are incident thereto. The Lender may perform any of its duties
hereunder or in connection with the Collateral by or through agents or employees
and shall be entitled to retain counsel and to act in reliance upon the advice
of counsel concerning all such matters. Neither the Lender nor any director,
officer, employee, attorney or agent of the Lender shall be liable to the
Borrower for any action taken or omitted to be taken by it or them hereunder,
except for its or their own gross negligence or willful misconduct, nor shall
the Lender be responsible for the validity, effectiveness or sufficiency of this
Security Agreement or of any document or security furnished pursuant hereto. The
Lender and its directors, officers, employees, attorneys and agents shall be
entitled to rely on any communication, instrument or document reasonably
believed by it or them to be genuine and correct and to have been signed or sent
by the proper person or persons. The Borrower agrees to indemnify and hold
harmless the Lender and any director, officer, employee, attorney or agent of
the Lender from and against any and all costs, expenses (including reasonable
fees, expenses and agent of the Lender from and against any and all costs,
expenses (including reasonable fees, expenses and disbursement of attorneys and
paralegals (including, without duplication, charges of inside counsel)), claims
and liabilities incurred by the Lender or such person hereunder, unless such
claim or liability shall be due to willful misconduct or gross negligence on the
part of the Lender or such persons.
13
<PAGE>
SECTION 6.12. Release; Termination of Agreement. Subject to
the provisions of Section 6.7 hereof, this Security Agreement shall terminate
upon full and final payment and performance of all the Obligations. At such
time, the Lender shall, at the request and expense of the Borrower, reassign and
redeliver to the Borrower all of the Collateral hereunder which has not been
sold, disposed of, retained or applied by the Lender in accordance with the
terms hereof. Such reassignment and redelivery shall be without warranty by or
recourse to the Lender, except as to the absence of any prior assignments by the
Lender of its interest in the Collateral, and shall be at the expense of the
Borrower.
SECTION 6.13. Counterparts. This Security Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which, when so executed and delivered, shall be
an original, but all of which shall together constitute one and the same
agreement.
SECTION 6.14. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND
ENFORCEMENT OF THIS SECURITY AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND ANY
DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS SECURITY AGREEMENT OR ANY OF
THE OTHER CREDIT DOCUMENTS, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR
OTHERWISE, SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS
OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF WYOMING.
SECTION 6.15. SUBMISSION TO JURISDICTION. ALL DISPUTES AMONG
THE BORROWER AND THE LENDER (OR THE LENDER ACTING ON THEIR BEHALF), WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE
AND FEDERAL COURTS LOCATED IN SHERIDAN COUNTY, WYOMING, AND THE COURTS TO WHICH
AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT THE LENDER SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY THE LENDER IN
GOOD FAITH TO ENABLE THE LENDER TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE LENDER. THE BORROWER WAIVES ANY
OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE LENDER HAS
COMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS.
14
<PAGE>
SECTION 6.16. SERVICE OF PROCESS. THE BORROWER HEREBY
IRREVOCABLY AGREES THAT SERVICE OF PROCESS IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY
BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE BORROWER AT ITS
ADDRESS SET FORTH BENEATH ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH
THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO.
SECTION 6.17. JURY TRIAL. THE BORROWER AND THE LENDER EACH
HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY. INSTEAD, ANY DISPUTES WILL BE
RESOLVED IN A BENCH TRIAL.
SECTION 6.18. LIMITATION OF LIABILITY. THE LENDER SHALL NOT
HAVE ANY LIABILITY TO THE BORROWER (WHETHER SOUNDING IN TORT, CONTRACT, OR
OTHERWISE) FOR LOSSES SUFFERED BY THE BORROWER IN CONNECTION WITH, ARISING OUT
OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY
THIS SECURITY AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION
THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OR
COURT ORDER BINDING ON THE LENDER, THAT THE LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR WILFUL MISCONDUCT OR SUCH LOSSES OR
DAMAGES ARE THE RESULT OF BREACH OF CONTRACT CLAIMS SUCCESSFULLY PROSECUTED BY
THE BORROWER.
IN WITNESS WHEREOF, the undersigned has caused this Security Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
--------
FOUNTAIN PHARMACEUTICALS, INC., a
Delaware corporation
By: /s/ Gerald T. Simmons
----------------------------------------------
Name: Gerald T. Simmons
Title: President/CEO
Address for Notice and Principal Place of Business:
7279 Bryan Dairy Road
Largo, Florida 33777
15
<PAGE>
By its acceptance hereof, as of the day and year first above written,
the Lender agrees to be bound by the provisions hereof.
LENDER
------
/s/ Joseph Schuchert
-------------------------------------------
JOSEPH SCHUCHERT
Address for Notice:
c/o Joseph S. Schuchert
1949 Sugarland Drive, Suite 250
Sheridan, Wyoming 82801
16
SECURED PROMISSORY NOTE
$1,500,000 December 31, 1998
FOR VALUE RECEIVED, the undersigned, FOUNTAIN PHARMACEUTICALS, INC., a
Delaware corporation ("Maker"), promises to pay to the order of Joseph Schuchert
(the "Payee"); (Payee and any subsequent holder[s] hereof are hereinafter
individually and collectively referred to as "Holder"), the principal sum of ONE
MILLION FIVE HUNDRED THOUSAND AND NO/100THS DOLLARS ($1,500,000), or such lesser
amount as may be advanced by Payee to Maker hereunder, together with interest on
the outstanding principal balance from time to time outstanding at a rate equal
to the greater of the "Adjusted Accrual Rate" (as defined below) or 9% per
annum. This Note represents a series of obligations of the Maker to the Payee
for cash and other advances made to the Payee and interest earned (as set forth
in Schedule A, attached hereto and all of which is now principal owing under
this Note), and all further extensions of credit up to the full face amount of
principal identified hereon each of which advances shall at the discretion of
Payee also be set forth on Schedule A as and when funds are advanced.
Interest shall accrue daily on the outstanding principal balance owing.
For purposes of this Note, the "Adjusted Accrual Rate" shall be determined by
reference to the Prime Rate as quoted by the Wall Street Journal. Specifically,
interest shall be adjusted monthly and accrue during each successive calendar
month at the Prime Rate most recently quoted by the Wall Street Journal as of
the last business day of each immediately prior month (the "Adjusted Prime
Rate"), plus one and one-half percent (the "Adjusted Accrual Rate").
The entire outstanding principal balance, together with all accrued and
unpaid interest hereon, shall be immediately due and payable in full on the
earlier of (i) December 31, 2000, (ii) one hundred eighty (180) days following
written demand, or (iii) upon any Event of Default herein or in the Credit and
Security Agreement of even date herewith (the "Security Agreement"). All accrued
interest shall be paid monthly on or before the tenth day of each calendar
month, or if not so paid when due, shall be added to the principal owing on this
Note. Following default, unpaid principal and interest shall bear interest at a
default rate equal to the Adjusted Prime Rate plus four percent. All payments
hereunder are to be made to the office of Payee at 1949 Sugarland Drive, Suite
250, Sheridan, Wyoming 82801, or such other location as Payee identifies to
Maker, in writing.
The indebtedness evidenced hereby may be prepaid in whole or in part,
at any time and from time to time, without premium or penalty. All payments made
hereunder shall be applied first to any costs incurred by Maker in enforcing or
administering this Note, then to accrued interest, then to principal.
1
<PAGE>
Any advances hereafter made by Payee to Maker that are not evidenced by
another instrument or agreement between the parties shall be conclusively
presumed to have been made hereunder when such advance is made. The entire
balance of all advances hereunder that may be outstanding from time to time
shall constitute a single indebtedness, and no single advance increasing the
outstanding balance hereof shall itself be considered a separate loan, but
rather an increase in the aggregate outstanding balance of the indebtedness
evidenced hereby.
If any payment hereunder is not paid when due (other than monthly
interest payments which may accrue as principal if unpaid when due as provided
above), the entire indebtedness evidenced by this Note may be declared to be
immediately due and payable in full without notice at the option of Holder.
Holder may waive any default before or after the same has been declared and
restore this Note to full force and effect without impairing the right to
declare the indebtedness evidenced hereby due for a subsequent default, this
right being a continuing one.
In the event that this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, the undersigned and any other parties hereto
agree to pay a reasonable attorneys' fee, all court and other costs and the
reasonable costs of any collection efforts.
Jurisdiction and venue in any action arising hereunder shall be in a
court of competent subject matter jurisdiction in Sheridan County, Wyoming. All
parties hereto waive demand, notice, presentment and protest.
The obligations represented by this Note are secured by a pledge of
substantially all of the assets of the Maker pursuant to the terms and
conditions of the Security Agreement of even date herewith.
To the extent any payment of interest or other consideration owing by
reason of the credit extended hereunder is determined by a court of competent
jurisdiction to exceed the amount permissible under any usury law of any
applicable state or other jurisdiction, this Note shall be automatically
reformed to allow the payment of the maximum amount of consideration permitted
under such law, and the Note shall otherwise remain in full force and effect.
"MAKER"
-------
FOUNTAIN PHARMACEUTICALS, INC.
By: /s/ Gerald T. Simmons
--------------------------------
Title: President/CEO
--------------------------------
2
<PAGE>
SCHEDULE "A"
CURRENT PRINCIPAL
-----------------
$0.00 total amount owing as of December 31, 1998, as principal
under the Note for advances made to date or for which forbearance and
consolidation into this Note are provided.
ADDITIONAL ADVANCES
-------------------
FOUNTAIN PHARMACEUTICALS, INC. OPERATING EXPENSES
- -------------------------------------------------
<TABLE>
<CAPTION>
Total Principal Owing as
Amount Date of Date of Advance
------ ---- ------------------
<S> <C> <C> <C>
$400,000 January 99 $400,000
$ 0 February 99 $400,000
$200,000 March 99 $600,000
$150,000 April 99 $750,000
$ 50,000 May 99 $800,000
$ 50,000 June 99 $850,000
$ 50,000 July 99 $900,000
$ 50,000 August 99 $950,000
$ 50,000 September 99 $1,000,000
---------
$1,000,000 Total
</TABLE>
DERMIK LEGAL FEES
- -----------------
<TABLE>
<CAPTION>
Total Principal Owing as
Amount Date of Date of Advance
------ ---- ------------------
<S> <C> <C> <C>
$ 300,000 January 99 $300,000
$ 50,000 February 99 $350,000
$ 50,000 March 99 $400,000
$ 50,000 April 99 $450,000
$ 50,000 May 99 $500,000
---------
$500,000 Total
</TABLE>
PATENT, TRADEMARK AND LICENSE MORTGAGE
--------------------------------------
THIS PATENT, TRADEMARK AND LICENSE MORTGAGE (the "Mortgage") made as of
this 31st day of December, 1998 by FOUNTAIN PHARMACEUTICALS, INC., a Delaware
corporation, having its principal place of business at 7279 Bryan Dairy Road,
Largo, Florida 33777 ("Mortgagor"), in favor of JOSEPH S. SCHUCHERT, an
individual, with an office at 1949 Sugarland Drive, Suite 250, Sheridan, Wyoming
82801 ("Mortgagee"):
W I T N E S S E T H:
--------------------
WHEREAS, Mortgagor and Mortgagee are parties to a certain Credit and
Security Agreement, dated as of December 31,1998 ("the Security Agreement"), and
the related Secured Promissory Note (the "Note") and other related loan
documents of even date herewith (collectively, the "Security Documents"), which
Security Documents provide (i) for Mortgagee to, from time to time, extend
credit to or for the account of Mortgagor and (ii) for the grant by Mortgagor to
Mortgagee of a security interest in certain of Mortgagor's assets, including,
without limitation, its patents, patent applications, trademarks, trademark
applications, tradenames, service marks, service mark applications, goodwill and
licenses;
NOW, THEREFORE, in consideration of the premises set forth herein and
for other good and valuable consideration, the receipt, sufficiency and adequacy
of which are hereby acknowledged, Mortgagor agrees as follows:
1. Capitalized Terms. All terms capitalized but not otherwise defined
herein shall have the same meanings herein as in the Security Agreement.
2. Mortgage of Patents, Trademarks and Licenses. To secure the complete
and timely satisfaction of all of Mortgagor's "Obligations" (as defined in the
Security Agreement), Mortgagor hereby grants, bargains, assigns, mortgages,
pledges, sells, creates a security interest in, transfers, and conveys to
Mortgagee, as and by way of a first mortgage and security interest having
priority over all other security interests, with power of sale, to the extent
permitted by law or by the specific license agreements, upon the occurrence of
an Even of Default (as defined in the Security Agreement) all of Mortgagor's
right, title and interest in and to all of its now existing and hereafter
created or acquired:
1
<PAGE>
(i) patents and patent applications, including, without
limitation, the inventions and improvements described and claimed
therein, and those patents listed on Exhibit A attached hereto and
hereby made a part hereof, and (a) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof,
(b) all income, damages and payments now and hereafter due or payable
under or with respect thereto, including, without limitation, damages
and payments for past or future infringements thereof, (c) the right to
sue for past, present and future infringements thereof, and (d) all
rights corresponding thereto throughout the world (all of the foregoing
patents and applications, together with the items described in clauses
(a)-(d) of this subsection 2(i), are sometimes hereinafter to
individually as a "Patent" and, collectively, as the "Patents");
(ii) trademarks, trademark registrations, trademark
applications, tradenames and tradestyles, service marks, service mark
registrations and service mark applications, including, without
limitation, the trademarks, tradenames, service marks and applications
and registrations thereof listed on Exhibit B attached hereto and
hereby made a part hereof, and (a) renewals or extensions thereof, (b)
all income, damages and payments now and hereafter due or payable with
respect thereto, including, without limitation, damages and payments
for past or future infringements thereof, (c) the right to sue for
past, present and future infringements thereof, and (d) all rights
corresponding thereto throughout the world (all of the foregoing
trademarks, tradenames and tradestyles, service marks and applications
and registrations thereof, together with the items described in clauses
(a)-(d) of this subsection (ii), are sometimes hereinafter referred
individually as a "Trademark," and, collectively, as the "Trademarks");
(iii) all license agreements with respect to any of the
Patents or the Trademarks or any other patent, trademark, service mark
or any application or registration thereof or any other tradename or
tradestyle between Mortgagor and any other party, whether Mortgagor is
a licensor or licensee under any such license agreement, including,
without limitation, the licenses listed on Exhibit C attached hereto
and hereby made a part hereof (all of the foregoing license agreements
and Mortgagor's rights thereunder are referred to collectively as the
"Licenses"); and
(iv) the goodwill of Mortgagor's business connected with and
symbolized by the Trademarks.
3. Warranties and Representations. Mortgagor warrants and represents to
Mortgagee that:
(i) Each of the Patents, Trademarks and Licenses is valid and
enforceable;
(ii) Mortgagor is the sole and exclusive owner of the entire
and unencumbered right, title and interest in and to each of the
Patents, Trademarks and Licenses, free and clear of any liens, charges
and encumbrances, including, without limitation, licenses, shop rights
and covenants by Mortgagor not to sue third persons;
2
<PAGE>
(iii) Mortgagor has no notice of any suits or actions
commenced or threatened with reference to the Patents, Trademarks or
Licenses; and
(iv) Mortgagor has the right to execute and deliver this
Mortgage and perform its terms and has entered into or will enter into
written agreements with each of its present and future employees,
agents and consultants which will enable it to comply with the
covenants contained herein.
4. Restrictions on Future Agreements. Mortgagor agrees that until the
Obligations shall have been satisfied in full and the Security Documents shall
have been terminated, Mortgagor shall not sell or assign its interest in, or
grant any license under, the Patents, Trademarks or Licenses, or enter into any
other agreement with respect to the Patents, Trademarks or Licenses which is
inconsistent with Mortgagor's obligations under this Mortgage, without the prior
written consent of Mortgagee, and Mortgagor further agrees that it shall not
take any action, or permit any action to be taken by others subject to its
control, including licensees, or fail to take any action (solely with respect to
the Patents and the Tradenames), which would affect the validity or enforcement
of the rights transferred to Mortgagee under this Mortgage.
5. New Patents, Trademarks, and Licenses. Mortgagor represents and
warrants that the Patents, Trademarks and Licenses listed on Exhibits A, B and
C, respectively, constitute all of the Patents, Trademarks, and Licenses now
owned by Mortgagor. All other patent rights or investments of Mortgagor shall be
subject to this Mortgage.
6. Royalties; Terms. The term of the mortgages granted herein shall
extend until the earlier of (i) the expiration of each of the respective
Patents, Trademarks and Licenses assigned hereunder, and (ii) the Obligations
have been paid in full and the Security Documents have been terminated. Upon the
occurrence of an Event of Default, Mortgagor agrees that the use by Mortgagee of
all Patents, Trademarks and Licenses shall be worldwide and without any
liability for royalties or other related charges from Mortgagee to the
Mortgagor.
7. Grant of License to Mortgagor. Unless and until an Event of Default
shall have occurred, Mortgagee hereby grants to Mortgagor the exclusive,
nontransferable right and license to use the Trademarks in the ordinary course
of its business, to exercise Mortgagee's rights under the Licenses, and to make,
have made, use and sell the inventions disclosed and claimed in the Patents for
Mortgagor's own benefit and account and for none other. Mortgagor shall use the
Trademarks only on goods of at least as high quality as the goods on which
Mortgagor or its predecessor used the goods prior to the date hereof. Mortgagor
agrees not to sell or assign its interest in, or grant any sublicense under, the
license granted to Mortgagor in this Section 7, without the prior written
consent of Mortgagee. From and after the occurrence of an Event of Default,
Mortgagor's license with respect to the Patents, Trademarks and Licenses set
forth in this Section 7 shall terminate forthwith, and Mortgagee shall have, in
addition to all other rights and remedies given it by this Mortgage, those
allowed by law and the rights and remedies of a secured party under the Uniform
3
<PAGE>
Commercial Code as enacted in any of the jurisdictions in which the Patents,
Trademarks or Licenses may be located, and shall have immediate power of sale
and full and unencumbered ownership of the Patents, Trademarks and Licenses.
8. Mortgagee's Right to Inspect. Mortgagee shall have the right, at any
time and from time to time during normal business hours and prior to payment in
full of the Obligations, to inspect Mortgagor's premises and to examine
Mortgagor's books, records and operations, including, without limitation,
Mortgagor's quality control processes. Upon the occurrence of an Event of
Default, Mortgagor agrees that Mortgagee, or a conservator appointed by
Mortgagee, shall have the right to establish such additional product quality
controls as Mortgagee, or said conservator, in its sole judgment, may deem
necessary to assure maintenance of the quality of products sold by Mortgagor
under the Trademarks.
9. Release of Mortgage. This Mortgage is made for collateral purposes
only. Upon, but only upon, payment in full of the Obligations and termination of
the Security Documents, Mortgagee shall execute and deliver to Mortgagor all
deeds, assignments and other instruments, and shall take such other actions, as
may be necessary or proper to re-vest in Mortgagor full title to the Patents,
Trademarks, and Licenses, subject to any disposition thereof which may have been
made by Mortgagee pursuant hereto or pursuant to the Security Documents.
10. Expenses. All reasonable expenses incurred in connection with the
performance of any of the agreements set forth herein shall be borne by
Mortgagor. All reasonable fees, costs and expenses, of whatever kind or nature,
including reasonable attorneys' and paralegals' fees and legal expenses,
incurred by Mortgagee in connection with the filing or recording of any
documents (including, without limitation, all taxes in connection therewith) in
public offices, the payment or discharge of any taxes, counsel fees, maintenance
fees, encumbrances or otherwise in protecting, maintaining or preserving the
Patents, Trademarks and Licenses, or in defending or prosecuting any actions or
proceedings arising out of or related to the Patents, Trademarks and Licenses,
shall be borne by and paid by Mortgagor on demand by Mortgagee and until so paid
shall be added to the principal amount of Mortgagor's Obligations and shall bear
interest at the rate set forth in the Note.
11. Duties of Mortgagor. Mortgagor shall have the duty (i) to prosecute
diligently any material patent, trademark or service mark applications pending
as of the date hereof or thereafter until the Obligations shall have been paid
in full, (ii) to make application on unpatented but patentable inventions and on
trademarks and service marks, as appropriate, and to the extent commercially
reasonable, (iii) to preserve and maintain all rights in the Patents, Trademarks
and Licenses, and (iv) to ensure that the Patents, Trademarks and Licenses are
and remain enforceable. Any expenses incurred in connection with Mortgagor's
obligations under this Section 11 shall be borne by Mortgagor. Mortgagor shall
not abandon any right to file a patent, trademark or service mark application,
or abandon any pending patent application, or any other Patent, Trademark or
License without the consent of Mortgagee, except as may be commercially
reasonable.
4
<PAGE>
12. Mortgagee's Right to Sue. After the occurrence of an Event of
Default, Mortgagee shall have the right, but shall in no way be obligated, to
bring suit in its own name to enforce the Patents, Trademarks and Licenses, and,
if Mortgagee shall commence any such suit, Mortgagor shall, at the request of
Mortgagee, do any and all lawful acts and execute any and all proper documents
required by Mortgagee in aid of such enforcement and Mortgagor shall promptly,
upon demand, reimburse and indemnify Mortgagee for all reasonable costs and
expenses incurred by Mortgagee in the exercise of its rights under this Section
12.
13. Waivers. No course of dealing between Mortgagor and Mortgagee, nor
any failure to exercise, nor any delay in exercising, on the part of Mortgagee,
any right, power or privilege hereunder or under the Security Documents shall
operate as a waiver thereof.
14. Severability. The provisions of this Mortgage are severable, and if
any clause or provision shall be held invalid and unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction.
15. Modification. This Mortgage cannot be altered, amended or modified
in any way, except as specifically provided in Section 5 hereof or by a writing
signed by the parties hereto.
16. Cumulative Remedies; Power of Attorney; Effect on Financing
Agreement. All of Mortgagee's rights and remedies with respect to the Patents,
Trademarks and Licenses, whether established hereby or by the Security
Documents, or by any other agreements or by law shall be cumulative and may be
exercised singularly or concurrently. Upon the occurrence of an Event of
Default, Mortgagor hereby authorizes Mortgagee to make, constitute and appoint
any officer or agent of Mortgagee as Mortgagee may select, in its sole
discretion, as Mortgagor's true and lawful attorney-in-fact, with power to (i)
endorse Mortgagor's name on all documents necessary or desirable for Mortgagee
in the use of the Patents, Trademarks and Licenses, or (ii) take any other
actions with respect to the Patents, Trademarks and Licenses as Mortgagee deems
to be in the best interest of Mortgagee, or (iii) grant or issue any license
under the Patents, Trademarks or Licenses to anyone, or (iv) subject to
applicable law, assign, pledge, convey or otherwise transfer title in or dispose
of the Patents, Trademarks or Licenses to anyone. Mortgagee hereby ratifies all
that such attorney shall lawfully do or cause to be done by virtue hereof. This
power of attorney shall be irrevocable until the Obligations shall have been
paid in full. Mortgagee shall have, in addition to all other rights and remedies
given it by the terms of this Mortgage and the Security Documents, all rights
and remedies allowed by law and the rights and remedies of a secured party under
the Uniform Commercial Code as enacted in any jurisdiction in which the Patents,
Trademarks or Licenses may be located.
17. Binding Effect; Benefits. This Mortgage shall be binding upon the
Mortgagor and its respective successors and assigns, and shall inure to the
benefit of Mortgagee, its successors, nominees and assigns.
5
<PAGE>
18. Governing Law. This Mortgage shall be governed by and construed in
accordance with the internal laws of the State of Wyoming.
19. Further Assistance. Mortgagor and Mortgagee agree to execute and
deliver such further agreements, instruments and documents, and to perform such
further acts, as either party shall reasonably request from time to time in
order to carry out the purpose of this Mortgage and the agreements set forth
herein.
20. Survival of Representations. All representations and warranties
contained in this Mortgage shall survive the execution and delivery of this
Mortgage and shall be remade on the date of each borrowing under the Note.
IN WITNESS WHEREOF, following approval by all of its directors,
Fountain Pharmaceuticals, Inc. has duly executed this Mortgage in favor of
Joseph S. Schuchert as of the date first written above.
ATTEST: FOUNTAIN PHARMACEUTICALS, INC.
______________________________ By: /s/ Gerald T. Simmons
------------------------------
Title: Corporation Secretary of Title: President/CEO
Fountain Pharmaceuticals, Inc.
AGREED AND ACCEPTED to this
31st day of December, 1998
/s/ Joseph S. Schuchert
- -------------------------------
Joseph S. Schuchert
6
<PAGE>
THIS INSTRUMENT PREPARED BY AND
AFTER FILING RETURN TO:
Joseph S. Schuchert III, Esq.
Jeffrey D. Warren, Esq.
Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, California 90802
STATE OF FLORIDA )
) ss.
COUNTY OF Pinellas )
The foregoing Patent, Trademark and License Mortgage was
executed and acknowledged before me this 6th day of January, 1999, by Gerald T.
Simmons and ______________________, personally known to me to be the
President/CEO and _______________________, respectively, of Fountain
Pharmaceuticals, Inc., a Delaware corporation, on behalf of such corporation.
/s/ Francis J. Werner
---------------------------
Notary Public No. CC520799
Pinellas County, Florida
My commission expires:
December 25, 1999
-----------------
7
<PAGE>
FOUNTAIN PHARMACEUTICALS, INC.
INTELLECTUAL PROPERTY - Domestic and Foreign
January 12, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
10767/0800 SERIES: METHOD FOR MAKING SOLVENT DILUTION MICROCARRIERS
This series of patents claims technology associated with adding the
active ingredient at the time of manufacture.
Specifically, this series of patents covers (1) methods, consisting
essentially of four steps, for forming solvent dilution microcarrier
vehicles (SDMCs) in which the active ingredient is added in the initial
preparation step, (2) SDMCs made according to the claimed method, and
(3) an optically clear solution made by following the first three
preparation steps. The method consists of the following steps: (1)
mixing the active ingredient with a bilayer-forming material in a
nonaqueous solvent; (2) adding water to form a turbid solution; (3)
adding a nonaqueous solvent to form an optically clear solution; and
(4) an organization step, which is either an aerosolization step, an
additional dilution step, or a drying/rehydrating step.
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623 U.S. 204214 06/08/88 ABANDONED - Appeal Withdrawn
(10767/00801)
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CN CANADA 602057 06/07/89 PENDING - Taxes due
(10767/00819) after grant
Issue Fee paid 08/03/98
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623IS ISRAEL 90561 06/07/89 90561 11/19/93 Expires 06/07/09
(10767/00821) Taxes due 07/07/99; 03; 07
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623SP SPAIN 8902007 06/08/89 2013531 03/30/90 Expires 06/08/09
(10767/00822) Taxes due 06/08/94 and
yearly thereafter until expiration
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP U.S. 07/460838 06/08/89 5133965 07/28/92 Expires 07/28/09
(10767/00802) Maintenance Fees
due 01/28/00; 04
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 1 of 6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/AS AUSTRALIA 37777/89 06/08/89 628355 01/22/93 Expires 06/08/09
(10767/00803) Taxes due 06/08/94 and
yearly thereafter until expiration
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIPD/AS AUSTRALIA 27194/92 10/20/92 ABANDONED
(10767/00807) (Divisional of 12/08/94
Australian Serial No.
37777/89)
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/BZ BRAZIL PCT/US89/ 06/08/89 ABANDONED
(10767/00804) 02454
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/EP EUROPEAN PATENT 89907512.1 06/08/89 0372070 01/15/97 Expires 06/08/09
(10767/00809) CONVENTION
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00823 AUSTRIA 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00827 BELGIUM 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00824 FRANCE 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00825 GREAT BRITAIN 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00811 GERMANY 0372070 06/08/89 68927669908 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00831 HONG KONG 981067494 06/25/98 PENDING
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2 of 6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00826 ITALY 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00828 LUXEMBOURG 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00829 NETHERLANDS 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
10767/830 SWEDEN 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
Expires 06/08/09
- ------------------------------------------------------------------------------------------------------------------------------------
SWITZERLAND 0372070 06/08/89 0372070 01/15/97 Annual Taxes Due June 8
(Liechtenstein) Expires 06/08/09
10767/00817
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/JA JAPAN 506883/89 06/08/89 PENDING - Taxes due after grant
(10767/00812) Response to Office Action due 09/02/98
(extendable)
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/KR SOUTH KOREA 90/700244 02/07/90 ABANDONED
(10767/00813) 06/07/94
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/NR NORWAY 900591 06/08/89 180771 06/18/97 Expires 06/08/09
(10767/00814) Taxes due 06/08/94 and
yearly thereafter until expiration
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/SI SINGAPORE 96095336 06/08/89 PENDING
(10767/00816) Grant Fee due 10/03/99
Published
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 3 of 6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIP/PCT PARIS COOPERATION TREATY PCT/US89/ 06/08/89 FILE CLOSED -
(10767/00815) 02454 Entered National Stage
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIPC U.S. 07/882801 05/14/92 5269979 12/14/93 Expires 12/14/10
(10767/00805) Maintenance Fees
due 06/14/01; 05
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIPD1 U.S. 07/885462 05/19/92 ABANDONED in favor of Divisional
(10767/00806) Application
- ------------------------------------------------------------------------------------------------------------------------------------
B-26623CIPDC U.S. 08/122808 09/17/93 ABANDONED 07/14/94
(10767/00808)
- ------------------------------------------------------------------------------------------------------------------------------------
10767/00900 SERIES: LIPOSOME PREPARATION AND ITS USE FOR TREATMENT OF BURN WOUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
B-33694 U.S. 08/027138 03/05/93 ABANDONED 11/22/94
(10767/00901)
- ------------------------------------------------------------------------------------------------------------------------------------
10767/01001 SERIES: VACCINE DELIVERY SYSTEM
This patent series focuses on precursor solutions and the so-called
Aremote-loadable@ technology, where a precursor solution is first made
and an active ingredient added at a Aremote@ point in time. For
example, in this case the product may be a precursor solution to which
another manufacturer adds desired active ingredients to form SDMC=s.
Specifically, this patent series covers (1) method, consisting
essentially of four preparation steps, for forming solvent dilution
microcarriers (SDMCs) in which the active ingredient is added in the
last preparation step and (2) a shelf stable, optically clear precursor
solution made according to the first three preparation steps. The
method consists of the following steps: (1) mixing the bilayer forming
material in a nonaqueous solvent; (2) adding water to form a turbid
solution; (3) adding a nonaqueous solvent to form a shelf stable
optically clear precursor solution; and (4) adding the active
ingredient to the optically clear precursor solution. The active
ingredient can be added either immediately or remotely to the optically
clear precursor solution.
</TABLE>
Page 4 of 6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910 U.S. 08/023971 02/26/93 ABANDONED 11/14/94
(10767/01001)
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP U.S. 08/507401 01/02/96 PENDING
(10767/01002) Notice of Allowance dated 09/02/98
received
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/PCT PARIS COOPERATION TREATY PCT/US94/ 02/25/94 FILE CLOSED--
(10767/01008) 02053 Entered National Stage
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/AS AUSTRALIA 6250694 02/25/94 677826 08/29/97 Expires 02/25/14
(10767/01003) Taxes due 02/25/97 and yearly
thereafter until expiration
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/CN CANADA 2157125 02/25/94 PENDING - Request for
(10767/01004) Examination due 02/25/01
Taxes due 02/25/96 and yearly
thereafter until expiration
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/EP EUROPEAN PATENT 94909807.3 02/25/94 PENDING - Taxes due 02/25/96 and yearly
(10767/01005) CONVENTION designating: thereafter until expiration
Austria, Belgium, Published Deadline to record in Hong
Denmark, France, Great Kong: 12/27/98
Britain, Germany,
Italy, Netherlands,
Portugal, Singapore,
Spain, Sweden, and
Switzerland/
(Liechtenstein)
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/JA JAPAN 51929694 02/25/94 PENDING - Request for Examination due
(10767/01007) 02/25/01
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5 of 6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
S&A File No. Country Serial No. Filing Date Patent No. Issue Date Status
------------ ------- ---------- ----------- ---------- ---------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
B-33910CIP/SI SINGAPORE 96092499 02/25/94 PENDING - Request for Examination
(10767/1009) filed
Published
- ------------------------------------------------------------------------------------------------------------------------------------
B-34347 U.S. 08/069267 05/28/93 ABANDONED 01/20/95
(10767/01101)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 6 of 6
<PAGE>
EXHIBIT B
Trademarks
<TABLE>
<CAPTION>
United States Trademarks and Trademark Registrations:
- -----------------------------------------------------
Trademark Reg. No. Goods
- --------- -------- -----
<S> <C>
LYPHAZOME
OCTAZOME in Block Letter Form 1,714,885
OCTAZOME & Design 1,799,024
"FP" in Stylized Form 1,810,369
DAYLONG 1,811,787
1,822,214
State Trademarks and Trademark Registrations:
- ---------------------------------------------
State Trademark Reg. No. Goods
- ----- --------- -------- -----
Foreign Trademarks and Trademark Registrations:
- -----------------------------------------------
Tradenames: Reg. No.
- ----------- --------
Trademark Applications:
- -----------------------
Trademark Application No. Application Date: Country
- --------- --------------- ----------------- -------
OCTAZOME EXCELL 75/568819 10/13/98 United States
BOTANICAL BODY DRENCH 75/568822 10/13/98 United States
FADE SHADES 75/568877 10/13/98 United States
</TABLE>
<PAGE>
EXHIBIT C
Licenses
--------
See Schedule 4(p)(ii) Contracts in Disclosure Schedules to Stock Purchase and
Subscription Agreement between Fountain Pharmaceuticals, Inc. and Fountain
Holdings, LLC dated July 11, 1997.
LEASE
THIS LEASE, made this 18th day of December, 1997, by and between
B.D.B.P., Ltd., hereafter called Lessor, and Fountain Pharmaceuticals, Inc.,
hereafter called Lessee.
WITNESSETH
ARTICLE 1 - GRANT AND TERM
1.01 LEASED PREMISES:
In consideration of the rents, covenants and agreements herein set
forth, Lessor hereby leases to Lessee and Lessee hereby rents from Lessor those
certain premises; hereafter called demised premises containing approximately
7,100 square feet of space, addressed as 7279 Bryan Dairy Road, Largo, Fl.
33777. Also included approximately 1,160 square feet of warehouse space behind
unit 7245.
1.02 ENTIRE PREMISES:
The building or buildings and common areas of the center are
hereinafter called the entire premises.
1.03 USE OF COMMON AREAS:
In addition to the demised premises Lessee shall have hereinafter
defined Common Areas subject to this lease and to reasonable rules and
regulations for use thereof as prescribed from time to time by Lessor.
1.04 QUIET ENJOYMENT:
Lessee shall have the right to quiet enjoyment of the demised premises,
subject to the terms, conditions, and covenants of this lease.
1.05 COMMENCEMENT:
The Lease terms and Lessee's obligation to pay rent shall commence on
the 1st day of January, 1998, ("Commencement Date"). Lessee agrees to pay $0
upon signing this Lease to cover the first month's rent per Article 2 and
security deposit per Article 4.01.
<TABLE>
<CAPTION>
Base Rent Additional Rent Sales Tax TOTAL
--------- --------------- --------- -----
<S> <C> <C> <C> <C>
First month $6,000 $0 $420.00 $6,420
Sec. deposit Transferred from 4,500
lease dated 3/7/96
</TABLE>
1
<PAGE>
1.06 TERM:
The term shall be for a period of Five (5) years, as hereinafter
defined, plus the part of a month, if any, from the date of commencement of the
term to the first day of the first full calendar month of the term. The dates
will be from the 1st day of January, 1998 to the 31st day of December, 2002.
1.07 Beginning January 1, 2001 providing Lessee is not in default and
has met all terms and conditions of this Lease, Lessee may terminate this Lease
by giving Ninety (90) days written notice and paying unamortized tenant
improvements and leasing commissions which will not exceed $23,000.
ARTICLE 2 - RENT
2.01 BASE RENT:
Lessee agrees to pay to Lessor as base rent for the demised premises
the following sums plus all applicable sales tax. Rent shall be due and payable
on the first day of each calendar month without any demand or setoff or
deduction whatsoever (except as herein provided), at the office of the Lessor
designated for notices. If the term shall commence upon a day other than the
first day of a calendar month, then the rent is payable in advance for such
fraction of a month until the beginning of the first full calendar month of the
term, prorated on a daily basis.
Annual Monthly
------ -------
Year 1 $72,000.00 $6,000.00
Year 2 $74,500.00 $6,208.33
Year 3 $76,750.00 $6,395.03
Year 4 $79,150.00 $6,595.08
Year 5 $81.600.00 $6,800.00
2.02 ADDITIONAL RENT:
Lessee is required thereunder to pay to Lessor, in each year during the
term of this Lease and any extension or renewal thereof, a sum equal to 6.8
percent of: such real estate taxes and assessments paid in the first instance by
Lessor, and the annual aggregate operating expenses incurred by Lessor in the
operation, maintenance and repair of the Premises which exceed base year 1997.
a. Any tax year commencing during any lease year shall be deemed to correspond
to such lease year. A copy of the tax statement submitted by Lessor to Lessee
shall be sufficient evidence of the amount of taxes and assessments assessed or
levied against the Premises of which the demised premises are a part, as well as
the items taxed.
b. The term "Reasonable Operating Expenses" shall include but not be limited to
water and sewer, garbage collection, maintenance, repair of plumbing, roofs,
parking and landscaped areas, signs, insurance premiums, management fee, and
wages and fringe benefits of personnel employed for such work.
2
<PAGE>
c. The payment of the sums set forth in this Article 2.02 shall be in addition
to the base rent payable pursuant to Article 2.01 of this Lease. All sums due
hereunder shall be due and payable within thirty (30) days of delivery of
written certification by Lessor setting forth the computation of the amount due
from Lessee. In the event the lease term shall begin or expire at any time
during the lease calendar year, the Lessee shall be responsible for its pro rata
share of additional rent under subdivisions a. and b. during the lease and/or
occupancy time.
d. Prior to commencement of this Lease, and prior to the commencement of each
calendar year thereafter during the term of this Lease or any renewal or
extension thereof, Lessor may estimate for each calendar year (i) the total
amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii)
Lessee's share of Real Estate Taxes for such calendar year; (iv) Lessee's share
of Operating Expenses for such calendar year; and (v) the computation of the
annual and monthly rental payable during such calendar year as a result of
increases or decreases in Lessee's share of Real Estate Taxes, and Operating
Expenses. Said estimates will be in writing and will be delivered or mailed to
Lessee at the Premises or other address per Article 17.02.
e. The amount of Lessee's share of Real Estate Taxes, and Operating Expenses for
each calendar year, so estimated, shall be payable as Additional Rent, in equal
monthly installments, in advance, on the first day of each month.
f. Upon completion of each calendar year during the term of this Lease or any
renewal or extension thereof, Lessor shall cause its accountants to determine
the actual amount of the Real Estate Taxes, and Operating Expenses payable in
such calendar year and Lessee's share thereof and deliver a written
certification of the amounts thereof to Lessee. If Lessee has underpaid its
share of Real Estate Taxes, or Operating Expenses for such calendar year, Lessee
shall pay the balance of its share of same within ten (10) days after the
receipt of such statement. If Lessee has overpaid its share of Real Estate
Taxes, or Operating Expenses for such calendar year, Lessor shall either (i)
refund such excess, or (ii) credit such excess against the most current monthly
installment or installments due Lessor for its estimate of Lessee's share of
Real Estate Taxes, and Operating Expenses for the next following calendar year.
A pro rata adjustment shall be made for a fractional calendar year.
g. Not withstanding the above only the excess of Reasonable Expenses over base
year 1997 will be paid by Lessee.
2.03 PAST - DUE RENT:
If the Lessee shall fail to pay within seven (7) days after the same is
due and payable any rent, additional rent, or any other amounts or charges
provided for in this Lease, there shall become due and payable a late fee on the
sixth day of the month equal to 5% of the total rent due, and 1% per day, for
each day thereafter that the rent, additional rent, or any other amounts or
charges are not paid. The Lessor may demand in any notice served on the Lessee
that payment be made by cashier's check. The Lessor reserves the right to refuse
late payments of rent, additional rent, or any other amount or charges, offered
after the expiration of the Lessor's notice and demand. The late charges are
imposed to reimburse the Lessor for additional costs in handling delinquent
payments. Lessee will also be required to pay a $30.00 fee on any check written
to Lessor by Lessee which is returned non-sufficient funds or similar wording.
2.04 INCREASES IN BASE RENT :
Will be in accordance with schedule in Article 2.01
3
<PAGE>
2.05 COVENANT TO PAY RENT:
The covenants of Lessee to pay the Base Rent and the Additional Rent
are each independent of any other covenant, condition, provision or agreement
contained in this Lease. All rents are payable to B.D.B.P., Ltd.:
% Garcia Enterprises of Tampa, Inc.
15950 Bay Vista Drive, Suite 250
Clearwater, Fl. 33760
ARTICLE 3 - CONDUCT OF BUSINESS BY LESSEE
3.01 USE OF PREMISES:
The demised premises shall be used by Lessee solely for the purpose of
conducting therein a business of Manufacturing Distribution and Research and
Development Activities of Pharmacuetical, Cosmetics and related items. Lessee
shall not suffer or permit all of any part of the demised premises to be used
for any other business or purpose, or by any other person, without the prior
written consent of Lessor, such consent not to be unreasonably withheld.
3.02 GOVERNMENTAL REGULATION:
Lessee, at its expense, shall comply with all federal, state, and local
laws, ordinances, orders, rules, regulations, all agreements and covenants of
public pertaining to any of the entire premises.
3.03 WASTE OR NUISANCE:
Lessee shall not commit or suffer to be committed any waste upon the
demised premises or the entire premises or any nuisance or other act or thing,
which may disturb the quiet enjoyment of any other tenant of the building.
ARTICLE 4 - SECURITY AND DAMAGE DEPOSIT
4.01 Lessee, contemporaneously with the execution of this Lease, has
deposited with Lessor the sum of *Four Thousand Five Hundred and 00/100 Dollars
($4,500 ), receipt of which is acknowledged hereby by Lessor, which deposit is
to be held by Lessor, without liability for interest, as a security and damage
deposit for the faithful performance by Lessee during the term hereof or any
extension hereof. Prior to the time when Lessee shall be entitled to the return
of this security deposit, Lessor may co-mingle such deposit with Lessor's own
funds and to use such security deposit for such purpose as Lessor may determine.
In the event of the failure of Lessee to keep and perform any of the terms,
covenants and conditions of this Lease to be kept and performed by Lessee during
the term hereof or any extension hereof, the Lessor, either with or without
terminating this Lease, may (but shall not be required to) apply such portion of
said deposit as may be necessary to compensate or repay Lessor for all losses or
damages sustained or to be sustained by Lessor due to such breach on the part of
Lessee, including, but not limited to overdue and unpaid rent, any other sum
payable by Lessee to Lessor pursuant to the provisions of this Lease, damages or
deficiencies in the reletting of demised premises, and reasonable attorney's
fees incurred by Lessor. Should the entire deposit
4
<PAGE>
or any portion thereof, be appropriated and applied by Lessor, in accordance
with the provisions of this paragraph, Lessee upon written demand by Lessor,
shall remit forthwith to Lessor a sufficient amount of cash to restore said
security deposit to the original sum deposited, and Lessee's failure to do so
within five (5) days after receipt of such demand shall constitute a breach of
this Lease. Said security deposit shall be returned to Lessee, less any
depletion thereof as the result of the provisions of this paragraph, at the end
of the term of this Lease. Lessee shall have no right to anticipate return of
said deposit by withholding any amount required to be paid pursuant to the
provision of this Lease or otherwise.
*Security Deposit of $4,500.00 is transferred from Lease dated 3/7/96.
4.02 In the event Lessor shall sell the Premises, or shall otherwise
convey or dispose of its interest in this Lease, Lessor may assign said security
deposit or any balance thereof to Lessor's assignee, whereupon Lessor shall be
released from all liability for the return or repayment of such security deposit
and Lessee shall look solely to the said assignee for the return and repayment
of said security deposit. Said security deposit shall not be assigned or
encumbered by Lessee without the written consent of Lessor, and any assignment
of encumbrance without such consent shall not bind Lessor.
ARTICLE 5 - CONTROL AND USE OF COMMON AREAS
5.01 DESCRIPTION OF COMMON AREA:
Common Areas are all those areas and facilities including, but not
limited to parking area, driveways, sidewalks, walkways, landscaped areas,
utility and drainage systems, utility rooms, hallways and improvements provided
by the Lessor for the general use, in common, of tenants, their officers,
agents, employees, customers, or persons having business with Lessee.
5.02 CONTROL OF COMMON AREAS BY LESSOR:
Common Areas are subject to the exclusive control and management of
Lessor, who shall have the right from time to time to establish, modify, and
enforce reasonable rules and regulations with respect to their use. The Lessor
shall have the right to change the size and uses of Common Areas as the Lessor
desires, provided said change does not adversely affect the Lessee's business
operation.
ARTICLE 6 - UTILITIES
6.01 Lessee shall pay for all utilities used at the demised premises
except those included in Article 2.02. Specifically, the demised premises shall
be separately metered for electricity use and the utility company shall bill
Lessee directly. Lessor makes no representation as to the adequacy of the
utilities available to the demised premises. Lessor shall not be liable for
interruption in service resulting from any act or omission of the Lessor or any
other cause whatsoever, except where caused by the negligence of the Lessor.
6.02 The Lessor will pay for normal water consumption and sewer
charges. All other costs of water and sewer shall be paid for by Lessee.
5
<PAGE>
6.03 Lessee will pay for dumpster to dispose of its refuge.
ARTICLE 7 - MAINTENANCE OF LEASED PREMISES
7.01 CARE AND REPAIR OF DEMISED PREMISES:
a. Lessee shall, at all times throughout the term of this Lease, including
renewals, and extensions, and at its sole expense, keep and maintain the demised
premises in a clean, safe, sanitary, and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligation hereunder shall include but not be limited to the maintenance, repair
and replacement, if necessary, of heating, air conditioning fixtures, equipment,
and systems. Lessee shall within five (5) days of occupancy, contract with a
licensed HVAC Maintenance Company to maintain the system in proper working
order. The Lessee agrees to supply a copy of the Maintenance Agreement to the
Lessor and shall at all times during the term of this Lease keep in full force a
HVAC maintenance agreement. Provided, however, at Lessor's option, Lessor may
obtain the HVAC maintenance agreement for the benefit of Lessee, and Lessee
hereby agrees to pay to Lessor's contractor or to Lessor, the total annual cost
of such services as soon as such is determined and billed to Lessee. Nothing
herein is intended to release Lessee from and Lessee agrees to be responsible
for the maintenance and repair or replacement of the HVAC system. Lessee has ten
(10) days from the commencement of this Lease to notify Lessor of any defects in
the HVAC system. If Lessee does not notify Lessor within ten (10) days Lessee is
deemed to have accepted premises in As Is condition. In addition, Lessee shall
maintain, repair and replace, if necessary, all lighting and plumbing fixtures
and equipment, fixtures, motors and machinery, all interior walls, partitions,
doors and windows, including regular painting thereof, all exterior entrances,
windows, doors and the replacement of all broken glass. When used in this
provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the demised premises and sidewalk and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt and rubbish.
b. If Lessee fails, refuses or neglects to maintain or repair the demised
premises as required in this Lease, after notice shall have been given Lessee,
in accordance with Article 17.02 of this Lease, Lessor may make such repairs
without liability to Lessor for any loss or damage that may accrue to Lessee's
merchandise, fixtures or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay Lessor all costs plus 15%
for overhead incurred by Lessor in making such repair upon presentation to
Lessee. Lessor shall repair, at its expense, the structural portions of the
Building, provided however where structural repairs are required to be made by
reason of the acts of Lessee, the costs thereof shall be borne by Lessee and
payable by Lessee to Lessor upon demand.
c. The Lessor shall be responsible for all outside maintenance of the demised
premises, including grounds and parking areas. All such maintenance which is the
responsibility of the Lessor shall be provided as reasonably necessary to the
comfortable use and occupancy of demised premises during business hours, except
Saturdays, Sundays and holidays, upon the condition that the Lessor shall not be
liable for damages for failure to do so due to causes beyond its control.
Notwithstanding the foregoing of this subparagraph, all outside maintenance
performed by Lessor shall be deemed "Operating Expenses" pursuant to Article
2.02
6
<PAGE>
7.02 SIGNS (See Exhibit C)
ARTICLE 8 - FIXTURES, ALTERATIONS, REPLACEMENTS
Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the demised premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of the Lessor. In the event alterations are required by any governmental agency
by reason of the use and occupancy of the demised premises by Lessee, Lessee
shall make such alterations at its own cost and expense after first obtaining
Lessor's approval of plans and specifications therefore and furnishing such
indemnification as Lessor may reasonably require against liens, costs, damages
and expenses arising out of such alterations. Alterations or additions by Lessee
must be built in compliance with all laws, ordinances and governmental
regulations affecting the demised premises and Lessee shall warrant to Lessor
that all such alterations, additions, or improvements shall be in strict
compliance with all relevant laws, ordinances, governmental regulations, and
insurance requirements. Construction of such alterations or additions shall
commence only upon Lessee obtaining and exhibiting to Lessor the requisite
approvals, licenses and permits and indemnification against liens. All
alterations, installations, physical additions or improvements to the demised
premises made by Lessee shall be equal in quality or better than original
installation and shall at once become the property of Lessor and shall be
surrendered to Lessor upon the termination of this Lease; provided, however,
this clause shall not apply to movable equipment or furniture owned by Lessee
which may be removed by Lessee at the end of the term of this Lease if Lessee is
not then in default.
ARTICLE 9 - POSSESSION AND LIENS
9.01 POSSESSION:
Except as hereinafter provided, Lessor shall deliver possession of the
demised premises to Lessee in the condition required by this Lease on or before
the Commencement Date. The rentals herein reserved shall commence on the date
when the improvements are substantially completed or possession of the demised
premises is delivered by Lessor to Lessee, whichever comes first. Any occupancy
by Lessee prior to the beginning of the term shall in all respects be the same
as that of a Lessee under this Lease. Lessor shall have no responsibility or
liability for loss or damage to fixtures, facilities or equipment installed or
left on the demised premises.
9.02 MECHANIC'S LIEN
Lessee shall not permit any mechanics' or other liens to be filed
against the Premises or any fixture or improvements therein. If any lien is
filed, Lessee shall have it discharged of record within ten (10) days after
notice of filing. If Lessee fails to discharge the lien, Lessor may, at its
option, do so by paying the full amount thereof, or otherwise, without any
investigation or contest of validity, and Lessee shall pay to Lessor upon
demand, as additional rent, the amount paid by Lessor, including Lessor's costs,
expenses and attorney's fees. The interest of Lessor shall not be subject to
liens for improvements made by Lessee. Lessee shall notify every contractor
making improvements of this provision.
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ARTICLE 10 - INSURANCE AND INDEMNITY
10.01 LIABILITY INSURANCE:
Lessee shall keep in force at its own expense throughout the term of
this Lease , public liability insurance with respect to the demised premises and
business operated by Lessee in such companies and in such form as are acceptable
to Lessor, with minimum limits with respect to bodily injury and property damage
of $1,000,000. Lessee shall have all such public liability policies endorsed to
show the Lessor as an additional insured with respect to occurrences upon the
demised premises. The Lessee's insurance policy will further provide for at
least thirty (30) days notice to Lessor before substantial reduction of policy
limits, cancellation, or any other policy changes adverse to the Lessor's
interests. Lessee shall furnish Lessor with a copy of the policy or policies of
such insurance or certificates thereof, within ten (10) days of the date of the
Lease. If Lessee shall not comply with the provision of this Section Lessor may
have required coverage issued and in such event, Lessee agrees to pay the
premium for such insurance promptly upon Lessor's demand as additional rent.
Nothing herein contained shall require the Lessor to be liable for any loss
occasioned by fire or other casualty to personal property or fixtures of the
Lessee, its agents, employees, assignees, sublessees, bailors, invitees, or any
other person, firm, or corporation upon any part of the demised premises.
ARTICLE 11 - CONSENT REQUIRED
11.01 Lessee shall not assign this Lease in whole or in part, nor
sublet all or any part of the demised premises, nor permit others to use the
demised premises, without the prior written consent of Lessor, said consent not
to be unreasonably withheld. Consent by Lessor to any assignment of subletting
shall not constitute a waiver of subletting. Notwithstanding any assignment or
sublease, Lessee and guarantors of this Lease, if any, shall remain fully liable
on this lease and shall not be released from performing any of the terms,
covenants, and conditions of this Lease unless released in writing by the
Lessor. A transfer, conveyance, or assignment of more than fifty-one percent
(51%), of Lessee's stock, if Lessee is a corporation, shall be deemed an
assignment for the purposes of this section.
ARTICLE 12 - DEFAULT OF LESSEE
12.01 If Lessee shall default in the payment of the rent reserved
herein, or in the payment of any item of additional rent or other monies due
hereunder or any part of same, then this Lease and the term hereof shall, at the
option and election of the Lessor, wholly cease and terminate upon three (3)
days written notice.
12.02 If Lessee shall violate or default any of the other covenants,
agreements, stipulations, or conditions herein, and such violation or default
shall continue for a period of ten (10) days after written notice of such
violation or default shall have been given by Lessor to Lessee, then it shall be
optional for Lessor to declare this Lease forfeited and the said term ended.
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12.03 If Lessor shall declare this Lease forfeited and terminated as
provided for in the preceding paragraphs, the Lessor may at Lessor's option,
terminate and end this Lease and re-enter upon the property, whereupon the term
thereby granted, and at the Lessor's option, all right, title and interest in or
under it shall end and Lessee becomes a tenant at sufferance or else said Lessor
may at Lessor's option, elect to declare the entire rent for the balance of the
term or any part thereof, due and payable forthwith, and may proceed to collect
the same either by distress or otherwise, and thereupon said term shall
terminate at the option of the Lessor, or else the said Lessor may take
possession of the premises and rent the same for the account of the Lessee, the
exercise of any of which options herein contained shall not be deemed the
exclusive Lessor's remedy. The expression entire rent for the balance of the
term as used herein, shall mean all of the rent for prescribed to be paid by the
Lessee unto the Lessor for the full term of this Lease, less however, any
payments that have been made on account of and pursuant to the terms of said
Lease.
12.04 Neither this Lease, nor any interest therein, nor any estate
thereby created shall pass to any trustee or receiver of assignee for the
benefit of creditors or otherwise by operation of law. In the event the estate
created hereby shall be taken in execution or by other process of law or if
Lessee shall be adjudicated insolvent or bankrupt pursuant to provisions of any
state or federal insolvency or bankruptcy act or if a receiver or trustee of the
property of Lessee shall be appointed by reason of Lessee's insolvency or
inability to pay its debts or if any assignment shall be made of Lessee's
property for the benefit of creditors or if any reorganization preceding under
the federal laws be instituted by or filed against Lessee, then and in any of
such events, Lessor may, at its option, terminate this Lease and all rights of
Lessee herein by giving to Lessee notice in writing of the election of Lessor so
to terminate. Lessee shall not cause or give cause for the institution of legal
proceedings seeking to have Lessee adjudicated bankrupt, reorganized, or
rearranged under the bankruptcy laws of the United States, and shall not cause
or give cause for the appointment of a trustee or a receiver for Lessee's assets
and shall not make an assignment for the benefit of creditors or become or be
adjudicated insolvent. The allowance of any petition or the appointment of a
trustee or receiver is vacated within thirty (30) days after such allowance or
appointment.
12.05 Lessee hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Lessee being
evicted or dispossessed for any cause or in the event of Lessor obtaining
possession of the leased premises by reason of the violation by Lessee of any of
the covenants or conditions of this Lease or otherwise.
12.06 ATTORNEY'S FEES:
The prevailing party shall be entitled to recover all reasonable
attorney's fees incurred by him in and about the enforcement or defense of this
Lease and the parties' Lessor/Lessee relationship.
ARTICLE 13 - ACCESS BY LESSOR
13.01 Lessor or Lessor's agent shall have the right to enter the leased
premises at all times, upon reasonable notice of not less than twenty-four (24)
hours, excluding emergency situation, to examine the same and to show them to
prospective purchasers or Lessees of the building. During the three (3) months
prior to the expiration of the term of this Lease, or any renewal term, Lessor
may exhibit the premises to prospective Lessees or purchasers and place upon the
premises the usual notices "TO LET or "FOR SALE", or similar wording, which
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notices Lessee shall permit to remain thereon without molestation. If Lessee
shall not be personally present to open and permit entry into said premises at
any time, when for any reason an entry therein shall be necessary in an
emergency, Lessor or Lessor's agents may enter the same by forcibly entering the
same without rendering Lessor or such agent liable therefore and without in any
manner affecting the obligations and covenants of this Lease. Nothing herein
contained, however, shall be deemed or construed to impose upon Lessor any
obligation, responsibility, or liability whatsoever, for the care, maintenance,
or repair of the building, or any part thereof, except as otherwise herein
specifically provided.
ARTICLE 14 - LESSEE'S PROPERTY
14.01 TAXES ON LESSEE'S LEASEHOLD:
Lessee shall be responsible for and shall pay before delinquency, all
municipal, county, state, and federal taxes assessed during the term of this
Lease against personal property of any kind owned by or placed in, upon, or
about the demised premises by the Lessee.
14.02 LOSS AND DAMAGE:
Lessor shall not be liable for any damage to property of Lessee or of
others located on the demised premises, nor for the loss of or damage to any
property of Lessee or of others by theft or otherwise, from any act or omission
of the Lessor or from any other cause. Lessor shall not be liable to Lessee and
the Lessee shall hold Lessor harmless from and indemnify Lessor against any
claims arising from injury to or death of persons, or damage to property,
resulting from fire, explosion, falling plaster, storm gas, electricity, water,
flood, air pollution, rain, or leaks from any part of the demised premises, or
from the pipes, appliances, or plumbing works, or by dampness, by the acts or
omissions of the Lessor or its agents, employees and contractors, or by any
other cause of whatever nature.
14.03 NOTICE BY LESSEE:
Lessee shall give immediate oral and written notice to Lessor in case
of fire or other casualty, or accidents in the demised premises, or in the
building, or of defects therein or in any fixtures or equipment.
ARTICLE 15 - HOLDING OVER
15.01 This Lease and the tenancy hereby created shall cease and
terminate at the end of the original term hereof, or any extension or renewal
thereof, without the necessity of any notice from either Lessor or Lessee, to
terminate the same, and Lessee hereby waives notice to vacate the demised
premises and agrees that the Lessor shall be entitled to the benefit of all
provisions of law respecting the summary recovery of possession of premises from
a Lessee holding over to the same extent as if statutory notice had been given.
15.02 Any holding over after the expiration of the term hereof with the
consent of the Lessor, shall be construed to be a tenancy from month to month at
a rent thirty percent (30%) greater than the base rent and additional rent
herein specified (prorated on a monthly basis), and shall otherwise be on the
terms and conditions hereby specified, so far as applicable.
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ARTICLE 16 - EMINENT DOMAIN
In the event of any eminent domain or condemnation proceeding or
private sale in lieu thereof in respect to the premises during the term thereof,
the following provisions shall apply:
16.01 If the whole of the premises shall be acquired or condemned by
eminent domain for any public or quasi-public use or purpose, then the term of
this Lease shall cease and terminate as of the date possession shall be taken in
such proceeding and all rentals shall be paid up to that date.
16.02 If any part constituting less than the whole of the premises
shall be acquired or condemned as aforesaid, and in the event that such partial
taking or condemnation shall materially affect the demised premises so as to
render the demised premises unsuitable for the business of the Lessee, in the
reasonable opinion of the Lessor, this Lease shall continue in full force and
effect but with a proportionate abatement of the Base Rent and Additional Rent
based on the portion, if any, of the demised premises taken. Lessor reserves the
right, at its option, to restore the Building and the demised premises to
substantially the same condition as they were prior to such condemnation. In
such event, Lessor shall give written notice to Lessee, within thirty (30) days
following the date possession shall be taken by the condemning authority, of
Lessor's intention to restore. Upon Lessor's notice of election to restore,
Lessor shall commence restoration and shall restore the Building and the demised
premises with reasonable promptness, subject to delays beyond Lessor's control
and delays in the making of condemnation or sale proceeds adjustments by Lessor,
and Lessee shall have no right to terminate this Lease except as herein
provided. Upon completion of such restoration, the rent shall be adjusted based
upon the portion, if any, of the demised premises restored.
16.03 In the event of any condemnation or taking as aforesaid, whether
whole or partial, Lessee shall not be entitled to any part of the award paid for
such condemnation and Lessor is to receive the full amount of such award, the
Lessee hereby expressly waiving any right to claim to any part thereof.
16.04 Although all damages in the event of any condemnation shall
belong to the Lessor, whether such damages are awarded as compensation for
diminution in value of the leasehold or to the fee of the demised premises,
Lessee shall have the right to claim and recover from the condemning authority,
but not from Lessor, such compensation as may be separately awarded or
recoverable by Lessee in Lessee's own right on account of any and all damage to
Lessee's business by reason of the condemnation and for or on account of any
cost or loss to which Lessee might be put in removing Lessee's merchandise,
furniture, fixtures, leasehold improvements and equipment. However, Lessee shall
have no claim against Lessor, make any claim with the condemning authority for
the loss of its leasehold estate, any unexpired term or loss of any possible
renewal or extension of said Lease or loss of any possible value of said Lease,
or any unexpired term, renewal or extension.
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ARTICLE 17 - MISCELLANEOUS
17.01 ENTIRE AGREEMENT
This Lease and riders attached hereto and forming a part hereof set
forth all of the covenants, promises, agreements, conditions or understandings,
whether oral or written between them other than are herein set forth. Except as
herein otherwise provided, no subsequent alteration, amendment, change or
addition to this Lease shall be binding upon Lessor or Lessee unless reduced to
writing and signed by them.
17.02 NOTICES
Any notice, demand, request, or other instrument which may be or is
required to be given under this Lease shall be delivered in person or sent by
United States certified mail, postage prepaid, return receipt requested, and
shall be addressed (a) if to Lessee, at the demised premises, or at such other
address as the Lessee shall designate by written notice, and (b) if to Lessor,
at 15950 Bay Vista Drive, Suite 250, Clearwater, Fl. 33760 or at such other
address as Lessor may designate by written notice. The notice shall be deemed
served when personally delivered or when deposited with the U.S. Postal Service.
17.03 This Lease shall be construed according to the laws of the State
of Florida.
17.04 VENUE:
Lessee and Lessor hereby agree that in the event either party files a
suit to protect their rights under this Lease, that venue shall be in the
Circuit Court for Pinellas County, Florida. Lessee and Lessor waive any venue
rights to institute suit in a jurisdiction other than in the Judicial Court for
Pinellas County, Florida.
17.05 RADON GAS:
Radon is a naturally occurring radioactive gas that, when it has
accumulated in a building in sufficient quantities, may present health risks to
persons who are exposed to it over time. Levels of radon that exceed federal and
state guidelines have been found in buildings in Florida. Additional information
regarding radon and radon testing may be obtained from your county public health
unit.
ARTICLE 18 - DESTRUCTION OF PREMISES
In the event of any damage or destruction to the Premises by fire or
other cause during the term hereof, the following provisions shall apply:
18.01 If the Building is damaged by fire or any other cause to such
extent that the cost of restoration, as reasonably estimated by Lessor, will
equal or exceed thirty percent (30%) of the replacement value of the Building
(exclusive of foundations) just prior to the occurrence of the damage, then
Lessor may, no later than the ninetieth (90th) day following the damage, give
Lessee written notice of Lessor's election to terminate this Lease.
18.02 If the cost of restoration as estimated by Lessor will equal or
exceed fifty percent (50%) of said replacement value of the Building and if the
demised premises are not
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suitable as a result of said damage for the purposes for which they are demised
hereunder, in the reasonable opinion of Lessee, then Lessee may, no later than
the ninetieth (90th) day following the damage, give Lessor a written notice of
election terminate this Lease.
18.03 If the cost of restoration as estimated by Lessor shall amount to
less than thirty percent (30%) of said replacement value of the Building, or if,
despite the cost, Lessor does not elect to terminate this Lease, Lessor shall
restore the Building and the demised premises with reasonable promptness,
subject to delays beyond Lessor's control and delays in the making of insurance
adjustments by Lessor, and Lessee shall have no right to terminate this Lease
except as herein provided. Lessor shall not be responsible for restoring or
repairing leasehold improvement of the Lessee.
18.04 In the event of either of the elections to terminate, this Lease
shall be deemed to terminate on the date of the receipt of the notice of
election and all rentals shall be paid up to that date. Lessee shall have no
claim against Lessor for the value of any unexpired term of this Lease.
18.05 In any case where damage to the Building shall materially affect
the demised premises so as to render them unsuitable in whole or in part for the
purposes for which they are demised hereunder, then, unless such destruction was
wholly or partially caused by the negligence or breach of the terms of this
Lease by Lessee, its employees, agents, contractors or licensees, a portion of
the rent based upon the amount of the extent to which the demised premises are
rendered unsuitable in Lessor's reasonable opinion shall be abated until
repaired or restored. If the destruction or damage was wholly or partially
caused by negligence or breach of the terms of this Lease by Lessee as aforesaid
and if Lessor shall elect to rebuild, the rent shall not abate and the Lessee
shall remain liable for the same.
ARTICLE 19 - SUBORDINATION
19.01 This Lease shall be subordinated to any mortgages that may exist
or that may hereafter be placed upon the demised premises and to any and all
advances made thereunder, and to the interest upon the indebtedness evidence by
such mortgages, and to all renewals, replacements and extensions thereof. In the
event of execution by Lessor after the date of this Lease of any such mortgage,
renewal, replacement or extension, Lessee agrees to execute a subordination
agreement with the holder thereof which agreement shall provide that:
19.02 Such holder shall not disturb the possession and other rights of
Lessee under this Lease so long as Lessee is not in default hereunder,
19.03 In the event of acquisition of title to the demised premises by
such holder, such holder shall accept the terms as Lessor of the demised
premises under the terms and conditions of this Lease and shall perform all
obligations of Lessor hereunder, and
19.04 The Lessee shall recognize such holder as Lessor hereunder. The
Lessee shall, upon receipt of a request from Lessor therefore, execute and
deliver to Lessor or to any proposed purchaser of the Premises, a certificate in
recordable form, certifying that this Lease is in full force and effect, and
that there are no offsets against rent nor defenses to Lessee's performance
under this Lease, or setting forth any such offsets or defenses claimed by
Lessee, as the case may be.
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ARTICLE 20 - ATTORNMENT
20.01 In the event of a sale or assignment of Lessor's interest in the
Premises, or the Building in which the demised premises are located or in this
Lease, or if the Premises come into custody or possession of a mortgagee or any
other party, whether because of a mortgage or any other party, whether because
of a mortgage foreclosure, or otherwise, Lessee shall attorn to such assignee or
other party and recognize such party as Lessor hereunder; provided, however,
Lessee's peaceable possession will not be disturbed so long as Lessee faithfully
performs its obligations under this Lease and shall not be in default hereunder.
Lessee shall execute on demand, any attornment agreement required by any such
party to be executed, containing such provisions and such other provisions as
such party may require.
ARTICLE 21 - NOVATION IN THE EVENT OF SALE
21.01 In the event of the sale of the demised premises, Lessor shall be
and hereby is relieved of all of the covenants and obligations created hereby
accruing from and after the date of sale, and such sale shall result
automatically in the purchaser assuming and agreeing to carry out all the
covenants and obligations of Lessor herein. Notwithstanding the foregoing
provisions of this Section, Lessor, in the event of a sale of the Demised
premises, shall cause to be included in this agreement of sale and purchase a
covenant whereby the purchaser of the demised premises assumes and agrees to
carry out all of the covenants and obligations of Lessor herein.
21.02 The Lessee agrees to any time and from time to time upon not less
than five (5) days prior written request by the Lessor to execute, acknowledge
and deliver to the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect and if modified, stating the
modifications and the dates to which the basic rent and other charges have been
paid in advance, if any, it being intended that any such statement delivered
pursuant to this paragraph may be relied upon by any prospective purchaser of
the fee or mortgagee or assignee of any mortgage upon the fee of the demised
premises.
ARTICLE 22 - SUCCESSORS AND ASSIGNS
The terms, covenants, and conditions hereof shall be binding upon and inure to
the successors and assigns of the parties hereto.
ARTICLE 23 - HAZARDOUS MATERIALS
Lessee shall not knowingly cause or permit any Hazardous Material (as
hereinafter defined) to be brought upon, kept or used in or about the Premises
or the Building by Lessee, its agents, principals, employees, assigns
sublessees, contractors, consultants or invitees without the prior written
consent of Lessor, which consent may be withheld for any reason whatsoever or
for no reason at all. If Lessee breaches the obligations stated in the preceding
sentence, or if the presence of Hazardous Material on the Premises or around the
Building caused or permitted by Lessee (or the aforesaid others as defined
above) results in contamination of the Premises or the Building or the
surrounding area(s), or if contamination of the Premises or the Building or the
surrounding area(s) by Hazardous Material otherwise occurs for which Lessee is
legally, actually or factually liable or responsible to Lessor (or any party
claiming by, through or under Lessor) for damages, losses, costs or expenses
resulting therefrom, then Lessee shall fully and
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completely indemnify, defend and hold harmless Lessor (or any party claiming by,
through or under Lessor) from any and all claims judgments, damages, penalties,
fines, costs liabilities or losses [including, without limitation; (i)
diminution in the value of the premises and/or the Building and/or the land on
which the Building is located and/or any adjoining area(s) which Lessor owns or
in which it holds a property interest; (ii) damages for the loss or restriction
on use of rentable or usable space of any amenity of the Premises, the Building
or the land on which the building is located; (iii) damages arising from any
adverse impact on marketing of space; and (iv) any sums paid in settlement of
claims, attorneys' fees, consultants fees and expert fees] which arise during or
after the term of this Lease, as may be extended, as a consequence of such
contamination. This indemnification of Lessor by Lessee includes, without
limitation, costs incurred in connection with any investigation of site
conditions or any clean-up, remedial, removal or restoration work required by
any federal, state or local governmental agency or political subdivision because
of Hazardous Material present in the soil or ground water on or under the
Premises or the Building. Without limiting the foregoing, if the presence of any
Hazardous Material on, under or about the Premises, the Building or the
surrounding area(s) caused or permitted by Lessor (or the aforesaid others)
results in any contamination of the Premises, the Building or the surrounding
area(s), Lessor shall immediately take all actions at its sole expense as are
necessary or appropriate to return the Premises, the Building and the
surrounding area(s) to the condition existing prior to the introduction of any
such Hazardous Material thereto; provided that Lessor's prior written approval
of such actions by Lessee shall be first obtained. The foregoing obligations and
responsibilities of Lessee shall survive the expiration or earlier termination
of this Lease.
As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material or waste, including, but not limited to, those
substances, materials, and wastes listed in the United States Department of
Transportation Hazardous Materials Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances (40 CAR Part 302) and
amendments thereto, or such substances, materials and wastes that are or become
regulated under any applicable local, state or federal law. "Hazardous Material"
includes any and all material or substances which are defined as "hazardous
waste," "extremely hazardous waste" or a "hazardous substance" pursuant to
state, federal or local governmental law. "Hazardous Substance" includes but is
not restricted to asbestos, polychlorobiphenyls ("PCB's") and petroleum.
Lessor and its agents shall have the right, but not the duty, to
inspect the Premises at any time to determine whether Lessee is complying with
the terms of this Lease. If Lessee is not in compliance with this Lease, Lessor
shall have the right to immediately enter upon the Premises to remedy any
contamination caused by Lessee's failure to comply, notwithstanding any other
provision of this Lease. Lessor shall use its best efforts to minimize
interference with Lessee's business, but shall not be liable for any
interference caused thereby.
Any non-compliance by Lessee with its duties, responsibilities and
obligations under this Item 23 shall be an "automatic" (no notice of any nature
from Lessor to Lessee being required) default of this Lease.
Lessor hereby acknowledge that Lessee uses some Hazardous materials in
its production process but Lessee will store and use these materials as
prescribed and Lessee will be fully responsible for any damage or costs of clean
up as specified in this article.
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IN WITNESS WHEREOF, this Lease has been duly and properly executed the
day and year first above written:
Dated: January 12, 1998 B.D.B.P., Ltd.
----------------- LESSOR
By /s/ Manuel Garcia
---------------------
Manuel Garcia
Its: General Partner
Dated: January 12, 1998 Fountain Pharmaceuticals, Inc.
----------------- LESSEE
By /s/ John C. Walsh
---------------------
John Walsh
Its: President
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EXHIBIT A
RULES AND REGULATIONS
Attached to and forming part of the
AGREEMENT OF LEASE
Leased to Fountain Pharmaceuticals, Inc.
Dated December 18, 1997
Lessee agrees that it will:
1. not waste any of the utilities furnished by Lessor;
2. not use the plumbing facilities for any purpose other than that for which
they are constructed, and not throw any foreign substance of any kind therein;
and will pay the expense of any breakage, stoppage, or damage resulting from
such violation;
3. deposit trash, refuse, garbage and waste material at the location and in the
container or containers specified by Lessor for such purposes;
4. not install any window blinds or shades without the written consent of
Lessor;
5. not display, store or keep any merchandise, materials or refuse outside the
demised premises, or in any way obstruct entries, halls, stairways, lavatories,
or other common areas;
6. not solicit business in the common areas or parking areas; and not distribute
any handbills or other advertising matter in the common areas or on vehicles in
the parking areas;
7. use, and cause its principals, employees, agents and contractors to use, the
parking areas in the manner prescribed by Lessor, including , but not limited
to, appropriate use by Lessee, its principals, employees, agents and contractors
of employee parking areas, if such be designated;
8. No loud speakers, televisions, phonographs, radios, or other devices shall be
used in a manner so as to be heard or seen outside of the Leased Premises
without the prior written consent of the Lessor.
9. The exterior areas immediately adjoining the Leased Premises shall be kept
clean and free from dirt and rubbish by Tenant to the satisfaction of Lessor,
and Lessee shall not place or permit any obstruction or merchandise in such
areas.
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EXHIBIT B
GUARANTY
Attached to and forming part of the
AGREEMENT OF LEASE
GUARANTY OF LESSEE'S OBLIGATIONS UNDER AGREEMENT OF LEASE BETWEEN: B.D.B.P.,
Ltd., as LESSOR and Fountain Pharmaceuticals, Inc. as LESSEE.
The undersigned, in consideration of the leasing of the demised premises
described in the attached Lease to Lessee, at the request of the undersigned and
on the faith of this Guaranty, hereby absolutely, unconditionally and
irrevocably guarantee(s) to Lessor the full and complete performance of all of
Lessee's covenants and obligations under said Lease and the full payment of
Lessee of all rentals, additional rentals and other charges and amounts required
to be paid thereunder, and the undersigned will pay all of Lessor's expenses,
including attorney's fees, incurred in enforcing the obligations of Lessee under
said Lease or incurred in enforcing this Guaranty.
The undersigned hereby waive(s) all requirements of notice of the acceptance of
this Guaranty, all requirements of notice of breach or non-performance by
Lessee, any necessity of proceeding first or simultaneously against Lessee, and
all rights of the undersigned under the Laws of the State of Florida. The
obligations hereunder of the undersigned shall remain fully binding, although
Lessor may have waived one or more defaults by Lessee, extended the time of
performance by Lessee, modified or amended said Lease, released, returned or
misapplied other collateral given later as additional security, including other
guaranties, released Lessee from the performance of its obligations under said
Lease or consented to any assignment of the Lease or sublease of the demised
premises. Discharge in bankruptcy of Lessee or its obligations shall not release
the undersigned.
If this Guaranty is signed by more than one person, their obligation shall be
joint and several, and the release of one guarantor shall not release any other
guarantor. This Guaranty shall be binding upon the undersigned and respective
heirs, executors, administrators, representative, successors and assignee.
DATED this _____________ day of ___________ 19____.
Guarantor: Guarantor:
Name: Waived Name: Waived
Home Address:______________________ Home Address:_______________________
___________________________________ ____________________________________
SS#________________________________ SS#_________________________________
By: By:
___________________________________ ____________________________________
___________________________________ ____________________________________
Witnessed: Witnessed:
___________________________________ ____________________________________
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EXHIBIT C
SIGN CRITERIA
Attached to and forming part of the
AGREEMENT OF LEASE
Leased to Fountain Pharmaceuticals, Inc.
Dated December 18, 1997
This sign criteria has been established for the mutual benefit of B.D.B.P.,
Ltd.,the Lessor, and Lessee. Conformance will be strictly enforced; any
installed nonconforming or unapproved sign shall be brought into conformance at
the sole expense of the Lessee. Further, the purpose of this criteria is to
assure consistent design, fabrication techniques, and materials with regards to
Lessee identification.
I. GENERAL REQUIREMENTS
--------------------
1. Each Lessee (or representative) must submit two (2) sets of scale
drawings of proposed signage for approval by Lessor or his appointed agent.
Lessee shall be responsible for all costs, expenses, fees, and taxes relating to
building, installing, and permitting their signs.
2. Necessary City of Pinellas Park sign permits must be obtained by
Lessee prior to installation of signs.
3. No signs, advertisements, notices, or other lettering shall be
displayed, exhibited, inscribed, painted, or affixed on any part of the
building, including storefront windows and Lessee doors, unless covered
specifically by this criteria.
4. No notices, decals, credit card acceptance information, security
system emblems, sales signs, or any other display shall be attached directly in
the windows outside the building or the door of any Lessee's leased space unless
expressly approved by Lessor.
5. No freestanding signs whether temporary or permanent large, small,
cardboard, plastic, metal or glass on a stand of any kind or sandwich-type
board, will be allowed in front or adjacent to any Lessee space or anywhere else
on the property or in the public right of way adjacent to the property, unless
expressly approved by Lessor.
6. No secondary exterior signs shall be placed on building wall
elevations.
19
<PAGE>
II. LESSEE SIGNAGE
--------------
1. Window signage is subject to Lessor or his appointed agent's
approval and must meet specifications as required by city or government
authority approval.
2. Letter style and logo are optional but subject to Lessor's approval.
3. No clips or mounting devices will be visible. No labels will be
directly visible.
4. All signs must comply with all applicable building and electrical
codes.
5. Each Lessee who has a non-customer door may install signage to said
door. Such signage, location, and color to be coordinated and approved by
Lessor.
6. No sign shall be installed or altered after installation except with
the permission of the lessor and his appointed agent and the appropriate city or
other governmental authority.
20
<PAGE>
EXHIBIT D
LESSOR'S WORK
Attached to and forming part of the
AGREEMENT OF LEASE
Leased to Fountain Pharmaceuticals, Inc.
Dated December 18, 1997
Lessor will at Lessors expense not to exceed $35,000 modify premises as agreed
to include:
1. Add demising wall and doors to men's and women's bathrooms now
shared with other tenant for exclusive use of Lessee.
2. Eliminate three doors to common bathroom area.
3. Change sink from present break room to new break room in warehouse
area.
4. Add offices in warehouse area.
5. Air condition warehouse behind 7245 and put in demising wall to
close opening to warehouse behind 7247and add bathroom fire wall for production
and supply room and water sewer and electrical as required and installation of
air lines and compressor.
All of the above work to be completed no later than January 31, 1998.
If Lessor spends less than $35,000 the savings will be discounted from Lessee's
future rents.
21
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
----------------------------------
Amendment to Lease Agreement, dated this 20th day of March, 1998,
between Highwoods/Florida Holdings Partners, L.P./Highwoods Realty GP
Corporation, its Authorized Agent, ("Landlord"), and Fountain Pharmaceuticals,
Inc. ("Tenant").
Witnesseth:
Whereas, the parties hereto entered into an Office Lease Agreement
dated the 18th day of December, 1997, hereinafter referred to as the "Prime
Lease"); and
Whereas, Landlord and Tenant desire to modify the Prime Lease by this
First Amendment to Lease Agreement (?Agreement?), to extend the Premises to
include the rear warehouse area at 7247-R Bryan Dairy Road, through the 31st day
of December 2002, and to provide for rent and related matters.
Now, therefore, in consideration of the mutual covenants herein
contained and other good and valuable consideration, it is covenanted and agreed
between Landlord and Tenant that the Prime Lease is modified to read as follows:
1. The above recitals are incorporated herein as if fully set forth.
2. All words and phrases, unless otherwise defined herein, have the
meanings attributed to them in the Prime Lease.
3. From the 1st day of April 1998, the Premises shall mean Suite 7279
(deemed to consist of approximately 5,940 rentable square feet), Suite 7245
(deemed to consist of approximately 1,160 rentable square feet), and Suite
7247-R (deemed to consist of approximately 1,304 rentable square feet of air
conditioned warehouse), for an aggregate deemed to consist of 8,404 rentable
square feet.
4. The Minimum Rent (not including calculation of sales tax) schedule
shall be as follows:
Period Premises Monthly
------ -------- -------
Year 1 7279 and 7245 $6,000.00
4/1/98 - 12/31/98 7247R $706.33
Year 2 7279 and 7245 $6,208.33
Year 2 7247R $741.65
Year 3 7279 and 7245 $6,395.03
Year 3 7247R $778.73
Year 4 7279 and 7245 $6,595.08
Year 4 7247R $817.67
Year 5 7279 and 7245 $6,800.00
Year 5 7247R $858.55
Each and every installment of rent shall be accompanied by the applicable sales
tax. In addition, the Tenant shall continue to pay all other Additional Rents
and such other amounts as required by the Prime Lease. All amounts due from
Tenant to Landlord under the Prime Lease as herein modified shall be deemed
?rent?.
5. Except as set forth herein, the Prime Lease as modified herein
remains in full force and effect in accordance with its terms and provisions;
and Landlord and Tenant do hereby ratify, adopt, and confirm its terms and
provisions and its terms and provisions shall remain in full force and effect.
March 16, 1998
Page 1 of 3
<PAGE>
6. Tenant acknowledges and agrees that through the date hereof,
Landlord, its predecessors in interest, and their respective partners,
directors, officers, employees and agents have fully and completely performed
all of the obligations on their part to be performed under the Prime Lease as
modified and amended, and thus Tenant has no claim or cause of action against
them under the Prime Lease or otherwise.
7. Landlord hereby acknowledges and agrees that it shall be responsible
for paying to Highwoods Properties, Inc., a leasing commission pursuant to a
separate agreement between Landlord and such party. Landlord and Tenant
represent and warrant that they neither consulted nor negotiated with any broker
or finder with respect to the Premises, except as set forth herein. Landlord and
Tenant agree to indemnify, defend, and save the other harmless from and against
any claims for fees or commissions from anyone other than the brokers as set
forth herein, with whom they have dealt in connection with the Premises or this
Amendment to Lease including attorneys' fees incurred in connection with the
defense of any such claim.
8. The Prime Lease as modified herein is intended by the parties as the
final expression of their agreement and as a complete and exclusive statement of
the terms thereof, all negotiations, considerations and representations between
the parties having been incorporated herein or therein. No course of prior
dealings between the parties, their officers, employees, agents, or affiliates
shall be deemed relevant or admissible to supplement, explain or vary any of the
terms and provisions of the Prime Lease as modified. No representations,
understandings or agreements have been made or relied upon in the making of this
Agreement other than set forth herein.
9. Landlord and Tenant agree that should any provision in this
Agreement disagree with or conflict with any provision in the Prime Lease, the
provision in this Agreement will control.
10. This Agreement is submitted to Tenant on the understanding that it
will not be considered an offer and will not bind Landlord in any way until (a)
Tenant has duly executed and delivered duplicate originals to Landlord and (b)
Landlord has executed and delivered one of such originals to Tenant.
SIGNATURE PAGE TO FOLLOW
March 16, 1998
Page 2 of 3
<PAGE>
IN WITNESS OF THIS AGREEMENT, Landlord and Tenant have properly
executed it as on the dates set out below.
LANDLORD:
HIGHWOODS FLORIDA HOLDINGS, L.P.
BY: HIGHWOODS PROPERTIES, INC. As Agent
WITNESSES AS TO LANDLORD:
/s/ Sue Wallace By: /s/ Richard A. Nash
- ---------------------------- -----------------------------
Richard A. Nash
Sue Wallace Its: Vice President
- ----------------------------
(Print name as signed above)
Dated: March 20, 1998
/s/ Karen Meyers
- ----------------------------
Karen Meyers
- ----------------------------
(Print name as signed above)
TENANT:
WITNESSES AS TO TENANT: FOUNTAIN PHARMACEUTICALS, INC.
/s/ Francis J. Werner By: /s/ John C. Walsh
- ---------------------------- ----------------------------
Francis J. Werner Its: President
- ----------------------------
(Print name as signed above)
Dated: March 20, 1998
/s/ Weldon Crow
- ----------------------------
Weldon Crow
- ----------------------------
(Print name as signed above)
March 16, 1998
Page 3 of 3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FOUNTAIN PHARMACEUTICALS, INC. FOR THE YEARS
ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 452
<SECURITIES> 0
<RECEIVABLES> 221
<ALLOWANCES> (16)
<INVENTORY> 195
<CURRENT-ASSETS> 885
<PP&E> 369
<DEPRECIATION> (268)
<TOTAL-ASSETS> 1,133
<CURRENT-LIABILITIES> 240
<BONDS> 0
0
2
<COMMON> 2
<OTHER-SE> 841
<TOTAL-LIABILITY-AND-EQUITY> 1,133
<SALES> 1,543
<TOTAL-REVENUES> 1,543
<CGS> 868
<TOTAL-COSTS> 2,368
<OTHER-EXPENSES> (74)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (1,629)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,629)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
