FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-26372
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1065 East Hillsdale Boulevard, Suite 418, Foster City,
California 94404 (Address of principal executive
offices, including zip code)
(650) 524-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares outstanding of the registrant's common stock at July 31,
1998 was 10,165,315.
<PAGE>
CELLEGY PHARMACEUTICALS, INC.
INDEX TO FORM 10-QSB
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 ......................................... 3
Unaudited Condensed Statements of Operations for the
three months and six months ended June 30, 1998 and
1997, and the period from June 26, 1989 (inception)
through June 30, 1998 ......................................... 4
Unaudited Condensed Statements of Cash Flows for the
three months and six months ended June 30, 1998 and
1997, and the period from June 26, 1989 (inception)
through June 30, 1998 ......................................... 5
Notes to Condensed Financial Statements ....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 11
Item 2. Changes in Securities ......................................... 11
Item 3. Defaults Upon Senior Securities ............................... 11
Item 4. Submission of Matters to a Vote of Security Holders ........... 11
Item 5. Other Information ............................................. 12
Item 6. Exhibits and Reports on Form 8-K .............................. 12
Signature(s) ................................................................ 13
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Balance Sheets
(Amounts in thousands, except share amounts)
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ......................................................... $ 1,323 $ 1,822
Short-term investments ............................................................ 6,248 7,482
Other current assets .............................................................. 761 1,011
-------- --------
Total current assets ................................................................... 8,332 10,315
Property and equipment, net ............................................................ 11 14
Long-term investments .................................................................. 10,406 12,422
-------- --------
Total assets ........................................................................... $ 18,749 $ 22,751
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities .......................................... $ 304 $ 705
Deferred revenue .................................................................. 250 500
Accrued research fees ............................................................. -- 155
Accrued compensation and related expenses ......................................... 67 37
-------- --------
Total current liabilities .............................................................. 621 1,397
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized: 10,165,315 shares
issued and outstanding at June 30, 1998 and 10,123,751 shares issued and
outstanding at December 31, 1997 .............................................. 44,353 44,192
Accumulated other comprehensive income (loss) ..................................... 64 (12)
Deficit accumulated during the development stage .................................. (26,289) (22,826)
-------- --------
Total shareholders' equity ........................................................ 18,128 21,354
-------- --------
Total liabilities and shareholders' equity ............................................. $ 18,749 $ 22,751
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
<CAPTION>
Period from
June 26, 1989
(inception)
Three Months Ended Six Months Ended through
June 30, June 30, June 30,
1998 1997 1998 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing and contract revenue from
affiliate ....................... $ -- $ -- $ -- $ -- $ 1,145
Licensing, milestone, and
development funding ............. 103 123 165 218 1,328
Government grants ................... 33 47 86 100 384
-------- -------- -------- -------- --------
Total revenues ........................... 136 170 251 318 2,857
Operating expenses:
Research and development ............ 1,752 803 2,934 1,537 15,843
General and administrative .......... 834 376 1,353 736 9,143
Acquired in process technology ...... -- -- -- -- 3,843
-------- -------- -------- -------- --------
Total operating expenses ................. 2,586 1,179 4,287 2,273 28,829
-------- -------- -------- -------- --------
Operating loss ........................... (2,450) (1,009) (4,036) (1,955) (25,972)
Interest expense .................... -- -- -- -- (864)
Interest income and other, net ...... 255 104 573 183 1,995
-------- -------- -------- -------- --------
Net loss ................................. (2,195) (905) (3,463) (1,772) (24,841)
Non-cash preferred dividends ............. -- 7 -- 33 1,448
-------- -------- -------- -------- --------
Net loss applicable to common shareholders $ (2,195) $ (912) $ (3,463) $ (1,805) $(26,289)
======== ======== ======== ======== ========
Basic and diluted net loss per common
share ............................... $ (0.22) $ (0.16) $ (0.34) $ (0.32)
======== ======== ======== ========
Weighted average common shares outstanding 10,165 5,738 10,154 5,559
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
<CAPTION>
Period from
June 26, 1989
(inception)
Six Months Ended June 30, through
-------------------------- June 30,
1998 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss ..................................................................... $ (3,463) $ (1,772) $(24,841)
Adjustment to reconcile net loss to net cash used in operating activities:
Acquired in process technology ............................................ -- -- 3,843
Depreciation and amortization ............................................. 3 12 267
Compensation expense related to the extension of option
exercise periods ........................................................ -- 70 338
Loss on sale of property and equipment .................................... -- -- 4
Amortization of discount on notes payable and deferred
financing costs ......................................................... -- -- 568
Issuance of common shares for services .................................... -- -- 24
Issuance of Series A convertible preferred stock for
services rendered ....................................................... -- -- 73
Issuance of Series A convertible preferred stock for interest ............. -- -- 68
Issuance of Series A convertible preferred stock for license
agreement ............................................................... -- -- 100
Changes in operating assets and liabilities:
Other current assets ...................................................... 250 135 (761)
Accounts payable and accrued liabilities .................................. (401) (159) 304
Accrued research fees ..................................................... (155) (21) --
Accrued compensation and related expenses ................................. 30 6 67
Deferred revenue .......................................................... (250) -- 250
-------- -------- --------
Net cash used in operating activities ........................................ (3,986) (1,729) (19,696)
Investing activities
Purchase of property and equipment ........................................... -- -- (173)
Purchases of investments ..................................................... (3,000) (1,000) (38,538)
Sales and maturities of investments .......................................... 6,326 5,256 21,948
-------- -------- --------
Net cash provided by (used in) investing activities .......................... 3,326 4,256 (16,763)
(continued on next page)
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Condensed Statements of Cash Flows - (Continued)
(Unaudited)
(Amounts in thousands)
<CAPTION>
Period from
June 26, 1989
(inception)
Six Months Ended June 30, through
----------------------------- June 30,
1998 1997 1998
-------- ---------- --------
<S> <C> <C> <C>
Financing activities
Proceeds from notes payable ............................................ $ -- $ -- $ 3,547
Repayment of notes payable ............................................. -- -- (2,111)
Net proceeds from issuance of common stock ............................. 161 116 24,668
Issuance of convertible preferred stock, net of issuance costs ......... -- -- 11,758
Deferred financing costs ............................................... -- -- (80)
Net cash provided by financing activities .............................. 161 116 37,782
-------- ---------- --------
Net increase (decrease) in cash and cash equivalents ................... (499) 2,643 1,323
Cash and cash equivalents, beginning of period ......................... 1,822 36 --
-------- ---------- --------
Cash and cash equivalents, end of period ............................... $ 1,323 $ 2,679 $ 1,323
======== ========== ========
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with acquired in process
technology .......................................................... $ -- $ -- $ 3,843
======== ========== ========
Conversion of preferred stock to common stock .......................... $ -- $ 1,969 $ 14,715
======== ========== ========
Issuance of common stock for notes payable ............................. $ -- $ -- $ 269
======== ========== ========
Issuance of warrants in connection with notes payable financing ........ $ -- $ -- $ 487
======== ========== ========
Issuance of Series A convertible preferred stock for notes
payable ............................................................. $ -- $ -- $ 1,153
======== ========== ========
Issuance of Series B convertible preferred stock for notes
payable ............................................................. $ -- $ -- $ 115
======== ========== ========
Issuance of common stock for Pacific Pharmaceuticals, Inc. ............. $ -- $ -- $ 9
======== ========== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
</TABLE>
6
<PAGE>
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Condensed Financial Statements
Note 1. - Basis of Presentation
The accompanying interim condensed financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all
of the information and footnote disclosures required by generally accepted
accounting principles for complete financial statements. These condensed
financial statements should be read in conjunction with the Company's financial
statements and notes thereto contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997. In the opinion of management, the
accompanying condensed financial statements include all adjustments (consisting
of only normal recurring adjustments) considered necessary for a fair
presentation of financial position and results of operations for the periods
presented.
Operating results for the three months and six months ended June 30,
1998 may not necessarily be indicative of the results to be expected for any
other interim period or for the full year.
Note 2. - Basic and Diluted Net Loss per Share
The financial statements are presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic net loss per
common share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share incorporates the
incremental shares issued upon the assumed exercise of stock options and
warrants, when dilutive. There is no difference between basic and diluted net
loss per share, as presented in the statement of operations, because all options
and warrants are anti-dilutive.
Note 3. - Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter of
1998. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. It has no impact on net loss or
stockholders' equity.
<TABLE>
The components of comprehensive income are as follows:
<CAPTION>
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss applicable to common shareholders ......... $(2,195) $ (912) $(3,463) $(1,805)
Change in unrealized gain (loss) on
available-for-sale investments -- (8) 76 (17)
------- ------- ------- -------
Comprehensive net loss ............................. $(2,195) $ (920) $(3,387) $(1,822)
======= ======= ======= =======
</TABLE>
Accumulated other comprehensive income (loss) presented on the
accompanying balance sheet consists of the accumulated net unrealized gain
(loss) on available-for-sale investments.
Note 4. - Debt Agreement
In June 1998, the Company entered into an agreement with a bank to
provide for borrowings of up to $4.5 million through December 1999 with interest
at the bank's prime rate plus one percentage point or a rate equal to four and
one quarter percentage points above the yield of the 48 month treasury bill.
Interest only payments are
7
<PAGE>
due during the first twelve months of the agreement. After the initial 12-month
period of the agreement, the Company is required to repay the amount then
borrowed in 48 equal monthly installments. As of June 30, 1998, no borrowings
were outstanding.
Note 5. - Lease Agreement
In April 1998, the Company signed an agreement to lease a new facility,
currently under construction, in the proximity of its current facilities. The
lease term is for ten years. The facility size is approximately 65,000 square
feet, of which a significant portion will be sublet by Cellegy during its
initial years of occupancy. The Company plans to consolidate its laboratory and
administrative operations into the new facility by the end of this year or early
in 1999.
The lease commitments are the following as of June 30, 1998:
1999 $ 989,625
2000 $1,164,936
2001 $1,199,880
2002 $1,235,880
2003 $1,272,948
Thereafter $6,961,020
The Company expects that, at current real estate market rates, more
than one half of the lease commitment above in 1999 and 2000 will be offset by
sublease of the facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-QSB, includes forward-looking statements.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. These forward-looking statements
concern matters that involve risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Further, the Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise after the
date of this report. Actual events or results may differ materially from those
discussed in this Quarterly Report. See "Factors That May Affect Future
Operating Results."
Cellegy Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the
development of prescription drugs and cosmeceuticals to address a variety of
diseases and conditions utilizing its patented transdermal and topical delivery
technologies. The Company was incorporated in California in 1989. Cellegy is
developing several prescription drugs, including Anogesic(R), a
nitroglycerin-based product for the treatment of anal fissures and hemorrhoids,
a transdermal testosterone gel for the treatment of hypogonadism, a condition
that frequently results in lethargy and reduced libido in men above the age of
40, and Glylorin(TM), a novel treatment for ichthyosis vulgaris, a debilitating
skin disease. Exclusive worldwide marketing rights for Glylorin have been
licensed to Glaxo Wellcome Inc. In addition to its prescription drugs, Cellegy
is testing and developing a line of anti-wrinkling cosmeceutical products which
the Company believes will address the skin care needs of an affluent and aging
population.
8
<PAGE>
General
In November 1997, the Company completed a $15.1 million public offering
of approximately 2.0 million shares of Common Stock. CIBC Oppenheimer Corp.
acted as underwriter in connection with the offering. Simultaneously, the
Company's stock was approved for listing on the Nasdaq National Market.
In December 1997, the Company completed an asset purchase agreement with
Neptune Pharmaceutical Corporation ("Neptune") to acquire all patent and other
intellectual property rights relating to Anogesic, a topical product candidate
for the treatment of anal fissures and hemorrhoids. The Company's expenses
relating to product development and clinical trials are expected to increase
during the remainder of 1998 and thereafter as a result of the initiation of
Phase III clinical trials in July 1998. Although the purchase price for Anogesic
is payable in Cellegy Common Stock, the Company recorded a non-cash charge to
operations for in process technology of $3,843,000 upon completion of the
Anogesic acquisition in 1997.
In June 1998, Cellegy and 3M Drug Delivery Systems announced that a
research agreement had been signed to evaluate combining Cellegy's CELLEDIRM
anti-inflammatory technology with 3M's Latitude(TM) Transdermal Delivery System.
A combination of Cellegy's inflammatory response modulator technology with 3M's
drug-in-adhesive transdermal system may eliminate or reduce skin irritation and
inflammation caused by some drugs in sensitive patients. 3M Drug Delivery
Systems is a world leader in transdermal technology. The Latitude Transdermal
System and 3M's transdermal components are approved globally for products in
numerous therapeutic areas.
Results of Operations
Revenues. The Company had revenues of $251,000 and $318,000 for the six
months ended June 30, 1998 and 1997, respectively. During the six months ended
June 30, 1998, revenues consisted of $160,000 for development funding associated
with the Glaxo license agreement, $86,000 related to an Orphan Drug grant from
the FDA to cover certain of the Company's clinical trial costs for Glylorin, and
$5,000 from Neutrogena for the reimbursement of patent expenses incurred by
Cellegy related to a license agreement with Neutrogena. During the first six
months of 1997, revenues consisted of $218,000 associated with the Glaxo license
agreement and $100,000 from FDA Orphan Drug grant payments.
For the three months ended June 30, 1998, the Company recorded revenues of
$136,000, compared with $170,000 for the same period last year. The Company will
continue to receive lower levels of development funding from Glaxo over the next
several quarters, but is pursuing other licensing and product supply agreements
which, if entered into, may result in additional contract revenues or product
sales. There can be no assurances regarding when, or if, such revenues will
occur. Through the end of the Orphan Drug grant period on September 30, 1998,
the Company expects to receive an additional $15,000 in FDA Orphan Drug grant
funding. Full grant funding of $400,000 is anticipated over the two year life of
the grant.
Research and Development Expenses. Research and development expenses were
$2,934,000 for the six months ended June 30, 1998, a 91% increase compared with
expenses of $1,537,000 for the same period last year. The Company incurred
research and development expenses of $1,752,000 and $803,000 for the three
months ended June 30, 1998 and 1997, respectively. These increases were
primarily due to salary costs in connection with increased scientific personnel
and the associated recruiting and relocation expenses, as well as increased
contract research and patent expenses. Cellegy's research expenses are expected
to continue to increase during 1998 as preclinical and clinical trial activity
associated with its Anogesic and anti-wrinkling programs increases and as it
continues development of the Company's drug delivery technologies, including
transdermal testosterone gel. The Company expects to continue selective hiring
in research and development, but at a slower rate than during the first half of
1998.
General and Administrative Expenses. General and administrative expenses
increased to $1,353,000 for the six months ended June 30, 1998, compared with
$736,000 for the same period last year. The Company incurred general and
administrative expenses of $834,000 and $376,000 for the three months ended June
30, 1998 and
9
<PAGE>
1997, respectively. These increases were primarily due to salary costs in
connection with the addition of administrative personnel and the associated
recruiting and relocation expenses, increased external reporting expenses and
marketing expenses related to the Company's cosmeceuticals. The Company's
general and administrative expenses are expected to continue to increase in the
future in support of its research and product commercialization efforts,
particularly associated with the launch of its cosmeceuticals, and the planned
expansion and consolidation of its office and laboratory facilities.
Interest Income and Expense. The Company earned $573,000 in interest income
for the six months ended June 30, 1998, compared with $183,000 for the same
period last year. For the three months ended June 30, 1998 and 1997, the
interest income earned was $255,000 and $104,000, respectively. Increases in
interest income were due to higher average investment balances during the period
resulting from proceeds principally associated with a public offering of Common
Stock in November 1997. No interest expense was incurred during the six months
ended June 30, 1998 or 1997.
Net Loss. The net loss applicable to common shareholders was $3,463,000 or
$0.34 per share for the six months ended June 30, 1998 based on 10,154,000
weighted average shares outstanding, compared with a net loss of $1,805,000 or
$0.32 per share for the same period in the prior year, when 5,559,000 weighted
average shares were outstanding. For the three months ended June 30, 1998, the
net loss applicable to common shareholders was $2,195,000 or $0.22 per share
based on 10,165,000 weighted average shares outstanding, compared with $912,000
or $0.16 per share based on 5,738,000 weighted average shares outstanding for
the same period last year.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from
operations each year since its inception. Through June 30, 1998, the Company had
incurred an accumulated deficit of $26.3 million and had consumed cash from
operations of $19.7 million. The Company's public financings included $6.4
million in net proceeds from its initial public offering in August 1995, $6.8
million in net proceeds from a preferred stock financing in April 1996, $3.8
million in net proceeds from a private placement of Common Stock in July 1997,
and $13.8 million in net proceeds for a secondary public offering in November
1997.
The Company's cash and investments were $18.0 million at June 30, 1998,
compared with $21.7 million at December 31, 1997. The decrease in cash and
investments was principally due to net cash used in operating activities. The
Company's operations have and will continue to use substantial amounts of cash.
Future expenditures and capital requirements depend on numerous factors
including, without limitation, the progress and focus of its research and
development programs, the progress and results of preclinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the
costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, the ability of the Company to establish collaborative
arrangements, the initiation of commercialization activities, the purchase of
capital equipment, and the availability of other financing.
In order to complete the research and development and other activities
necessary to commercialize its products, additional financing may be required.
As a result, the Company will seek private or public equity investments and
future collaborative arrangements with third parties to meet such needs. There
is no assurance that such funding will be available for the Company to finance
its operations on acceptable terms, if at all. Insufficient funding may require
the Company to delay, reduce or eliminate some or all of its research and
development activities, planned clinical trials and administrative programs. The
Company believes that available cash resources and the interest thereon will be
adequate to satisfy its capital needs through at least December 31, 1999.
10
<PAGE>
Factors That May Affect Future Operating Results
This Quarterly Report on Form 10-QSB contains forward-looking statements
which involve risks and uncertainties, including, but not limited to, statements
concerning the commencement and completion of clinical trials, the timing of
planned regulatory filings, the applicability of drug and cosmetic laws and
regulations to the Company's products, independent decisions made by its
collaborative partners, the Company's strategic plans, the scope and
defensibility of the Company's patent coverage, anticipated expenditures and the
need for additional funds. The factors discussed in the Company's reports filed
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997, in particular under
the caption "Factors That May Affect Future Operating Results," should be
carefully considered when evaluating the Company's business and prospects.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders, held on May 28, 1998,
four matters were submitted to vote of the shareholders: (i) the election of
directors; (ii) certain amendments to the Company's 1995 Equity Incentive Plan
(the "Plan"); (iii) certain amendments to the Company's 1995 Directors' Stock
Option Plan (the "Directors' Plan"); and (iv) the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending December 31, 1998.
(i) With respect to the election of directors, the following nominees
(constituting of all nominees for election by the Company) were elected by the
votes indicated:
Nominee Votes Votes Withheld
- ------- ----- --------------
Jack L. Bowman 7,717,307 46,490
Denis R. Burger, Ph.D. 7,717,307 46,490
K. Michael Forrest 7,716,807 46,990
Tobi B. Klar, M.D. 7,717,307 46,490
Alan A. Steigrod 7,716,807 46,990
Carl R. Thornfeldt, M.D. 7,717,307 46,490
Larry J. Wells 7,715,807 47,990
(ii) With respect to the amendment of the Plan, 3,967,444 shares voted
in favor, 1,453,458 shares voted against, and 2,342,895 shares were withheld or
not voted.
11
<PAGE>
(iii) With respect to the amendment of the Directors' Plan, 7,262,429
shares voted in favor, 382,323 shares voted against, and 119,045 shares were
withheld or not voted.
(iv) With respect to the ratification of Ernst & Young LLP as the
Company's independent auditors, 7,740,272 shares voted in favor, 14,825 shares
voted against, and 8,700 shares were withheld or not voted.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.01 Loan and Security Agreement between Silicon Valley Bank
and Cellegy Pharmaceuticals, Inc. dated June 10, 1998.
(b) Reports on Form 8-K
None
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLEGY PHARMACEUTICALS, INC.
Date: August 4, 1998 /s/ K. Michael Forrest
--------------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Date: August 4, 1998 /s/ A. Richard Juelis
--------------------------------------------
A. Richard Juelis
Vice President, Finance and
Chief Financial Officer
1. DEFINITIONS AND CONSTRUCTION.........................................1
1.1. Definitions.................................................1
1.2. Accounting Terms............................................7
2. LOAN AND TERMS OF PAYMENT............................................7
2.1. Term Loan...................................................7
2.2. Interest Rate Protection....................................8
2.3. Interest Rates, Payments, and Calculations..................8
2.4. Crediting Payments..........................................9
2.5. Fees........................................................9
2.6. Additional Costs............................................9
2.7. Term.......................................................10
3. CONDITIONS OF LOANS.................................................10
3.1. Conditions Precedent to Initial Term Advance...............10
3.2. Conditions Precedent to all Term Advances..................10
4. CREATION OF SECURITY INTEREST.......................................11
4.1. Grant of Security Interest.................................11
4.2. Delivery of Additional Documentation Required..............11
4.3. Right to Inspect...........................................11
4.4. Springing Lien.............................................11
5. REPRESENTATIONS AND WARRANTIES......................................11
5.1. Due Organization and Qualification.........................11
5.2. Due Authorization; No Conflict.............................11
5.3. No Prior Encumbrances......................................11
5.4. Merchantable Inventory.....................................12
5.5. Name; Location of Chief Executive Office...................12
5.6. Litigation.................................................12
5.7. No Material Adverse Change in Financial Statements.........12
5.8. Solvency...................................................12
5.9. Regulatory Compliance......................................12
5.10. Environmental Condition....................................12
5.11. Taxes......................................................13
5.12. Subsidiaries...............................................13
5.13. Government Consents........................................13
5.14. Full Disclosure............................................13
6. AFFIRMATIVE COVENANTS...............................................13
6.1. Good Standing..............................................13
6.2. Government Compliance......................................13
6.3. Financial Statements, Reports, Certificates................13
6.4. Inventory; Returns.........................................14
6.5. Taxes......................................................14
6.6. Insurance..................................................14
6.7. Principal Depository.......................................14
6.8. Total Liabilities-Net Worth Ratio..........................14
6.9. Tangible Net Worth.........................................15
6.10. Minimum Liquidity/Debt Service Coverage....................15
6.11. FDA Compliance.............................................15
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6.12. Further Assurances.........................................15
7. NEGATIVE COVENANTS..................................................15
7.1. Dispositions...............................................15
7.2. Change in Business.........................................15
7.3. Mergers or Acquisitions....................................16
7.4. Indebtedness...............................................16
7.6. Distributions..............................................16
7.7. Investments................................................16
7.8. Transactions with Affiliates...............................16
7.9. Subordinated Debt..........................................16
7.10. Inventory..................................................16
7.11. Compliance.................................................16
8. EVENTS OF DEFAULT...................................................17
8.1. Payment Default............................................17
8.2. Covenant Default...........................................17
8.3. Material Adverse Change....................................17
8.4. Attachment.................................................17
8.5. Insolvency.................................................17
8.6. Other Agreements...........................................17
8.7. Subordinated Debt..........................................18
8.8. Judgments..................................................18
8.9. FDA Adverse Action.........................................18
8.10. Misrepresentations.........................................18
9. BANK'S RIGHTS AND REMEDIES..........................................18
9.1. Rights and Remedies........................................18
9.2. Power of Attorney..........................................19
9.3. Accounts Collection........................................19
9.4. Bank Expenses..............................................19
9.5. Bank's Liability for Collateral............................19
9.6. Remedies Cumulative........................................20
9.7. Demand; Protest............................................20
10. NOTICES.............................................................20
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..........................20
12. GENERAL PROVISIONS..................................................21
12.1. Successors and Assigns.....................................21
12.2. Indemnification............................................21
12.3. Time of Essence............................................21
12.4. Severability of Provisions.................................21
12.5. Amendments in Writing, Integration.........................21
12.6. Counterparts...............................................21
12.7. Survival...................................................21
12.8. Confidentiality............................................21
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CELLEGY PHARMACEUTICALS, INC.
LOAN AND SECURITY AGREEMENT
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of June 10, 1998,
by and between SILICON VALLEY BANK ("Bank") and CELLEGY PHARMACEUTICALS, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1. Definitions. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents (including fees and expenses of
appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Line" means Four Million Five Hundred Thousand Dollars
($4,500,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
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obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Equipment" means all present and future machinery, equipment,
tenant improvements, including related costs of installation, furniture,
fixtures, vehicles, tools, parts and attachments in which Borrower has any
interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"First Term Advances" means cash advances under the First Term
Loan Facility.
"First Term Loan Facility" means the facility under which Borrower
may request Bank to issue cash advances, as specified in Section 2.1(a) hereof.
"First Term Availability Date" means the date immediately
preceding the first anniversary of the date of this Agreement.
"GAAP" means generally accepted accounting principles as in effect
from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
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<PAGE>
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's Books relating
to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Payment Date" means the ninth (9th) calendar day of the month for
each month of the term of this Agreement.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness secured by a Lien described in Subsection (c) of
the definition of "Permitted Liens" below provided the principal amount of such
Indebtedness does not exceed the lesser of the cost or fair market value of the
Equipment financed;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
(e) Contingent Obligations of Borrower consisting of guarantees
(and other credit support) of the obligations of vendors and suppliers of
Borrower in respect of transactions entered into in the ordinary course of
business;
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<PAGE>
(f) Indebtedness with respect to capital lease obligations
(including leases of real property);
(g) prepaid royalties and deferred revenue in connection with
prepaid support services;
(h) extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of any of the items of Permitted Indebtedness (a)
through (g) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower;
(i) Indebtedness with respect to deferred purchase obligations of
Borrower in connection with acquired products or technologies, outstanding at
any given time, which in the aggregate exceeds the greater of Two Million
Dollars ($2,000,000) OR ten percent (10%) of outstanding shares of capital stock
of Borrower.
"Permitted Investment" means:
(i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof;
(ii) Corporate commercial paper, corporate notes and bonds,
master notes, medium term notes, bankers acceptances, certificates of deposit
and repurchase agreements which, if short-term, have a minimum credit rating of
A-1 or P-1 or, if long-term, have a minimum credit rating of A by Standard
Poor's or Moody's Investor Services; and non-diversified short duration mutual
funds with an average credit rating of at least A- and a duration not to exceed
three (3) years. Investments shall mature no more than three (3) years from the
date of purchase by Borrower, and shall have been approved by Borrower's
investment policy, provided that such investment policy and any amendments
thereto have been approved by Bank, which approval shall not be unreasonably
withheld;
(iii) Certificates of deposit maturing no more than one (1)
year from the date of investment therein issued by Bank;
(iv) Extensions of credit in the nature of accounts receivable
or note receivable arising from the sale or lease of goods or services in the
ordinary course of business;
(v) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(vi) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business; and
(vii) Investments consisting of (i) compensation of employees,
officers and directors of Borrower so long as the Board of Directors of Borrower
determines that such compensation is in the best interests of Borrower, (ii)
travel advances, employee relocation loans and other employee loans and advances
in the ordinary course of business, (iii) loans to employees, officers or
directors relating to the purchase of equity securities of Borrower, and (iv)
other loans to officers and employees approved by the Board of Directors.
"Permitted Liens" means:
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<PAGE>
(a) any Liens existing on the Closing Date and disclosed in the
Schedule or arising under the terms of this Agreement;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens on Equipment leased by Borrower or any Subsidiary
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and licenses and sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license;
(f) Liens on assets (including the proceeds thereof and accessions
thereto) that existed at the time such assets were acquired by Borrower or any
Subsidiary (including Liens on assets of any corporation that existed at the
time it became or becomes a Subsidiary); provided such Liens are not granted in
contemplation of or in connection with the acquisition of such asset by Borrower
or a Subsidiary;
(g) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.8;
(h) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not constituting a Material Adverse Effect;
(i) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of customs duties in connection with the
importation of goods;
(j) Liens that are not prior to the Lien of Bank which constitute
rights of set-off of a customary nature or banker's Liens with respect to
amounts on deposit, whether arising by operation of law or by contract, in
connection with arrangement entered in to with banks in the ordinary course of
business; and
(k) earn-out and royalty obligations existing on the date hereof
or entered into in connection with an acquisition permitted by Section 7.3 that
are not prior to the Lien of the Bank.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
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<PAGE>
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quarterly Covenant Threshold" means Borrower is maintaining, as
of the last day of each month, Liquidity of not less than twelve (12) months
Remaining Months Liquidity and not less than two and one-half (2.5) times the
outstanding principal amount of the Term Advances.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Second Term Advances" means cash advances under the Second Term
Loan Facility.
"Second Term Loan Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1(b)
hereof.
"Second Term Availability Date" means the date which is six (6)
months following the First Term Availability Date.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power to elect the Board of Directors, managers or
trustees of the entity shall, at the time as of which any determination is being
made, be owned by Borrower, either directly or through an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts attributable
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"Term Advances" means cash advances made under the First Term Loan
Facility and the Second Term Loan Facility.
"Term Maturity Date" means the date immediately preceding the
fifth (5th) anniversary of the date of this Agreement.
"Total Liabilities" means, at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness.
1.2. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
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2. LOAN AND TERMS OF PAYMENT
2.1. Term Loan.
(a) First Term Loan Facility. Subject to and upon the terms and
conditions of this Agreement from the Closing Date through the First Term
Availability Date, Bank agrees to make First Term Advances from time to time to
Borrower in an aggregate amount not to exceed the Committed Line; provided,
however, the First Term Advances and the Second Term Advances shall not, in the
aggregate, exceed the Committed Line. The First Term Advances shall be used only
to purchase Equipment approved from time to time by Bank, and shall not exceed
one hundred percent (100%) of the invoice amount of such Equipment, including
taxes, shipping, warranty charges, freight discounts, installation expense,
tenant improvements and software licenses. Borrower shall deliver to Bank, at
the time of each request for a First Term Advance, an invoice for the Equipment
to be purchased.
(b) Second Term Loan Facility. Subject to and upon the terms and
conditions of this Agreement from the First Term Availability Date through the
Second Term Availability Date, Bank agrees to make Second Term Advances from
time to time to Borrower in an aggregate amount not to exceed the Committed
Line; provided, however, the First Term Advances and the Second Term Advances
shall not, in the aggregate, exceed the Committed Line. The Second Term Advances
shall be used only to purchase Equipment approved from time to time by Bank, and
shall not exceed one hundred percent (100%) of the invoice amount of such
Equipment, including taxes, shipping, warranty charges, freight discounts,
installation expense, tenant improvements and software licenses. Borrower shall
deliver to Bank, at the time of each request for a Second Term Advance, an
invoice for the Equipment to be purchased.
(c) Interest shall accrue on each Term Advance from the date of
such Term Advance at the rate specified in Section 2.3(a), and shall be payable
monthly on the Payment Date of each month through the Term Maturity Date. The
aggregate amount of First Term Advances outstanding on the First Term
Availability Date shall be repaid in forty-eight (48) equal monthly installments
of principal, plus accrued interest, beginning on the date which is twelve (12)
months following the Closing Date, and continuing on the Payment Date of each
month thereafter through the Term Maturity Date. The aggregate amount of Second
Term Advances outstanding on the Second Term Availability Date shall be repaid
in forty-two (42) equal monthly installments of principal, plus accrued
interest, beginning on the date which is eighteen (18) months following the
Closing Date, and continuing on the Payment Date of each month thereafter
through the Term Maturity Date. All outstanding obligations under this
Agreement, including, but not limited to, any accrued and unpaid interest and
other unpaid charges or principal balances, shall be payable on the Term
Maturity Date. Term Advances, once repaid, may not be reborrowed.
(d) When Borrower desires a Term Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. California
time, on the Business Day that the Term Advance is to be made. Such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of Exhibit B hereto. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer, and
Borrower shall indemnify and hold Bank harmless for any damages or loss suffered
by Bank as a result of such reliance. Bank will credit the amount of each Term
Advance to Borrower's deposit account.
2.2. Interest Rate Protection. Subject to the terms and condition of
this Agreement, Borrower may prepay the Term Advances, in whole or in part, only
upon payment in full of (i) all accrued but unpaid interest and all outstanding
obligations hereunder (or, if partial prepayment, an applicable or proportionate
amount of such obligations), and (ii), if Borrower has elected the fixed rate
option set forth in Section 2.3(a), a fee as shall be
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<PAGE>
determined by Bank in its reasonable discretion to provide for interest rate
protection in the event the then current Treasury Bill rate is different from
the fixed interest rate set forth in Section 2.3(a).
2.3. Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b), the Term
Advances shall bear interest as follows:
(i) First Term Advances. Prior to the First Term Availability
Date the First Term Advances shall bear interest, on the average daily balance
thereof, at a rate equal to one (1) percentage point above the Prime Rate. First
Term Advances outstanding after such date shall bear interest, at Borrower's
option, either (i) at a floating rate equal to the Prime Rate plus one (1)
percentage point, or (ii) at a fixed rate equal to four and one-quarter (4.25)
percentage points above the yield of the 48 month Treasury Bill as reported in
the Western edition of The Wall Street Journal, which rate shall be fixed at the
time of Borrower's election. Borrower shall give written notice to Bank of its
interest rate election two (2) Business Days prior to the First Term
Availability Date. If Borrower fails to give such notice, then the applicable
rate shall be a floating rate equal to the Prime Rate plus one (1) percentage
point.
(ii) Second Term Advances. Prior to the Second Term
Availability Date the Second Term Advances shall bear interest, on the average
daily balance thereof, at a rate equal to one (1) percentage point above the
Prime Rate. Second Term Advances outstanding after such date shall bear
interest, at Borrower's option, either (i) at a floating rate equal to the Prime
Rate plus one (1) percentage point, or (ii) at a fixed rate equal to four and
one-quarter (4.25) percentage points above the yield of the 42 month Treasury
Bill as reported in the Western edition of The Wall Street Journal, which rate
shall be fixed at the time of Borrower's election. Borrower shall give written
notice to Bank of its interest rate election two (2) Business Days prior to the
Second Term Availability Date. If Borrower fails to give such notice, then the
applicable rate shall be a floating rate equal to the Prime Rate plus one (1)
percentage point.
(b) Default Rate. All Obligations shall bear interest, from and
after the occurrence and during the continuance of an Event of Default, at a
rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default. If the Event of
Default is cured, the interest rate shall revert to the previously applicable
interest rate.
(c) Payments. Interest hereunder shall be due and payable on each
Payment Date during the term hereof. Borrower hereby authorizes Bank to debit
any accounts with Bank for payments of principal and interest due on the
Obligations and any other amounts owing by Borrower to Bank. Any interest not
paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.
(d) Computation. In the event the Prime Rate is changed from time
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by
an amount equal to such change in the Prime Rate. All interest chargeable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed.
2.4. Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment
8
<PAGE>
on account unless such payment is of immediately available federal funds or
unless and until such check or other item of payment is honored when presented
for payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5. Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Forty-Five Thousand
Dollars ($45,000), which fee shall be due on the Closing Date and shall be fully
earned and nonrefundable, and Bank hereby acknowledges that, prior to the
execution of this Agreement, Bank has received from Borrower a payment of Twenty
Thousand Dollars ($20,000) and the remaining balance owed to Bank on the
Facility Fee is Twenty-Five Thousand Dollars ($25,000);
(b) Bank Expenses. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6. Additional Costs. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by Borrower or otherwise with
respect to the transactions contemplated hereby (except for taxes on the overall
net income of Bank imposed by the United States of America or any political
subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
of hundred eight (180) days prior to the date of such certificate.
Notwithstanding the foregoing, if Borrower repays all outstanding Term Advances
within forty-five (45) days of the date of such certificate, no amount shall be
assessed by virtue of this Section 2.6.
2.7. Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Term Advances under this Agreement
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immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1. Conditions Precedent to Initial Term Advance. The obligation of
Bank to make the initial Term Advance is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a negative pledge agreement in substantially the same form as
Exhibit D hereto;
(d) financing statement (Form UCC-1);
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2. Conditions Precedent to all Term Advances. The obligation of Bank
to make each Term Advance, including the initial Term Advance, is further
subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as provided
in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Term Advance as though
made at and as of each such date, and no Event of Default shall have occurred
and be continuing, or would result from such Term Advance. Except as otherwise
disclosed to Bank in writing, and approved by Bank, the making of each Term
Advance shall be deemed to be a representation and warranty by Borrower on the
date of such Term Advance as to the accuracy of the facts referred to in this
Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1. Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except for Permitted Liens and
except as set forth in the Schedule, such security interest constitutes a valid,
first priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof, subject to Permitted Liens.
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4.2. Delivery of Additional Documentation Required. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3. Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, at its own expense (except during the continuance
of an Event of Default), upon reasonable prior notice, from time to time during
Borrower's usual business hours, to inspect Borrower's Books and to make copies
thereof and to check, test, and appraise the Collateral in order to verify
Borrower's financial condition or the amount, condition of, or any other matter
relating to, the Collateral.
4.4. Springing Lien. In the event Borrower fails to comply with one or
more of Sections 6.7, 6.8, 6.9, 6.10 and 6.11, below, Borrower shall grant and
pledge to Bank, cash in an amount not less than the aggregate outstanding Term
Advances on such terms as are acceptable to Bank, in Bank's sole discretion.
Upon compliance with this Section 4.4 to grant and pledge cash to Bank, any such
failure to comply with any of Sections 6.7, 6.8, 6.9, 6.10 and 6.11 below shall
not constitute an Event of Default.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1. Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2. Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3. No Prior Encumbrances. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens, except for Permitted Liens, as defined
on the Schedule.
5.4. Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free from all material defects.
5.5. Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.6. Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision is reasonably
likely to have a Material Adverse Effect or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral. Borrower does
not have knowledge of any such pending or threatened actions or proceedings.
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5.7. No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.8. Solvency. The fair saleable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
Borrower is not left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.9. Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.10. Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.
5.11. Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.12. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments, and except for those equity interests disclosed in any schedule
attached to this Agreement.
5.13. Government Consents. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.14. Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Term Advance hereunder, Borrower shall do all of the following:
6.1. Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which is reasonably likely to
have a Material Adverse Effect.
6.2. Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which is reasonably likely to have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3. Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month in which the Quarterly Covenant Threshold is
not satisfied, a company prepared consolidated balance sheet and income
statement covering Borrower's consolidated operations during such period,
certified by a Responsible Officer; (b) as soon as available, but in any event
within ninety (90) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank, provided that any "Big Six" accounting firm shall be deemed
acceptable to Bank; (c) within ten (10) days upon becoming available, copies of
all statements, reports and notices sent or made available generally by Borrower
to its security holders or to any holders of Subordinated Debt and all reports
on Form 10-K and 10-Q filed with the Securities and Exchange Commission; (d)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; and (e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
Borrower shall deliver to Bank with the monthly or quarterly financial
statements, as the case may be, a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto.
6.4. Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5. Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws
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concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Bank with proof satisfactory to
Bank indicating that Borrower or a Subsidiary has made such payments or
deposits; provided that Borrower or a Subsidiary need not make any payment if
the amount or validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrower.
6.6. Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8. Total Liabilities-Net Worth Ratio. Borrower shall maintain, as of
the last day of each month, or as of the last day of each quarter in the event
the Quarterly Covenant Threshold for the most recently completed month has been
satisfied, a ratio of Total Liabilities less Subordinated Debt to Tangible Net
Worth plus Subordinated Debt of not more than 1.00 to 1.00.
6.9. Tangible Net Worth. Borrower shall maintain, as of the last day of
each month, or as of the last day of each quarter in the event the Quarterly
Covenant Threshold for the most recently completed month has been satisfied, a
Tangible Net Worth plus Subordinated Debt of not less than Six Million Dollars
($6,000,000).
6.10. Minimum Liquidity/Debt Service Coverage. Borrower shall maintain,
as of the last day of each month, or as of the last day of each quarter in the
event the Quarterly Covenant Threshold for the most recently completed month has
been satisfied, (i) Liquidity of at least two (2) times the outstanding
principal amount of the Term Advances and (ii) Remaining Months Liquidity of at
least six (6) months. "Liquidity" means the sum of Borrower's unrestricted cash
and cash equivalents plus fifty percent (50%) of Borrower's net trade Accounts.
"Remaining Months Liquidity" means the ratio of (a) unrestricted cash and cash
equivalents to (b) the average change in cash from operations during the three
month period of measurement. Notwithstanding the foregoing, from and after the
time Borrower achieve, for two consecutive fiscal quarters, a Debt Service
Coverage of at least 1.50 to 1.00, Borrower shall not be subject to the minimum
liquidity requirement set forth above, but instead shall maintain, as of the
last day of each fiscal quarter, a Debt Service Coverage of at least 1.5 to 1.0.
"Debt Service Coverage" means, as of any date of determination, with respect to
Borrowers on a consolidated basis, a ratio of (a) the sum of (i) quarterly
annualized earnings after tax plus (ii) non-cash (i.e. depreciation and
amortization) expense to (b) the sum of current portion of long term debt and
capitalized leases.
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6.11. FDA Compliance. Borrower shall cause its manufacturing and
quality controls to conform to FDA Good Manufacturing Practices ("GMP")
regulations and such other regulations applicable to Borrower with respect to
advertising, labeling and reporting of adverse experiences with the use of any
of Borrower's products, and those concerning recordkeeping, reporting, product
testing, design, safety and labeling of products. To the extent necessary to
conduct its business, Borrower shall register with the Food and Drug Branch of
the California Department of Health Services and the Food and Drug
Administration, and Borrower shall register its manufacturing facilities in
accordance with GMP regulations.
6.12. Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Term Advances, Borrower
will not do any of the following without consent of the Bank, which is not to be
unreasonably withheld:
7.1. Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and exclusive licenses with geographic or other limitations granted in
the ordinary course of business and similar arrangements for the use of the
property of Borrower or its Subsidiaries by licensee(s); (iii) Transfers of
worn-out or obsolete Equipment, (iv) transfers in connection with Permitted
Indebtedness or (iv) other Transfers not exceeding One Hundred Thousand Dollars
($100,000) in the aggregate in any fiscal year, provided that in each such case
an Event of Default does not exist before or after giving effect to such
Transfer.
7.2. Change in Business. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto). Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3. Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4. Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5. Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6. Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, other than, for so long as an Event of Default has not occurred, payments
made for the repurchase of stock effected in connection with the termination of
an employee, officer or director.
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7.7. Investments. Directly or indirectly acquire, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8. Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9. Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.10. Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing and
described on the Schedule, as amended from time to time, Borrower shall keep the
Inventory only at the location set forth in Section 10 hereof and such other
locations of which Borrower gives Bank prior written notice and as to which
Borrower signs and files a financing statement where needed to perfect Bank's
security interest.
7.11. Compliance. Become an "investment company" or become "controlled"
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Term Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral, or
permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1. Payment Default. If Borrower fails to pay the principal of, or any
interest on, any Term Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2. Covenant Default. If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants
contained in Article 7 of this Agreement, or fails or neglects to perform, keep,
or observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the
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failure to have cured such default shall not be deemed an Event of Default
(provided that no Term Advances will be required to be made during such cure
period);
8.3. Material Adverse Change. If there occurs a material adverse change
in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4. Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within twenty (20) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within twenty (20)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Term Advances will be required to be made during such cure period);
8.5. Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Term Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6. Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in the exercise by
such third party or parties, of a right to accelerate the maturity of any
Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000)
or that is reasonably likely to have a Material Adverse Effect;
8.7. Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8. Judgments. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no Term
Advances will be made prior to the satisfaction or stay of such judgment);
8.9. FDA Adverse Action. If there is any non-approval, recall or other
action by the Food and Drug Administration that has a Material Adverse Effect;
or
8.10. Misrepresentations. If, as of the date such representation or
warranty was made or such certificate delivered, any material misrepresentation
or material misstatement exists now or hereafter in any warranty or
representation set forth herein or in any certificate delivered to Bank by any
Responsible Officer pursuant to this Agreement or to induce Bank to enter into
this Agreement or any other Loan Document.
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9. BANK'S RIGHTS AND REMEDIES
9.1. Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Make such payments and do such acts as Bank considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may reasonably designate. Borrower
authorizes Bank to enter the premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to
or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit, except to the extent that such license would result in a breach of such
agreement;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Borrower.
18
<PAGE>
9.2. Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors as they relate to the Collateral; (d) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance; (e)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; and (f) dispose of the Collateral; provided Bank may exercise such
power of attorney to sign the name of Borrower on any of the documents described
in Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3. Accounts Collection. At any time when an Event of Default has
occurred and is continuing, Bank may notify any Person owing funds to Borrower
of Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Revolving Facility as Bank deems necessary to protect Bank from the exposure
created by such failure; or (c) obtain and maintain insurance policies of the
type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5. Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
19
<PAGE>
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: Cellegy Pharmaceuticals, Inc.
1065 East Hillsdale Boulevard, Site 418
Foster City, CA 94404
Attn: Mr. Richard Juelis, Chief Financial Officer
FAX: (650) 524-1616
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Mr. Gary Reagan
FAX: (650) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1. Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that except as provided in Section 7.3, neither this
Agreement nor any rights hereunder may be assigned by Borrower without Bank's
prior written consent, which consent may be granted or withheld in Bank's
reasonable discretion. Bank shall have the right without the consent of or
notice to Borrower to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
hereunder.
12.2. Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by
20
<PAGE>
any other party in connection with the transactions contemplated by this
Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or
paid by Bank as a result of or in any way arising out of, following, or
consequential to transactions between Bank and Borrower whether under this
Agreement, or otherwise (including without limitation reasonable attorneys fees
and expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3. Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4. Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5. Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7. Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8. Confidentiality. In handling any confidential information Bank,
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement,
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (ii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain, or becomes part of the public domain, after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third party
is prohibited from disclosing such information.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
CELLEGY PHARMACEUTICALS, INC.
By: _____________________________________
Title: __________________________________
SILICON VALLEY BANK
By: _____________________________________
Title: __________________________________
22
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor; any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; provided Collateral shall include
the proceeds of any disposition of any of the foregoing.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _____________________
FAX#: (408) 496-2426 TIME: _____________________
________________________________________________________________________________
FROM: CELLEGY PHARMACEUTICALS, INC.
_________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE NUMBER: __________________________________________________________________
FROM ACCOUNT # _______________________ TO ACCOUNT # _______________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $ __________________________________
PRINCIPAL PAYMENT (ONLY) $ __________________________________
INTEREST PAYMENT (ONLY) $ __________________________________
PRINCIPAL AND INTEREST (PAYMENT) $ __________________________________
OTHER INSTRUCTIONS: ____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Payment/Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
________________________________________________________________________________
________________________________________________________________________________
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
________________________________________________________________________________
Authorized Requester Phone #
________________________________________________________________________________
Received By (Bank) Phone #
________________________________________________________________
Authorized Signature (Bank)
________________________________________________________________________________
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: CELLEGY PHARMACEUTICALS, INC.
The undersigned authorized officer of Cellegy Pharmaceuticals, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
<TABLE>
Please indicate compliance status by circling Yes/No under "Complies" column.
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Monthly financial statements Monthly within 30 days1 Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Form 10-K and 10-Q Within 10 days of filing Yes No
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
Maintain on a Quarterly Basis2:
Minimum TNW plus Sub Debt $6,000,000 $________ Yes No
Total Liabilities/Tangible Net Worth 1.00:1.00 ____:1.00 Yes No
Minimum Liquidity3 2x Term Advances _________ Yes No
Remaining Months Liquidity (RML)3 6 months _________ Yes No
Debt Service Coverage4 1.50:1.00 ____:1.00 Yes No
<FN>
1 Only if Liquidity is less than 2.5 times outstanding principal amount of Term
Advances or less than 12 months RML
2 If Liquidity is less than 2.5 times outstanding principal amount of Term
Advances or less than 12 months RML, then financial covenants must be maintained
on a monthly basis
3 Converts to Debt Service Coverage ("DSC") on 2 consecutive quarters of DSC of
1.50 to 1.00
4 Required on release of Minimum Liquidity and RML covenants
</FN>
</TABLE>
<TABLE>
<CAPTION>
Comments Regarding Exceptions: See Attached. ________________________________________________
<S> <C>
Sincerely, BANK USE ONLY
________________________________ Received by: ___________________________________
SIGNATURE AUTHORIZED SIGNER
________________________________ Date: __________________________________________
TITLE
Verified: ______________________________________
________________________________ AUTHORIZED SIGNER
DATE
Date: __________________________________________
Compliance Status: Yes No
________________________________________________
</TABLE>
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of June 10, 1998, by and
between CELLEGY PHARMACEUTICALS, INC. ("Borrower") and SILICON VALLEY BANK
("Bank").
In connection with the Loan and Security Agreement being concurrently
executed between Borrower and Bank, Borrower agrees as follows:
1. Except as permitted in the Loan and Security Agreement, Borrower
shall not sell, transfer, assign, mortgage, pledge, lease, grant a security
interest in, or encumber any of Borrower's intellectual property, including,
without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections,
including, without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including, without
limitation, the patents and patent applications (collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any
of the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
The foregoing not withstanding, Borrower shall be able to grant
security interests or licenses of its intellectual property in connection with
corporate partnering arrangements, including research, development, distribution
or marketing agreements, entered into in the ordinary course of business.
2. It shall be an Event of Default under the Loan Documents between
Borrower and Bank if there is a material breach of any term of this Negative
Pledge Agreement.
<PAGE>
3. Capitalized items used herein without definition shall have the same
meanings as set forth in the Loan and Security Agreement of even date herewith.
CELLEGY PHARMACEUTICALS, INC. SILICON VALLEY BANK
By: ___________________________________ By: __________________________________
Title: ________________________________ Title: _______________________________
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Cellegy Pharmaceuticals, Inc. Bank: Silicon Valley Bank
- --------------------------------------------------------------------------------
LOAN TYPE. This is a Term Loan Facility consisting of two tranches, of an
aggregate principal amount up to $4,500,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Equipment Acquisition.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Term Loan
Amount paid to Borrower directly: $________
Undisbursed Funds $________
Principal $________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Charges Paid in Cash:
$45,000 Loan Fee (less $20,000 paid prior to execution of
this Agreement)
$100 UCC Search Fees
$100 UCC Filing Fees
$________ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered 3300037247 the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF JUNE 10, 1998.
BORROWER: CELLEGY PHARMACEUTICALS, INC.
____________________________________________________
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: Cellegy Pharmaceuticals, Inc. Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. Cellegy Pharmaceuticals, Inc.
("Grantor") understands that insurance coverage is required in connection with
the extending of a loan or the providing of other financial accommodations to
Grantor by Bank. These requirements are set forth in the Loan Documents. The
following minimum insurance coverages must be provided on the following
described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of June 10, 1998, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 10,
1998.
GRANTOR: CELLEGY PHARMACEUTICALS, INC.
x_______________________________________
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME: __________________________________________________________________
INSURANCE COMPANY: _____________________________________________________________
POLICY NUMBER: _________________________________________________________________
EFFECTIVE DATES: _______________________________________________________________
COMMENTS: ______________________________________________________________________
================================================================================
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
================================================================================
Borrower: Cellegy Pharmaceuticals, Inc.
================================================================================
I, the undersigned Secretary or Assistant Secretary of Cellegy
Pharmaceuticals, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation
is organized and existing under and by virtue of the laws of the State of
California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Articles of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----------------------------------------------------------------------
NAMES POSITIONS ACTUAL SIGNATURES
_____________________ _____________________ _____________________
_____________________ _____________________ _____________________
_____________________ _____________________ _____________________
_____________________ _____________________ _____________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of June 10, 1998 (the "Loan
Agreement").
Execute Notes. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Bank's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
Grant Security. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and
<PAGE>
costs, and to execute and deliver such other documents and agreements as they
may in their discretion deem reasonably necessary or proper in order to carry
into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 10, 1998 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X____________________________
Attachments
1. Articles of Incorporation
2. Bylaws
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,323
<SECURITIES> 16,654
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0
0
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